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. Identify 2 major benefits that the bank hopes to gain by outsourcing.

2. What role can Internal Audit play in the outsourcing decision? Explain how this role would help ensure these benefits are on target to be met but not impair Internal Audit independence.

Answer 1

Part 1)

The 2 major benefits that bank hopes to gain by outsourcing are given as below:

1) Outsourcing will help the bank in identifying and retaining talent people in the human resource department. These employees will work at the vendor's place but will continue to be bank's employees. The excess staff (which may not actually be required) will get removed after six months. This will result in better managment and improved functioning of the human resource department.

2) Cost reduction is another major benefit that the bank expects to gain from outsourcing. The bank will be required to maintain lesser resources that are generally required by the human resource department. Further, with the use of standard applications (provided by the vendor), the bank will be able to streamline its human resource processes and achieve addtional cost reduction.

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Part 2)

Internal audit can play a very important role in the outsourcing decision. The information maintained by the human resource department (such as employee data, compensation details, background details, etc.) is of critical importance and its leakage/misuse can create serious problems for the bank. Internal audit can evaluate the control procedures implemented by the selected vendor to prevent any such mishappening(s). Internal audit team can select critical controls in particular related to data protection and secrecy and test them to evaluate their effectiveness. Internal audit team should ensure that use of pen drives and portable data storage devices are prohibited for use at vendor's place. Further, CCTV cameras are installed by the vendor and they are functioning. Only authorized personnel are allowed to access computer systems and applications used for performing day to day human resource activities. Further, Internal audit team should also ensure that the systems deployed by the vendor are in sync with the systems used by the bank. Internal auditors should be objective in their approach and should carry out their activities in the most ethical and unbiased manner. They should not get lured by any benefits that may be offered to them by the vendor and should have full support of the bank's management while performing internal audit of vendor's business processes.