This has come at an inopportune time with many management teams looking to cut back on IA budgets swollen by the recent years of SOX activity.
Increased use of co-sourcing arrangements — to fill the current skills gaps — may well be the way forward but there is no doubt that budgetary decisions made now could seriously affect the shape of IA for the years ahead.
Mike Nolan, a partner in the U.S. firm’s Advisory practice and Global Head of Internal Audit Services, explained:
“I think this is crunch time. After several years of seeing more money pumped into internal audit in response to the requirements of SOX, it’s an understandable reaction from management to now look to trim that budget. In this regard, internal audit has possibly suffered from an overly close association with SOX. Its remit was greater than just SOX but that has totally dominated corporate priorities in recent times so IA teams were staffed accordingly. Now SOX has stabilized and many IA teams may find themselves exposed, lacking the skills required to deal with the new raft of contemporary business risks.”
“For evidence of that, look no further than the way in which more forward-looking companies are already increasing their use of co-sourcing arrangements to try to plug the obvious skills gaps which have now appeared. This is a time for more investment — or, at the very least, smarter investment — not less, yet I fear that many management teams may go down the simple cost-cutting route, especially in today’s more challenging economic environment. In these post-credit crunch days when more business risks abound than ever before, this is a dangerous strategy. If budget cuts must be made, then companies will be faced with the challenge of paying less but getting more for their money. This is where really good co-sourcing arrangements can come into their own — but it’s a very tricky balance to strike.” Nolan admits that it’s not difficult to see the logic for cutting back on IA’s funding. After all, much of the resources put in place to deal with SOX will have been junior, ‘box-checking’ resources which will appear easily dispensable. That may well be the case but any cash saved, he argues, should be reinvested in more specialist resources, not simply banked. The need for specialist resources — necessitated by the myriad of new, niche risks which have emerged in recent years — means that the days of the fully in-house IA model may be limited. Any IA function which tried to cover off all the requisite skills to handle complex risk areas within its own employee base would quickly become an extremely bloated and cost inefficient monster.
At the same time, more and more companies are expecting their IA teams to deliver more in terms of value creation from their risk and control based activity, not just value preservation. In this way, pressure is mounting on all sides — to deliver more while paying less and coming to terms with the skills gaps in the current organizational set-up; hence why further use of co-sourcing arrangements with third party providers looks like the way forward.
Nolan continued:
“Having the capability to deal with today’s business risks requires a significant level of investment in skilled resources, methods, training, career paths and technical infrastructure. Audit committees increasingly look to IA to help them expand their oversight of organizational risks, governance, financial reporting and control frameworks. Maintaining that capability requires a sustained level of investment in both good and challenging economic times. As both a critical business operation and a function perceived by many to be a cost center, IA therefore looks like a prime candidate for strategic sourcing.”
“Internal audit is undoubtedly at a crossroads in its evolution. I hope that the decline in the SOX work is not simply used as an excuse for cutting back on spending without thinking of the fuller ramifications of what this means for a business’s ability to independently assess, monitor and evaluate controls related to the myriad of risks that it faces. Now is the time to be beefing up with more sophisticated capability in this area, not stripping it down.”
Contact:Simon Griffiths, Global Advisory Corporate Communications, KPMG in the U.K.
Mobile: +44 121 232 3760
e-Mail:
simon.griffiths@kpmg.co.uk
