Outsourcing to third parties is not new. Accounts preparation, payroll and bookkeeping have been outsourced for decades, often within the UK but also to the Indian sub-continent and elsewhere, and are now embedded in the way many firms of all sizes do business. 

‘Outsourcing’ refers to situations in which audit work is performed by staff not employed by the firm or a network firm, whether on or offshore. ‘Offshoring’ refers to situations in which audit work is performed by staff outside the jurisdiction in which the auditor reports, regardless of who employs the staff. 

The amount of audit work outsourced and offshored has grown in recent years and all stakeholders recognise the need for good quality controls to be exercised by both the firms and the third parties to whom work is outsourced. Outsourcing and offshoring are now perceived by some firms as critical to audit quality, as well as cost. 

What’s driving change?

The use of outsourcing and offshoring has been accelerated by two factors: 

• increased regulatory demands, starting in 2016, significantly increased the number of audit hours required to comply with the new requirements; and

• normalisation of virtual working practices – the pandemic put paid to the idea that audit requires large numbers of staff on site and that the value of audit work conducted remotely is somehow less valuable. 

Most of the growth in audit work offshored by larger firms in recent years is to network firms. 

We spoke to senior staff at five larger and mid-tier firms and heard that outsourcing and offshoring is critical to the continued servicing of high-quality audits. Enhanced regulatory demands have not been matched by an increase in the supply of auditors. While student intakes continue to hold up, the great post-pandemic ‘reset’ meant that for a few years many firms were unable to replace the qualified staff they lost. 

In ICAEW’s report Evolution of mid-tier accountancy firms, a talent-related issue was listed as the highest of the top three concerns by 70% of respondents, while a further 18% listed it as one of their top two. As a result of these issues, half of respondent firms had already offshored or outsourced at least one service line. 

Firms have widened their traditional hunting grounds to India, the Philippines, Pakistan, Bangladesh, North Africa and the Gulf States, among others. That is now flattening off, but the trend towards the use of centres of excellence, whether in-house, outsourced or offshored, has accelerated. 

How does it all work in practice?

We heard about two basic models. The first is a ‘ticketing’ system, whereby a piece of work is sent to a service centre and picked up by the next available staff member. The second involves a named individual at the service centre, who becomes part of the audit team. Either of these can be onshore or offshore and the service centre can be:

• within the network, operating as a captive or independently within the network;
• serving one firm, several within a network and sometimes non-network clients; or
• a third party.

Features of offshored arrangements not involving third parties commonly include some combination of the following: 

• control by a local firm, a locally recruited individual, a ‘returnee’ member of staff or an individual partner who specialises in the area; 
• using highly qualified offshore staff to do relatively basic work, subject to local review;
• recruiting local school leavers who are then trained in the firm’s methodology; and 
• training local staff in UK GAAP. 

All the firms emphasised the importance of good-quality foundations and of the need to build facilities slowly, at least initially. Those that had done this were able to increase capacity quickly during the pandemic. India was particularly successful, partly because of the large numbers of qualified local staff, enabling service centres to upscale at pace. 

What are the challenges?

Offshore centres seem to work best where there is a large pool of qualified anglophone or francophone staff, such as Morocco, Romania and the Baltic states, as well as India, Bangladesh and South Africa. Family connections also played a part – we heard of several examples of first- or second-generation immigrants from India who qualified in the UK or Australia and then returned to India to set up service centres. 

Globalisation, technology, the pandemic and recruitment issues have combined to embed outsourcing and offshoring into many audit firms. For some, 30-40% of audit hours are now outsourced. All this may have implications for the skills that UK firms are looking for in staff recruited in the UK, and for the training, education and continuing professional development (CPD) provided by firms and professional bodies such as ICAEW. 

• A longer version of this article is available at Audit & Beyond.