Research Journal of Finance and Accounting www.iiste.

org
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.6, No.10, 2015

The Effect of the Internal Audit Outsourcing on Auditor

Independence: The Nigerian Experience
Ofe Iwiyisi Inua Ph.D
School Of Management Sciences, National Open University f Nigeria
[email protected]

Emmanuel Umo Abianga

School of Management Sciences, National Open University of Nigeria

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.

INTRODUCTION
Fierce market competition has led many organizations to reconsider what they do best, and to concentrate on
their core competencies. ‘Support’ activities such as building security and maintenance which do not directly
contribute to revenue may therefore be outsourced (Jiang & Peursem, 2006). Outsourcing, while common
generally in the business environment, is controversial and not always advised for internal audit. Independence
as well as whether outsourcing is beneficial are some of the issues raised about outsourcing (Haylock, 2006;).
Over the years, the internal audit (IA) function has evolved from the traditional ‘watchdog of controls’
to a value-added business function. The America Institute of Internal Auditors (IIA) defines IA as ‘an
independent appraisal function established within an organization to examine and evaluate its activities as a
service to the organisation’ (Marvine & Livine, 2000). While the IA function has traditionally been performed
in-house, there is increasing trend to outsource IA activities (Rittenberg, Moore & Covaleski, 1999).
Traditionally, the internal auditing function has been designed to help ensure reliable accounting information and
to safeguard company assets. More recently, internal auditing has evolved to encompass operational auditing,
risk assessment, IT assurance services and more. This expanding role has increased the importance of internal
auditing as part of the organization’s management control structure. But, it has also changed the demands being
put on internal auditors. Their new role requires different skills and competencies, and many organizations need
to face the choice whether to develop these providers (Ahlawat & Lowe, 2004; Widener & Selto, 1999) A
survey of 1300 internal audit directors in North America shows that 25% of U.S and 31.5% of Canadian
organizations outsource their internal audit function (Marvine & Lavine, 2000) and researches show that
accounting firms have found the provision of internal audit services to be a lucrative market (Ritternberg &
Covaleski, 1999). Aldhizer, Cashel & Martin (2003) estimate that potentially, an accounting firm’s revenues
from internal audit services can be up to ten times that of annual financial statement audits. But, regulators and
critics of the profession contend that the provision of these services threatens auditor independence (Earnscliffe
Research & Communications, 1999).
According to Shapoff (1999), the most commonly cited reasons for outsourcing the IA function
include cost savings, purchase of more technologically competent expertise, improved risk coverage, avoidance
of investment in a non-core operation and consequently, improved organizational performance. Also,
accounting firms justify their presence in the market for internal audit services by stressing their sophicated
expertise, flexibility and cost effectiveness (Caplan & Kirschenheiter, 2000). A more recent study by

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ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.6, No.10, 2015

Subramaniam, NG & Carey (2004) investigated IA outsourcing practices in public sector agencies, and found
that the main reasons for outsourcing include to gain technological know-how and to gain better service quality
rather than for financial reasons. But, Martin & Lavine (2000) stated that the reason for not outsourcing relate to
inefficiencies created through external providers’ behavior. Martin & Lavine (2000) in challenging IA
outsourcing stated that internal auditors emphasize the importance of in-depth, organization-specific knowledge,
loyalty and their role in handling crisis situations and fraud prevention.
These outsourced internal audit functions are offered by accounting firms to their audit and non audit
clients. With each new service offered to audit clients, concern over the auditors’ independence deepens (James,
2001).

OBJECTIVE OF THE STUDY

The objective of this paper is to determine the general perception of audit independence when IAF is performed
by external auditor. Specifically, this study intends to find out if there is any significant difference in the
perception of auditors’ independence when:
• External auditors provide full internal audit services;
• Internal audit is partially outsourced to external auditor;
• Internal audit services are provided by different audit firms;
• Internal audit services are provided by staff of separate division within the same audit firm handling the
external audit.

