Outsourcing the internal audit function: the British Government experience with market testing

Abstract

Internal auditing has historically functioned as an integral part of an organization's risk assessment, control, and governance structure. Recently, the internal audit world has been challenged by external firms, including the large professional services firms, who are marketing internal audit services (outsourcing). The market potential for internal audit services is large with some firms projecting internal audit services to be 25% of the total of external audit billings in the next few years. Many governments have also argued that they could improve both the cost and the efficiency of governmental services by subjecting individual governmental units to competition from the private sector. Internal auditing may be an ideal candidate for market testing because (1) it is usually organized as a separate, stand-alone unit, and (2) there are many alternative providers of audit services. The authors had the opportunity to examine the ‘market testing’ of internal audit services within the British Government. We interviewed most of the major parties involved in a market test of internal audit services. Those interviewed included outsourcing providers, heads of internal audit departments, and a member of the Treasury who provided oversight of the process. Market testing led to some significant changes and challenges—some good and some not so good. This paper describes the market testing process in the UK and the potential benefits and costs associated with outsourcing governmental internal audit functions.