Internal Audit - 2017 Salary Guide and Market Report

Snap shot - Internal Audit

Welcome to Barclay Simpson’s 2017 Internal Audit Market Report - Barclay Simpson has been producing corporate governance market reports since 1990. They produce two reports each year. This one, summarizing and analysing recruitment trends in the internal audit recruitment market, is supplemented by an employer survey.

Living with Brexit

Our market reports in July focused on remuneration and were released immediately after the vote to leave the EU. At the time, possibly rashly, we predicted that by the time our 2017 employment report became available, the consequences of that decision would be better known. Unfortunately, six months later, what might practically be achieved in exit negotiations is no clearer.

This report focuses on employment. Whilst the anticipated Brexit inspired recession has not occurred, the UK is about to start negotiations to leave the EU, an action that even those who support Brexit recognise will do short term damage to the economy. Nobody should doubt the value of the financial services industry to the UK. The largest fifty financial services groups contributed over £70 billion in taxes in 2016 and the industry as a whole exported £20 billion of services to the EU. Given this, from our perspective as recruitment consultants, the key to a successful Brexit will be to avoid any serious self-inflicted economic damage.

Economy continues to turn

Brexit has raised the level of uncertainty, which is no friend of the recruitment market. Companies invest and recruit when they feel confident and sit on their hands when they do not. However, as we predicted last year, the internal audit recruitment market, together with the wider economy, will likely learn to live with Brexit. Our experience during the last six months has borne this out. Whilst it is not entirely business as usual, the economy is still turning and recruitment decisions are being taken.

Influence of the banks

The financial services industry, particularly the banking sector, has a major influence over the internal audit recruitment market. The sector is big enough to significantly affect recruitment market statistics, but is not representative of the wider market.

Therefore, even prior to Brexit, when many higher tier banks were retreating from the recruitment market and the overall number of internal audit vacancies were down, in sectors outside of banking, the number of vacancies were either unchanged or up.

Recruitment remains broadly healthy

Our survey results reflect our own experience and show that, whilst the recruitment market has slowed, it remains broadly healthy with vacancies continuing to be generated and filled. For example, 67% of Heads of Audit (against 71% a year ago) report they have recruited in the last six months and only 19% anticipate they are unlikely to recruit in 2017 (against 15% a year ago). These are surprisingly resilient findings.

We will avoid predicting that in a further six months all will have become clear. Whilst economic growth and particularly employment have been far stronger post Brexit than all but a few predicted, it is likely that in 2017 the internal audit recruitment market will be facing some steady headwinds. Rising inflation could also have some interesting consequences for internal audit salaries.


Market Analysis

Vacancies being driven by the need to replace internal auditors

Vacancies Internal Audit 2017Six months ago, the anticipated recovery in demand that a vote to stay in the EU was supposed to create, did not materialise. The immediate uncertainty caused by Brexit resulted in a hiatus where the value option of doing nothing was taken by both candidates and clients. Fortunately, with economic Armageddon avoided, the internal audit recruitment market recovered and, in the final quarter of 2016, benefited from a period of catch up as recruitment freezes were lifted and otherwise postponed recruitment was initiated. Despite this, the overall number of vacancies generated was lower than in the comparable period in 2015. However, given Brexit and the more uncertain economic outlook, the fall was less than might have been anticipated.

Within this fall, discernible trends have included UK domestic banks in part recruiting in the place of higher tier investment banks. However, structural changes are leading to the emergence of new providers in almost all sectors of the industry. These range from Fintech companies that offer personal loans, mortgages, payments and remittances, commercial lending, foreign exchange, asset based finance, digital banks and more. To the benefit of those who make their living out of internal auditing, this whole myriad of start-ups, in various stages of their evolution, could potentially require their expertise.

Outside of banking, demand from the insurance and asset management sectors has broadly held up. In industry and commerce, the fall in vacancies has been more evident in UK centric groups than in multinational ones. Demand from the consultancy sector remains robust, while the public sector is subdued.

More specific issues currently driving demand include regulatory pressure within the financial services sector, the development of specific methodologies and the relocation of audit departments away from London to the regions. Given the outlook for corporate investment and GDP growth, we are not anticipating an increase in the number of internal audit vacancies during 2017. Heads of Audit are predicting their recruitment requirements are more likely to be driven by the need to replace internal auditors than by business growth and development.