INTERNAL AUDIT FUNCTION

The growth of the IAF as a practice and profession, and it impact on the external financial audit has been brought
forth partially by legislation. For example, the Foreign Corrupt Practices Act of 1977 (FCPA) mandates that
public companies maintain adequate internal control systems, and the commission on Fraudulent Reporting (the
Tread way Commission) recommends that all public companies should establish an IAF (NCFFR 1987). The
Committee of Sponsoring Organisations of the Treadway Commission (COSO) views the IAF as performing an
important role in monitoring entities internal control system (James, 2001).
Internal auditing is not just about compliance anymore, it is about companies succeeding and
preventing fraud and abuse (Herdman, 2002). One change that has enhanced the role of the internal auditor is
the requirement in Section 302 of Sarbanes Oxley (SOX) Act that a firm’s certifying officers (typically the Chief
Executive Officer and Chief Financial Officer) must state that they are responsible for establishing and
maintaining internal controls over financial reporting. As part of this certification, they must also indicate that
the internal controls were designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance with Generally Accepted Accounting
Principles (GAAP) in the United States. These section 302 certifications are required to be included with the
firm’s annual financial statements. Section 404 of the SOX Act also increased responsibilities of internal
auditors. This section requires that management include, in the firm’s annual financial statements a report on
internal controls. The report must indicate that management is responsible for establishing and maintaining
internal controls over financial reporting and management’s conclusions regarding the effectiveness of those
internal controls (Encyclopedia of Business, 2010).
Apart from the financial audit, the internal auditor performs a compliance and operational audit. A
compliance audit assures that the company’s activities comply with relevant firm laws and regulations. An
operational audit explores the effectiveness and efficiency of the firm’s activities, seeking to reduce the risks
faced by the specific firm. In performing an operational audit, performance standards may include a variety of
criteria other than monetary measures, such as the percentage of late deliveries or idle labor time. It is the
responsibility of the internal auditor to determine appropriate measures on the basis of experience and insight
into the integrated function of the company’s activities (Encyclopedia of Business, 2010). The scope of internal
auditing, which had traditionally focused primarily on financial accounting issues, widened considerably during
the last three decades to encompass almost every aspect of an organization (James, 2001).
Responding to such legislation, and the availability of a prestigious IA certification, the proportion of
organizations that maintain IAFs increased significantly and already existing IAFs tended to become more
involved in and more important to the overall effectiveness and efficiency of the organization they serve. As a
result of SOX, and in the U.S., internal audit budgets and staffing levels increased by over 10% on average from
2001 to 2002, and internal audit meetings with the audit committee increased in frequency and length by over
25% on average (Carcello, Hermanson & Raghunandan, 2005). Internal auditing provides a broad based,
independent, value-adding function that is essential for the effective management of a firm.
The need for and advantage of increased external-internal auditor cooperation during a financial
statement audit can be seen as a logical and natural development. The internal auditor may represent a highly
efficient partner to the external auditor due to the internal auditor’s in-depth familiarity with total operations of

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ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.6, No.10, 2015

the entity. Effective utilization of IAFs by the external auditor appears to have increase significantly during the
past decade as evidenced by research conducted by the AICPA (1998) and Oliverio & Newman (1991).

