Outsourcing internal auditing: Empirical evidence from Vietnamese listed companies

 results of the 
performance of the duties of the internal audit chief must be regularly inspected, reviewed and 
evaluated by the direct manager of such personnel. 
According to the Draft Decree, listed companies are obliged to organize the internal 
audit.It is undeniable that these regulations are enforceable in Vietnam, especially for listed 
companies, which are important to the public as well as the economy. However, if the Decree 
is issued without preparation, it will cause many difficulties for businesses. 
The first difficulty in implementing this regulation is the human resource challenge. 
According to the draft, internal auditors must meet many criteria such as having bachelor or 
higher degree in subjects in accordance with auditing requirements, full knowledge and 
always up to date on the real field of current internal audit; Having worked for more than 5 
years in the specialized field of training, or for 3 years or more working in the companies, or 
for 3 years or more as an auditor, accountant or auditor; Have general knowledge and 
understanding of law and operation of the companies; Ability to collect, analyze, evaluate and 
synthesize information; Have knowledge, skills in internal audit. With the chief audit 
executives, in addition to the standards as for internal auditors, they must have bachelor or 
higher degree in one of audit, accounting, finance, economics, business administration, bank, 
or law. If they do not have a bachelor degree in one of the above-mentioned specializations, 
they must have an internal audit certificate issued by an international professional 
organization for internal audit or an accounting expert certificate and have at least 5 years of 
practical experience in auditing, accounting, finance, control or inspection. 
The second difficulty is to ensure the objectivity and independence of the internal 
audit department. It is funded by enterprise, but it has the function of auditing other 
departments, even the Executive Board. Therefore, the internal auditors should have sufficient 
knowledge and be empowered to ensure their functions. 
Therefore, in order to prepare the foundation for Vietnam's legal requirements, 
Vietnamese listed companies need to gradually establish internal audit functions in their 
businesses. In the short-term, if Vietnamese listed companies do not meet the conditions of 
resources, they may consider outsourcing the internal audit service. However, through the 
survey results of this study, the outsourcing of internal audit services is still relatively new to 
Vietnamese enterprises. 
4. Benefits and drawbacks of outsourcing internal audit activity 
Out-sourcing is the substitution of internal capacity with an external organization’s 
capacity. In internal auditing, out-sourcing pays an outside firm to handle the internal 
auditing. 
There are several benefits as well as drawbacks to outsourcing internal auditing. Some 
potential benefits cited for outsourcing include: 
(i) Quick start-up and execution of work by the outsourcing organization: For companies 
starting to perform internal auditing, it may be more efficient to use an existing outside 
organization rather than building one’s own internal department from scratch. 
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(ii) More Qualifed staff: An outside firm might assert that its claim of a more qualified 
staff refers not so much to their audit teams as to the resources of the firm as a whole. 
Howevcr, well-staffed and well-managed intemal audit departments have even superior 
resources available to them. 
(iii) A variable cost arrangement rather than having fixed costs: the payment of outsourced 
internal auditors using an arrangement rather than paying fixed salaries to employees. 
(iv) Access to more resources than the company would have on its own: An outside firm 
would have a larger talent pool of internal auditors from which to obtain expertise in various 
auditing techniques and risk areas, as well as expanded geographic coverage through trained 
personnel who possess local knowledge; and 
(v) Potentially more independence and objectivity: because outsourced internal auditors 
are contractors rather than employees, and thus not subject to the same potential degree of 
control by management as would be internal auditors who are employees. The potential for 
increased independence and objectivity is corroborated by a study that found that outsourced 
internal auditors advocated managements position to a lesser extent than in-house internal 
auditors 
On the other hand, potential drawbacks of outsourcing include: 
(i) Internal auditors who do not have much knowledge about the company’s business 
processes and operations; 
(ii) Internal auditors lacking relationships and networks throughout the company; 
(iii) Internal auditors whose allegiances are to the outsourcing firm rather than to the 
company; and 
(iv) Not having a department where company employees can rotate through, learning 
about internal controls and expanding their knowledge about different facets of the company’s 
operations to better prepare them for future roles in the company as internal audit departments 
are frequently training grounds for managerial positions elsewhere in the company. 
5. Research Methodology 
The study involved a mailed questionnaire survey (available on request from the 
corresponding author). Closed questions were used to avoid ambiguous interpretation, to 
make answer coding easier, and to facilitate statistical analysis. The questionnaire survey 
includes demographic questions in addition to 3questions that aim to explore the insourcing or 
outsourcing arrangements of internal audit function. In survey questions, respondents were 
requested to indicate if internal audit function is performed by outside services providers or 
by in-house internal audit department and provide details concerning, if internal audit function 
has been done by internal auditors, the position of internal audit function in the organizational 
structure. The questionnaire survey was directed to the managers of internal audit function. 
