Guidelines on Outsourcing

Outsourcing certain functions or responsibilities has become popular with bank management because it can be a cost-effective way of achieving a goal or requirement. It can also give banks access to a skill level that the bank could not attain using its own staff. However, in addition to these advantages, there can be drawbacks.

On December 22, 1997, the four federal banking agencies issued guidelines on outsourcing the audit function. While this deals specifically with audit, the principles can also apply to compliance. Both audit and compliance are risk management functions that involve specialized knowledge and skills. Both involve a different set of concerns and priorities than the product delivery parts of the bank.

First, the agencies stress that the Board is responsible for the safe and sound operation of the bank and that they cannot delegate this responsibility. As with compliance, outsourcing audit does not change or transfer the board's primary responsibility. Outsourcing thus must involve careful selection of the service provider. The primary tool that management can use to ensure quality is contract negotiation and performance standards set in the contract.

The Interagency Policy Statement includes guidelines and advice on how audit should be structured, considerations for maintaining internal audit ability or outsourcing, assigning responsibility for audit, scope of audits, and internal communications regarding audit functions and findings. In arriving at a contract for outsourcing audits, the bank should use the contract to set the scope of the audit, frequency and form of communication with bank management, responses to a finding that may trigger an expansion of scope, establish the bank's ownership of the audit reports, specify that the audits and workpapers are available to bank examiners, and that auditors will not make management decisions or act in the capacity of management.

Copyright © 1998 Compliance Action. Originally appeared in Compliance Action, Vol. 3, No. 1, 1/98