B.

Tom Harry
VU1409-0075
23rd Oct 2015

Thesis Proposal
Internal Audit Outsourcing
This research investigates the consequences of internal audit outsourcing function (IAOF)
performance measures and various independent variables
Thesis Statement
Is a company better off when sourcing internal audit rather than performing the
function in house?
A. CHAPTER ONE:
1.0 Introduction
The internal audit department is very important inside a firm that the internal audit is
regarded as the key element in the application of accounting systems which in turn, helps in
evaluating the work of the department. The internal audit is considered as the backbone of the
business accounting as it is the section that records all businesses related to the sector. The
efficiency of internal audit helps develop the work of the company because the financial
reports reflect the internal audit departments quality.
In most cases companies in Uganda tend to outsource, this practice is used by different
companies to reduce costs by transferring portions of work to outside suppliers rather than
completing it internally and its an effective cost-saving strategy when used properly
according to my research however Internal Audit Outsourcing professionals help
organizations meet their internal audit needs. "Companies must maintain an internal audit
function to provide management and the audit committee with ongoing assessments of the
company's risk management processes and system of internal control." This research
identifies the consequences effects of internal outsourcing, potential benefits, problems
solutions reasons and the keys to a successful practice to the organization
Business technology allows companies to outsource internal audit function to other
businesses in the national and international business environment. Outsourcing can help
companys lower costs and focus on completing the business function they do best. Internal
audit outsourcing function (IAOF) is an important and timely subject because financial
statements users, regulators, directors and managers view it as a key component of an
organizations corporate governance
The outsourcing of essential accounting functions, such as tax returns, book keeping, and
auditing my focus, have become a multi-million shillings industry around Uganda. Reports
of the scope and size of the outsourcing market vary greatly, but the largest outsourcing
government entities claim that thousands of returns were processed during the 2010 tax
season.
As business becomes more complex, and as organizations demand greater value from Internal
Audit, Internal Audit functions are increasingly stretched to do more with less. Outsourcing
the Internal Audit department can help meet this array of demands from reducing costs to
improving performance to boosting operational efficiency. Outsourced Internal Audit
The Institute of Internal Auditors Research Foundation in Uganda under Council-Institute of Procurement professional of
Uganda (IPPU) guided me to the Competency Framework for Internal Auditing study to gather information about the
internal audit outsourcing practice.

B. Tom Harry
VU1409-0075
23rd Oct 2015

functions can also provide insights beyond assurance and compliance by offering a truly
strategic capability.

1.1 Background of the Research

The accounting profession has felt the negative and positive effects of the internal audit
outsourcing going on by firms within this country, accounting firms are continuing to feel
more and more pressure to outsource some of their work and lower their costs. The
outsourced professionals prepare a thousand more tax returns without adding even one more
staff member? And what if you could prepare those returns for up to 50% less than what it
costs you right now? Meaning that with virtually unlimited ability to prepare and process
returns, you can increase volume, multiply profits, and grow your practice.
To date, however, no empirical evidence exists that attempts to assess financial statement user
perceptions or decisions regarding the practice of outsourcing internal audit activities to
external auditors. Do users believe that auditor independence or financial statement reliability
are jeopardized when external auditors are engaged to perform internal audit activities as
extended audit services? While several studies have examined the extent of internal audit
outsourcing (e.g., James 1994; Pelfrey and Peacock 1995; Petravick 1997; Schulz 1995), no
study has attempted to assess the impact of outsourcing internal audit on financial statement
users perceptions of auditor independence and related decisions
This is a very hard proposal for an accounting firm to ignore. Why wouldnt you want to
increase your volume and profits without adding any additional staffing? It seems like the
perfect situation for accounting firms. There are additional benefits that internal audit
outsourcing provides for accounting firms or any other entity

Many accounting/auditing firms claim that it is increasingly difficult to find qualified

part time help for auditing during tax seasons.
There is a significant cost advantage to internal audit outsourcing.
Improved turnaround time and productivity, in this case turns often come back in less
than 48 hours.
Reduced tax preparation workload frees up firms professional staff to find ways of
offering their clients new value-added services.
Internal audit outsourcing can serve as a catalyst for business transformation, enabling
a firm to outsource other accounting functions, such as bookkeeping and tax returns.
It also provide the organization with a greater level of assurance and risk coverage
Offer short- and long-term cost flexibility and scalability
Save the organization as much as 20% to 40% in costs
Boost operational efficiency and performance
Coordinate with the organizations governance, risk, and compliance program
Identify and manage emerging risks more effectively
Provide broader skills sets and deeper industry specialization, on an as-needed basis

The Institute of Internal Auditors Research Foundation in Uganda under Council-Institute of Procurement professional of
Uganda (IPPU) guided me to the Competency Framework for Internal Auditing study to gather information about the
internal audit outsourcing practice.