JUSTIFICATION FOR OUTSOURCING

There has been competition among accounting firms and the merger activity of the 1980s and 1990s has led to
the stagnation of auditing revenues. So, in an effort to maintain growth and profitability, auditing firms have
sought alternative sources of revenue by offering various types of professional services including internal audit,
risk management and a variety of assurance and consulting services (Chewning, 2001). Between 1982 and 1988,
revenues from Non Accounting Services (NAS) increased by an average annual rate of 3.8% reaching 53% of
total revenues in 1988 (Read & Tomczyk, 1992). At the same time, revenues from audit services have stayed
fairly constant in a basically mature market. Levitt (2000) reports that audit services represent only about 30%
of the largest audit firms total revenues. Regulators and critiques of the profession contend that the provision of
these services threaten auditor independence (Earnscliffe Research & Communications, 1999).
In the interest of efficiency and improving profitability, companies have turned to outsourcing internal
audit services (Kurtzman, 1996; Berton, 1996). The number of firms that outsource is substantial. In a survey of
more than 1,300 responding organizations, Kusel, Schull & Oxner (1997), found that 21% of U.S. organizations
and 31% of Canadian organizations outsourced at least a part of their internal audit function. In both the U.S and
Canada, approximately 10% of the organizations outsourced the entire internal audit function. Of the
organizations not currently outsourcing, more than 30% indicated their expectation to do so in the future. These
numbers imply that the incidence of internal audit outsourcing is significant. Many accounting firms now
provide internal audit services including Nigeria big accounting firms such as KPMG and Price water house
Coopers.
The idea of outsourcing organizational activities traditionally performed within the organization is not
a new one. Drucker (1995) envisioned future business as one in which the majority of work would be contracted
out to non-employees. According to Davis (1992) outsourcing originated from Adam Smith’s parable “the tailor
does not tend to make his own shoes, but buys them at the shoemaker”. It is assumed that business success calls
for organizations to renew their focus on core business activities and contract out those internal supporting but
nonessential jobs to external expertise (Jiang & Peursem, 2006). Van Peursem & Wells (2000) defines
outsourcing as the introduction of expertise into a firm by means of contractual obligation other than direct
employment, which may involve temporary contractual arrangements with expert individuals, long term
contractual relationships or the use of externally developed electronic knowledge expert systems.
For external auditors, the knowledge obtained while performing internal audit activities can increase
the efficiency of the annual independent financial statement audit. For example, the internal control knowledge
obtained while performing internal audit services should reduce the amount of work needed to document internal
controls, access control risk, and design tests of controls. It should also enhance the auditor’s awareness of
specific client related risks. This would help in planning effective and efficient substantive audit program and
should assist with detecting fraudulent financial reporting (Aldhizer & Cashell, 1996). For companies,
outsourcing the IAF offers potential cost benefits. Internal audit outsourcing may reduce overlapping positions
and audit effort by creating more flexibility in increasing and decreasing workloads. Additionally, outsourcing
allows a company replace “fixed” cost employees with “variable” fees for services. Finally, a wide range of
expertise is available from large firms that would be too expensive for a company to maintain internally
(Aldhizer & Cashell, 1996).
Internal audit professionals have been very critical of outsourcing and point to independence and
competency issues (Gibbs & Courtemanche, 1994; Acciani, 1995). They believe that internal auditing is best
performed by an independent entity that is an integral part of the management structure of an organization. This
argument follows that the internal auditor’s role is necessarily a management function. Performance of such
functions by the external auditor is alleged to impair the perception of auditor independence and pose a serious
threat to actual independence.
In 1996, the American Institute of Certified Public Accountants (AICPA) responded to this public
criticism by issuing new interpretations of Rule 101 of the code of Professional Ethics. The new guidance
reaffirmed that independence would not be impaired as long as the auditor does not act in a capacity that is
equivalent to that of a member of management or as an employee (Anderson, 1996).

AUDITORS INDEPENDENCE
Auditor independence has been termed the cornerstone of the auditing profession, since it is the foundation for
the public’s trust in the attest function (Caswell & Allen 2001). Auditor independence helps to ensure quality
audits and contributes to financial statement users’ reliance on the financial reporting process. The Securities
and Exchange Commission (SEC, 2000), refers to the external auditor as the ‘gatekeepr of the public securities
markets”. Agency theory research identifies the external audit as a monitoring device that reduces an entity’s

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ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.6, No.10, 2015

agency costs (Antle, 1984, Baiman, Evans & Noel, 1987, and DeAngelo, 1981a). The value of an audit depends
on the perceived quality of the audit which is strongly influenced by the perceived competence and
independence of the auditor discovering a material misstatement and reporting the misstatement. An impairment
of independence reduces the value of the audit and imposes agency costs. Agency costs are defined by Jensen &
Meckling (1976) to incude: monitoring expenditure; bonding expenditures and residual loss.

