ABSTRACT
While outsourcing internal audit function in the private sector has been extensively Investigated by various researchers (Carey and Chua, 1999; Petravick, 1997; and Sharma and Subramaniam, 200l; amongst others), there is scant empirical data from the public sector. This study attempts to fill the gap by providing some preliminary evidence in food and beverages industry. Using responses from 3 firms which includes Dangote flour mills, UAC and Northern Nigeria flour mills plc, the study found that more than 85% of the respondents had either fully outsourced or co-sourced their internal audit function. Further, non-department entities were found to more likely to fully outsource their internal audit function than the departments. Lack of technological know-how and service quality of external providers seem to outrank cost-related factors as reasons for outsourcing. The study also raises several issues in relation to a lack of segregation of duties in the process of selecting and monitoring outsourced arrangements. Implications for policy setting and avenues for future research avenues are discussed.
INTODUCTION
In today’s business environment, outsourcing processes to a third party has become relatively commonplace. The practice gives organizations an opportunity to gain efficiencies, improve performance, lower costs, and focus on core competencies. Many businesses, however, fail to complete necessary due diligence work before the outsourcing relationship begins and neglect to take sufficient care of the relationship, adopting an “out of sight, out of mind” approach once outsourcing begins. A key feature of the changing industrial environment is the growing practice of outsourcing or contracting out of services previously delivered by industrial agencies. However, the management of external contracts can be problematic, particularly when there is poor management of risks and a lack of understanding of the costs and benefits of the services outsourced (Barrett, 2001). This study focuses on the outsourcing of internal audit services within food and beverages industry. As defined by the Institute of Internal Auditors (IIA) (1999), internal auditing is: “an independent, objective assurance and consulting activity designed to add value and improve an organisation's operations. It helps an organisation accomplish its objectives by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes") Clearly, the internal audit function is central to an organisation's management structure and serves as a key corporate governance device. Outsourcing of such an important internal review and monitoring function invariably raises various concerns over the accountability, risk management and efficiency of internal audit practices within industrial sector of organisations. A literature review indicates there is scant empirical evidence on the practice of outsourcing internal audit services in the industrial sector. Some evidence is derived from the 1997-98 Australian National Audit Office (ANAO) survey of 49 Commonwealth public sector organisations whereby 76% of the organisations were found to have either fully or partly outsourced their internal audit function. The survey also indicated that the relative cost of internal audit as a percentage of the total expenditure and the total assets of an organisation is lower under fully outsourced arrangements than in-house situations. However, the ANAO was not able to gauge whether the relatively lower level of resources used by the outsourced organizations correlated to any specific factors such as lower levels of coverage or different salary costs, and called for further research in the area. Likewise, in a recent speech, Pat Barett (2000), the Auditor-General for Australia, highlighted the importance of assessing the overall cost and benefits of outsourcing. Extant evidence, however, is limited to only Commonwealth public sector entities. The present study is thus motivated by the increasing calls for a better understanding of the risks faced and benefits derived from outsourcing of internal audit services across different types of government agencies. Such as understanding is important for the efficient management of external contracts within the public sector. The remainder of the paper is structured as follows. In the next section, an overview of the theoretical approaches adopted for understanding the cost saving associated with outsourcing phenomena is provided, followed by a review of past empirical studies. Subsequent sections address, in turn, the research method, results and discussion of the study's significant findings and its implications for practice.

THEORITICAL BACKGROUND
Practice and motives for outsourcing, and particularly the outsourcing of audit services, are examined in order to determine a survey appropriate for the study. ‘Outsourcing’ refers to:
“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” (Van Peursem and Wells, 2000, p. 69).
The idea of outsourcing organisational activities traditionally performed within the organisation 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, p.58), it originated from Adam Smith’s parable “the tailor does not tend to make his own shoes, but buys them at the shoemaker”. Assumed is that business success calls for organisations to renew their focus on core business activities, and contract out those internal supporting but nonessential jobs to external expertise. As documented in Behara, Gundersen and Capozzoli (1995), every Fortune 500 company studied in 1995 acknowledged it would consider outsourcing during the next decade and 20 percent of these companies would enter into a contract by the end of the decade. In particular, SMEs are known to take advantage of outsourcing options, including accounting firms (Van Peursem and Wells, 2000). Outsourcing is a growing means of managing modern, and postmodern, business.

INTERNAL AUDIT
Effective internal control is a foundation for the safe and sound operation of any organisation. The board of directors and senior management of an entity are responsible for ensuring that the system of internal control operates effectively. Their responsibility cannot be delegated to others within the institution or to outside parties. An important element in assessing the effectiveness of the internal control system is an internal audit function. When properly structured and conducted, internal audit provides directors and senior management with vital information about weaknesses in the system of internal control so that management can take prompt, remedial action. The Institute of Internal Auditors define Internal auditing as an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. In addressing various quality and resource issues, many institutions have been engaging independent public accounting firms and other outside professionals (outsourcing vendors) in recent years to perform work that traditionally has been done by internal auditors. These arrangements are often called internal audit outsourcing, internal audit assistance, audit co-sourcing, or extended audit services.