B. Tom Harry
VU1409-0075
23rd Oct 2015

Supply intellectual capital, offering proactive insights and recommendations on

leading practices
Provide access to leading-edge tools and methodologies, such as data analytics
Redeploy valuable internal resources toward core business activities
Execute on business strategy more effectively and achieve strategic goals and
objectives
Transfer knowledge and capabilities to the organization

Furthermore, being accustomed to an assurance role, many internal audit departments may
not stray far from this area of expertise. But when internal auditors stick solely to what they
know, it can be difficult to meet the evolving risks, strategies, and needs of the organization.
An external service provider can offer a consultative mindset on a range of risks and issues,
as well as industry-specific leading practices and knowledge acquired by working with other
clients.
To determine if outsourcing is right for your organization, they are various case questions
identified that you have to ask yourself:
Case Questions

Is your internal audit function auditing to the risk or business profile of your
company? Or is it auditing to its own capabilities?
What approaches, types, and methods of training are most effective at improving
internal auditor performance? What work environment, organizational culture, and
other factors affect this relationship and determine the types of training offered?
Does internal audit have the talent and capabilities to address the evolving risk
environment? Or is it struggling to keep pace with regulatory and marketplace
changes, as well as escalating demands? And how effectively does your organization
identify, recruit, and retain skilled internal audit professionals?
Can your internal audit department leverage leading technologies, such as data
analytics, to identify trends and patterns and provide deeper intelligence on business
issues?
Is internal audit misaligned that is, does it create potential exposure to your
organization when critical risks are not appropriately addressed?
Does internal audit have the subject matter expertise to provide insights and offer
quality improvement recommendations?
Can internal audit contribute to strategy discussions? Does it have the consultative
mindset to help your organization execute on business strategy when entering a new
market, developing a new product, or acquiring or merging with another company?
If you are in a high-growth, high-stress, or highly regulated industry, could your
organization benefit by redeploying internal audit professionals to other areas?
Are you getting value from internal audit that is commensurate to what you are
spending?
What is the value of employing personnel who have certifications, or helping
employees become certified? How can the benefits and costs of employee
certifications be measured?

The Institute of Internal Auditors Research Foundation in Uganda under Council-Institute of Procurement professional of
Uganda (IPPU) guided me to the Competency Framework for Internal Auditing study to gather information about the
internal audit outsourcing practice.

B. Tom Harry
VU1409-0075
23rd Oct 2015

What communication patterns do effective internal audit outsourcing establishes with

management and with the board?
What are the common definitions of success or failure in an internal audit
outsourcing? Which performance measures accurately measure the success or failure
of an internal audit outsourcing?
Is outsourcing an ethical practice, as a whole?
Is outsourcing for the sole purpose of reducing costs ethical?
Should accountants and lawyers be required to inform clients when they are
outsourcing services to a third-party provider?
Do jobs need to be destroyed to create new jobs?
What responsibility, if any, does a company have to employees that it has layed off
because of outsourcing?
Do the legal and accounting professions require regulation with regards to
outsourcing to ensure security for their clients?
What responsibilities do Uganda companies have to the workers they are outsourcing
to?
When does outsourcing become a necessity?
Are Uganda corporations too greedy? Is outsourcing just a way to make the rich more
rich?
Do you agree with outsourcing? Why?

Internal audit outsourcing is one way to help deliver higher levels of independence and
assurance, provide more detailed and unfiltered information, and offer broader value to the
organization. This study attempts to answer some of these questions.
Prior to PPDA, The Institute of Internal Auditors Research Foundation sponsored
several research studies concerning Organization internal audit outsourcing performance
quality. Benon C. Basheka Chairperson of Council-Institute of Procurement professional of
Uganda(IPPU) Senior Lecturer and Head of Higher Degrees, Uganda Management Institute
(2007) developed a method for internal Audit Functions to establish quality measuring
systems. John Ogwang and Ray Max Barugahare senior PPDA Auditors (1998) investigated
the role that internal audit outsourcing could take in their organizations total quality
improvement process. Finally, A survey of National Public Procurement Integrity conducted
in (2006) demonstrated how internal audit outsourcing could implement a balanced scorecard
framework to measure their performance. This were reviewed the Global Internal Auditing
Network; in this research I identified more than ten potential performance measures that
internal audit outsourcing could use; the survey was conducted to identify those performance
measures actually used; and developed an index to measure practice performance.
Other authors in different books consulted have also studied internal audit
performance issues. Applegate, (1997) described the non-traditional performance
measurement process at the Boeing Aircraft Corporation. Beeler, (1999) examine the factors
associated with internal auditor promotion probabilities. Williams (2000) identify the
efficiencies associated with value-added auditing. Reding (2000) benchmark the Allstate
Insurance Companys internal audit function against the internal audit functions Competency
Framework for Internal Auditing study. Brierley (2001) study the factors that prevented the
establishment of an internal audit function in the Sudanese public sector. Nash and Flesher
The Institute of Internal Auditors Research Foundation in Uganda under Council-Institute of Procurement professional of
Uganda (IPPU) guided me to the Competency Framework for Internal Auditing study to gather information about the
internal audit outsourcing practice.