LITERATURE REVIEW
Mcgrath, Siegel, Dunfee, Glazer & Jaenicke (2001) argue that when independent auditors render unbiased audit
decisions, the broader goal of auditor independence, namely “to support user reliance on the financial reporting
process and to enhance capital market efficiency,” is accomplished. However, several major instances of
misstated earnings have been reported over the last several years (e.g Greising 2002; King 1999; Levitt 2000;
McDonald 2000). These misstatements have led many to question the effectiveness of various aspects of the
audit function, especially auditor independence, previously prompting the Securities and Exchange Commission
(SEC), in 2000, to adopt rules identifying nine non-audit services that are deemed inconsistent with auditor
independence. Further, the SEC is considering additional measures to strength actual and perceived auditor
independence, especially in light of the Enron debacle.
Because the goal of auditor independence is to support user reliance on the financial reporting process,
auditors must be independent both “in fact” and “in appearance”. Actual auditor independence is a mental state,
and is in essence embodied in an individual auditor’s mind. Accordingly, it is impossible for investors and other
users of financial statements to accurately assess actual auditor objectivity (McGrath et al. 2001). Therefore,
users of financial statement information can only evaluate an auditor’s appearance of objectivity. Thus, even
when an auditor in fact acts independently and issues an unbiased audit opinion, if investors and other users of
the financial statement information do not believe that the auditor is independent, investor confidence is eroded
and capital market efficiency will suffer. Even a relatively small loss in investors’ confidence may have a
relatively large economic impact by increasing investors required rate of return, which raises the cost of capital
(SEC, 2000). Further, given recent changes to the rules and guidelines governing independence, the definition of
“factual” independence has changed.
It is evident then, that independence is socially defined. While independence “in fact” and “in
appearance” are required to achieve the goal of Independence, specific expectations may have been altered by
the Enron debacle and the negative publicity the auditing profession has received. Enron outsourced its internal
audit department to Andersen in 1993. The accounting firm then hired 40 members of Enron’s internal audit
staff. The firm also hired Enron’s internal audit director at a significantly higher salary to continue to oversee
the internal audit function. (Andersen later discontinued internal audit outsourcing services, after Enron decided
to reestablish a full-time, in-house internal audit department. At minimum, the magnitude of these revenues and
the ongoing nature of the service are likely to have a negative impact on the appearance of independence and
may even bias the auditor in favor of the client. According to former SEC Chairman Arthur Levitt, the most
flagrant conflict of interest in the Enron case was outsourcing the internal audit function, because Andersen was
in effect auditing its own work (Aldhizer, Cashell & Martin, 1996). The Enron case shows that there is a conflict
of interest that is inherent in the different roles that internal and external audits play. Both audit professions
stress independence of the audited activity and object. However, some important differences exist.
External auditors are responsible to the stakeholders of the firm, their first and primary responsibility is
to preserve the integrity and reliability of financial reporting. Internal auditors on the other hand are responsible
to management and their primary responsibility is to assist management in achieving effectiveness and
efficiency. They are considered an important part of the internal control system, and are in essence a
management function (James, 2001). Furthermore, consistent with Statement of Auditing Standard (SAS) 55,
the external auditor must asses an entity’s internal controls, and consistent with SAS 65, the integrity of the IAF.
Thus, if the auditor performs the dual role of internal and external auditor, the auditor must evaluate his or her
own work and this is where a conflict of interest will tend to rise. There is therefore a striking difference of
opinion between regulators and many practitioners about the appropriateness of external auditors providing
internal audit services in various forms (Chewning, 2001). In this paper we shall test hypotheses relating to
auditors independences with respect to the provision of internal audit services.

PRIOR RESEARCH FINDINGS AND DEVELOPMENT OF HYPOTHESES

Full outsourcing to current audit firm hypotheses
Simunic (1980) developed a model of the demand for audit and non-audit services based on the concept of
economic bonding and found out that audit fees charged to large Management Advisory Services (MAS) clients
were larger than that charged to small MAS clients and it follows that the increased fees associated with both the
internal and external audits increase the economic bond between auditor and client. Also, anecdotal evidence
reveals that due to keen competition for audit and non-audit services, audit firms are more likely to offer

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ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.6, No.10, 2015

discount in audit fees for initial engagements when they will also provide non-audit service in which case the
fees will be much more. Simunic & Stein (1996), using proprietary data of one Big 5 firm, report that audit firm
increase its audit effort in response to higher litigation risk (which is associated with internal audit) and therefore
charges higher audit fees. It is believed that this economic bonding may cause the auditor to disagree with the
client on accounting and auditing matters.
H1: There is no significant difference in the perception of auditor independence when current audit firm
provides full internal audit services.

Partial outsourcing to current audit firm hypothesis

According to Bar & Chang (1993), this is the simplest form of external assistance and could also be referred to
as supplementation. The U.S SEC believes that partial outsourcing creates less of an economic bond than full
outsourcing. Recent rules enacted by the SEC in 2000 limit the outsourcing of internal auditing to a maximum
of 40% of the total hours devoted to the internal audit function at the client company (SEC, 2000). But, will this
partial outsourcing increase in any way the perception of independence in the internal audit function?
H2: There is no significant difference in the perception of auditor independence when there is partial
outstanding to current audit firm.

Full outsourcing to another audit firm hypothesis

Considering the Economic bonding theory, problems envisaged with it will not arise since different audit firms
will perform the internal and external audit functions. Independence in this case may not be compromised.
Auditors will be seen to be independent.
H3: There is no significant difference in the perception of auditor independence when another audit firm
provides full internal audit service.