WHAT IS INTERNAL AUDIT?
Internal audit is described as ‘an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations.
It helps an organisation accomplish its objectives by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.’
Internal audit’s role is primarily one of providing independent assurance over the internal controls and risk management framework of the council.
Management has primary day-to-day responsibility for the design, implementation, and operation of internal controls.
Internal audit has no direct involvement in day-to-day operations, but it has a direct functional relationship with the General Manager and the council. An effective internal audit function should evaluate and monitor the adequacy and effectiveness of the internal control framework as a minimum.
Risk management is also an essential part of a council’s management and internal control framework. It looks at what risks the council may face and the best way to address these risks. Assessment and management of risk is central to determining internal audit activities.
Internal audit’s core competencies are in the area of internal control, risk and governance. Typically, internal audit’s scope will include some or all of the following areas: * Reliability and integrity of financial and operational information * Effectiveness and efficiency of operations and resource usage * Safeguarding of assets * Compliance with laws, regulations, policies, procedures and contracts * Adequacy and effectiveness of the risk management framework.

ASSESSMENT OF INTERNAL AUDIT FUNCTION
In many organizations internal audit function is an additional responsibility and often leads to conflict of interest. Also where we have noticed that internal audit department is independent, people are routinely drawn from functional role into the internal audit department. In such scenarios the internal auditor often need to asses functions wherein they have worked earlier. Objective audit in such cases are not practical.
Establishing the authority of internal audit department and internal auditor cannot be set by the management .The authority of the internal audit function has to be earned by the auditor s through their conduct and reporting of the audit. Lack of required skill sets act as dampener to the individual auditor gaining respect and authority leading to the function becoming ineffective.
Also in many instances we have noticed CEOs putting up pliant internal auditors thereby negating the objective of the function as well as the Board of Directors.In small and medium organizations in-house internal auditors don’t have full time role and end up being idle or assigned other operational role along with the internal audit function .Such appointments are sure recipe for ineffective internal audit function.

OUTSOURCING THE INTERNAL AUDIT FUNCTION

Outsourcing
Outsourcing involves the transfer of management’s day-to-day execution of an entire business functions to an external service provider. An outsourcing arrangement is a contract between an organisation and an outsourcing vendor to provide internal audit services. Some institutions consider entering into these arrangements to enhance the quality of their control environment by obtaining the services of a vendor with the knowledge and skills to critically assess, and recommend improvements to their internal control systems. The internal audit services under contract can be limited to helping internal audit staff in an assignment for which they lack expertise. Such an arrangement is typically under the control of the institution’s manager of internal audit, and the outsourcing vendor reports to him or her. Entities often use outsourcing vendors for audits of areas requiring more technical expertise, such as electronic data processing. Such uses are often referred to as internal audit assistance or audit co-sourcing. Some outsourcing arrangements are structured so that an outsourcing vendor performs virtually all the procedures or tests of the system of internal control. Under such an arrangement, a designated manager of internal audit in the entity oversees the activities of the outsourcing vendor and typically is supported by internal audit staff. The outsourcing vendor may assist the audit staff in determining risks to be reviewed and may recommend testing procedures, but the internal audit manager is responsible for approving the audit scope, plan, and procedures to be performed. Furthermore, the internal audit manager is responsible for the results of the outsourced audit work, including findings, conclusions, and recommendations. The outsourcing vendor may report these results jointly with the internal audit manager to the audit committee.

REASONS FOR OUTSOURCING THE INTERNAL AUDIT FUNCTION
The reasons for outsourcing the internal audit functions are:
(a) Available Resources
Appropriate internal audit resources may be scarce or unavailable in certain situations and for a number of reasons. Whether selected as a temporary alternative or permanent solution, outsourcing may be necessary to acquire timely, professional internal audit services and competent internal auditing staff.
(b) Size of the Organisation
Both large and small organisations may need to take advantage of outsourcing alternatives. Common reasons include temporary staff Shortages, specialty skills, coverage of remote business locations, special project work, and supplemental staff to meet tight deadlines. Small organisations may also find it necessary to explore outsourcing due to the inability to hire permanent or full-time internal audit staff.
TYPES OF OUTSOURCING ALTERNATIVES
Organisations may need to define the types of outsourcing engagements or practices to be considered. Outsourcing alternatives include:
(a) Total outsourcing; where 100 percent of the internal audit services are obtained from external sources, usually on an ongoing basis.
(b) Partial outsourcing; where less than 100 percent of the internal audit services are obtained from external sources, usually on an ongoing basis.
(c) Co-sourcing; where external resources participate on joint engagements with in-house internal audit staff. Engagements may be ongoing or for specific terms.
(d) Sub-contracting; where a specific engagement or portion of some engagement is performed by an external party, typically for a limited time period. Management and oversight of the engagement is normally provided by in-house internal audit staff.