B. Tom Harry
VU1409-0075
23rd Oct 2015

(2001) sampled the middle 400 companies from the Fortune 1000 to identify performance
measures currently being used by internal audit function s. Felix (2001) research the
contribution of internal audit outsourcing as a determinant of external audit fees and the
factors that influenced this contribution. Lampe and Garcia (2003) present the current state of
professionalism among internal auditors. Moeller (2004) describes how to manage an internal
audit outsourcing function among others.
Finally, this was summarize the literature demonstrating that the value of information
from audited financial statements declines as audit report lag increases and Carcello (2002)
found that what audit committees say they are doing differs significantly from what their
charters say the committee was actually doing particularly concerning voluntary disclosure
topics
However there are a few factors that are important to the success of an internal audit
outsourcing initiative. These include:

Alignment among internal audit, executive management, and the board regarding how
risks should be assessed, monitored, and managed

Clearly defined communications and expectations (i.e., how frequently and to whom
issues should be communicated)

Established and explicitly documented lines of authority and responsibility

By focusing on these areas, organizations can help their internal audit outsourcing initiatives
stay on track and meet desired objectives.
1.2 Statement of the problem
For organizations with little or no existing internal audit resource there is often little risk
associated with taking on an outsourced provider, particularly where the organization has a
need for an effective internal audit function. This is not the case in organizations with any
significant existing internal audit service. If the whole function is outsourced and employees,
certainly initially, expect to transfer to the audit provider, the organization will need to ensure
that the chosen provider can manage the transition and still provide the required level of
service
Outsourcing based on reducing costs and inputs can make a tempting case for those on tight
budgets, whether private or public sector, particularly in the current climate. It is important in
such circumstances for an organization to think rationally about what it is seeking to achieve
by outsourcing internal audit. Reducing costs can be achieved easily in the short term by
reducing employees and/or their remuneration. Outsourcing can also help to reduce future
pension costs. If the organization needs to pay lip service to an internal audit function only in
order to keep its regulator or external stakeholders happy, then outsourcing based purely on
lowest cost, regardless of quality, will achieve that objective.

The Institute of Internal Auditors Research Foundation in Uganda under Council-Institute of Procurement professional of
Uganda (IPPU) guided me to the Competency Framework for Internal Auditing study to gather information about the
internal audit outsourcing practice.

B. Tom Harry
VU1409-0075
23rd Oct 2015

Although the big four and those specializing in providing internal audit services among the
larger players in the market place can often provide a lean, high-powered internal audit
service, particularly for blue-chip and well-established commercial organizations, they are
often a step too far for public bodies with tighter budgets and less flexibility about the
existing workforce. Employees at major accountancy firms are generally better paid and
rewarded than public sector equivalents, making genuine cost savings difficult. For some
medium-sized and smaller players in the market it is not desirable to take on employees who
are unlikely to add to their bottom line or marketability elsewhere. In effect, for many public
bodies this can have a significant impact on any perceived savings from outsourcing internal
audit, as more specialized, smaller organizations may feel unable to compete for the contract,
leaving the field clear for a major player to bid at a less competitive price than might
otherwise have been achieved.
Getting the basket of performance measures right will be the key for most organizations.
Defining an effective internal audit function is not as straightforward as at first it might seem.
Describing performance in a rigid or mechanical way, such as an overly systematic approach
through ISO standards and the like, can lead to a sterile audit service that fails to pick up the
issues of most significance and risk to the organization. What use is an internal audit that
routinely checks and reports on standard activities but fails to notice the hurricane waiting to
blow the organization away?
1.3 Purpose of the study
The purpose of this study is to begin such an investigation. Specifically, this exploratory
study assesses both perceptions of auditor independence and financial statement reliability, as
well as a loan decision like when for example ACCA audit professionals has performed
extended audit services (i.e., internal audit activities) for an audit client. The objective is to
examine financial statement users reactions to the existence of different types of
relationships between auditors and their audit and non-audit clients regarding the
performance of internal audit related tasks
1.4 Objectives of the study
1.5 Research questions/ hypothesis
This study attempts to answer two general research questions. The first issue addressed is
whether outsourcing of a companys internal audit function to another external auditor (i.e.,
not their own external auditor), affects financial statement users perceptions of auditor
independence, the reliability of the financial statements, and their willingness to grant loans.
This type of outsourcing relationship is not uncommon as companies at times would prefer to
outsource their internal audit function to another external auditor than the one that performs
their external audit
Accordingly, the first research question is:
Q1: Does the outsourcing of a companys internal audit function to another external auditor
affect financial statement users perceptions of auditor independence, financial statement
reliability, and a loan decision? The second issue addressed is whether the outsourcing of a
companys internal audit function to their own external auditor affects similar perceptions and
The Institute of Internal Auditors Research Foundation in Uganda under Council-Institute of Procurement professional of
Uganda (IPPU) guided me to the Competency Framework for Internal Auditing study to gather information about the
internal audit outsourcing practice.

