“Times, they are a changing,” the words of a popular song extol. But in the case of the Internal Auditing profession, times have already undergone a radical evolution. The field is experiencing a metamorphosis every bit as dramatic as the transformation of a caterpillar into a Monarch Butterfly.
The stereotype of auditing has been cacheted into our consciousness through a combination of television and Hollywood. The word evokes images of an individual laboring alone in a small, hidden office beneath a single light bulb. The ingrained vision wears a green eyeshade (always green) and periodically plunges a pen into an inkwell as he endeavors to reconcile an endless compendium of numbers in some gigantic ledger. “Balancing the Books” it was uneasily called in days past, and was more often than not accompanied with a conspiratorial wink.
Today, much more than simply adding up figures is required of internal auditing. “It is now an integral part of value production within a company.” So avers Terence McGrane, the National Accounts Partner for KPMG’s Internal Audit Services Practice. KPMG is a major, international accounting firm, and McGrane has spent more than 20 years designing, developing and deploying internal audit functions in fifty six countries and on six continents.
The new role of internal auditing
Internal auditing has ceased being, in a historical sense, merely the enumerator of a company’s financial activity. It now plays an active role in the strategic planning and prognostication of future values and profits. Internal auditing has been transformed into a value driven function necessary to the planning and growth of any business, large or small.
“The major focus of KPMG’s Internal Audit Practices,” according to McGrane, “is the internal auditing community that works for major companies.” There is an overriding advantage for bringing in an outsourcing firm such as KPMG to work with an existing internal auditing function already existent within a company.
McGrane cites four main cornerstones to such an outsourcing arrangement:
- Industry focus and expertise. This is a key quality that a business should take a hard look at before retaining an outsourcing, internal auditing supplier. Are they familiar with the specific industry that the company’s engaged in? Diversity of industries has become the blessing, and bane, of the marketplace. Within specific industries, there has been a geometric growth of specialized segments, each with its own problems and methodology.
- An outsourcing firm must bring to the company’s internal auditing structure multi-disciplinary experience, strategy-process risk subject matter particularly. This will quickly expand the company’s internal auditing groups overall core knowledge. It can do this by interjecting a broader concept approach, compared to the tight parameters many “home-grown” departments create for themselves. McGrane describes KPMG’s entrance into this scenario as a “just in time approach” to the involvement of its own labor.
- An auditing outsourcer must bring to the table a broad, integrated resources approach to what – up until that time – had been a narrow, and often shallow viewpoint by an internal department. An experienced outsourcer will provide solutions not apparent to the company team.
- “Methodology and tools,” states McGrane, “is an added dimension that an outsourcing, internal auditing firm will put into the mix for a client company. Not just the ‘whys’ of an approach, but the ‘hows’.”
- These four axioms, when fully implemented, will enable the outsourcing supplier to “bundle” with the internal auditing function within a company.
“Bundling” as a path to success
The capability of generating this close, integrated ‘marriage’ of outsourcer with the company’s internal audit group should be of paramount importance to any business seeking such an arrangement. McGrane says such a close knit working equation will enable the outsourcing firm to come to grips with the culture and politics existent with any corporation. An outsider that doesn’t “bundle” with the internal team will always remain just that, an outsider. This could limit the effectiveness of the outsourcing firm to accomplish its purpose…even lay the groundwork for failure.
“Bundling” with the resident, internal auditing group is the optimum way to achieve maximum value. This will permit the alignment of the two teams, outsourcer and internal department, and produce the greatest impact by actually making possible a free exchange of information and effort.
The Value Strategy
Company management today, is increasingly declaring that they want to turn what they are spending on internal auditing into an investment that will produce measurable value. An outsourcing, internal auditing firm, according to McGrane, “should be a coach, advisor and contributor to the shift in managements’ intent for its internal audit function.” This can be a major transformation for a company’s internal audit group. The available resources to produce such a change may not be readily available within the department.
According to McGrane, “An outsourcing firm can provide the expertise in this area that may be lacking within the company’s infrastructure. This arrangement will fill that need and create an internal core auditing function that will work in tandem with managements’ strategy, processes, risks and controls.” This will produce value for the company.
The historical knowledge of an industry’s activity, particularly a company’s role in it, will enable an internal auditing core group to predict with uncanny accuracy the future effects of a company’s endeavors. It will forecast correct returns on investment and identify and recover investment and revenue leakages. This takes critical guidance and coaching; a homegrown internal department lacks this diversity of experience.
The marketplace is now undergoing a transition into E-commerce, and many companies are struggling with this transformation. An outsourcing, internal auditing firm can smooth the way. They can evaluate the e-processes and e-tools available to the client company and its relative position on the business life cycle. Some organizations have already made the transition into the supply-side of the e-business but have stalled due to lack of internal infrastructure to finish the journey. An outsourcing internal auditing firm can help that company dock their corporate ship.
Evaluate any prospective outsourcing firm with the four components enumerated by Terence McGrane: industry focus and expertise, multi-disciplinary experience, integrated resources, and methodology and tools.
Lessons from the Outsourcing Primer:
- The internal auditing function within business is changing.
- Internal auditing, instead of an expense, should be a value producer.
- E-commerce is a new frontier many companies have problems crossing. An experienced internal audit outsourcing firm can guide the way.