ADVANTAGES AND DISADVANTAGES OF OUTSOURCING
(a) Outsourcing affords the client the luxury of having access to global expertise and cutting edge technology in internal auditing. Because internal audit is not a core experience area for many companies, many internal audit functions are not adequately equipped with either intellectual or human capital, to execute their mandate effectively. Outsourcing it to professionals provides the organisation with the best expertise in this area.
(b) Due to the prohibitive cost involved; most organisations do not make sufficient investment to improve their internal audit functions and generally lack access to updated methodologies and technologies because of the prohibitive costs. These results in high staff turnover as they struggle to hire and retain talented personnel, who wish to make a career in internal auditing. Outsourcing saves the organisation this dilemma.

The following items, while not all-inclusive, should be considered when outsourcing the internal audit function:
(a) Independence of the service providers;
(b) Allegiance of in-house versus external service provider;
(c) Professional standards followed by the service provider;
(d) Qualifications of the service provider;
(e) Staffing, training, turnover, rotation of staff, management;
(f) Flexibility in staffing resources to meet engagement needs or special requests; (g) Availability of resources;
(h) Retention of institutional knowledge for future assignments;
(i) Access to best practice or insight to alternative approaches;
(j) Culture of the organisation receptiveness to service providers;
(k) Insight into the organisation by the service provider;
(l) Coverage of remote locations;
(m) Coordination with in-house internal audit services;
(n) Coordination with external auditor;
(o) Use of internal auditing as a training ground for internal promotions;
(p) Retention, access to and ownership of working papers;
(q) Acquisition and availability of specialty skills;
(r) Cost considerations; and
(s) Good standing membership in an appropriate professional organisation.

THE INTERNAL AUDIT OUTSOURCING DECISION
Previous research has identified several motivations for outsourcing internal audit activities. Petravik (1997) describes three factors important to outsourcers: the reduction of redundant audit work, resulting in external audit cost savings; the professional liability insurance of the external auditor; and the prestige of the external auditor. Pelfrey and Peacock (1995) posit that outsourcing internal audit projects may actually improve the quality of the audit because companies can employ external individuals with advanced degrees and technological specialization to provide the required services. Pelfrey and Peacock (1995) also document that when outsourcing takes place, the most likely candidates are EDP auditing and/or operating systems design. However, both studies note that the outsourcing of an entire, existing internal audit department is relatively rare. In addition, Petravik (1997) finds that only 35% of fully outsourced internal audit functions involved replacing an existing internal audit department, whereas 65% of outsourced internal audit departments were actually the formation of an internal audit function where one had yet to exist. Pelfrey and Peacock (1995) find that only 45% of any outsourcing decisions actually lead to the dismissal of any internal auditor staff.
The results of Pelfrey and Peacock (1995) and Petravik (1997) suggest the majority of outsourcing is actually non-recurring, special consulting projects or the formation of a new internal audit function using the external auditor. Moreover, Pelfrey and Peacock (1995) (who explores neither the degree of outsourcing involved nor its relation to the audit committee’s composition) note that only a surprisingly small percentage (24%) of outsourcing decisions involved the audit committee. However, non-recurring, special consulting projects are unlikely to threaten the external auditor’s independence, impair a firm’s internal control structure or reduce overall audit quality.1 On the other hand; outsourcing existing internal audit department operations may have larger economic consequences (i.e. cost savings) and is more likely to be of concern to audit committee members, external and internal auditors.
The most rigorous outsourcing study to date is Widener and Selto (1999). In it, the authors document the relation between firm-level characteristics and the degree of outsourcing of existing internal audit operations. Widener and Selto (1999) find statistically negative relations between the degree of outsourcing and proxies for asset specificity. However, Widener and Selto (1999) do not consider the role of the audit committee in their analyses. A review of the prior outsourcing literature reveals a paucity of evidence regarding the audit committee’s role in the outsourcing decision. In the following three sections, we develop an effective audit committee’s role in the outsourcing decision.

