Proper Banking Limited (PBL) has been trading for 20 years selling banking products and has recently become a listed company. In accordance with corporate governance principles of Bank of Ghana PBL maintains a small internal audit department. The board of directors feel that the authorized business of the Company is banking which is core to the success of PBL. On 20 November, 2017, the Operational and Governance Committee of the Board met to discuss whether to maintain the internal audit department and increase its size and build its expertise or to outsource the whole function to their external auditors, International & Co with headquarters in Accra, Ghana with global presence over ninety-nine (99) countries.
Required:
Advise the Board of PBL on the advantages and disadvantages of whether to outsource or maintain their internal audit function. (10 marks)
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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.