The management of your company is carrying out major restructuring of the operations of the company for more effective and efficient achievement of objectives and targets. One of the major decisions taken was the outsourcing of the Internal Audit Function.
Required:
i) Define outsourcing. (2 marks)
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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.
ii) Identify FOUR (4) advantages and FOUR (4) disadvantages of outsourcing the internal audit function. (8 marks)
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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.