Internal Audit vs. External Audit

  • Former Federal Agents
  • 100 Years of Combined Experience
  • Investigations, Compliance & Defense
Chris Quick

Former Special
Agent (FBI & IRS)

Roger Bach

Former Special
Agent (DOJ-OIG & DEA)

Timothy Allen

Former Special Agent
(U.S. Secret Service & DOJ-OIG)

Ray Yuen

Former Special
Agent (FBI)

Michael S. Koslow

Former Special
Agent (DOD & OIG)

Corporations often find themselves in a position where conducting an audit is in their best interests. Whether the goal of the audit is to improve the company’s business practices and bolster its bottom line or to test its compliance mechanisms in order to protect it from legal liability, one of the most important decisions that stakeholders will have to make about the audit is whether to handle it internally or to get external help.

The internal audit consultants at Corporate Investigation Consulting have guided numerous companies through this difficult decision. With their experienced help and insight, companies, executives, and stakeholders have been able to make an informed decision about how to proceed with their auditing endeavor.

The Difference Between Internal and External Audits

As their names imply, the core difference between an internal and an external audit is who is conducting it: Internal audits are handled by people within the corporation, while external audits are handled by professionals or contractors who are not employed by the corporation. In many cases, internal audits are conducted by employees in a particular department within the company, like the:

  • Corporate Compliance Office,
  • Human Resources Department, or
  • Office of Legal Affairs.

The precise wording of these departments will vary by corporation, though the general responsibilities will be largely the same.

External audits, on the other hand, are performed by professionals who are independent of the company. These auditors are generally employed by auditing companies, themselves.

The Pros and Cons of External and Internal Audits

This singular difference between internal and external auditors spills out into numerous drawbacks and benefits for each type. Some of these results can, and often should, change whether it is an internal or an external audit that is in the company’s best interests.

Here are six pros and cons that distinguish internal from external audits.

1. Familiarity with the Company and Its Culture

Internal auditors are going to bring with them a relatively intimate knowledge and understanding of the company and its culture. External auditors will not have that.

Depending on the goals of the audit, that insider knowledge can be either a perk or a drawback. Generally speaking, though, it is a drawback.

Internal auditors are going to have a good understanding of the company politics that are always at play, regardless of whether the company is a small one or a multinational corporation. This understanding can help them see hidden influences in the results of their audit and can alert them to potential problems that might arise during the process.

External auditors, on the other hand, are going to come to the audit process with clear eyes. While this means they will not be steeped in the company’s culture and might not see what is really going on behind the scenes, it also means that they will bring a fresh perspective to their inspection.

Depending on the type of audit you want to perform, that outsider’s view of the company can be a significant bonus.

2. Independence of the Auditor

Internal auditors are not going to be as independent as external auditors. Even when internally conducted audits claim to be independent and unbiased, the reality is that internal auditors depend on their employer for their livelihood. If the audit uncovers damning information that could subject the company to liability or negative publicity, internal auditors are likely to take steps to mitigate the damage or potentially even sweep the information under the proverbial rug.

The focus and the goal of the audit should dictate how much independence is a good thing. Many audits want to obtain objective, actionable information about the company, its risks, and its business practices. Occasionally, though, audits are conducted to control the perception of events, instead.

Generally, if the goal of the audit is to be unbiased, going outside the organization and hiring external auditors is the best way to proceed. This can eliminate the possibility that internal auditors will avoid uncomfortable facts and focus on details that paint themselves in a good light.

3. Cost

Internal audits cost very little money to perform because the company conducting the audit is already paying the people who will be running it. External audits will cost more because the auditors are not already on the company’s payroll.

4. Time

While they cost relatively little in the way of money, internal audits cost the firm far more in the time that will be spent on the audit. The company’s own employees will be spending time inspecting the company’s practices, taking their productivity away from other job duties that could be enhancing the firm’s bottom line.

Hiring an external auditor will not divert company resources away from pressing business needs. Additionally, externally-conducted audits tend to resolve more quickly than internal ones because external auditors are professional auditors – they likely have a far more refined and streamlined system for conducting audits than internal personnel who only perform audits on occasion.

5. Legal Privileges

One of the most important aspects of compliance audits – those that review the company’s protocols that are designed to keep the firm on the right side of the law or to perform any affirmative legal obligations that it might have – is to keep the results of the audit privileged from disclosure in a subsequent legal action. If you audit a compliance mechanism, find that it is inadequate and that legal violations have already happened, and then get sued or face a law enforcement action, that audit can get used against you if it is not privileged from disclosure.

Conducting an internal audit with the wrong personnel can leave the results open to disclosure, putting the company at extreme risk of liability. External audits that are done by experienced auditing professionals are done with this risk in mind. Ensuring that the audit is privileged from later disclosure is one of the basic services that external auditors frequently offer.

6. Expertise

An internal audit will generally be done by company staff members who do not conduct audits for a living. External audits are done by individuals and companies that do nothing but audit other companies.

This is perhaps the biggest reason to strongly consider hiring outside help to conduct a corporate audit.

Even if your team of auditors has some experience conducting an audit, there are several different types of auditing procedures. For example, two of the most common types of audits are those that test compliance mechanisms and those that focus on streamlining business practices. If a company’s internal auditing team has done one type but is now faced with the other, their experience is an illusion.

Additionally, the experience that external auditors have obtained from auditing other firms can provide extremely valuable insight into your own company’s compliance or business practices. External, professional auditors have seen it all. They may have seen problems similar to your own and have solutions that you might never have thought of.

Frequently Asked Questions About Corporate Investigation Consulting and Auditing

What are Some Different Auditing Goals?

Every audit is unique. However, audits generally fall into a small number of categories based on what the company’s goal is in conducting the audit. Three of the most common are:

  1. Auditing the company’s compliance mechanisms
  2. Auditing the company’s business practices
  3. Investigating an internal or external complaint

An example of the first is to review the steps that a company is taking to comply with and satisfy a legal obligation. An example of the second is to review the company’s production line to spot inefficiencies that are costing the company time and money. An example of the third is to investigate an allegation of sexual harassment to determine if it has merit or not before deciding how to respond to it.

What Makes Corporate Investigation Consulting Better Than Other Auditing Firms?

Corporate Investigation Consulting’s auditing services are exceptional because our firm is staffed with experienced auditors and investigators from some of the leading and most powerful law enforcement agencies in the world, including the Federal Bureau of Investigation (FBI) and the U.S. Department of Justice (DOJ). The experience that these investigators obtained over years of service at these powerful agencies has given them unparalleled skills in the private sector, as well as an intimate understanding of how a law enforcement agency is likely to investigate your company. That inside knowledge can help you better comply with the law.

Why Doesn’t Corporate Investigation Consulting Call Itself the Best?

Because we prefer to let our prior clients do that sort of talking for us. Our investigators have extensive experience in financial inspections and compliance auditing, allowing them to provide far more valuable and in-depth insights to our clients than other firms can. This has helped our clients reach the goals that they have in mind for their auditing needs.

Auditing Consultants at Corporate Investigation Consulting

The auditing consultants at Corporate Investigation Consulting have helped numerous corporate clients perform effective and thorough audits that fit the company’s needs and goals. Contact them online or call them at (866) 352-9324 to tap into their extensive experience and talents.

Contact Us Today

Contact Team Lead, Timothy Allen,
For a Confidential Consultation

  • This field is for validation purposes and should be left unchanged.

Contact Us 24/7 to Schedule Your Free Consultation

Call 866-352-9324 or request an appointment online. We are available 24/7, and our consultants can take action immediately to protect your company.

WordPress Lightbox