Recent trends in the outsourcing of internal audit : an analysis

Abstract

Purpose: Locally, a study on the outsourcing of internal audit has not been carried out since 1999, where the pros and cons of outsourcing internal audit were analysed by Galea Scannura. Therefore, this study seeks to examine how the outsourcing of internal audit has developed since then, by, identifying the recent trends in the outsourcing of internal audit, identifying the major factors considered in the internal audit sourcing decision, and by examining how outsourced internal audit functions are being managed. Design: The objectives of this study are achieved through a series of semi-structured interviews, carried out with best-fitting management representatives of ten public interest entities, senior managers from the big four audit firms, and the chairman of the Malta Forum for Internal Auditors. Findings: This study establishes that outsourcing of internal audit is increasing in Malta, even though in-house internal audit functions are generally preferred. Furthermore, the study determines that the trend is to have a big four audit firm as the internal audit outsourcer. With regards to factors, the transactional factors, i.e. the costs of having an internal audit function and the size of the entity, are the most considered in the internal audit sourcing decision. On the other hand, with regards to management of outsourced internal audit functions, the study determines that the selected companies effectively manage their outsourcing contracts and outsourcing relationships. Conclusion: This study concludes that although outsourcing of internal audit is increasing, this trend may be temporary since companies are likely to opt for an in-house function if they grow in size and find people who are adequately qualified and willing to work in internal audit. The study also concludes that costs play a major role in the internal audit sourcing decision, and that the selected companies recognise that an outsourced internal audit function must be well-managed in order to be successful. Value: It is hoped that the study provides necessary information to both companies and audit firms, on what is the perspective of each of these parties with regards to the outsourcing of internal audit. Furthermore, the study provides a number of recommendations related to the subject which may possibly be implemented in Malta.