Outsourcing and Risk Management from an SME Perspective
Posted 09 May 16
With the continued reduction of barriers and overhead costs surrounding the outsourcing of business processes and functions, our approach to managing the associated risks facing governance must evolve to meet the changing business environment. Particularly from an SME governance perspective, it is imperative that the risk management processes remains one step ahead of the new opportunities faced by Australian businesses.
Specific risks associated with outsourcing can range from data security risk from an external IT service provider, to the risk of quality control and production capacity of outsourced supply chain activities.
The outsourcing of business operations can present additional obstacles for external auditors. Particularly when internal administrative and financial procedures are outsourced to third parties, the quality and integrity of financial information can be a recurring area of contention throughout the audit process.
Some specific areas of consideration for external auditors in response to risks associated with outsourcing are:
- The level of oversight from those within the organisation (is somebody responsible for monitoring and assessing information provided by outsourced parties?)
- Quality of internal controls of the outsourced party (are these controls externally reviewed?)
- Asset misappropriation (does the outsourced party have access to the organisation’s assets?)
There are various types of external examination reports that outsourced service providers can obtain in order to support their representations regarding internal controls. These reports are generally issued in accordance with ASAR 3402; Assurance Reports on Controls at a Service Organisation.
The Victorian Government’s report; “Key advice update No.1, 2015; Managing outsourced financial services”, can be a useful guide for SMEs on how to approach outsourced relationships from a governance perspective.
While the prospect of reduced overhead costs through the outsourcing of administrative, and other labour-intensive activities can be appealing to SMEs, it is the role of governance to ensure that their policies and procedures prepare their business for the road ahead.
If you have any questions regarding how to manage outsourcing risk from a governance perspective please do not hesitate to contact Charles McKee or Ken Weldin< in our Melbourne office on 03 9679 2222, or click here to find the expert nearest you.