Full outsourcing to current audit firm but with separation of staff for internal and external audit function
hypothesis.
According to Eugene (2001), the argument regarding staff separation is that the greater the separation (mental,
physical and financial) between two individuals performing two different tasks, the greater is the likelihood that
one will not influence the judgment of the other. With separate divisions performing the two types of audit
service and no sharing of staff, we expect that perceptions of independence would be greater than a situation
with no separation. But, note that staff separation does not in any way reduce the economic bond between the
auditor and the client, thus, if separation of staff is a way of reducing lack of independence in outsourcing, then
economic bonding fails to explain independences issues arising in outsourcing of IAF. The studies carried out
by Lowe, Geigner & Pany (1999) and Eugene (2001) reveal that staff separation has effect on auditor
independence.
H4: There is no significant difference in the perception of auditor independence when there is staff
separation between the same audit firm rendering both internal and external audit function.

METHODOLOGY
This study is an empirical study that tries to measure the perception of Auditors Independence when carrying out
internal audit outsourcing. Financial analysts, external auditors, accounting students and organization
accountants in Lagos state were selected as the target population. It is assumed that they have sufficient
knowledge of Internal audit outsourcing and its possible effect on auditors independence. They were provided
with a 5 point Likert scale questionnaire containing 14 questions on auditor’s independence. These 14
questions were repeated 4 times so as to capture respondents’ perception in the four different outsourcing
scenarios. The total numbers of questions were then 56.
A total of 100 questionnaires were sent out, but only 63 had sufficient and usable response. This
implies a response rate of 63%. Out of this `63, 15 were financial analysts, 19 were accounting student who are
preparing for professional accounting examination, 23 were accountant while 6 were external auditors. Financial
analyst were drawn from financial advisory section of a consultancy firm accounting student were drawn from
an accounting firm, accountants were selected from the bursary department of the National Open University of
Nigeria and the external auditor were selected from the audit department of an audit firm. The selection of these
groups (Accounting firm, audit firm, consultancy firm and the National Open University of Nigeria) were
conveniently done, while the sampling of respondents from each of this group was randomly done.
The one way Analysis of Variance (ANOVA) technique was used to test the various hypothesis and
the results were evaluated at a 0.05 significance level. Also, percentage analysis (Descriptive statistics) were
used to determine respondents perception of IAF and auditors independence.

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ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.6, No.10, 2015

RESULTS
Test of Hypothesis
Hypthesis 1 tests whether there is no significant difference in the perception of auditor independence when
current audit firm provides full internal audit service.
ANOVA TABLE
Sum of squares DF Mean square F Sig
Between Groups 5.448 5 1.090 10.014 .000
Within Groups 6.202 57 .109
Total 11.650 62
From our ANOVA table
FCal.(5,57) 10.014 > F Tab (0.05) 2.37
Decision: We reject the Null hypothesis. This implies that there is significant difference in the perception of
auditor independence when current audit firm provides full internal audit services. That is, the perception of
auditors independence will be low when the current audit firm provides full internal audit service.

Hypothesis 2 tests whether there is no significant difference in the perception of auditor independence when
there is partial outsourcing to current audit firm.

ANOVA TABLE
Sum of Squares Df Mean Square F Sig
Between Groups 13.620 5 2.724 16,864 .000
Within Groups 9.207 57 .162
Total 62

Fcal (4,58) 3.143 > F Tab (0.05) 2.37

Decision: We reject the Null hypothesis. There is significant difference in the perception of auditor
independence when another audit firm provides full internal audit service. Respondents do not perceive the
auditors performing the internal audit function to be independent even when they are from another audit firm.

Hypothesis 4: Tests whether there is no significant difference in the perception of auditor independence when
there is staff separation between the same audit firm rendering both internal and external audit function. Our
result reveals that
ANOVA TABLE
Sum of Squares Df Mean Square F Sig
Between Groups 3.482 4 .871 3.903 .007
Within Groups 12.937 58 .223
Total 16.419 62
FCal(4,58) 3.903 > FTab(0.05) 2.37
Decision: We reject the Null hypothesis. There is significant difference in the perception of auditor
independence when there is staff separation between the same audit firm rendering both internal and external
audit function. This suggests that respondents do not perceive auditors who carry out IAF from a separate
department within the same audit firm to be independent.

Additional Hypothesis Testing

Results have revealed to us that for each of the various internal audit function respondents do not perceive
auditors to be independent when performing these functions. We will go further to test for significant difference
between the various groups. We state our hypothesis in the null form.
H: There are no significant difference in the perception of auditor’s independence between various types of
Internal Audit Services.
Fcal 8.481 > Ftab 2.37
We reject the Null hypothesis. This implies that there are significant differences in the perception of auditor’s
independence when the IAF is performed in several ways. The extent to which respondents perceive auditors
independence vary from full outsourcing to partial to another audit firm to separate department within the same
audit firm.

