The Effect of the Internal Audit Outsourcing on Auditor Independence: The Nigerian Experience

Abstract

In recent times, accounting firms are showing more interest in the provision of Internal Audit Services to their audit clients.  The outsourcing of these Internal Audit Function (IAC) is advantageous to both the audit firm and the audit client.  But, there are a number of problems envisaged and the major one is impairment of Auditors independence.   This study is an empirical one that considers Audit Independence and Internal Audit outsourcing.   The paper looks at the reason for outsourcing and the benefits and problems of outsourcing the IAF.   A five-point Likert scale was prepared and sent out to the public testing their perception of the effect of internal audit outsourcing on auditors’ independence.  The Analysis of Variance (ANOVA) technique was used to analyze responses from the questionnaire.  Results from this analysis show that there is significant different in the perception of auditors independence when they perform full IAF, partial IAF, another audit firm performs the IAF, a separate department within the same audit firm performs the IAF.  This result indicates that auditors will not be perceived to be independent if they provide internal audit services to organizations.  But, since this practice is already in existence in other parts of the world, we feel that it will definitely be practiced in Nigeria.  It was therefore recommended that when taking up this responsibility, the external auditor should not act or appear to act as a member of management or as an employee of the client and external auditors should ensure that the client’s board of directors and/or audit committee are informed of the roles and responsibilities of both management and external auditor.

Keywords: Internal audit function, outsourcing, auditors independence, external auditor, audit client.