Graham Liddell: internal audit’s snog, marry, avoid conundrum

Graham Liddell considers the relative merits of delivering internal audit services in-house, outsourced or through a shared service.

Your head of audit leads an effective in-house audit team that delivers a valuable service.

But the internal audit function is coming under increasing budgetary pressure and you want to avoid the trap of saving costs by simply trimming audit days (the internal audit equivalent of salami slicing).

It’s time to revisit the options for how internal audit is delivered. Should you:

• retain internal audit 100% in-house?
• outsource part or all of the function?
• join forces with other local authorities to develop a shared service?

Each has its attractions and its supporters and no doubt you will want to carry out a full business case, ideally with a sophisticated scoring system.

But ultimately it will all come down to what you want out of your internal audit service and the sort of relationship you looking for.

In which case there is only one way to categorise the options: which would you snog, which would you marry and which would you avoid? Here are my (very personal) views.

Retaining 100% in-house

In-house audit teams offer a local authority some great benefits. Typically audit staff are highly experienced with a deep knowledge of (and commitment to) your local authority. They are seen round and about, are trusted by officers and members and can be asked to investigate areas of concern at a moment’s notice.

But in the current climate of decreasing budgets and increasingly sophisticated use of IT, the limitations of the 100% in-house teams are beginning to show.

Audit risks and audit techniques are changing rapidly and it’s hard for in-house teams, with limited economies of scale and little experience of other organisations, to keep pace.

Furthermore, as in-house audit teams become smaller, they are less able to cope with changes in demand or the loss of key members of staff. They are often seen as less attractive places to work and struggle to retain or attract quality professionals.

So should you snog, marry or avoid an in-house team? Whatever your relationships you have had with in-house audit teams in the past, it’s time to face up to the facts. The 100% in-house audit team is no longer as attractive as it once was: AVOID.

Outsourcing part or all of the function

In many ways internal audit is a strong candidate for outsourcing. There is a highly regulated and competitive market with some really big hitters keen to get your business.

If all goes well you could end up with an internal audit team that can cope with fluctuations in demand, has specialist knowledge combined with experience from a wide range of other clients. And the stiff competition from the market will help keep costs down.

The downside is that you will lose the deep knowledge of your local authority built up by your in-house team.

And despite the glossiness and smoothness of the winning pitch, you might end up being disappointed with the quality, especially if your new internal audit provider has cut its margins to the bone.

Can you see yourself in a relationship with an outsourced provider of internal audit services?

At first glance the private sector is enticing but there are real disadvantages in entering a long-term monogamous relationship.

By all means, bring in the private sector for specific pieces of work (like many other internal audit teams, we buy in IT audit services) but be wary of going all the way. If the choice is snog, marry or avoid, then the answer is snog.

Develop a shared service

A shared service between two or more local authorities can offer the best of both worlds.

Get it right and you can retain auditors with a deep knowledge of your authority, supplemented with experience of what happens elsewhere, your audit team can benefit from the economies of scale and resilience from being part of a larger audit grouping and you can provide opportunities for staff to develop and progress their careers.

However, developing a shared service is not straight-forward. It takes time and hard work and, despite the obvious opportunities for staff, is inevitably unsettling.

Much will depend on developing strong working relationships between the heads of audit at each local authority, putting robust project management in place and engaging with staff.

So, how do you feel about a shared internal audit service: snog, marry or avoid?

By now, you will have spotted that I have declared my hand. For me, developing a shared internal audit service across two or more local authorities is by far the best option.

But it will only turn out well if you can work together and are prepared to put in the effort. In other words: find the right partner, commit and marry.

Graham Liddell is Head of Internal Audit at Brighton & Hove City Council.

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