In-House vs. Outsourced Internal Audit: Which Is Better for Financial Institutions?

Internal audit departments have been a core component of financial institutions for decades. However, with the rise of regulatory scrutiny and the complex risk landscape of financial institutions, having an in-house team is not always feasible.

In today’s fast-paced business operations, outsourcing has become a popular approach to reduce costs and improve efficiency. It’s also a great way to access expertise and skills that might be lacking in-house. But before we explore why outsourcing might be a better solution to internal audits in the financial service industry, let’s look at internal auditing and how in-house internal audits differ from outsourcing.

What is internal auditing?

Internal auditing in the banking sector is a key component of the overall internal control framework. It helps management to identify and assess risks and opportunities arising from operational, financial and compliance-related processes within the bank. The banking sector is one of the most risk-laden industries in the world. From operational to liquidity risks, banks need to conduct risk-based internal audits regularly to assess their risk exposure.

Examples of risk-based internal audit plans for banks include identifying 

key areas of risk related to operations and compliance with regulatory requirements such as anti-money laundering laws.

It is important to note that internal audits can vary widely. It may depend on the size and nature of an organization’s operations. However, a bank’s internal audit checklist typically includes questions about accounting procedures, compliance with laws and regulations and security measures. It also frequently involves comparing the results of tests against expected outcomes, identifying discrepancies, and recommending necessary improvements.

In-House vs outsourced internal audit, what is the difference?

Internal auditors, whether an outsourced firm or an in-house department, are primarily responsible for compliance functions–ensuring that financial institutions adhere to all applicable laws and regulations. They monitor the effectiveness of internal controls and conduct risk-based internal audits for banks.

Let’s digress briefly into the concept of risk-based internal audits.

Risk-based internal audit is one of the most common approaches to internal auditing. With this approach, banks can identify areas with higher risks and focus on them in their internal audit process. Risk assessment can be done using a variety of methodologies. It could be a formal risk assessment involving an external consultant or an in-house internal audit team.

One of the major differences between in-house internal audit departments and outsourcing firms is that the latter provides various services usually unavailable through in-house departments. This service could include industry-specific expertise acquired through working with different financial institutions. 

In-house internal audit departments operate without being contracted out to an external firm. The internal auditor may be part of a larger department or division, such as finance, operations or IT. 

On the contrary, outsourced internal audit services are provided by third-party firms specialising in internal audit services. Organizations may hire these firms as needed for short-term projects or on a long-term basis for ongoing needs. Outsourced internal auditors are especially useful if your financial institution doesn’t have the time or resources to manage an internal audit function independently. 

In some cases, outsourcing can save organizations money if they don’t have the resources or expertise to perform certain tasks themselves.

Why outsourcing may be the best approach for internal auditing in financial institutions


1. Independence and Objectivity

A third party usually has the advantage of being independent and objective. As a result, they are less vulnerable to influence from the organization. In various cases, the in-house auditor can be too loyal or biased in their findings and recommendations. 

This is especially true for a big financial institution with multiple business units or divisions, which have their own target goals that may not always align with the organization’s overall goals.

Being outside of the organization could mean seeing things that many in-house internal auditors miss or choose to ignore. An independent consultant may be able to give an unbiased answer based on their experience with other companies in the same industry. Because they don’t have a direct stake in your company’s success or failure, they are less likely to have biases, making them ideal representatives of shareholders’ interests. 

2. Specialised expertise plus a fresh perspective

 Since they have a greater understanding of the inner workings of a banking institution, internal auditors are often seen as an excellent way to ensure that your organization performs at its best. However, there are some limitations to this approach. For example, in-house internal auditors may not have the necessary expertise for specialized audits or regulatory compliance matters. 

 On the other hand, an outsourced internal audit firm can offer insight into industry-specific and general issues that an organization may not be aware of. Suppose your organization has specific needs or requirements that aren’t met by in-house teams (for example, cybersecurity). In that case, it may be best to consider outsourcing internal audit services from an experienced firm specializing in that industry. 

Besides, regulators recommend rotating internal audit firms every three years. Why? One reason is to bring fresh perspectives to the audit processes and programs. Another is that an outsourced internal auditor can help create reports that properly portray the financial institution in the face of external entities like regulators, investors or lenders.

 3. Cost

Outsourcing your internal audit function saves costs associated with hiring staff or securing office space. If you’re looking for someone to help with a specific project, you might consider hiring an independent auditor instead of bringing someone on board full-time. With this, you can also save on time spent on developing reports since most outsourced internal audit services–from working with different companies–have extensive tools that make it easy to generate reports without having to do much manual work. At RADD, for example, we use a scalable and secure analytics solution with real-time data collection that may not be available in-house.

Finally, outsourcing internal auditing allows you to hire only those employees who are best suited for the job rather than hiring an entire team yourself. There’s no need to waste time interviewing people when already experienced professionals are available on the market! Doing this allows you to scale back when necessary without letting anyone go. You can temporarily stop using the outsourced service and return to it when needed.

Factors to Consider before Outsourcing Internal Audit Function

While outsourcing internal audit activities can be a good way to reduce costs and improve efficiency, it can also be risky if not properly managed. Therefore, it is advisable to consider the following factors before you decide to insource or outsource your internal audit functions or activities.

1. The first and most important factor is identifying the need for outsourcing. Internal audit functions could be outsourced when there is a shortage of skilled in-house internal auditors, when the internal audit department has a high workload or when there are no internal auditors. 

2. The second factor is to understand the audit scope of your bank’s operations and to determine the scope of services that will be outsourced. The scope should include financial services and other areas such as risk management, IT and compliance with regulations. Evaluating your audit scope will help you determine whether your internal audit department can handle all the work or not.

3. Thirdly, it is essential to identify firms that can provide the required internal audit outsourcing services. Look into their track record and choose an experienced firm that has worked with other banks or financial institutions.

At RADD LLC, we’ve been helping financial institutions with their internal audit needs for over a decade. Our Internal Audit team comprises experts in various fields such as Accounting-Finance, BSA/AML, Legal Audit, Inventory Tracking, and Compliance Management Programs. If you’re looking for a professional internal auditing service, our team is here to help! Contact us today for more information about our services.