Question

A large, international bank is considering outsourcing all facets of the human resource function, including recruiting, benefits, payroll, employee training, and development, compensation, and information systems. Three potentially viable vendors have been identified. The internal audit function has been asked to review the vendor selection process and evaluate each vendor’s system of internal controls. Senior management has decided it wants a 10 equity stake in the company that performs the outsourcing function. The original terms of the agreement call for 1,000 employees to be moved from the bank’s human resources function to the company who ultimately receives the contract. The vendor will then be responsible for evaluating the employees’ performance and determining which employees will be terminated after a six-month period. The vendor has the option to determine which computer systems are used. The length of the contract will be either five or 10 years, depending on its pricing structure. The bank expects to achieve significant financial gains from this outsourcing arrangement, including significant cost reductions associated with the conversion to standard applications provided by the vendor. The vendor will be expected to leverage existing systems, processes, and personnel and be able to make a profit based on the economies of scale, particularly in the systems areas.

1. How can Internal Audit help during the transition phase? Explain how this help would not impair independence.

2. What kinds of tests might Internal Audit perform after the transition is complete that will help the bank determine if the outsourcing was successful.

Answer 1

1. The transition involves outsourcing human resource function of the organisation. Three potential vendors have been identified and internal audit functions have been asked to review the vendor selection and internal controls. The internal controls of the selected vendor is going to directly affect the performance of Bank as Bank is going to outsource its Human Resource Function. Reviewing Vendor selection processs is vital ti ensure no corruption or bribery was inolved and selection was done purely on the basis of merit. The vendor will be responsible for evaluating the performance of the employees who are outsourced, reviewing internal controls would ensure that the same are in line with Bank's performance evaluation system. The internal audit function is independent function and in not involved in day to day functioning with management. Therefore, getting help from internal auditors will not hamper independence.

2. The Internal audit function can Observe the way things are functioning. They can perform enquiry and ask questions to outsources employees to know how things are functioning there. They can perform analytical procedures to compare results. They can compare employee performances to check their efficiency.