B. Tom Harry
VU1409-0075
23rd Oct 2015

decisions. The concern is whether the external auditor can perform the internal audit function
and also provide an independent second set of eyes at the internal control systems. As
discussed, while some have raised concerns over this relationship, the overall position
adopted by the AICPA is that performance of these types of services would not of themselves
impair auditor independence and thus are allowable by CPAs engaged to perform the
financial statement audit. In fact, there may be strong incentives to remain independent in this
situation.
Q2: Does the outsourcing of a companys internal audit function to their own external auditor
affect financial statement users perceptions of auditor independence, financial statement
reliability, and a loan decision?
Under the new guidance in Interpretation 101-13, auditors that perform the outsourced
internal audit procedures cannot act or appear to act in the capacity of management or an
employee of the client company. That is, company management still retains ultimate
responsibility for the internal audit.
This requirement is intended to maintain the auditors appearance as an outside professional
consultant to the clients management regarding their internal audit and related functions.
Such management decision-making authority on the part of the external auditors is explicitly
prohibited since it would presumably cause financial statement users to question the
independence of the auditor, and as a result, the integrity of the financial statements.
Accordingly, we also address the following related research issue in conjunction
Q2a: Does an apparent management role on the part of the external auditor performing the
outsourced internal audit function of a client affect financial statement users perceptions of
auditor independence, financial statement reliability, and a loan decision? Previous research
has found that the separation of consulting and audit personnel has not only mitigated any
independence concerns or problems but at times has also resulted in the highest perceptions
of independence, financial statement reliability, and credit/investment decisions. We expect
that a similar separation of personnel performing the external and internal audit functions
might also result in favorable independence-related perceptions
In an attempt to address this staffing issue and assess whether financial statement users
differentially view engagements with different staffing arrangements, we also examine the
following related research issue concerning external auditor involvement with a client:
Q2b: Does the distinct separation of individuals within the CPA firm that performs the
external audit versus those that perform the outsourced internal audit affect financial
statement users perceptions of auditor independence, financial statement reliability, and a
loan decision?
1.6 Scope of the study

The Institute of Internal Auditors Research Foundation in Uganda under Council-Institute of Procurement professional of
Uganda (IPPU) guided me to the Competency Framework for Internal Auditing study to gather information about the
internal audit outsourcing practice.

B. Tom Harry
VU1409-0075
23rd Oct 2015

1.7 Significance of the study

1.8 Conceptual/theoretical framework

B. CHAPTER TWO: Literature review
2.0 Introduction:
2.1 -2.3 Review as per variables/objectives
C. CHAPTER THREE: METHODOLOGY
3.0. Introduction
3.1. Research design
3.2 Research approach
3.3. Population and sampling
3.3.1 Study population
3.3.2. Sample size selection
3.3.3 Sampling techniques
3.4. Sources of data
For this research, my primary source is research studies and other published articles. I
heavily consulted various academic research studies that have been conducted on the topic
and also obtain my information from the Internet. My sources include the Social Sciences
Research and articles from industry and business publications such as the Journal of
Accountancy, and Internal Auditing. I also conducted informal interviews on the topic with
my Audit and investigation lecturer Mr. Saturday John in the advisory industry. However, I
used the interviewing only as a source for generating ideas for further pursuit.
3.5. Data collection methods
3.5.1. Data collection tools/instruments
3.5.2. Research procedure
3.6. Measurement of variables
The Institute of Internal Auditors Research Foundation in Uganda under Council-Institute of Procurement professional of
Uganda (IPPU) guided me to the Competency Framework for Internal Auditing study to gather information about the
internal audit outsourcing practice.

B. Tom Harry
VU1409-0075
23rd Oct 2015

3.7. Validity and reliability of research instruments

3.8 Data process and analysis
3.9. Ethical considerations
3.9.1 Limitations of the study
3.9.2 Work plan and budget
D. CHAPTER FOUR
4. Data presentation, analysis and interpretation of findings
E. CHAPTER FIVE
5. Discussion of findings
F. CHAPTER SIX
6. Conclusions and recommendations

The Institute of Internal Auditors Research Foundation in Uganda under Council-Institute of Procurement professional of
Uganda (IPPU) guided me to the Competency Framework for Internal Auditing study to gather information about the
internal audit outsourcing practice.