What Are The Advantages & Disadvantages Of OUTSOURCING your INTERNAL AUDIT FUNCTION. KPA/KPI To Measure The Outsourcing Provider's performance

Nowadays, we see many medium companies dispensing with internal audit department and instead outsourced it to other external professional parties.

Why is this so?

This can be answered from the Advantages and Disadvantages point of view:

ADVANTAGES:

1 Skills

If the auditing firm that you outsourced to is a large one, the company can enjoy the expertise of the auditors who are most skilled in their areas of audits.

2 Staff Quality

Especially true if the provider is from the Big Four where the quality of the auditing staff supplier should be unusually high. This allows the company to have confidence that the audits will be in-depth and thorough

3 Knowledge of Best Practices

Compared to the in-housed auditors, the outsourced auditors might have more knowledge acquired when they review the functions of many companies hence building up a hugh knowledge base of how processes can be performed most efficiently and effectively.

4 Variable costs

The company only pays for audits performed hence the auditing cost can be switched from being a fixed one for an in-house staff to a variable one for an outside staff.

5 Quick accessibility to audit services

The company has the advantages of very quick accessibility to an experienced audit team if it acquires a new business in a foreign location that is inconvenient for its internal staff to reach

6 Reduced travel costs

With a big auditing firm, it can avail itself with audit staff from all over the region hence saving the company hugh traveling costs if it will to send its own internal staff

7 No downtime

The company is able to avoid nonproductive downtime that sometimes occurs with an in-house staff, such as the interval between the end of one audit and the beginning of the next

8 No hiring and training costs

The company can avoid the substantial hiring and training costs needed to staff and retain high key powered audit team



DISADVANTAGES:

1 Higher Cost?

This can be more expensive as the auditing firm will charge its client using hourly rate which includes the firm’s overheads and profit margin. Also, there is the additional concern that as the audit progress, the audit firm will increase its fees.

2 Experience & skillsets

The perceived quality of the auditors provided by the audit firm may be lower than anticipated since most of them have a very high staff turnover and also recruiting staff with lower level of experience in order to give them experience.

3 Training

Some companies used the internal audit function to train their managers so as to given them a sound knowledge of how the company functions. By outsourcing, the company loses its training ground for the future manager of the company.

4 Responsibility

The management might have the wrong notion that the responsibility now is passed to the outsourced provider.

5 Independence

Sometimes, the outsourced providers are the external auditors hence the dependence of the external auditor is at stake as its directly conflict with their role as the internal auditors.


Once, management had selected the outsourced provider for its internal audit department, another critical factor to consider is to understand how to measure the performance/efficiency. Append below are some KPA/KPI to measure the performance:

1 % of Audits Completed

This can be measured by dividing the total number of completed number of audits signed off by all parties by the total number of audits listed in the annual audit plan. If there is a big variance, it might mean that the appointed outsourced audit firm might be inefficient which should be replaced with another one.

2 Cost per audit

This can be quantified or measured by extracting directly from the bills/invoices of the audit firm.

How To Monitor/Control The Work Of Outsourced Provider

Earlier article focus on what KPA/KPI needs to be set for an outsourced partner. Besides, management also need to understand how to institute controls to check on them.

Some of the minimum control points that need to be instituted on accounting and bookkeeping external outsourced provider are as follows:

1. Timeframe on the audit of the bookkeeping and accounting service provider- twice or at least once a year,
2. Company needs to compare billings from the bookkeeping and accounting service provider against the budget,
3. Similarly the company also needs to compare billings from the service provider against the original contract,
4. The company official needs to keep proper documentation on meeting minutes. The minutes must be very clear of what has transpired, who are responsible, and others,
5. The company needs to review the outsourcing accounting and bookkeeping outsourced provider's expense trend periodically whether monthly, quarterly or yearly
6. The general ledger in the books of accounts must have detailed accounts to keep track of all types of expenses of the service provider. Detailed monthly budget should earlier be keyed in.
7. A complaint database whether from internal or external customers should be maintained to ensure that the provider is providing efficient and satisfactory services.
8. The general ledger in the books of accounts must have to keep track of all types of expenses of the accounting and bookkeeping service provider. Detailed monthly budget should earlier be keyed in.
9. The company official needs to keep proper documentation on . The minutes must be very clear of what has transpired, who are responsible, and others,
10. Company needs to compare billings from the accounting and bookkeeping service provider.

