A large, international bank is considering outsourcing all facets of the human resources (HR) function, including recruiting, benefits, payroll, employee training and development, compensation, and information systems. Three potentially viable vendors have been identified. The internal audit function has been asked to review the vendor selection process and evaluate each vendors system of internal controls. Senior management has decided it wants a 10 percent equity stake in the company that performs the outsourcing function. The original terms of the agreement call for 1,000 employees to be moved from the banks HR function to the company who ultimately receives the contract. The vendor will then be responsible for evaluating the employees performance and determining which employees will be terminated after a six-month period. The vendor has the option to determine which computer systems are used. The length of the contract will be either five or 10 years, depending on its pricing structure. The bank expects to achieve significant financial gains from this outsourcing arrangement, including significant cost reductions associated with the conversion to standard applications provided by the vendor. The vendor will be expected to leverage existing systems, processes, and personnel and be able to make a profit based on the economies of scale, particularly in the systems areas.

1. Identify 2 major benefits that the bank hopes to gain by outsourcing.

2. What role can Internal Audit play in the outsourcing decision? Explain how this role would help ensure these benefits are on target to be met but not impair Internal Audit independence.

3. How can Internal Audit help during the transition phase? Explain how this help would not impair independence.

4. What kinds of tests might Internal Audit perform after the transition is complete that will help the bank determine if the outsourcing was successful?