RATIONALES FOR OUTSOURCING
Using ‘outsourcing’ to enable an organisation to concentrate on ‘core functions’ is a well known rationale. Peripheral functions can be carried out by non-employees through such mechanisms as outsourcing (as long as doing so does not risk the ownership of fundamental functions) (Lankford and Parsa, 1999, p. 311). Carey (1995) suggests that core functions, by definition, are those enabling the organisation to better serve their customers and/or deal with their products directly. These functions are vital for developing an organisation’s core competence while non-core functions are essentially supporting activities. As a result, Carey (1995) suggested these activities such as human resources; payroll and information systems are ripe for being outsourced.
Related to this are strategic reasons for outsourcing. Increasing market competition requires organisations to take a larger view – sometimes difficult from the ‘inside’ or when distracted by detail – and to respond strategically. Quinn and Hilmer (1995) recognised outsourcing would open the avenue for organisations to consider a number of alternative strategies such as focusing on core competencies, creating synergies with strategic partners and make major divisional and cost-cutting decisions.
Cost savings from outsourcing could provide a known benefit and further enable the organisation to refocus their resources more appropriately. Outsourcing allows an organisation to use technology that is too expensive to replicate or purchase internally. Outsourcing can reduce expenses through opportunities of scale such as in purchasing benefit or service plans (Moran cited in McCarthy, 1996).
The ‘need for flexibility’ is said to be one of principal motivations for outsourcing (Lankford and Parsa 1999; Marshall 1994). Outsourcing enables an organisation to ‘rent-in’ external expertise at a moment’s notice or for specified periods of time without needing to hire a permanent staff. It thus reduces the risk of employing or hiring in staff or services that may not be needed over the long term.
Keys to a strong outsourcing arrangement
For an outsourcing arrangement to succeed, the provider must be able to work as an insider – with the trust and confidence of the organisation’s executive leadership and board of directors. To help gauge a provider’s ability to deliver quality outsourcing services, an organisation should expect the provider to bring four essential qualities and capabilities to the table: * Industry focus and experience * A multidisciplinary approach * Seamlessly integrated resources * Sophisticated methodology and tools
Ultimately, if the fit is right, the organisation should get a high quality internal audit function that focuses on the strategic risks facing the organisation in a cost effective way.

COST SAVINGS ASSOCIATED WITH OUTSOURCING THE INTERNAL AUDIT FUNCTION
Unfortunately, the purported benefits of outsourcing may have been overestimated. Companies have not been able to reduce their internal audit costs as much as expected, which correlates with a 1991 study that found that companies would not realize cost savings unless accounting firms drastically lowered their hourly billing rates or reduced the scope of audit programs.
Outsourcing became popular because it appeared to offer significant advantages to both corporations and accounting firms. A company would benefit by reducing internal audit costs and by obtaining access to the outsourcing firm’s broad range of expertise that would otherwise be too expensive to maintain internally. Costs would be reduced by eliminating overlapping positions and audit effort, and by replacing fixed-cost with variable-cost employees. The expected benefits to accounting firms were significant outsourcing fees and the ability to better balance workloads, because much of the outsourcing work could be performed during the off-peak summer season. Additionally, it was expected that the knowledge obtained while performing internal audit activities would increase the efficiency and effectiveness of the annual financial statement audit. For example, the understanding of internal controls obtained while performing internal audit services would enable the auditors to reduce the amount of work needed to document and test internal controls during the financial statement audit, as well as enhance the Auditor’s awareness of client-specific fraud risks.
More recently, high-profile reporting frauds such as the Enron debacle suggest that outsourcing may not be as effective as a separate external auditor and an in-house internal audit department at detecting and reporting fraudulent activity. As a result of Enron, the Sarbanes-Oxley Act of 2002 now supercedes the voluntary self-regulation of SEC auditors with the Public Company Accounting Oversight Board (PCAOB). The implementation of the Sarbanes-Oxley Act will also forbid some and limit many non audit services that a CPA firm can provide to an SEC client.
While complete internal audit outsourcing is a concern, the same is not true of co-sourcing. Co-sourcing relies on a strong in-house internal audit department and usually uses external service providers only for non-routine services where special capabilities are needed.
Compromising Independence in Fact and Appearance To maintain public confidence in the financial statement audit process, auditors must remain independent. Widespread concern that internal audit outsourcing may compromise independence in both fact and appearance arises mainly because of the magnitude and continuous nature of these services and the lack of strict and enforceable AICPA and SEC independence rules. Magnitude and continuous nature of non-audit service fees. Beginning in 2000, the SEC began requiring all publicly held companies to separately disclose the dollar amount of their external audit fees, their information technology (IT) consulting fees, and all other fees (including internal audit outsourcing fees) paid to their audit firms. In reviewing the 2001 disclosures of non audit fees by 307 companies in the S&P 500, the Wall Street Journal found that every one of the companies had purchased non audit services from their audit firms during the previous year (based on the SEC’s definition of what constitutes audit services), and, on average, non audit fees were nearly three times as large as audit fees. While many types of consulting and assurance services may not represent significant fees, the IIA estimated that internal audit services could be 10 times as large as the annual external audit fee. (Purchases of expensive computer hardware or software systems for clients appear to be one of the few types of consulting services where fees may be as large as internal audit outsourcing fees.) Additionally, unlike other consulting and assurance services, internal audit outsourcing is not a one-time service, but rather is offered on a continual basis, thereby increasing the likelihood of closer relationships with client employees. For example, as reported in the Wall Street Journal, 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.
Companies outsource to avoid certain types of costs. Among the reasons companies elect to outsource include avoidance of burdensome regulations, high taxes, high energy costs, and unreasonable costs that may be associated with defined benefits in labor union contracts and taxes for government mandated benefits. Perceived or actual gross margin in the short run incentivizes a company to outsource. With reduced short run costs, executive management sees the opportunity for short run profits while the income growth of the consumers’ base is strained. This motivates companies to outsource for lower labor costs. However, the company may or may not incur unexpected costs to train these overseas workers. Lower regulatory costs are an addition to companies saving money when outsourcing. On comparative costs, a U.S. employer typically incurs higher defined benefit costs associated with taxes for (social security, Medicare, safety protection (OSHA regulations)/FICA (taxes)). On comparative CEO pay, executive pay in the United States in 2007 was more than 400 times more than average workers -- a gap 20 times bigger than it was in 1965. In 2011, twenty-six of the largest US corporations paid more to CEO's than they paid in federal taxes. However, it appears companies do not outsource to reduce executive or managerial costs.
Companies may seek internal savings to focus money and resources towards core business. A company may outsource its landscaping functions irrelevant to the core business. Companies and public entities may outsource certain specialized functions, such as payroll, to ADP or Ceridian. Companies may find the same level of consumer satisfaction.

