Save money and improve risk management: Co-source the internal audit function

As you look for opportunities to cut costs and improve profit, the question of where you can reduce salaries may arise. Co-sourcing internal audit and information technology functions may be an easy way for you to save money and improve your business’s risk management at the same time.

Co-sourcing the internal audit function can take various forms, such as total outsourcing, staff supplementation and co-sourcing specialized skillsets. The optimal structure will vary for each organization and may change over time as your business changes. Many companies find that some use of external resources is appropriate to reduce the number of full-time resources required. Reasons for this conclusion vary, but they generally revolve around four key concepts:

• cost savings
• inability to hire and retain qualified staff
• required, specialized expertise
• independence/objectivity

Let’s take a look at each one of these concepts in more detail.

Cost savings

To establish whether there are cost savings in co-sourcing the internal audit function, we must first understand what the cost of a full-time internal audit employee is. The cost of an employee can vary significantly, but is made up primarily of three components: salary, benefits and other costs.

Tables 1 and 2 below provide an overview of the estimated cost of internal audit employees. Base salaries were obtained from Robert Half’s 2015 Salary Guide¹. The average base salaries we used are for corporate accounting, internal auditors — midsize companies (companies with $25 million to $250 million in sales). This classification represents the type of employers that many businesses will compete with for employees.

The cost of benefits varies with each business’s offerings. According to an economic news release² from the United States Department of Labor’s Bureau of Labor Statistics, the costs of benefits for an employee can average from 30.6 percent to 35.9 percent of base salary. Typical benefit costs include the employer’s portion of Social Security/Medicare, workers compensation, unemployment and life insurance, health insurance coverage, long-term disability and retirement related costs.

Other costs include items such as space (an office, a cube, etc.), office equipment (computers, software, telephone, etc.), and training costs (continuing education). For purposes of this overview, we have estimated that total benefits and other costs will range from 35 percent to 45 percent of the base salary.

Table 1 – The Cost of an Employee – Internal Audit Manager

	Estimated Benefits and Other Costs at 35% of Base Salary	Estimated Benefits and Other Costs at 45% of Base Salary
Average Base Salary	$104,375	$104,375
Benefits and Other Costs	$36,531	$46,969
Total Estimated Cost	$140,906	$151,344

 

Table 1 represents the cost of one internal audit manager. Some organizations may be able to get by with one person managing the internal audit department. For those organizations that may not want to, or may not be able to, rely on just one employee, we have included a manager and staff (with one to three years of experience) in Table 2.

Table 2 – The Cost of Employees – Internal Audit Manager & Staff

	Estimated Benefits and Other Costs at 35% of Base Salary	Estimated Benefits and Other Costs at 45% of Base Salary
Average Base Salary – Manager	$104,375	$104,375
Benefits and Other Costs – Staff	$67,625	$67,625
Benefits and Other Costs – Both	$60,200	$77,400
Total Estimated Cost	$232,200	$249,400

 

Both of these tables indicate that the cost of employees is high. In many cases, these salaries are higher than what a company would pay to outsource the entire internal audit function. Realize that these estimates are conservative, and they do not include the cost of hiring, evaluating and managing, retaining or replacing an employee.

Inability to hire and retain qualified staff

As competition for qualified applicants continues to increase, you may find it difficult to attract and retain qualified staff. Often these situations lead to resource constraints, and the execution of a comprehensive audit plan is put at risk. Co-sourcing offers significant staffing benefits because providers can give you access to a steady stream of resources with varied backgrounds and skillsets available to meet deadlines and perform special projects, as needed. A good internal audit function doesn’t slow an organization down; it makes it faster.

Expertise

The increasing complexity of the regulatory and accounting landscapes necessitates an internal audit function that maintains specialized skills and training. In-house internal auditors do not always receive the training necessary to stay on top of new issues and risks. Furthermore, many businesses have a limited number of internal audit staff and simply do not have the breadth of experience or training that is available from outsourcing partners. Good outsourcing partners can bring in specialists when needed to target specific, complex areas. These specialists are rightfully named because they usually practice in their specific areas of expertise, such as technology or compliance, 100 percent of the time. It is not practical or economically feasible for most businesses to maintain this type of expertise in their in-house internal audit departments.

The role of internal audit continues to change. Many internal audit functions are still focused historically and rarely contemplate the future. An audit that only reports exceptions to policies and procedures does little to add value to an organization. A valuable internal audit function will not only report what has happened in the past, but will also help management and board members obtain a deeper understanding of key business risks and how to manage them to achieve the greatest return for shareholders. Outsourcing partners often are able to share ideas that improve business performance because they work with multiple businesses and, therefore, have access to best practices and insights into alternative approaches.

Independence and objectivity

Independence is the foundation for any internal audit function. In some organizations, the internal audit employee has other responsibilities that can often lead to a conflict of interest. Sometimes internal auditors are brought in from other functions in the organization and are then expected to audit that function. Regardless of structure, employees are often unwilling to challenge management. In these situations, maintaining an objective viewpoint is often not possible. Typically, it is easy to establish independence with an outsourcing partner and completely avoid conflicts of interest. However, professional standards recommend that a business’s outsourced internal auditor and external auditor not be the same provider.

Conclusion

Should you co-outsource or outsource your internal audit function? In most instances, whether your business is large or small, the benefits typically exceed the cost. There are some benefits to having an internal audit function in-house, such as retention of institutional knowledge for future assignments and the use of internal auditing as a training ground for management positions. But generally, the benefits of co-sourcing or outsourcing outweigh the benefits of retaining only in-house internal audit professionals. In some situations, co-sourcing may offer the best of both worlds — having one or two staff in-house working under the guidance and direction of an outsourced provider (or vice versa) who can provide specialized expertise, objectivity and a wealth of experience.

1 “2015 Salary Guide” © 2014 Robert Half International Inc. http://www.roberthalf.com/finance/accountant-salary?lobId=roberthalffinance
2 “Employer Costs for Employee Compensation,” Economic News Release, March 11, 2015, United States Department of Labor – Bureau of Labor Statistics http://www.bls.gov/news.release/ecec.nr0.htm