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Straddling the Fence: Should You Co-Source or Outsource Your Internal Audit?

Dec 1, 2021

Just as a fence is designed to safeguard communities from outsiders, business owners do as much as they can on their own to protect their companies from potential threats or risks. However, there comes a time in the life of any business (particularly, a successful one) in which owners begin to look beyond their “perimeters” for internal audit assistance. Increasingly, many small and owner-managed businesses are deciding to co-source or outsource their internal audit functions. Even companies with internal auditors on staff often find benefit from using external professionals as they grow in size and sophistication.

Consider these three key milestones as potential cues for your internal audit function to become external:

  • Your company has grown significantly. More revenue means more assets are at risk, and more employees can create more opportunities for employee theft or error. In fact, the Association of Certified Fraud Examiners (ACFE) reports that employee fraud consumes an estimated 5% of revenues. In the beginning, a fully outsourced internal audit team can be a cost-effective way to put a robust risk management program in place. As your organization grows in size and complexity, you will likely need at least one in-house internal auditor to run point.
  • You need capital or are preparing for a future sale. As your business grows and you seek financing or capital to expand, underwriters will expect more sophisticated financial statements and reporting. Supporting an in-house internal audit function with independent, external sources demonstrates that your organization takes its financial reporting — and the internal controls around and monitoring of its processes — seriously.
  • Your compliance stakes grow higher. As the size and complexity of your business increases, so do the intricacies of compliance. Larger corporations are subject to greater scrutiny, more frequent reporting, and additional compliance requirements demanding specialized industry knowledge. Keeping up with ever-changing accounting rules — such as the repeatedly delayed revenue recognition and lease accounting standards — can quickly become a full-time job. For that reason, independent CPA firms often make the perfect outsourced or co-sourced internal audit partners.

In-House, Co-Source, or Outsource? Weigh Costs and Benefits

As you weigh the decision of how to source your internal audit function, conduct a thorough cost-benefit analysis to determine whether the function should be in-house, fully outsourced, or co-sourced. If you need more assistance regarding how to best approach your internal audits and remove any potential barriers to a successful audit engagement contact your CRI advisor.

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