Rate of placements - Heads of Audit finding it more difficult to recruit

To provide a better insight into the dynamics of the recruitment market, this graph plots the rate at which placements have been made across the last four years. It reflects the rate at which candidates are accepting offers of employment.Rate of placement Internal Audit 2017

We reported last year that the rate of placements was falling. This trend has continued and is supported by the results of our survey where there was a modest uptake in Heads of Audit reporting they are finding it difficult to recruit. There appears to be both cyclical and structural reasons for this.

Cyclical explanations include a reluctance amongst internal auditors to change jobs. This should improve as the Brexit inspired warnings of economic Armageddon subside. Companies are also fighting to retain their internal auditors with counter offers, which try to address the usual reasons why internal auditors seek to move: salary, promotion, job content and flexible working. It is not unusual for an offer to work one day at home to thwart a resignation.

The structural explanation is the shortage of internal auditors with the package of soft and technical skills that companies are looking for, particularly at senior auditor/junior manager levels. This results in some internal auditors attracting multiple offers, while others struggle to attract any offers at all. This trend is being exacerbated by not only the specific but also the specialist skills that internal audit departments increasingly require.

Going forwards, a development that will most likely improve the rate of placements in the financial services industry, is the emergence of smaller, more outwardly entrepreneurial groups. When they go to the recruitment market it is because they are determined to recruit. This is reflected in their recruitment processes, which are usually streamlined and effective. They are also more likely to be seeking generalists to join a small team. Both the broader nature of the role and benefits package can potentially be moulded around the preferred recruit.

These companies are more likely to treat potential recruits and even their recruitment representatives as prospective customers, which in part is reflected in their higher offer acceptance rates. Many large financial services groups simply fail to communicate effectively between the ultimate decision maker and the candidate they might otherwise wish to recruit. Recruitment consultants are often excluded from a process they could facilitate and add value to, whilst smaller entrepreneurial groups benefit from rarely having such inhibitions.


Conclusions from Employer Survey

Whilst the demands on internal audit departments and other areas of corporate governance are becoming greater, more Heads of Audit report their departments are not sufficiently resourced to meet those demands. This is against a backdrop where recruitment budgets are under pressure and the cost of recruiting internal auditors with the required skills and experience is increasing. The consequences of Brexit are yet to come.

Departments remain under-resourced Recruitment Budget Internal Audit 2017

  • Only 49% of managers believe their internal audit department is "sufficiently resourced for the demands that are made on it"

Pressure on recruitment budgets intensifies

  • Fall from 40% of internal audit departments reporting an increase in their recruit budget in 2015 to 32% in 2016. 12% now reporting a drop
  • IT audit budget increases more common than general audit
  • Increases remain more likely in banking, financial services and practice than other sectors

Further slowdown in recruitment activity Recruitment Activity Internal Audit 2017

  • 67% of internal audit departments have recruited or attempted to recruit in the last 6 months, down from 71% in 2015 and 77% in 2014
  • The exception is practice where, once again, all respondents have looked to recruit
  • FTSE 100 also strongly represented with 83% looking to recruit

Recruitment getting harder

  • 73% of managers report they are finding it difficult to recruit (up from 71% in 2015)
  • Insurance companies, non-FTSE 100 commercial companies and practices are finding it the most difficult to recruit


Recruitment of internal auditors remains a challenge

High salary expectations Salary expectations Internal Audit 2017

  • 72% of managers (65% in 2015) report candidate salary expectations to be either excessive and beyond their budget or more than expected
  • 28% consider salary expectations to be reasonable (35% in 2015)

Internal recruitment on the increase

  • 15% (10% in 2015) of managers using internal recruitment as principal source of candidates
  • At 53%, external preferred suppliers remain the principal source

Increasing reliance on external resourcesExternal Resources Internal Audit 2017

  • 82% of departments (80% in 2015) report they would consider using external resources
  • 27% report they routinely or significantly use external resources

