In an evolving regulatory landscape, financial institutions face increasing pressure to maintain robust internal audit functions while managing operational efficiency. One strategic solution gaining traction is co-sourcing internal audit functions, which combines the strengths of in-house teams with external expertise. This approach offers numerous advantages, including enhanced compliance, cost-effectiveness, and access to specialized knowledge.

What Is Co-Sourcing?

Co-sourcing is a flexible audit model where an institution retains control over its internal audit function but collaborates with an external audit firm to supplement expertise and resources. Unlike full outsourcing, which relies entirely on an external provider, co-sourcing allows institutions to adapt while leveraging external knowledge where needed.

Key Benefits of Co-Sourcing Internal Audit

1. Enhanced Expertise & Industry Knowledge

• • External audit professionals bring specialized knowledge of regulatory requirements, industry trends, and best practices.
  • Institutions gain access to a diverse skill set without the need for extensive in-house training.

2. Risk Management

• • Keeping up with evolving technologies and risk landscape can be challenging.
  • Co-sourcing provides an independent perspective on control compliance gaps and emerging risks.

3. Cost-Effective Resource Allocation

• • Hiring and retaining a full-time, in-house audit team with specialized skills can be costly.
  • Co-sourcing allows institutions to scale resources up or down as needed, optimizing budgets.

4. Flexibility & Scalability

• • Institutions can adjust the level of external support based on seasonal demands, regulatory changes, or specific projects.
  • It provides access to additional resources during peak audit periods without long-term commitments.

5. Objective & Independent Perspective

• • External auditors offer an unbiased review of internal processes and controls.
  • This helps mitigate internal biases and enhances audit credibility with regulators and stakeholders.

Ideal Use Cases for Co-Sourcing Internal Audit

• Cybersecurity and IT Audits: Assessing information security controls and emerging cyber threats.
• BSA/AML Audits: Strengthening anti-money laundering and fraud prevention frameworks.
• Operational and Financial Audits: Evaluating internal controls, policies, and financial reporting accuracy.
• FDICIA Key Control Testing: Co-sourcing provides access to specialized knowledge and skills that may not be available in-house. This ensures that the testing is conducted by professionals with extensive experience in FDICIA compliance.

How to Implement a Co-Sourced Internal Audit Model

1. Assess Internal Capabilities & Gaps

• • Identify areas where additional expertise or resources are needed.

2. Select the Right Co-Sourcing Partner

• • Look for an audit firm with financial industry experience and a deep understanding of regulatory requirements.

3. Define Roles & Responsibilities

• • Establish clear guidelines on which audit functions will be handled in-house versus externally.

4. Ensure Seamless Collaboration

• • Foster open communication between internal and external auditors for effective knowledge sharing.

5. Monitor & Evaluate Performance

• • Regularly review the effectiveness of the co-sourcing arrangement and make adjustments as needed.

Conclusion

As financial institutions continue to navigate complex regulatory requirements and evolving risk landscapes, co-sourcing internal audit functions presents a strategic, cost-effective, and scalable solution. By combining internal institutional knowledge with external expertise, banks and credit unions can enhance compliance, mitigate risk, and optimize operational efficiency.

For institutions considering a co-sourcing arrangement, selecting the right audit partner is critical. If you’d like to explore how our firm can support your internal audit needs, contact us today.