Outsourcing certain types of work to third parties is not new. Accounts preparation, payroll and bookkeeping have been outsourced for many decades, often within the UK but also to the Indian sub-continent and elsewhere. But outsourcing and offshoring either within the firm or network, or to a third party, are now embedded in the way many firms of all sizes do business. 

For the purposes of this article, ‘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. This article does not deal with work performed by component auditors for the purposes of group audits.

The amount of audit work outsourced and offshored has grown in recent years. Audit regulators seem more comfortable than they once were about the purpose and audit quality aspects. 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 for all such work. Outsourcing and offshoring are now perceived by some firms as critical to audit quality, as well as cost. 

What’s driving change?

Some larger firms have been outsourcing and offshoring some elements of audit work for well over a decade, but the use of both 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. While some face-to-face contact is needed to build relationships and trust, the global pandemic put paid to the idea that audit always requires large numbers of audit staff on site for long periods of time. Auditors do need to be on site from time to time to count stock and ‘kick tyres’, among many other things, but the idea that the value of audit work conducted from behind a computer screen is somehow less valuable has diminished. Virtual meetings, which were relatively rare before the pandemic, are now embedded in working life, including the performance of audits.

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

Audit and Assurance Faculty staff spoke at length to senior staff at five larger and mid-tier firms for this article. We heard that outsourcing and offshoring was, is and will remain critical to the continued servicing of high-quality audits. Enhanced regulatory demands have not been matched by a corresponding 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 to industry or to other firms, whatever incentives they offered. 

This was an unprecedented situation. Long hours, regulatory risk and better opportunities elsewhere have always been a feature of post-qualification working life for those with aspirations to partnership. But the extent of the hours, the enhanced regulatory risk, and the abundance of other opportunities, meant that firms were often unable to replace those for whom the path to partnership was just too long and arduous. 

For a while, firms had to widen their traditional hunting grounds for newly qualified staff to India, the Philippines, Pakistan, Bangladesh, North Africa and the Gulf States, among others. That trend is now flattening off, but the trend towards the use of centres of excellence, whether in-house, outsourced or offshored, has accelerated. 

Recent ICAEW research shows that retention of qualified staff, together with outsourcing and offshoring, are also major trends for mid-tier firms.

How does it all work in practice?

We heard about two basic models. The first was often described as a ‘ticketing’ system, whereby a piece of routine work is sent to a service centre and picked up by the next available member of staff. The second model involves a named individual at the service centre, who becomes part of the audit team. Either of these arrangements 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. 

Many centres provide high-volume, low-risk work such as transactions testing, including journals testing and bank reconciliations. Service level agreements are in place and data security is critical. Where work is offshored, the data never leaves the UK in most cases, but is instead accessed by the service provider via a portal. 

Other centres provide a highly personalised service to network firms, who access staff and treat them as full members of the audit team. Such centres may be set up by a single firm, or as joint ventures between several network firms, for example.

Well-known third-party providers include Gold City Offshoring, Makosi, Advance Track and Sapro. UK-based providers such as Affinity Associates and others may provide audit services directly to their own clients, as well as outsourcing services to other firms.

We were told that 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 tight local review;
• recruiting school leavers locally who are trained in the audit firm’s methodology, and providing routes to qualification for those who desire and merit it; and 
• training local staff in UK GAAP, applying the fit and proper rules, UK managers visiting offshore centres and generally integrating the offshore service provider with the UK firm and teams. 

All of the firms we spoke to 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 is a particular success story, partly because of the availability of large numbers of highly qualified local staff, enabling service centres to upscale at pace where necessary. Centre staff are highly mobile and salary inflation is beginning to emerge. The movement of staff between offshore service centres and the UK – in both directions – is increasingly common. 

What are the challenges?

In all cases, it seems that there is a job to be done in encouraging UK staff to use the services offered and in educating them on how to get the best from offshored service centres. This includes the need to engage properly with offshore staff and not simply expect work to be done to a certain standard, or in a certain way, without providing feedback. 

Offshore centres that have grown organically in response to demand seem to be successful. We heard that attempts to engineer centralised service centres globally have not been so successful, partly because of the very different needs of firms in different jurisdictions, such as the UK and US.

Offshore centres seem to work best where there is a large pool of highly qualified, anglophone and/or francophone staff, such as in Morocco, Romania and the Baltic states, as well as India, Bangladesh and South Africa, among others. 

Family and regional connections have also played a significant part in the development of some service centres. 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, either independently, or through the firm, to set up what have become very successful service centres. 

While there are limits to what can be outsourced and offshored – we heard that some audit clients ‘really don’t like it’ - globalisation, technology, the pandemic and ongoing recruitment issues have combined to embed this type of work in the business model of many audit firms. 

We heard that for some firms, 30-40% of audit hours are often now outsourced and that the cost, efficiency and quality advantages that this model provides is forcing more audit firms to look at the model.

All of 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. 

The Audit and Assurance Faculty is grateful to senior staff at five larger and mid-tier firms who were interviewed for the purposes of this article.