Co-Sourcing and Outsourcing of the

Internal Audit Function

Roundtable Discussion of Strategic Alternatives

October 23, 2008

Emerging role of Internal Audit

Success factors and reason to source

Internal Audit sourcing alternatives

Business Cases

About Jefferson Wells

Q & A

Today’s Discussion

Emerging Role of Internal Audit

Emerging Role of Internal Audit

CorporateGovernance

Risk Management and Strategic Planning

Base Level Internal Control Checking

Governance structure, functional committee set up, policy setting

management of business risk

andParticipate of

strategic planning

Information Protection,

accounting and operations control

Success Factors and Reasons to Source

Success Factors

“ Sourcing” Internal Audit works well when the following conditions exist:

The mission is clearly articulated and objectives are mutually agreed upon

Internal Audit is considered important

Budget constraints drive need for flexibility

Rapid changes in the business

Turnover limits in-house resources

Specialized skills are necessary

Technology enhancements drive efficiency

Geographically disbursed operations

The investment is reasonable

Teaming approach

Why Leading Organizations Are Sourcing

Allows management to focus on core competencies

To acquire needed skillsSubject matter or Systems expertiseGeographic needs

Innovative approaches

Need for flexibility regarding cost structure – variable vs. fixed cost

Lower net cost, i.e., “value for money”

Access to technology/knowledge repositories

Talent Attraction / Retention / Total Life Cycle Hiring Costs

Internal Audit Sourcing Alternatives

FullIn-House

Co-Sourcing

FullOutsourcing

Full In-House- Execution of internal audit program using only internal resources

Co-Sourcing- Outsource selected functions, divisions, geographies, and/or projects

Full Outsourcing- Delivery of all internal audit services by a third party

FullInternalStaffing

LimitedInternalStaffing

Sourcing Alternatives

Sourcing Continuum – Sourcing Alternatives

Benefits

Highest degree of control over Internal Audit functionHigh sense of organization connectivityKnowledge of the company, processes and peopleTraditional structure for Board and managementIn-house talent training groundNew hires bring new expertise

Concerns

Internal Audit not a core competencyStatic resource modelRequires high level of management time and attentionInability to own specialized resourcesIncreasing stakeholder expectationsInvestments necessary to redirect the functionContinuous recruiting, training, methodology and technology investmentsHighest “fixed cost” model

Full In-House Model

Co-Sourcing Model

Benefits

Functional control remains in-houseRapid response to needs and issuesAllows management to focus on core competenciesAccess to specialized resourcesEliminates certain recruiting, training and employment costsCost flexibility via “as needed” resources (variable vs. fixed cost)Access to service provider’s best practices and technologiesGeographic coverage with reduced travel costsOvercomes scarcity of qualified resources in the marketAbility to terminate the relationship

Concerns

Provider’s organization and industry knowledgePossible poor cultural fitShift from managing a department to managing a relationshipDependent upon strong Chief Internal Audit ExecutiveStaff continuityCertain overhead and support costs remain

Benefits

Highly cost-effective optionAllows management to focus on core competenciesProvider “owns” human resourcesProvider is responsible for day-to-day administration of the function and executionClient controls risk assessment and audit planCost and skill set flexibilityHighly specialized skill sets on as-needed basisGlobal resource poolState of the art technology/ knowledge sharing

Concerns

Comfort level of Board of DirectorsKnowledge of organization and industryPossible poor cultural fitManagement must “own” all strategic decisionsInternal Audit may have less in-house linkageModel may need to be adjusted to provide a source of executive talentDifficulty in re-establishing in-house function

Full Outsourcing Model

Business Cases

Our Success Stories

Client background Needs We provided & the Results

A NASDAQ listed company specializing in the production of precision metal with annual turnover of US$421 million.

The client required a co-sourcing audit arrangement to execute their Asia-Pacific Audit Program. They were experiencing high levels of staff turn-over and high costs associated with the recruitment, retention and training of IA staff.

Co-sourcing IA structure where Jefferson Wells assists in planning and supports the execution of Asia-pacific audit program. We provided experienced auditors to supplement the audit team to perform both IA and SOX audits. This allowed the company to better retain the current audit staffing levels while minimizing on-going audit costs.

A NYSE listed company specializing in filtration, separations and purifications technology with annual turnover of US$2.6 billion

The group outsource its SOX testing to Jefferson Wells on a global basis. In Asia, Hong Kong Office is responsible for the SOX testing in Japan.

The Hong Kong Office team up with the colleagues of our Japan Office and we conduct the testing in a timely and professional manner.

With the participation of our native Japanese speaking team member, the language barrier between the local client and audit team is avoided.

Our Success Stories

Client background Needs We provided & the Results

An innovate Fortune 500 specialty chemical company with manufacturing facilities in 20 countries and annual turnover of US$4 billion

Following an acquisition, the client found it lacked the right kind of internal audit resources to meet the needs of its newly expanded organization, specifically, the professional with sufficient domestic and international knowledge and expertise to employ a risk-based internal audit approach and methodology across the organization.

We developed and implemented a risk-based internal audit strategy, which provided assurance to the company’s Audit Committee and Board of Directors on the adequacy of internal controls in existing and new business units.

With the implementation of new risk-based internal control strategy and methodology, the client’s internal audit department now has a balanced approach to SOX compliance and a proven process for performing internal audits in a period of significant growth.

About Jefferson Wells

About Jefferson Wells

Founded in 1995 as Audit Force, to be credible alternative to Big 6 firms for Internal Audit Services

Name changed to Jefferson Wells in 1999. Initial concept expanded to include Finance and Accounting, Technology Risk Management, and Tax

Company acquired by Manpower in 2001, to be run as a wholly owned subsidiary

At present, 2500+ professionals based out of 54 offices located in 9 countries around the world.

Average experience level is almost 18 years; minimum experience level is 5 years

To date, we have served more than 4700 clients (including 50% of Fortune500) and performed work in 30+ countries

About Jefferson Wells Asia

Hong Kong office was set up in 2007 as regional hub

Current client engagements include locations in Hong Kong, China, South Korea and Japan

Regional industry experience include banking, insurance, high-tech, professional services, automotive, manufacturing, consumer products

Main focus in Finance Operations and Internal Audit & Controls Solutions

Existing capabilities include, but not limited to, the following:– Internal Audit Outsource/Co-source– Contract compliance & cost recovery audits– SOX compliance – Regulatory compliance– Policies & procedures development – Financial process improvement– Shared services center– Interim professional– Investment accounting– Project management – Accounts reconciliation

Jefferson Wells Model

No attestation work – avoids conflicts of interest

Hire only Experienced Professionals – no trainees– Salaried Professionals with deep industry and/or public accounting

backgrounds– Extensive skill sets and cross-functional abilities

High Value Proposition– Flat, local, team based business model with no partnership overhead– Highly competitive rates representing superior “value for money”– Enterprise wide sharing of knowledge/best practices

Focus on client needs – and client success

Results-Driven– Executing on our business model leads to positive references and

additional business opportunities

Questions/Discussion