Accordingly, the questionnaire survey was mailed to 97 of the managers of internal audit 
function in Vietnamese listed companies. 46 of the managers of internal audit function were 
responded to the survey resulting in a response rate of 47.42 percent. The questionnaire 
responses form the primary basis for data analysis. 
6.Results 
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6.1. Demographic profile of respondents 
The analysis of respondents’ demographic characteristics indicates that 83 percent of 
the respondents have at minimum an undergraduate academic degree in accounting. The 
average working experience of the respondents in their present position was 3.9 years and in 
the firm was 6.3 years, indicating that they had adequate knowledge of the firm and its 
internal processes. 
6.2. Descriptive analysis 
The study examined the insourcing versus outsourcing arrangements of internal audit 
function. Some companies have been engaging independent public accounting firms and other 
outside professional in recent years to perform work that traditional has been done by internal 
auditors. These arrangements are often called internal audit outsourcing. Since the 
maintaining of internal audit department by Vietnamese companies is still voluntary, 
respondents were asked to indicate if internal audit function is performed by outside services 
providers or by in-house internal audit department and provide details concerning, if internal 
audit function has been done by in-house internal auditors, the position of internal audit 
function in the organizational structure. 
About 42 of internal audit mangers (91.3 percent) indicate that internal auditing is 
performed by in-house internal audit department. Internal auditing may be conducted by a 
formal department in the firm’s organizational structure or may be conducted as a part of the 
work of accounting department. So, respondents were also asked to indicate if internal audit 
activity, which has been done by in-house internal auditors, is performed in a formal 
department or as a part of the work of accounting department. About 39 of respondents (92.9 
percent) indicate that internal auditing is conducted by a formal department in the firm’s 
organizational structure compared to only three (7.1 percent) who indicate that internal 
auditing is conducted as a part of the work of accounting department. These results may 
indicate to the increasing recognition of the internal auditing by Vietnamese listed companies. 
However, about 18 of respondents (42.9 percent) indicate that internal auditing is not 
respected in the business, there is no efficient support from the management so the operation 
of internal audit department has not really effective. 
7. Discussions and Recommendations 
7.1. Discussions 
Recent internal auditing plays a critical role in corporate governance by providing a 
wide spectrum of assurance and consulting services. To be effective, internal auditing should 
be given the appropriate status in the organization to enable the activity to exercise 
organizational independence and individual internal auditors to act objectively. Internal 
auditors should possess the knowledge, skills, and other competencies needed to perform their 
individual responsibilities. The management support with resources and commitment to 
implement the internal audit recommendations is essential in attaining internal audit 
effectiveness. Also, internal auditing needs to expand its traditional activities from 
compliance assurance and assets safeguarding to value-added assurance and consulting 
services through its role in monitoring, evaluating, and improving risk management, control, 
and governance process. 
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The study aims to explore the features of internal auditing in Vietnamese listed 
companies. The results of the study reveal that a large proportion of Vietnamese listed 
companies has internal audit function and adequate internal audit staff. However, internal 
audit activities in many companies have not really effective. These resultsmay indicate to the 
increasing recognition of the internal audit activity by Vietnamese listed companies. These 
results are inconsistent with some researches in prior literature. For example, Carey et al. 
(2006) find that 45 percent of Australian firms have outsourced some or all of their internal 
audit activities; Dickins and O’Reilly (2009) find that 77 percent ofUSmiddle-market firms 
have outsourced some portion of their internal audit work, with 15 percent outsourcing more 
than half of this work. 
7.2. Recommendations 
The issue of outsourcing the internal audit activity carries serious implications for 
internal auditors, internal audit leaders, management and board of director of listed 
companies. For some companies, outsourcing can be perfect solution, while for others it is 
neither cost-effective nor efficient. This depends on factors such as the efficiency of the 
current internal audit department, the size of the company, and the cost of outsourcing 
arrangements. However, to catch up with the international trend, in the near future, 
Vietnamese listed companies should consider outsourcing internal auditing to enhance this 
activity in corporate governance. If following this model, Vietnamese listed companies should 
consider factors that may affect the quality of outsourced internal auditing services, including: 
The outsourced internal auditors need to have a clearly defined mission that was continually 
reinforced by company management; There is excellent communication, both formal and 
informal, between the outsourced internal auditors and top management; there are strong 
relationships between the outsourced internal teams and audit committees; Outsourced 
internal auditors should be willing to be measured according to the value-added services they 
provided to the company; The outsourced providers should have expertise and experience in 
IT auditing and were willing to obtain additional assistance when necessary; The outsourced 
internal auditors should be responsive to the needs of the company and eager to bring their 
insights into discussions about problems and potential solutions. 
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