A Case Study in the Trend of Financial Institutions Outsourcing Their Internal Audit Function; Specializing in Smaller to Mid-Sized Banks
Internal audit has gained the reputation of being a "necessary evil." Thus, many firms are looking for alternatives to the traditional audit department. Outsourcing ofthe internal audit function is an option that has become increasingly popular over the past several years, even though it has been in existence for more than 20 years. Over one-half of the decisions to outsource have been made over the last five years. Financial institutions, specifically, have been one of the most active in the decision to outsource. According to a 1997 survey, over one-third ofthe industry has out-sourced their internal audit function. This paper investigates several specific institutions and their justifications for outsourcing (or not outsourcing), along with interviewing the institutions' outside internal audit service provider. The heart ofthis case study revolves around small to mid-size banks. Interviews with bank executives have lent credible and relevant knowledge to the study. The root motives behind the outsourcing of the internal audit department among smaller banks is shown to be an interrelated combination among cost and quality factors. Furthermore, the choice to outsource (or not to out source) has clearly been in the best interest of stakeholders. Smaller financial institutions are realizing that in most cases a higher quality end product can be achieved with little additional cost (or even cost savings) when the internal audit department is outsourced to a competent provider.