Who Should Perform an Internal Audit?
From evaluating the sufficiency of compliance policies and procedures to preparing for a federal investigation, there are a variety of reasons why companies might need to perform internal audits. Minimally, companies should conduct internal audits annually to ensure that their compliance policies and procedures are working and up to date. Companies should also conduct internal audits any time they are at risk for facing a government investigation or enforcement action, as knowing what (if anything) the government is going to find is imperative to building an effective legal defense.
But, there are other circumstances in which internal audits will be necessary as well. For example, when a company intends to launch a new product or service line, it needs to know whether its existing policies, procedures, and systems are sufficient. Likewise, if an employee files a complaint of harassment or discrimination, this should also trigger an internal audit focused on determining what additional or revised measures are necessary to protect both the company’s employees and the company itself.
Two Main Options for Conducting an Internal Audit
Regardless of why a company needs to conduct an internal audit, it has two main options for doing so: (i) it can rely on in-house personnel to conduct the audit; or, (ii) it can engage an outside consulting firm. As we discuss below, while both options have merits, the limitations of utilizing in-house personnel will weigh in favor of engaging an outside consulting firm for most companies.
Using In-House Personnel to Conduct an Internal Audit
The first option companies have for conducting an internal audit is to rely on their own in-house personnel. If a company has sufficient internal resources to manage an audit in-house, this approach might seem like the most cost-effective option. However, this is not necessarily the case, particularly when you take into consideration the risks involved.
Benefits of Using In-House Personnel
What are the benefits of using in-house personnel to conduct an internal audit? While each company’s circumstances are different, broadly speaking these benefits include:
1. The Company’s In-House Personnel are (or Should Be) Familiar with Its Policies, Procedures, and Operations
The company’s in-house personnel should be familiar with its policies, procedures, and operations, and this should allow them to hit the ground running. However, while this might be the case, what most in-house personnel will lack is knowledge of the processes and protocols involved in conducting an audit and assembling information on which the company’s leadership team can confidently rely.
2. The Company’s In-House Personnel Can Be Diverted from Their Normal Tasks to Work on the Audit Immediately
If a federal investigation or other event has triggered the need for an unanticipated audit, the company’s in-house personnel can be diverted from their normal tasks to begin work on the audit immediately. However, once again, whether and to what extent internal personnel have the capabilities required to conduct an effective internal audit is a concern that cannot be ignored.
3. The Company Isn’t Spending on an Outside Consulting Firm
The third benefit of relying on in-house personnel is that it avoids the additional expense of engaging an outside consulting firm. It is important to keep in mind, however, that there are productivity costs associated with relying on in-house personnel to conduct an internal audit. Additionally, as discussed further below, the costs of an ineffective internal audit can far outweigh the costs of hiring a team of professionals to efficiently gather and assess all pertinent information.
Limitations of Using In-House Personnel
Now, what about the limitations? As we mentioned above, while relying on in-house personnel to conduct an internal audit might seem highly cost-effective, this is not necessarily the case. Consider these limitations:
1. The Company’s In-House Personnel May Lack the Knowledge and Skills Required to Conduct an Effective Internal Audit
Conducting an internal audit requires special knowledge and skills. If your company’s internal personnel are not intimately familiar with contemporary internal auditing processes and protocols, they are not going to be able to collect the data your company needs.
2. The Company’s In-House Personnel May Only Be Available During Normal Business Hours
Even if your company has exempt employees who are not limited to working nine-to-five, your company’s in-house personnel are not going to be available around the clock. This means that there will be delays in the audit process—and these might not be delays your company can afford.
3. Limited Knowledge, Skills, and Time Can Lead to an Inefficient and Incomplete Audit
As we alluded to above, if your company’s in-house personnel are not experts in internal audit processes and protocols, your company will not be able to confidently rely on the outcome of the audit. If they cannot complete the audit efficiently, this will render the audit effectively useless as well.
4. In-House Personnel Who are Focused on Conducting an Internal Audit are Not Focused on Their Normal Job Duties
When in-house personnel are focused on conducting an internal audit, they are not focused on their normal job duties. Also, remember that conducting an internal audit is not a one-time event. Companies should conduct compliance audits annually (if not more frequently), and both expected and unexpected events can trigger the need for ad hoc internal audits. If company personnel are regularly being diverted from their normal job duties to conduct internal audits, the company’s operations and profitability are going to suffer.
5. In-House Personnel May Be Personally Involved in Matters Falling Within the Scope of the Internal Audit
Finally, one of the most-significant limitations associated with utilizing in-house personnel is that those who are assigned to conduct the audit could have a personal interest in the outcome of the process. If in-house personnel believe that the outcome of an internal audit could have an impact on their personal employment status, this will compromise the entire audit.
Engaging a Consulting Firm to Conduct an Internal Audit
What about engaging an outside consulting firm? This is the preferred option in virtually all scenarios. Unlike utilizing in-house personnel, the benefits of engaging an outside consulting firm far outweigh the perceived limitations.
Benefits of Engaging a Consulting Firm
The benefits of engaging an outside consulting firm to conduct an internal audit include:
1. Your Company Can Rely on the Expertise of the Consulting Firm’s Personnel
The consulting firm’s personnel should be experts in auditing protocols and procedures. Additionally, with significant experience conducting internal audits for other companies, the consulting firm’s experts should be able to quickly get up to speed on your company’s policies, procedures, and operations.
2. Your Company Can Rely on the Efficiency of the Consulting Firm’s Personnel
As a result of their experience and expertise, the consulting firm’s experts should be able to conduct the audit efficiently and provide company leadership with timely and actionable data. Additionally, while your company’s in-house personnel will be limited in the number of hours they can devote to an internal audit, a consulting firm should be able to devote the resources necessary to complete the audit as quickly as possible. This includes having personnel work on the audit around the clock if necessary.
3. Your Company’s In-House Personnel Can Stay Focused on Their Normal Job Duties
Since they are not focused on trying to conduct an internal audit, your company’s in-house personnel can stay focused on their normal job duties. Productivity and customer experience will not suffer, and the internal audit will be both more efficient and more effective.
4. The Audit Will Be Comprehensive, Well-Documented, and Devoid of Potential Conflicts of Interest
Expert consultants who have honed their auditing skills over decades of practice will be able to provide comprehensive and well-documented data that your company can use without reservation. Additionally, engaging an outside consulting firm avoids the risk of any conflicts of interest (or perceived conflicts of interest) involving in-house personnel.
5. You Can Move Forward Confidently with the Data You Need to Make Informed Decisions
The purpose of conducting an internal audit is to gather the data your company’s leadership needs in order to make informed decisions. Engaging an outside consulting firm ensures that this purpose will be fulfilled. The consulting firm should not only be able to conduct a comprehensive audit, but also document the audit’s comprehensiveness, and this will give your company’s leaders the confidence they need to move forward.
Limitations of Engaging a Consulting Firm
There is really only one limitation when it comes to engaging a consulting firm: The company will incur an expense that it would not incur if it relied exclusively on in-house personnel to conduct its internal audit. However, this expense is well worth it (and not as great as many company lawyers and executives think) when you consider the risks of the alternative approach.
If an audit is compromised or incomplete, it serves no valid business purpose, and it can leave the company exposed to administrative, civil, or criminal liability. In contrast, a professionally-conducted comprehensive internal audit will allow the company’s leadership team to make informed decisions and execute strategies focused on protecting the company.
Speak with a Former Federal Agent at Corporate Investigation Consulting
Does your company need to conduct an internal audit? If so, we encourage you to get in touch. To speak with one of our former federal agents in confidence, please call 866-352-9324 or inquire online today.