Outsourcing is the process of purchasing key functions from an outside supplier. In order words it is contracting out certain functions for example internal audit or information technology.

Advantages:

• Cost: A key advantage of outsourcing is that it is often cheaper to contract a service out than it is to conduct it in house. It may also significantly improve cost control.
• Specialist Service: Outsourcing results in specialist being used to provide the service when that would not have been the case if the function was performed in the house.
• Indemnity: The service organisation may provide indemnity in the event of problems arising. If problems arose in house, there is no such comfort zone.
• Cash flow: Obtaining the service through a contract may assist with cash flow, as the contract will represent a flat rate fee, whereas the cost of providing the service in house might have led to fluctuating cost. Example if temporary staff are required in a busy period.
• No need to recruit additional staff.
• Can be used on short term basis.
• A team of staff can be provided if required.
  Disadvantages
• Loss of control: The single biggest disadvantage of outsourcing is the extent to which the company loses control over the function itself, although not over cost control.
• Time demand on management: The contract has to be managed and ensure that the service being provided is appropriate and is in accordance with the contract. This may take a disproportionate amount of time
• Possibility of Litigation: The contract might limit the liability of the contractor, leading to problems if the contract is not performed well. This may results in court action being required.
• Disadvantage may outweigh advantages: Should these disadvantages be realised, the cost of outsourcing could outweigh the benefit, even though in theory outsourcing should reduce cost.
• Independent and objectivity issues.
• High cost of outsourcing.
• Company staff may oppose outsourcing if it result in redundancy.
• High turn over of Internal Audit staff.
• Outsource staff may have a limited knowledge of the company.

Advantages

• Skills and experience
  International & Co is likely to have a large pool of staff available to provide the internal audit service to Proper Banking Limited. In addition, the audit firm is likely to have staff with specialist skills already available.
• Flexibility
  If the internal audit department is outsourced, Proper Banking Limited will have total flexibility in its internal audit service. Staff can be requested from International & Co to suit the company’s workloads and requirements. This will ensure that, when required, extra staff is readily available for as long or short a period as needed.
• Staffing
  Proper Banking Limited (PBL) wishes to expand its internal audit department in terms of size and specialist skills. If they outsource, then there will be no need to spend money in recruiting further staff as International & Co will provide the staff members.
• Immediate solution
  As the current internal audit department is small, then outsourcing can provide the number of staff needed straight away.
• Cost control and management
  Outsourcing can be an efficient means to control the costs of internal audit as any associated costs such as training will be eliminated as International & Co will train its own employees. In addition, the costs for the internal audit service will be agreed in advance. This will ensure that Proper Banking Limited can budget accordingly.

Disadvantages

• Confidentiality
  Knowledge of company systems and confidential data will be available to International & Co. Although the engagement letter would provide confidentiality clauses, this may not stop breaches of confidentiality.
• Loss of Control
  Proper Banking Limited currently has more control over the activities of its internal audit department; however, once outsourced it will need to discuss areas of work and timings well in advance with International & Co.
• Knowledge of company
  International & Co will allocate available staff members to work on the internal audit assignment; this may mean that each visit the staff members are different and hence they may not fully understand the systems of Proper Banking Limited. This will decrease the quality of the services provided and increase the time spent by Proper Banking Limited’s employees in explaining the system to the auditors.
• Existing internal audit department
  Proper Banking Limited has an existing internal audit department; if they cannot be redeployed elsewhere in the company, then they may need to be made redundant and this could be costly for Proper Banking Limited. Staff may oppose the outsourcing if it results in redundancies.
• Increased costs
  As well as the cost of potential redundancies, the internal audit fee charged by International & Co may over a period of time increase, proving to be very expensive.
• Loss of in-house skills
  If the current internal audit team is not deployed elsewhere in the company, valuable internal audit knowledge and experience may be lost. If Proper Banking Limited then decided at a future date to bring the service back in-house, this might prove to be too difficult.

International & Co
Advantages

• Additional fees for International & Co
  The audit firm will benefit from the internal audit service being outsourced as this will generate additional fee income. However, the firm will need to monitor the fees to ensure that they do not represent too high a percentage of their total fee income. As a public interest company, fee income should not represent more than 15% of gross practice income for two consecutive years.

Disadvantages

• Independence: If International & Co provides both external audit and internal audit services, there may be a self-review threat especially where the internal audit work is relied upon by the external audit team. The firm would need to take steps to ensure that separate teams are put in place as well as additional safeguards.