What Are The Reasons, Risks and Opportunities When Outsourcing The Company's Bookkeeping and Accounting Department

Nowadays, management view many aspects of the bookkeeping and accounting work as non-core transaction processing function. They would like to their financial controller, accountants to become business partners to them by they offering higer efficent services.
Hence there are many typical and easily outsourced tasks in the Bookkeeping and Accounting Section. Some of them are included below:

• Transaction processing – Accounts Receivable and Accounts Payable
• Treasury namely cash management,
• Collections of monies from Accounts Receivable,
• Keeping books of accounts until preparation of financial statements,
• Internal auditing,
• Taxation,
• Company secretarial,
• Payroll
• Investment
• Pension

Some specific reasons and opportunities for outsourcing the Bookkeeping and Accounting functions are:

      1.0 Focus on strategy and its core function

By outsourcing, it is able to avoid spending the bulk of the day handling, checking and reviewing the low value transaction processing operations. Time can be better spend on high key strategic and business partnering function,



      2.0 Avoid major investments

Sometimes, management needs to make a decision to make a major investment in the function in order to modernize it. By outsourcing the function, the company can permanently avoid having to make this investment.


3.0  Handle overflow situations,

There are times of the day or year when a function is overloaded for reasons that are beyond its control. In these situations, it may be cost-effective to retain a supplier/outsourced provider to whom the excess work can be passed to when the in-house staff is unable to keep up.

4.0  Elimination of fixed costs

Instead of handling overflow situation, the function can be wholly pass for outsourcing simply to converts a fixed cost into a variable costs- the prices of the outsource provider will fluctuate directly with the transaction volume it handles

5.0 Improve ratios

It enhances especially profitability or productivity per person. This is especially true if you have too hugh manpower in the accounting function


6.0 Reduce costs

Enhance credibility by passing the job to the Big Accounting Four or larger reputable accounting firms

7.0 Jumping on the bandwagon.

As more and more coverage and publicity are on this, we see senior management of the companies asking their CFO’s to look into this option or strategy.


8.0 Improving performance

Sometimes, a company may find that the accounting functions has bloated costs or inadequate performance. This tempted management to “shake up “ the accounting function by advocating outsourcing to internal ( share service centre ) or to external party.


Following are some of Risks when outsourcing the bookkeeping and Accounts Department:

• The outsourced provider’s ability to supply the services may change over time.
• The situation may change in the future, causing problems in the outsourcing relationship. This might be due to the provider having financial difficulties or it’s change in strategy that forces it to provide different services,
• Another risk is that available information about the success of outsourcing is usually skewed in favor of success stories.
• It’s might ruin or dent the reputation of the company, if the company lays off a large number of employees as a result of an outsourcing arrangement. This is especially true if the employer has been known to be a very caring employer whether towards it community and its staff.

Therefore, it is very important to reiterate that if we were to outsource the some of or all of the accounting function, the financial executives need to carefully plan ahead by examining some of the following factors :

• The need to have a clear definition of the desired relationship. We should not jump into the vendor selection process,
• The need to remember that outsourcing is not all about cost cutting. Otherwise, the results will be disastrous,
• To allow outsourcing option a success will depends on the way requirements are defined, the way objectives are laid, the way vendor is chosen and the way service level agreement is written.

How To Measure The Efficiency Of External Outsourced Partners

When management have decided to outsource some of its business processess to external outsourced partners. one critical factor to consider is to how to measure or maintain certain performance level of the services render by such outsourced providers.

The key performance metric or key performance area(KPA) and key performance indicator(KPI) can be demarcated into the different areas :

TRANSACTION PROCESSING:

• Average cost per transaction

Strictly the average cost per transaction does not varies with the volume. This change unless there is a contractual agreement to alter the cost per transaction if there is significant change in the volume of transactions. This cost is easily obtained from the provider billing statement and should be tracked on a trend line to spot any changes to the per-unit cost.

