Outsourcing the Audit: Is it Right for Your Firm?

by Thomas M. Angelo, CPA, CITP, Spire Group PC – August 2, 2018
Outsourcing the Audit: Is it Right for Your Firm?

Each firm needs to assess their practices, clients and teams to determine whether outsourcing works best for them. Certainly, this is not a black-and-white decision and requires much planning as well as beta testing over periods of time.

Outsourcing seems to be a buzzword in the accounting industry right now. Many firms are looking at which types of services they can effectively outsource to reduce their costs as well as cover for a lack of qualified internal talent. 

The most common function CPA firms are outsourcing is the preparation of indi­vidual tax returns. Often they are using companies such as XCM Solutions or SurePrep to prepare their individual and business tax returns.  In addition, some firms that are beginning to grow their outsourced accounting services are turning to outside firms including those in foreign countries to provide transaction processing activities, reconciliations and financial statement preparation for their clients. Many of the Big 4 and other top-10 firms are using their own staff located in foreign countries, such as India, to perform many of the lower-level audit functions to reduce costs and cut the overall audit fee which has become highly competitive. Some of the many functions that can be outsourced included:

  • Confirmations
  • Reconciliations
  • Detail testing
  • Analytics

While the Big 4 firms may have embraced this, many of the small to medium-sized firms have yet to outsource their audit work. Many believe that auditor judgement, localized planning and using the same staff on recurring engagements is the recipe for efficiency as well as quality. Finding qualified staff to perform these tasks in firms has proven to be very difficult. Often CPA firms are lacking the number of team members needed to staff busy peak seasons such as February and March or September and October.

In addition, much of the assurance world has become highly regulated whether you are doing public company audits, Department of Labor (DOL) audits or private company audits. The peer review process is far more intense than it was 10 years ago, and the requirements for documentation support are even greater. Many firms would not feel comfortable shifting any of these responsibilities to offshore firms to save money. Typically, CPA firms have used the traditional leveraged model to perform audits: a combination of staff accountants, senior accountants, managers and partners all working together to perform an audit, document all the necessary compliance workpapers and produce an audited financial statement.

AI vs. Outsourcing

While outsourcing could be a quick fix, another question is whether the evolution of artificial intelligence (AI) in the audit process is going to trump any savings that outsourcing can bring. Machine learning is new, and we are continuing to find and test new possibilities of its capabilities. One of the Big 4 firms is already testing using drones for inventory observations, coupling drone technology and machine learning to improve the accuracy of counts and ensure that nothing is missed, which can happen with the human eye.

AI could be used to analyze revenue contracts, for example, to understand how to apply the new ASC 606 and IFRS 15 standards. With something of such complexity, could this really be outsourced when factoring in finding qualified talent and training them? 

Internal Audit Outsourcing

There hasn’t been a great deal of audit support work being outsourced, but many private companies are outsourcing their internal audit functions. In some countries, such as Malaysia, the majority of publicly listed companies outsource their internal audit functions. In an age where effective governance, risk management and rapidly changing technology are happening, many companies in the U.S. may not want to outsource all their internal audit functions. However, potentially co-sourcing many of the internal audit functions to both internal company employees and outside companies may be the best combination. This lets the internal company executives and employees who have the pulse and understanding of the entity do their job while it taps additional resources when needed for many of the tests and other work without having to find the talent on a permanent basis. 

New Models 

Qualified staff in the five- to seven-year experience range at small to mid-size public accounting firms (which are a struggle to find) are key to running efficient smaller audits at competitive pricing. A more senior-level person with the firm could review and put together information into the audit file that would be worked on collaboratively by the firm’s staff and an outsourced provider, if hired. This combination would allow more staff to work on more engagements and utilize the outsourced provider during peak seasons.

Outsourcing also is not completely defined as sending work overseas. For example, a small firm that wants to do audits in a certain industry in which it does not have expertise can either decide to refer it out or partner with a larger, more-experienced firm to utilize some of their staff.

CPAs likely will never totally outsource a function that requires judgement and professional skepticism to ensure that the clients’ financial statements are fairly presented. However, CPA firms need to be open to filling the talent gap with some lev­el of outsourced support, AI and emerging technologies in order to stay competitive in the marketplace.

Thomas M. Angelo

Thomas M. Angelo

Thomas M. Angelo, CPA, CITP, is the managing principal of Spire Group, PC, and Spire IT, LLC, the firm's technology affiliate. He is a member of the NJCPA Content Advisory Board and Nonprofit Interest Group.