COSTS AND BENEFITS OF OUTSOURCING.

Estimates of budget savings
The primary motive for outsourcing the provision of public services to the private sector has been the desire to reduce public expenditure. Most contracts have been designed to achieve such savings and in some cases, such as that of Commonwealth IT outsourcing, agency budgets have been cut in anticipation of projected cost savings. At least in Australia, the most widely used estimate of the cost savings associated with outsourcing has been that, on average the cost of providing public services will be reduced by 20 per cent as a result of outsourcing. This estimate is derived mainly from the work of academic and consultant, Simon Domberger and his co-workers, and has been employed by the Industry Commission (1996) and other government agencies. Domberger’s research was used to justify the savings targets outlined in the South Australian Commission of Audit. Other studies have suggested that, when the costs of tendering and contract management are taken into account, and if there are no changes in wages and conditions as a result of outsourcing, the average cost saving from outsourcing will be less than 20 per cent in most cases. Paddon (1991, 1993) criticises the work of Domberger and cites British estimates that the average cost saving was around 7 per cent. As is discussed below, the Commonwealth IT outsourcing program failed to achieve the projected savings and was drastically scaled back.

Service quality
There are both political and economic reasons to expect that outsourcing will be directly associated with quality reductions. First, governments frequently use outsourcing as a cover for deliberate reductions in the quality of service and designed to cut costs. It is more politically attractive to implement reductions in service quality at the time of outsourcing than to reduce service quality first, then to call for tenders for the provision of service at the reduced quality level. Second, the incentives for private contractors are clearly to provide the minimum service specified in the contract. Hence, if any services previously provided are not specified in the contract, or if there is room for interpretation regarding the quality of service required, it is reasonable to assume that the minimum quality will emerge. Instances of this kind are examined in the case studies presented below. This point raises serious problems for governments seeking to evaluate the performance of outsourcing. If the measures of service quality used in the evaluation are the same as those used in the contract specification, the evaluation will be biased in favor of a positive assessment. This point is illustrated with respect to the Job Network, discussed below.
Most international and Australian studies of outsourcing of public services have found that service quality deteriorated (Ascher 1987, Evatt Research Centre 1990; Rimmer 1993, Egan, Montesin and Adena 1995, Fraser 1997). Savas (1977) found no evidence of statistically significant change. The Productivity Commission (1996) cited a number of Australian studies finding that service quality either improved or remained unchanged. However, nearly all of these studies came from a single group of researchers, led by the late Simon Domberger and affiliated with the consulting group CTC Consultants, which took a leading role in the promotion and implementation of competitive tendering policies in New South Wales.

Wages
In both the private and public sectors, outsourcing has been used as a device to reduce wages. Although the Productivity Commission (1996) found no systematic pattern of wage reductions following outsourcing, the ACTU submission to the same inquiry found a number of cases where wages were reduced. Further evidence can be found in a number of decisions of the Industrial Relations Court preventing employers from reducing wages and conditions as a result of outsourcing.
The very existence of decisions of this kind is evidence that, in their absence, at least some employers would seek to reduce conditions.

