Problem

A large, international bank is considering outsourcing all facets of the human resource function, including recruiting, benefits, payroll, employee training, and development, compensation, and information systems. Three potentially viable vendors have been identified. The internal audit function has been asked to review the vendor selection process and evaluate each vendor's system of internal controls. Senior management has decided it wants a 10 equity stake in the company that performs the outsourcing function.

The original terms of the agreement call for 1,000 employees to be moved from the bank's human resources function to the company who ultimately receives the contract. The vendor will then be responsible for evaluating the employees' performance and determining which employees will be terminated after a six-month period.

The vendor has the option to determine which computer systems are used. The length of the contract will be either five or 10 years, depending on its pricing structure.

The bank expects to achieve significant financial gains from this outsourcing arrangement, including significant cost reductions associated with the conversion to standard applications provided by the vendor. The vendor will be expected to leverage existing systems, processes, and personnel and be able to make a profit based on the economies of scale, particularly in the systems areas.

A) What role should the internal audit function play in the bank's decision to outsource this function?

B) What specific areas should the internal audit function review during the transition phase?

C) What areas of risk should the bank consider during the transition phase? After the transition phase is complete?

D) What types of internal audit consulting activities related to the outsourced human resources function might be appropriate once the transition is complete?