Trend: Outsourcing of Internal Audits

Looking to gain expertise rather than save money, banks are handing some internal audit duties to outside firms, a recent survey found.

About one-quarter of the 45 financial institutions around the world surveyed by Deloitte Touche Tohmatsu International rely on outside sources for certain internal audit functions - which include keeping watch over banks' compliance and risk management efforts.

That proportion is expected to grow.

More than half of those who outsource some auditing duties said expert knowledge on new regulations, products, or services was the main reason they use outsourcing firms. Only 19% cited savings.

In the survey, done last fall, internal audit heads at the 45 banks - including 13 in North America - were asked to answer 60 questions about their practices.

The survey highlighted a trend throughout the banking industry toward consulting with outside firms. More banks are understanding the potential danger to reputation involved in making questionable financial decisions, and controlling risk is quickly becoming a top concern at banks, said JoAnn Barefoot, president of the Columbus, Ohio, compliance consulting firm Barefoot, Marrinan & Associates.

"It's happening primarily because a bank doesn't want to hire personnel if they will only need them for two or three months out of the year," said Christine Tate, a partner in the Washington office of Deloitte & Touche, the U.S. arm of the international accounting firm that did the survey. "It's a growing area, and we expect it will continue to increase."

Those surveyed said internal audit departments don't do enough to address high-risk items like derivatives and that the onset of electronic banking is the biggest risk management concern of the future.

Seventy-two percent of those contacted also said internal auditors are judged more for their ability to give a bank's management sound business advice than for being watchdogs.

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