Conditions of employment
Even more than with reductions in wages, outsourcing has been associated with changes in the conditions of employment designed to increase output per worker. Such changes are commonly referred to as the removal of ‘restrictive work practices’. Most official evaluations of outsourcing have proceeded on the assumption that such changes involve a mutually beneficial increase in flexibility and productivity. Flexibility of employment arrangements is often discussed in terms that suggest that flexibility is unambiguously desirable. In reality, flexibility in employment is, for most purposes, a zero-sum commodity. The greater the flexibility available to the manager, the less there is for the worker and vice versa. From the employer’s point of view, the most flexible employee is one who is permanently on-call, but is paid only when called upon to work. Obviously, such employees have essentially no flexibility in managing their own time. More generally, the productivity gains derived from the removal of ‘restrictive work practices’ are typically the result of an increase in unpaid working hours and in the pace and intensity of work. The main source of efficiency gains explicitly noted by Domberger, Meadowcroft and Thompson (1986) is the replacement of fixed 'task and finish' payments with piecework rates. Productivity gains from such changes in payment schedules will arise primarily from increased effort. Ganley and Grahl (1988) cite a number of cases of increases in working hours or reductions in working conditions associated with outsourcing of garbage collection. The Industry Commission (1996) argues that it is impossible to distinguish between increases in work intensity arising from outsourcing and general changes in the labour market. This kind of obfuscation is, unfortunately, typical of the analytical approach adopted by the Industry Commission in its evaluation of microeconomic reform. A more intellectually honest statement of the position would be that outsourcing is one of a number of strategies adopted by private and public sector employers to increase the intensity of work and enhance the flexibility of employers at the expense of employees.
Cost shifting
Cost shifting between levels of government has been a common practice for many years, but the emphasis on cost minimisation associated with outsourcing creates new incentives for cost shifting. An obvious way of minimising costs at one level of government is to make extensive use of services provided by another level of government on a free or subsidised basis. Another source of cost shifting is tax evasion. Outsourcing increases the opportunities for evasion and avoidance. Public sector wage employees have fewer opportunities for evasion than any other group of income-earners. By contrast, contractors and their employees are in a very good position to evade taxes, especially if, like cleaners and garbage collectors, they work non-standard hours. The evidence reported in Tanzi (1982) indicates that evasion is insignificant among government employees and highest in the small business sector.

The allocation of risk
The appropriate allocation of risk is a crucial element of successful contractual relationships of all kinds. In a well-designed contract, risks and the associated rewards are allocated to the party best able to manage those risks. This point may be illustrated by considering a construction project. Under a fixed-price contract, the builder bears the risk of any unanticipated cost increases and receives the benefit of any unanticipated cost savings. By contrast, under a ‘cost-plus’ contract, these risks are allocated to the customer. In general, the allocation of risk under the fixed-price contract is superior, because the builder has more capacity to manage risk associated with the construction process. Outsourcing is likely to be beneficial in cases where risks peripheral to the core concerns of a government agency can be transferred to a contractor who is well placed to manage those risks. On the other hand, poorly designed contracts can leave governments, and ultimately the community, in the position of bearing high risks while receiving no return. The case of CSL, discussed below, is a good example.

Firm size
Firm size has an impact on the volume of activity within an organisation. The larger the organisation the greater the frequency and scope of activities. It is argued that larger organisations may prefer to retain their internal audit function in-house because they have greater capacity to obtain cost efficiencies through economies of scale (Anderson 1996; Barr and Chang 1993, Niles, 1997). The marginal costs of internal audit will be lower in larger firms as a greater number of internal audit activities are expected to be conducted in these organisations. In turn, the recovery of the initial set-up costs and the ongoing costs of having permanent staff, expertise and the capital fund invested will be faster in larger firms. According to Transaction Cost Economics theory (V/illiamson, 1999; Ouchi, 1980), it is argued that goods and services are efficiently provided or conducted in organisations that are able to achieve economies of scale. As such, activities that occur more frequently are seen to be less amenable for outsourcing (and more amenable for in-housing) as more frequently the activities are conducted, the lower is the cost per activity. Given that it is more likely that various internal audit services will be conducted more frequently in larger organisations than in smaller ones, economies of scale are expected through in-housing in larger organisations (V/idener and Selto, 1999). Similarly, through outsourcing smaller companies may avoid the large set-up costs of developing an in-house internal audit department. Therefore, outsourcing potentially provides smaller companies with the opportunity to engage internal auditing at a lower price. Empirical evidence on the association between the size of the organisation and the decision to outsource appears mixed. Based on a survey of 232 of senior executives of US-based financial institutions, Petravick's (1997) study revealed that the median size of institutions that retained the internal audit function in-house was nearly four times larger than those companies that adopt outsourcing arrangement (i.e. Larger firms tend to in-house). Further, from the total number of companies which outsourced their internal audit function, 32%o of the organisations fell into the smallest size category as measured by total assets. Results from Petravick (1997) thus supports the prediction that the smaller the size of the organisation, the greater the likelihood that the organisation may adopt outsourcing arrangement. On the other hand, Carey and Chua (1999) found that smaller size organisations have a greater tendency to internalise their internal audit function than their larger counterparts. It is suggested that "perhaps the very small companies tend to perform a limited range of internal auditing services which are more easily handled in-house" (Caret and Chua, 1999,p.34).

