Blindsided by Outsourcing

 A CAE learns executive management is considering a third-party firm for the company’s internal audit services.   

Stewart James is the chief audit executive (CAE) of a franchising company located in North America. The organization’s network of company-owned and franchise operations has grown in size during the past several years, with retail sales now exceeding US $3 billion.
Stewart’s department consists of one audit manager and three senior auditors, whose professional experience ranges from two to 19 years. All of the auditors work long hours to meet their annual audit plan, which is based on The Committee of Sponsoring Organizations of the Treadway Commission’s Internal Control-Integrated Framework and includes operational, financial, and compliance reviews as well as consulting engagements. Because the company is listed on the New York Stock Exchange (NYSE) and subject to U.S. Sarbanes-Oxley Act of 2002 requirements, the audit department also works with management, the audit committee, and the external auditors to comply with the law’s provisions.
Earlier today, Stewart encountered the company’s chief operating officer (COO) and chief financial officer (CFO) while walking to his office. The COO asked Stewart if he had a moment to discuss something that had just been brought to his attention — as part of a corporatewide cost-saving initiative, the CFO recently solicited a proposal from a third-party firm to outsource internal auditing. Stewart was shocked by the news and the manner in which it was presented to him, particularly because his audit shop had been generating increasingly important audit findings during the past 18 months. When he asked if the COO or CFO had discussed this initiative with the audit committee or its chair, they responded, “No, this is a management issue, not a board issue, Stewart.”
How should Stewart respond to the COOand CFO’s proposal, and what specific actions should he take? What could he have done differently to avert this situation?
Post your own thoughts on this scenario, or see expert commentary in the full version of the article.

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Blindsided by outsourcing
My suggestion is that Stewart should talk to the audit comitte regarding it.
Posted By: Michael Akindutire
2010-01-16 6:16 PM
"Blindsided by Outsourcing"
Outsourcing the internal audit should be the function of the audit committee if the principles of Corporate Governance are to be entrenched.
Posted By: olayinka Adegbite
2009-12-17 10:17 AM
Blindsided by Outsourcing
Stewart shall inform the CFO and COO that the decision on the quality of work, man power of internal audit department are the decision of the audit committee based on the Code on Corporate Governance. The management does not have the right to decide before the board and the management proposal shall be presented to the audit committee on the next meeting. He may suggest to the CFO & COO that outsourcing internal audit may not be a cost savings method as his department is now equiped with experienced and qualified personnel who have been working long hours to fulfill the audit plan. Meanwhile, Stewart take into consideration in his audit planning that the decision by the CFO & COO may indicate possible attempt to hide or avoid the current audit team from discovering certain sensitive issues.
Posted By: Sophia
2009-12-10 8:59 PM
Blinded by outsourcing
Stewart needs to know that the behaviour of CFO and COO indicates a red flag for fraud. He should discuss the matter with the Audit Committee and try to escalate it.
Posted By: Sowate Samson
2009-11-13 6:51 AM
Blinsided by Outsoursing
One of the most critical IA question is “How Internal Audit culture should be enhanced" As CFO and COO are not recognizing IA role and authority, misappropriate thoughts could be laid out. Accordingly, IA role, authority and responsibilities should be dispatch to all related party clearly. In such case only the Audit Committee should be decide quality level of IA
Posted By: M.Ashour
2009-11-10 5:07 AM

During the past 18 months, the audit shop does not appear to have raised awareness regarding responsibilities of internal audit and what is needed to fulfil those responsibilities, which led to COO and CFO attempting to decide on matters that belong primarily to the CAE and the Audit Committee
Posted By: Khalil
2009-08-24 8:33 AM
Comment: "Blindsided by Outsourcing"
The COO and CFO are wrong! Internal Audit's independence requires that it report to direct to the Board via the Audit Committee. If Stewart needs additional manpower to fulfill his fudiciary responsibilities, he and the Audit Committee should decide how to best provide the additional staff.
Posted By: Jack T. Beavers
2009-08-12 4:41 PM


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