Big trend: Offshoring audit work

Here's another unintended consequence of Sarbanes-Oxley: Top audit firms are increasingly outsourcing core audit functions to their overseas affiliates. The logic goes like this: Sarbanes-Oxley has resulted in "fee fatigue" for a lot of clients. To give them a break, more auditors are lowering costs via their overseas affiliates. This logic is hardly rock solid. Sarbox costs have been moderating at many companies. It may be less a matter of giving clients a fee break, and more a matter of wanting to boost margins.

For whatever reason, the trend seems to be real. To be sure, top accounting firms have deployed their overseas units for tax and audit work for years. Firms often use their foreign offices to audit foreign subsidiaries of U.S. companies, for example.

But what we're seeing now is a fundamental shift, reports an article in the CPA Journal. There are a host of pilot programs underway that represent "the first time that U.S. firms have offshored the performance of certain audit procedures on the domestic records of U.S.-based clients to the firms' foreign affiliates."

Several firms, the article notes, are using their offshore units to perform non-audit procedures for their U.S.-based clients. For example, Ernst & Young uses its offshore unit to prepare client tax returns. The largest international public accounting firms have recently begun testing the offshoring of certain auditing procedures on large U.S. clients to their India-based units.

The core internal audit functions as of now have not been outsourced. But it seems like only a matter of time before even that is outsourced, which puts audit firms in an interesting situation. Just as their clients have had to grapple with internal controls and their overseas operations (notably supply chains and such), so the audit firms must deal with quality issues--and perceptions--that stem from the use of overseas affiliates. The trend also poses certain challenges for the PCAOB as it monitors all this. At some point, the industry would benefit from some COSO-like best practices. There are possible PR issues as well.

The trend is not likely to simply vanish. The financial benefits are that compelling. - Jim