Replacement recruitment to be main recruitment driver in 2017

  • 48% of internal audit departments report replacement recruitment to be their key driver
  • At 29%, business growth and development second most important

Demand set to continue in 2017

  • Only 19% (15% in 2015) of managers report they are unlikely to recruit in 2017
  • Sectors most likely to recruit are insurance, FTSE 100 companies and practice

Brexit yet to have a meaningful impact

  • Only 11% of managers report that Brexit is influencing the work they undertake
  • Brexit is having a greater influence in financial services than commerce


Market Commentary

Our survey suggests that, despite Brexit and the prospect of a weaker economy, the demand for internal auditors is broadly holding up. However, recruitment budgets remain under pressure and Heads of Internal Audit are struggling to attract and recruit the internal auditors they require. These difficulties may explain why our survey reveals an increasing reliance on external resources to help staff internal audit departments.

More internal auditors appointed internally

The recruitment challenges Heads of Audit are facing also appear to be driving the increasing percentage of internal auditors being recruited internally. This percentage has increased for each of the last three years. They include staff transferring from other areas of corporate governance reflecting that it can be more cost effective to train an already employed subject matter expert than to provide an externally appointed internal auditor with the necessary expertise.

Given the ongoing loss of internal auditors to accounting and line management positions, and the more proprietorial attitude that audit practices are taking to the auditors they train, an additional source of internal auditors can only be welcomed. However, whilst Big 4 trained internal auditors remain attractive as potential recruits, for some Heads of Audit they do not have the commercial skills necessary, can be expensive and, given their propensity to move on quickly, can represent a poor investment.

Brexit’s modest impact

Although still early in the process, our survey asked Heads of Audit if Brexit was already influencing the work they undertook or was likely to impact on the resources their departments required. We were not surprised by the modest impact reported, particularly from Heads of Internal Audit in commerce and industry.

However, Brexit may bring into focus the reliance UK based internal audit departments place on European recruits. Notwithstanding their much-needed audit expertise, the language skills they bring to the UK are not commonly held by British internal auditors. It is an example of where internal audit jobs otherwise based in the UK could migrate to Europe.


What is currently driving the recruitment market?

There are three main drivers:

1. Regulation

Whilst it did not appear as a significant factor in our survey, we are aware how frequently it appears in job descriptions and shapes the work that internal audit departments undertake. Huge numbers of internal auditors are employed to meet the regulatory demands placed on the financial services industry. For example, The Senior Managers Regime will increase pressure across a much wider section of the financial services industry and regulation is currently driving the demand for specialists in financial crime, external regulation, finance, third parties and risk. With the BHS sale debacle causing political unrest, regulation may be set to spread outside of financial services.

However, the regulatory high water mark may have already been reached. Whilst Brexit and the transfer of jobs to the Eurozone are a threat, to what extent is it likely to happen given the human capital, costs and additional uncertainties involved? A less published threat to those who make their living out of corporate governance in the City is the potential for deregulation in the United States within financial services. That would clearly make New York a more attractive option for the type of high value jobs London excels at and maybe more so than Paris or Frankfurt.

The political determination that there must not be a re-run of the financial crisis has put the cost of regulation ahead of the need for the industry to be competitive. Should that no longer be so and, given the value of the industry to the UK economy, competitiveness may once again become a factor in framing regulation. The copper-bottomed nature of some of the regulatory requirements and the jobs that go with them would potentially be at stake. There are many things that go around in circles and overzealous regulation might just be one of them.

Notwithstanding future developments, for now, regulation continues to be a major factor in financial services recruitment.

2. Subject matter expertise

The second factor is the development of audit methodologies, particularly the increasing use of big data and data analytics as an audit tool. Given also the demand for specialists in areas such as financial modelling, actuarial, traded products and cybercrime, it is not surprising, when out of necessity, Heads of Audit recruit subject matter experience over auditing skills. The growing importance of subject matter expertise, particularly in the financial services industry, may in the future provide a challenge to senior auditors with only generalist backgrounds. If these professionals are unable to progress into management, they may find the opportunities available to them become more limited. Equally more junior candidates who build a subject matter specialism early in their career are finding opportunities arising not only in first or second line defence roles, but in non-control functions where their skills are also in demand.