Cost factors/Cost pressure
Cost factors are often cited as an important element in the outsourcing decision (Carey and Chua, 1999; Barr and Chang. 1993; Rittenberg and Colevaski, 1997). It is argued that outsourcing offers immediate costs savings as external service providers in the market tend to offer their services at more competitive and lower prices. Crawford, Mathews and Cooper (1996) note that external providers of internal audit services are managing to quote for and win total outsourcing work, on the basis that their proposed fee is less than the cost of the current internal audit function. It is argued that external providers are able to offer highly competitive and lower prices through cost efficiencies that they gain from economies of scale.
Cost savings are also created for the service purchaser through outsourcing because such arrangement allows companies to replace "fixed cost" employees with "variable fees" (Aldhizer and Cashell, 1996; Rittenberg et al., 1999). In other words, outsourcing reduces direct and overhead costs associated with recruitment, training and wages (Martin and Lavine, 2000). Thus, the internal audit service provided by the external provider may generate costs savings through downsizing in-house facilities. Sharma and Subramaniam (2001), however, found that among a list of 10 perceived benefits of outsourcing provided to the respondents 'reduced internal audit costs' ranked weakly as a benefit in terms of its extent as a benefit i.e. with a mean of 2.55 on a7 - point scale. Empirical evidence from Carey and Chua's (1999) study appears to support financial costs factor as a significant element affecting the decision to outsource. 'When asked if they perceived outsourcing as a cheaper alternative to building an in-house internal audit department, 60% of organisations that had outsourced indicated outsourcing as a cheaper alternative, while only 26% of organisations that had not outsourced indicated the same expectation. Based on the above discussion, it can be argued that organisations that face greater cost pressures and those who perceive cost savings to be important are likely to outsource their internal audit function because the external service providers arguably offer the audit services at lower cost. Conversely, organisations that face low cost pressures will more likely choose to retain the internal audit function in-house.

HOW MUCH SAVINGS THROUGH OUTSOURCING?
There’s certainly a lot of confusion regarding the potential savings from outsourcing. In one article, we learn that India’s wage rate for computer programmers is 15% that of a programmer in the United States. But in that same article, we hear from an industry expert that “Realistically, a company might expect to save about 20% through outsourcing.” Can both figures be correct? Yes, they can. Let’s take a look.
First, we need to recognize that there’s a fixed cost associated with establishing and maintaining a relationship with any supplier. And if that supplier is located overseas, that fixed cost is generally higher. The figure above shows both the higher fixed cost, and also the lower variable cost (the slope of the total cost curve), associated with outsourcing work to another industry. Note that the variable cost for outsourced work is much less (about15%) that of keeping the work in-house. This is a reflection of the fact that “India’s wage rate for computer programmers is 15% that of a programmer in the United States.
At point A, the two total cost curves (“in-house” and “outsource”) intersect. Beyond this point – that is, at a transaction volume greater than volume level A – the company would save money by outsourcing. At a transaction level below this number, the company would save money keeping the work in-house.
Regarding the industry expert’s comment that, “Realistically, a company might expect to save about 20% through outsourcing,” note volume level B on the curve. At this transaction volume level, it’s about 20% less expensive to send the work overseas than it is to perform the work in-house. Clearly, at yet higher volumes, the percentage saved is greater. At lower volumes, the savings is less.
Logically, outsourcing should be of less interest to smaller companies. For they generally don’t have the necessary transaction volume to overcome the fixed cost associated with establishing and maintaining the necessary overseas relationship. Yes, this is certainly true. But guess what? Outsource companies are opening offices in the US and other industrialized nations to accommodate smaller companies’ lower transaction levels. Thus, the offshore companies are driving down the fixed cost associated with their services – making it easier for smaller companies to do business with them.
In fact, outsourcing is becoming especially important to smaller firms. For they’re being pressured into sending work overseas. An article in The Wall Street Journal (“Small firm’s Outsource Abroad by Tapping Offshore Producers” January 7, 2004), tells of large, industrial customers giving their smaller suppliers an ultimatum. They’ve said, “If they [the smaller company suppliers] don’t have an offshore operation within six to 12 months, they will lose business to competing producers who do.”