Further Analysis
Descriptive statistics was further used in analyzing the data and the following results were obtained. 66.60% of
respondents agree that IAF will affect auditors’ independence negatively when there is full outsourcing. 64.35%
of respondents agree that auditor’s independence will be impaired when there is partial outsourcing. 73.93% of

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Vol.6, No.10, 2015

respondents agree that auditors’ independence will be affected when another audit firm provides full internal
audit service. 72.04% of respondents believe that auditor’s independence will be affected when they perform
IAF with a separate department handling the service.

DISCUSSION OF FINDINGS
Results reveal that financial analysts, accountants, students and external auditors perceive internal audit
outsourcing as a risk to audit independence. Results from ANOVA table 1 & 2 reveal that the perception of
audit independence is very significant compared with results from ANOVA table 3 & 4. This implies that
respondents perceive full and partial outsourcing to be the most risky compared with another firm handling the
IAF or a separate department handling the IAF. This is an important indicator that IAF can be tolerated when
another firm handles the IAF or a separate department within the same audit firm handles the IAF. But, on a
general note Internal audit outsourcing will affect auditor’s independence especially in appearance.
Having a separate department within the same audit firm may not increase the perception of
independence significantly because the separation of roles will be difficult and the auditor will be vulnerable to a
conflict of interest with regards to financial issues, areas of focus that the internal and external audit profession
have in common and what will happen when the investors interest and the company’s management do not
coincide? (James, 2001). Also, as earlier stated, in contrast to traditional consulting services, it is estimated that
an accounting firm’s revenues from providing internal audit services could be up to 10 times higher than their
accounting and auditing services revenues. In addition, the Internal audit services would likely be provided on
an ongoing basis year after year. Because of the magnitude of these revenues and the ongoing relationship, the
external auditors may unconsciously become biased in the client’s favour. Also, even if the auditor is able to
maintain complete objectivity, the general public appearance of independence may be harmed (Aldhizer &
Cashell, 1996).
Auditors have always insisted that the responsibility of preventing fraud lies with the internal auditors
(management). It seems that respondents believe that this responsibility will now be shifted to auditors thereby
exposing them to litigation risks. Another reason for respondents not supporting the internal audit function
outsourcing could be that there may be insufficient information available about the potential benefits of internal
audit outsourcing especially for external auditor’s i.e the knowledge obtained while performing internal audit
activities can increase the efficiency of the annual independent financial statement audits. Also, the Nigerian
economy, both the private and public sector is fraught with unethical practices including mismanagement and
misappropriation of funds and the public is aware of the accountant’s role in all of this. The common man
especially investors see the external auditor and other regulatory bodies as their last resort. Any signal that the
external auditor is to become ‘a part of management’ will not go down well with them. And when stakeholders
who are mostly investors suspect that IAF outsourcing is about to be introduced, it could affect the capital
market as investors will now seek for more returns on their ‘risky’ investments.

CONCLUSION
Big accounting firms in Nigeria, especially those with international affiliation are already providing internal
audit services to international clients. There is therefore a high probability that these services will soon be
introduced in Nigeria especially as more local audit firms are springing up and competition is on the increase.
Audit firms will therefore be willing to avail themselves the opportunity of providing more non-audit services to
make more income. This is inevitable. We should therefore make preparations to accommodate this inevitable
development.

RECOMMENDATIONS
We agree with the recommendation of Aldhizer & Cashell (1996) wherein they recommend that whenever
auditors are to accept internal audit functions:
• The external auditor should not act or appear to act as a member of management or as an employee of
the client. That is, he should not be involved in the day to day activities of the organization.
• The client should be responsible for determining the scope, risk, and frequency of internal audit
activities, including those to be performed by the auditor. This will be immunity in cases of fraud
detection. If the detection of any type of fraud does not fall within the stated jurisdiction of the external
auditor performing the IAF, then he is not liable.
• External auditors who are interested in IAF should ensure that when performing audit procedures that
they follow guidelines established by the client. This makes the relationship more formal and
professional. The external auditor does not need to go out of his way to impress the client.
• External auditors should ensure that the client’s board of directors and/or audit committees is informed
of the roles and responsibilities of both management and external auditor.

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