• Error rate on processing

It’s important to have an almost zero free error rate otherwise it will have great impact on the customers. Therefore, the company should schedule periodic audits of all processed transactions to determine the percentage of errors in such areas as billing addresses, accounts payable matching and others

• Average turnaround time like payment of employee expense reports ( staff) or to the creditors

Periodic checks should be done to ensure that the agreed average turnaround time to pay the above is on target otherwise there will serious repercussions to the company’s business

• Average time to resolve errors
• Timeliness of processing like invoicing customers on time
• Percentage of invoices paid on due date
• Percentages of payment discounts taken

BOOKKEEPING AND ACCOUNTANCY SERVICES:

• Time to release financial statement

This can be measured by the number of days lag between the end of the reporting period and the receipt date.

• Number of percentage of material irregularities

This can be determined by the amount which the financial statements are incorrect, and derive a percentage of inaccuracy based on how far off the profits are from what they should have been.

• Accuracy of accruals

This can be reviewed by looking at the calculation used for the accruals. This can be determined by the amount which the financial statements are incorrect, and derive a percentage of inaccuracy based on how far off the profits are from what they should have been.

In a nutshell, when a company outsourced its bookkeeping,accounting and other business process to external outsourced partners, it is important to have an almost zero free error rate otherwise it will have great impact on the customers. Therefore, the company should schedule periodic audits of all processed transactions to determine the percentage of errors in such areas as billing addresses, accounts payable matching and others

What to Plan For When Outsourcing?

Some noteworthy factors to consider when planning to outsource to external parties:

1. The need to have a clear definition of the desired relationship. We should not jump into the vendor selection process,
2. The need to remember that outsourcing is not all about cost cutting. Otherwise, the results will be disastrous,
3. To allow outsourcing option a success will depends on the way requirements are defined, the way objectives are laid, the way vendor is chosen and the way service level agreement is written.

Why Outsourced? What are some of the Advantages and Disadvantages of Outsourcing?

In today's highly competitive environment, the Head of Finance or Accounting is pro-actively working together with top management to aggressively pursue ways to achieve efficiencies, improve customer services and save money. It is a continuing trend of finance transformation role from a low value transaction service provider into higher value added service provider.

It is therefore not a surprise that outsourcing option will poise to be one of the financial strategy of the company. This is particularly applied to non-core business processes & activities and related labor and resource intensive tasks.

What really is Outsourcing?
Outsourcing in general can be defined as passing of service provision or production to another internal or external party.

With Outsourcing, we seek the following advantages or benefits:

1. It reduces the dependency upon internal resources and increases the flexibility to meet the changing business and commercial conditions,
2. It facilitate best-of-breed implementations,
3. It reduces capital expenditure over a business process.
4. It's a way to manage costs and convert fixed assets to variable costs - while staying abreast of new technologies.
5. It brings predictability and reliability to the management of information technologies. It offers the advantages of converting fixed costs into variable costs without sacrificing service quality.

As stated above, Outsourcing allows management to meet the challenges of today’s global economy.It is a powerful management tool to meet several critical success needs in today's global economy. These include speed to market, a standardized global presence, overcoming skill shortages, and coping with trends like the rise of e-business, deregulation and privatization.

Perhaps some of the disadvantages when deploying external outsourced partners:

• Tendency to loose the managerial control. This happens because it is harder to manage the outsourcing service provider as compare to managing one's own employees,
• Might tend to under-estimate the potential hidden costs of outsourcing like legal costs of putting together a contract between companies and time spent on coordinating the contracts.
• It can prove to be a threat to the security and confidentiality of issues of a company. If your company is outsourcing business process such as payroll, confidential information such as salary will be known to the outsourcing service provider. Therefore one must be very careful in choosing which business process to outsource and which one not,
• Outsourcing may also result into the possible loss of flexibility in reacting to changing business conditions, lack of internal and external customer focus and sharing cost savings.
• Loss of internally generated talent is yet another problem associated with the outsourcing as it may hamper the growth of an employee by depriving him from the experience he would have gained by handling the business issue himself then by passing it over to some other external party.