RESEARCH METHOD
The design and administration of this study mirrored the 'total design approach' advocated by Dillman (1973) whereby appropriate strategies were undertaken to maximise the quality and quantity of survey responses. The strategy includes general interview of audit staff, making clear the objectives of the study, and ensuring anonymity of interviewee. The research project involved two phases. In Phase l, a series of interviews involving staff of 3 firms of the food and beverage industry that have outsourced part or all of their internal audit activity was conducted by one of the researchers. A qualitative research approach was appropriate at this stage of the research because the objective was to gain an in-depth understanding of the cost savings associated with outsourcing the internal audit function. At each research site, interviews were conducted with the person/s responsible for outsourcing part or all of the internal audit activities, for example, the head of the internal audit department and the Director of Corporate Services. These interviews were designed to ascertain the cost savings associated with outsourcing internal audit function and extent of internal audit outsourced, choice of the external provider, and factors related to the decision as well as the perceived benefits of the decision. Attention was also given to matters relating to activities that were continued to be completed in-house in cases where only partial outsourcing had occurred. In Phase 2, a larger and more quantitatively based survey designed to appraise how different factors affect the decision to outsource, and the implications of such a decision was undertaken.

FINDINGS AND DISCUSSION
The interview comprises 4 sections. The first section gathers general information on the respondent, organisation surveyed, annual budget, engagement of internal audit services, the proportion of in house/outsourced internal audit activities, and types of internal audit service. Section B collects data on outsourcing activities, including information on external service providers, decision to outsource and perceived benefits of outsourcing; while Section C amasses information relating to internal audit unit/section of the entity, its decision to use in-house internal audit services, and perceived benefits of in-housing.
The purpose of this study was to provide empirical evidence on the cost savings associated with outsourcing of internal audit function and issues related to outsourcing internal audit function in food and beverage industry. Our preliminary findings indicate that more than 85% of the interviewee had either completely outsourced or co-sourced their internal audit function. In terms of the type of activities outsourced, it appears that specialised activities, e.g. information systems review and asset valuation are more likely to be outsourced. It is probable that rapid developments in information technology and the changes in financial reporting requirements such as asset valuation policies encourage outsourcing to 'the experts'. On the other hand, in-housed internal audits seem to be more involved in review services such as performance review, risk management, and fraud investigation. While performance reviews and fraud investigations have been traditionally conducted in-house, undertaking risk management reviews signals the broadening role of internal audit units. The ANAO (1998 - 99) likewise in their report also highlight the increasing role that internal audit units are beginning to play in risk management. These findings have important implications for staff recruitment and training in internal audit units. Given that the perceived benefits of outsourcing more closely relate to acquiring technological know-how, while in-house internal audit units appear to benefit from improved internal processes and communication, recruitment of internal audit staff will need to consider more carefully match the knowledge and skills of the recruits to the role of internal audit within an organisation.
Further, the perceived benefits of in-housing in terms of improving internal processes and helping employees learn about business risks also suggest an expanding role for internal audit units in terms of risk management and organisational learning. Thus, the linking the internal audit function with the risk management structure is clearly important for enhancing the role of in-house facilities.
The findings of this study also highlight that audit committees play a significant role in the internal audit outsourcing process. In particular, they are strongly involved in the decision to outsource internal audit projects and approving the external auditor. However, a lack of segregation of duties in the management and evaluation of outsourcing decisions indicates a need for a review of the decision making process. In particular, evidence of contractual breaches by external service providers suggests a need for further research in the area of contract negotiations, monitoring and evaluation processes.

CONCLUSION
Strategically, sourcing the internal audit function presents an array of potential benefits and challenges. Different organisations will require different sourcing models. And for some businesses, sourcing might not be a viable option given current circumstances. For many leading organisations, however, strategic sourcing has created a valuable opportunity to manage the fixed costs associated with the internal audit function, enhance its value to the organisation, and refocus its resources and energies on what the organisation does best - its core competencies.
Applying outsourcing to the internal audit and controls function in industries can provide a great deal of value to the public and reduce industrial operating costs. We have seen the following benefits from outsourcing internal control, compliance and audit functions in an industrial sector and non-profit applications:
• 20-30 percent reduction in internal labor costs by providing a more experienced team with defined methodologies, processes and approach to testing and audit.
• Greatly reduces the risk of misappropriation of funds or lack of compliance on how funds are to be administered.
• 10-15 percent opportunity savings of lost revenue associated with collections and cash processing transactions (e.g. tickets in law enforcement, cash management in transit services, cash and payment processing for licenses and other fee administration).
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