Many companies use the services of internal auditors, who perform various investigative and consulting tasks within organizations, such as reviewing divisional financial statements and making recommendations to improve operating performance (e.g., improving quality and customer service). In the past, this has provided both career paths for professional internal auditors and valuable training for new managers, who benefit from seeing firsthand many of the company’s operations. In recent years, however, many companies have begun to outsource their internal auditing services.

Consider this recent discussion between the new chief financial officer (CFO) and the long-time director of internal auditing (DIA) at Jeans “R Us, a large manufacturer of casual and fashion denim clothing, which has experienced serious declines in profitability.

CFO: We need to look very hard at all of our support services and consider whether we can afford them. We need to talk seriously because I think that outsourcing internal auditing will save the company millions of dollars. In our current situation, we need to save costs wherever we can.

DIA: I think you are being shortsighted. I believe our staff can provide the best possible service to management because it understands our business. An external provider of internal audit services just will not appreciate the unique aspects of our business and our culture.
CFO: | understand that internal audit has had a long tradition here, but based on our budget constraints, I think we have no choice but to use an outside service. The service provider we are considering has a worldwide staff with wide-ranging expertise that we can utilize. You know that many of our manufacturing plants are foreign operations and require the auditors to be fluent in speaking and writing the local language and to understand the local culture.
Furthermore, all of our data communications rely on information technology that changes every year. To keep internal auditing staff with these talents at Jeans ‘R Us will just be too costly. And what about all of the travel expenses in the internal audit department?
DIA: I’m sorry, but you don’t appreciate that internal audit is a strength of the company that has been built over the years by a trust between the internal auditors and the operational and financial management. You cannot replace that level of trust and understanding with outsourced internal auditors whose only loyalty is to the fee they will collect. Internal audit is a “partner” promoting valuable improvements, and top management has always supported it in that way. If you outsource internal audit, you will change the climate of cooperation and trust and free flow of information that you need. In the long run, you will end up paying a lot more for inferior service. Outsourcing internal audit will be a serious mistake. If you insist on this approach, I will go straight to the board of directors. By the-way, you know that internal audit reports to the board each year on whether it can rely on the company’s financial statements.
Required

a. Describe the possible costs and benefits of outsourcing internal auditing at Jeans “R Us.

b. What pressures are motivating the arguments of both the CFO and the DIA?

c. How do you interpret the DIA’s last comment?

d. Can you recommend a course of action that might satisfy the CFO, DIA, and board of directors