Is offshoring audit a passport to success?

Is offshoring audit a passport to success?

Offshoring audit is gaining attention but neither firms nor regulators are quite sure what it all means

OFFSHORING is the word on everyone’s lips. The Financial Reporting Council’s audit chief Paul George insists the phenomenon is nascent, but it is clear firms are twitching their noses at the prospect of this industry development.

Otherwise known as outsourcing, it seems firms are looking into establishing service centres in low-cost regions such as India, with a view to farming out simple procedures to make audit cheaper to execute.

Or at least, this is what we think. George, head of the FRC’s Public Oversight Board, isn’t sure himself what offshoring consists of, saying the body has just begun “fieldwork” to determine what firms are planning and what it could mean for the future of audit.

Outsourced expectations

Educated guessers think processes such as checking bank reconciliations and cross-casting numbers could be sent east, but no one is really sure of the extent of this practice, nor what it means for quality control.

Offshorers will have to put in place rigorous checks and balances to maintain standards, and regulators will be faced with tyre kicking not just in the UK, but potentially around the world.

PwC is among the firms most strongly associated with the phenomenon, after the FRC last year warned it against “arbitrary” offshore target setting. It was reported that the auditor hoped to ship 20% of its core audit hours to India by 2014, and the regulator questioned how this would affect quality and controls.

Whether PwC will curbe its eastern enthusiasm is unclear, but there is no doubt that top audit firms – which currently offshore around 1-2% of audit work – are seriously considering upping this number.

Head of reputation and policy Richard Sexton recently insisted offshoring is not about cutting costs but about boosting quality, and doubtless other proponents agree.

Many would argue that sending dogsbody work to cheaper centres will release resources to ramp up reviews of high-risk, high-cost issues in the UK. This is tough maths to prove, however, and it may never be possible to calculate an exact payoff between offshoring and higher UK audit spending.

Cost concerns

Mazars is not a fan of international delegation, and audit expert David Herbinet said he is “far from convinced” that the costs and benefits of such an exercise would work in clients’ favour.

“We have discussed offshoring, and it’s not for us,” he said. The 12-ranked firm believes audit is “a trade-off between intelligence and efficiency”, and fears offshoring places too much emphasis on the latter.

PwC does not agree. Deian Tecwyn, head of assurance risk and quality, said the firm only outsources when it is “convinced quality will rise”. A steering committee examines the suitability of processes for this purpose, and there are “a great number of checks and balances in place”.

For PwC, offshoring work does not even have to go abroad, as one “delivery centre” is located in Newcastle. Public sector members have in the past attempted to cut costs by establishing UK-based shared services centres, but Ian Carruthers, CIPFA policy and technical director, said such experiments have met with mixed success.

He questioned the value of outsourcing “tick and bash” processes, saying much of the cost of audit comes from face-to-face meetings and the involvement of senior staff, activities that could not and should not be farmed out.

This is the main fear of detractors – with so much of audit based on interaction and relationship building, how can it be parcelled off to various service centres and still hope to retain quality?

Firms are sometimes accused of tick-box auditing, an attitude that they say is forced upon them buy overly prescriptive regulation which focuses on minutiae rather than encouraging partners to use professional judgement.

One expert questioned whether offshoring is in fact a form of self-inflicted tick-box mentality, breaking down the audit into a series of menial tasks devoid of client interaction. However, supporters maintained that in every audit there will be routine tasks requiring no judgement, and these boxes can be ticked just as well from India as the UK.

Audit for tomorrow

But what if there is value in these mundane tasks? The more routine parts of audit – mechanistic checks and clerical functions – provide vital training for budding accountants, and sending them abroad could knock out a link in the chain that churns out tomorrow’s high-quality auditors.

The contradictory argument is that feeding newbies more challenging audit work will keep them interested for longer, reducing the graduate churn that sees top firms lose around 50% of their post-university intake within the first five years. This, arguably, would be a good thing for long-term audit quality, and such simple changes might help firms keep a tight hold on their brightest and best.

There is no shortage of examples of outsourcing work, from call centres to law firms sending routine tax compliance tasks abroad. But so far we lack examples of audit work in foreign climes. It is reasonable to assume among the Big Four that a small percentage of their audit hours go overseas, while smaller firms may have considered the tactic or already be working towards it.

This is the first year in which the FRC will take a serious look at quality and controls in offshoring, and Paul George admitted he is not sure what he’ll find. Around 20% of inspectors’ work looks at quality and risk management, while the remainder of the time is spent dissecting the audits themselves. The results are sure to be interesting.

In today’s risk-obsessed, cost-averse market, any innovation in the market is to be applauded, but firms and their clients are to some extent going in blind as more and more audit work is offshored. In the end, it is for companies and regulators to decide whether PwC and its peers are heading in the right direction. In the meantime, it is for the auditor to count the costs and the benefits.

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