Internal Audit Costs: A Critical Metric of CFO Services

Amy Pattinson
July 28, 2022
 Mins Read

Internal Audit was originally conceived as a way of protecting and preserving business assets and function as well as ensuring compliance with standard regulations; now its importance has expanded to being used as a parameter to drive business change and add business value. The maintenance of internal audit is evolving into a distinct area of functionality, on its own. Experts in Financial and Accounting BPO outsourcing services can  provide the necessary knowledge and expertise about implementing Internal Audit.

1. How Can Internal Audit Do This?  

  • Internal Audit can help achieve all the above by :
  • Enhances competitive value across the whole enterprise
  • Helps in streamlining and quickening business adaptability and responsiveness in response to changing trends
  • Functions in the role of an advisor for the organization by helping to identify enterprise wide cost efficiencies as well as information on what can improve business performance
  • Ensures that external and internal financial communication would be monitored and appropriate accountability would be placed on those responsible
  • Ensures better checking of existing risk mechanisms and control procedures to ensure that it is in line with the trends

2. Why is Internal Audit Important?

It is becoming increasingly important for companies to maintain not just an external audit but also an internal audit function in the interest of transparency and effective corporate governance. Its importance has grown over time, particularly with the implementation of the Sarbanes-Oxley Act in the 2000s, that led to the demand for internal auditors, and increased emphasis on compliance testing and financial controls. Developments in the technology and the business intelligence gathering arena are also pushing the importance of Internal Audit forward.

In a survey by Forbes Insights for Ernst and Young on the importance of internal audit, 96% of respondents stated that internal audit plays a critical role in their risk management functions. Greater than 70% of respondents feel that there is a need for greater improvement in how internal audit is regarded by companies. Only 37% feel that there is a role for consideration of internal audit in business decision making and strategizing.

CFOs may have to include internal audit in their list of procedures that contribute to monitoring and ensuring financial well-being of companies. The advantages of maintenance of internal audit are as follows:

  • Being aligned with the organization’s key business objectives
  • Enhancing audit efficiency and effectiveness
  • Promoting risk management by monitoring risk
  • Being proactive about existing and emerging risks
  • Ensures cost efficiencies across all business units
  • Identifying the required internal and external skills that would help push organizational effectiveness
  • Providing competitive advantage by helping to implement improvements that are achievable

3. Implementation of Internal Audit:

There are different ways by which internal audit can be implemented in an organization based on the complexity of the business and its geographical coverage. Internal audit can be a full in-house activity, can be co-sourced (partial or strategic) or fully outsourced.  Organizations have to take a call based on their requirements, their strengths and their functions. Keeping in mind that internal audit is a long-term process, co-sourcing or full outsourcing may be useful in carrying out an internal audit transformation.

What are the benefits that a third party agent will bring to the management of your organization’s internal audit?

Firstly, such an arrangement brings organization specific, sector specific and international experience to the ecosystem. In addition, this external experience brings fresh perspective and knowledge gained from having helped other clients transform their Internal Audit functions. Third party outsourcing also provides highly skilled and experienced talent who are regularly trained in best practices. In addition, the agent also provides a wide variety of technology solutions and audit tools that can be customized to meet specific Internal Audit needs

4. What Should Your Internal Audit Cost be?

Investment in internal audit would require allotment of internal audit funds from the budget. Estimating how much it would be cost can be quite tricky. This cost has to be estimated from an evaluation of how much internal audit is required by an organization. Greater the internal audit required, more would be the investment.

A survey conducted by APQC showed conflicting views on how organizations spend on their internal audit, with some, not really keen in investing in the internal audit function;  they feel that it really does not add value, hence allocate less than 13 cents per 1000$  in revenue for monitoring controls and ensuring compliance with internal controls and procedures. The maximum spending on internal audit cost is $1.4/1000 $ in revenue.

However, the survey also showed that cost effective companies can actually leverage the costs of internal audit effectively to achieve a value for total process costs (including internal audit, reporting, establishing controls) ranging between 40 c to 3 $ per 1000$. While the actual cost of internal audit can be kept really small with minimal investment in compliance (as is actually done by some companies), this really does nothing to contribute to its effectiveness.

A more effective strategy should include both preventive and detective controls. Research shows that most companies choose a mix of controls that has 57% preventive and 38% detective controls, What is the appropriate mix of both that contributes towards the final internal audit cost, is dependent on many factors that affect the business specifically the business complexity and geographical location of the organization. These factors can be summarized as :

  • Geographical coverage of the company
  • Number of locations: local/international
  • Degree of centralization
  • Control
  • How mature are the businesses
  • Extent and planning of the Audit program
  • What is the percentage of change which the business undergoes?
  • How much can the management risk tolerance?
  • Risk Appetite of the board
  • Company’s risk management maturity
  • Risks specific to the company
  • Internal audit efficiency
  • Productivity
  • Complexity of business model

In summary, the benefits of outsourcing internal audit for your organization is numerous. It  streamlines and accelerates internal audit results, cuts costs, manages and monitor your business risks and provides an oversight of operational controls, thus freeing you up to work on your core tasks. It functions as a kind of strategic advisor that gives companies operational freedom, and flexibility.

In addition, IA transformation helps in creating and delivering on a business case for change! IA is about finding the balance between risk, cost, and value. Implementing this crucial function and associated metrics would prove transformational for the organization. Taking the help of a recognized CFO service provider would provide you the expertise to manage your Internal Audit efficiently.

Article by
Amy Pattinson

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