Tuesday, 12 July 2011

Internal Audit Outsourcing

 The Copyright of this Article rests with the writer Mr. Vinod Khurana

The business world over is quietly undergoing through the fundamental changes, which have very serious long-term consequences. The impact of privatization, speed of communication, globalization, border less trade, impact of e-commerce, influence of intellectual property and relentless drive to do more with less have converged to place Internal Audit to fore front in the business management. The importance of internal audit has also been intensified, as the pace of fundamental change is strongly influenced by the change in information technology compliance, in the functioning process, and aligning the ever changing information technology plans with existing business process needs effective monitoring to prevent any adverse consequences in time to come.

These changes have broken the traditional well-defined role of internal audit revolving around control and compliance. As a result generally internal audit group of corporate needs alignment to deliver value. In view of wide spread changes there is an urgent need to make internal audit beyond the traditional role and have to be assigned new value based agenda covering wide spectrum. To meet this challenge, the Internal Auditor has to have complete business knowledge and clear perception as to how the entire business operates in the changing business methods and environments. There fore the internal auditor has moved from being just accountant to 'also an accountant 'and hence is coming under intense scrutiny.
By virtue of its position and role, internal auditor is more effective than external auditor in all respects, particularly in protecting the business assets and detecting fraud. In order to serve the organization and to stay in control he must make a valuable contribution or he will become irrelevant. Being internal control expert, the internal auditor has to play crucial and visible role, to play such role, besides his much wider understanding of the business as whole, he must have in-depth knowledge of accounting and its vulnerability to exploitation. As accounting is a language, it speaks for itself, but like any other languages it takes time for any auditor to acquire command, extensive auditing experience adds to the knowledge to really understand the accounting language and only there after you can put your fingers where the things have gone wrong and for some it becomes passion. At the same time understanding of accounting principle is not limited to management and accounting of liquid and tangible assets, when in the modern economy the intangible assets primarily consisting of intellectual property, have emerged as a new source of wealth and urgently needs proper accounting and management system for its protection and commercial exploitation, hence the internal auditor has to have in-depth knowledge of intellectual property, its commercial value and its fast changing legislation.

The new business methods and technology dependency, which are making business dynamic, are also making them vulnerable to financial fraud. To cope with the complications and to understand the implications of new business methods and technology, the internal auditor can no more limit himself revolving around control and compliance and confine himself with in the perimeters of accounting records, in fact he only begins there. He has to have much wider business perception and ability to link data, knowledge, and insight together to prevent potential wrongdoings. The role of internal auditor covers the new emerging areas such as; vulnerability to changing software system and new information technology methods, consequences of e-commerce transactions, protection and commercial exploitation of intellectual property, analysis of implication of WTO agreement, evaluation and implementation of cost saving methods, compliance of new developing legislation, among other issues, besides the traditional role.

Independence is an important characteristic of an audit. The changing role and position of Internal Auditor has led to power struggle with in corporate finance department. Internal auditor must have direct link to audit committee, which has resulted to loss of power of CFO and needs to be understood in the overall interest of the corporate. However in some companies internal audit is still seen as a necessary evil and in some the corporate employees are not even equipped to take on the new role, at the same time some business organizations spend large sums of money but have no system to measure the real worth of contribution made by the internal auditors. Therefore there is urgent need to understand the importance of internal audit and to place the system in the hands of those who understand the nitty-gritty and can contribute to the organization

Under these circumstances outsourcing the internal audit to reputed establishments, who have expertise in the field has many inherent advantages for any business organization. Institutions, which are primarily focusing on internal audit, have vast experience and expertise in new developing areas such as e-commerce, intellectual property, and globalization through WTO and can well appraise their consequence on the existing business. They are also widely aware of issues such as; general weak areas in accounting which promote frauds, different modus operandi of white-collar crime, inadequacies in computerization and accounting software witch helps in financial frauds, how the employees and ex employees play around with intellectual property, lacunae in finalization of contracts and their legal consequences, among other issues.
Therefore outsourcing of internal audit besides being cost effective can provide the real insight and business organizations can gain rich dividends by rectifying the anomalies existing in the system. If the internal audit is integral part of the establishment the results are less likely to prove effective as the results would be restricted by inherent limitations of internal audit team and at the same time would be influenced by some vested interest, compromising with its independence. That is the primary reason as to why the statutory audit has been barred to also perform internal audit. Therefore internal audit services from those that provide specialized services will strengthen confidence at all levels and bring about internal discipline and deterrence besides being cost effective