Inside out: did Time Warner ask outsiders to do its internal audit?

• Author: Shapoff, Stephen H.
• Position: Includes related article on Ernst and Young Partner's views on Time Warner audit - Interview with Time Warner VP Robert Michael Hayes - Interview

Outsourcing the internal audit is attracting the attention of many financial executives. Time Warner, a recent convert to the practice, fields some of the most frequently asked questions about the strategic move.

A year ago, Time Warner outsourced its entire internal audit function to a Big Five consulting firm. Financial Executive recently caught up with the company's vice president of internal audit, Robert Michael Hayes, who remains with the company in an oversight role. What, we wondered, was behind the outsourcing decision? How is the process working? And would he do it all again?

Financial Executive: Why did you decide to outsource your internal audit function? Was it strictly a cost decision?

Hayes: Cost was secondary. The important factors were internal audit service delivery, value and coverage - and improving them. For some time we had struggled to maintain a full complement of auditors to carry out our internal audit plan. Recruiting, training, career development and travel issues increasingly diverted audit management's attention. We also needed to invest in technology and training to increase productivity and job satisfaction.

We had been committed internally to improving these elements, but we'd gone about as far as we could. I speculated our external auditor - and others like it - could help. To my surprise, I found Ernst & Young had invested considerable sums to form a new business unit to provide internal audit services.

We were impressed enough with its initial presentation to ask for a detailed proposal. After a five-month evaluation, senior manage ment and the audit committee approved the decision to outsource. We saw six advantages: improved risk coverage; improved performance; more operational value; guaranty of competent resources; no loss of management control; and avoidance of investment in a non-core operation.

Financial Executive: How are you achieving these advantages?

Hayes: We improved risk coverage and eliminated gaps and duplications in audit coverage through joint planning by the internal and external audit teams. We use a business-process audit methodology - and the outsourcer's advanced technology, training resources and industry and technical knowledge. This has resulted in improved performance and more operational value. And the provider's large multinational professional employee base guarantees us competent resources on a global basis.

Thus, Time Warner continues to determine internal audit scope and the appropriate response to audit findings. The outsourcer, in effect, executes the audit plan we develop.

Moreover, our provider states it invested over $150 million to develop the methodology, technology and knowledge that underlie its internal audit services. We couldn't match that kind of global investment just to provide state-of-the-art internal audit services for our businesses.

Financial Executive: But isn't outsourcing the internal audit an oxymoron?

Hayes: It certainly is an interesting play on words. But if you go back 30 years or so, you'll find it was mainly the independent auditor that audited internal controls - and determined whether those controls helped to produce fair financial statements. Then, largely to save money, companies started to bring this low-tech, labor intensive work in-house.

What's changed is the impact of technology on audit productivity and coverage. Top-notch...