If subcontracting does occur, and is not provided for in the contract, the outsourcer may not be liable for functions that were subcontracted.
However, just as financial scandals such as Enron and WorldCom have highlighted the importance of having the absolute highest quality of internal audit performed, in order to safeguard the interests of stakeholders, these scandals also have provided evidence that outsourcing this critical function may not be the best move, for an organization.
Smith sees Enron as proof positive that the outsourcing of internal audit services is not in the best interest of the organization.
Enron's services as external auditor, outsourcer of internal auditing, and consultant equated to fees in the tens of millions of dollars.
As Smith notes, this level of financial involvement no longer allows an outsourcer to be independent of their client organization. This results in conflicted interests. Although external and internal auditing must now be conducted by separate entities, there is still a dependent relationship formed with outsourcers and their client organizations, especially with larger contracts.
Conclusion:
strong and capable internal audit is needed to detect questionable transactions. As Smith points out, the failure of the internal audit is what allowed Enron management to get away with the inflating of the organization's stock.
Yet, arguments can be made for both sides of the argument, on whether or not this crucial organizational function should be outsourced or not.
In today's hypercompetitive world, the benefits of outsourcing the internal audit services has enticed many companies looking to streamline their non-core business functions. This allows organizations to focus on their core competencies and their customers. In addition, outsourcers can often take advantage of economies-of-scale, due to their specialization, providing organizations with a similar level of service for a lower cost than if handled in-house, or even providing a higher quality service for a reduced cost. Outsourced auditors are often privy to the latest internal audit tools and methodologies and remove the need of continuously training internal audit staff.
Also, organizations lose the aspect of development for new managers when outsourcing this function. The outsourcer does not know the organization as well as an in-house internal auditor would, and there is the challenge of mixed allegiance, which wouldn't be present for in-house auditing staff. There is also a concern with the security of sensitive data, when opening an organization's financial data to a third-party. and, lastly, the dependent nature of an outsourcer/organization relationship does not necessarily mean that questionable transactions will not occur, as demonstrated in the case of Enron.
Works Cited
Carey, P., Subramaniam, N., Ching, K., & Chua, W. "Internal Audit Outsourcing in Australia." Accounting & Finance 46 (1) Mar 2006: pp. 20-24. Business Source Complete. EBSCOHost. University of Phoenix, Phoenix, AZ. April 7, 2008 http://web.ebscohost.com.
Internal Audit Services: Adding True Value. No date. Deloitte Touche. April 7, 2008 http://www.deloitte.com/dtt/cda/doc/content/Audit_interne.pdf.
Klosek, J. "Data Privacy and Security are a Significant Part of the Outsourcing Equation." Intellectual Property & Technology Law Journal 17 (6) Jun 2005: pp. 15-18. Business Source Complete. EBSCOHost. University of Phoenix, Phoenix, AZ. April 7, 2008 http://web.ebscohost.com.
Rittenberg, L., Moore, W., & Covaleski, M. "The Outsourcing Phenomenon." Internal Auditor 56 (2) Apr 1999: pp. 42-46. MasterFILE Premier. EBSCOHost. University of Phoenix, Phoenix, AZ. April 7, 2008 http://web.ebscohost.com.
Smith, G. "Enron's Lesson: Rebuild Internal Auditing Now!" Journal of Corporate Accounting & Finance 13 (4) May/June 2002: pp. 13-15. Business Source Complete. EBSCOHost. University of Phoenix, Phoenix, AZ. April 7, 2008 http://web.ebscohost.com.
Trent, G. "SAS 70 New Life for an Old Audit Standard." Financial Executive 20 (3) May 2004: pp. 43-44. Business Source Complete. EBSCOHost. University of Phoenix, Phoenix, AZ. April 7, 2008 http://web.ebscohost.com.