3. Growth in regional demand

The third factor is the growth in the regional demand for internal auditors, driven by the financial services industry. Some of this demand is the result of the regional development of the industry. However, in many instances it is a consequence of banks deciding to migrate away from London. For example, ring fenced bank operations have recently been established in Birmingham and Manchester, other banks have moved audit teams to Belfast and Sheffield and challenger banks have chosen Manchester and Scotland as their bases. Cities in Eastern Europe are also becoming hubs, particularly for back office activities. Given that such decisions are based on cost considerations alone, the low salaries and shortage of locally based audit skills can make it difficult to recruit.

Some further observations

We have already noted that internal auditors are more likely to be recruited internally and commented on the effort to which companies will go to retain their staff. One effect of this is that internal auditors are more likely to be promoted earlier. This is resulting in more senior auditors being sought at the expense of managers.

Many internal auditors looking for new positions are sensitive about their potential job title and perhaps not unreasonably look for a title that reflects greater responsibility. Given the increase in more junior positions, it is not unusual for companies to inflate a job title with a reference to management where such responsibilities may not exist. Many internal auditors are now alive to this and will only settle for a role and a job title that meets their expectations.

Sector observations

Within financial services, recruitment activity in Banking has been more subdued. The reason is that the ongoing multiple internal audit vacancies in the higher tier investment banks, that were once a feature, are no longer supporting demand in the sector. These banks are now at best looking to recruit on a replacement basis. Currently, much of the demand from the banking sector is being driven by UK retail and commercial banks. Whilst London remains the main centre for activity, regional recruitment is becoming increasingly significant as many banks relocate teams and departments away from London.

Asset Management benefited from a steady stream of vacancies in 2016. Industry consolidation may continue in both asset and wealth management as the burden of regulatory compliance weighs heavily on smaller groups. In the search for cost savings, efficiency initiatives are becoming commonplace. Some groups that have outsourced internal audit have looked to save costs by recruiting in-house audit management whilst retaining a co-source capability. Going into 2017, a number of major asset managers will be changing their Heads of Audit. This is due to various reasons, such as retirement, transferring internally (usually to compliance), moving internationally, including internally back to an overseas head office. A number of audit committees are also in the process of authorising increases in audit coverage for 2017, which should result in significant demand for 2017.

The Insurance sector is recruiting steadily across all areas, with many of the larger general and life insurers and brokers actively in the recruitment market. As ever, the focus of their recruitment is at senior auditor level where candidate shortages are endemic. Whilst the insurance sector has always been more regionally based than banking, some of the larger groups in the sector are mimicking the banks by having audit hubs in both London and the regions. Corporate relocations have also had an impact. With regulation driving demand, subject matter specialists (such as actuarial) are highly sought after. Bank assurance groups have also been upskilling their functions with a number of senior appointments.

Within Commerce & Industry, vacancy generation has slowed. A notable exception has been the technology and telecoms sectors, seemingly driven by product development, change projects and growth in the sectors. Multinationals have been more active than more UK centric groups, although it is difficult to discern if Brexit has been responsible for this. Vacancies are overwhelmingly at senior auditor level where the competition is fierce and companies are still likely to lose prospective recruits to better paying financial services groups. Given this, it is evident that companies are less concerned about prospective recruits having sector specific experience or product knowledge and are more likely to focus on core internal audit and interpersonal skills. Companies in industry and commerce appear to be leaning more heavily towards co-sourced agreements, with the consequent loss of in-house internal audit positions.

The Consultancies have been recruiting steadily throughout the year as they build their outsourcing and co-sourcing services. Recruitment is dominated by the Big 4 who have been transferring staff from overseas to assist with UK staff shortages. They are focused on providing specialist skill sets such as financial crime, IT audit and data analytics on a co-sourced basis. Brexit consultancy will no doubt become a growth area. Their recruitment has been directed towards expanding their lower level audit pool at the expense of higher paid senior managers where some voluntary redundancies have been offered.

Mid-Tier practices are recruiting. Notwithstanding their widespread demand at internal and senior audit level, a notable feature has been the recruitment of partners with special financial services skills to lead their service offerings in the sector.

Demand from the Public Sector is currently subdued. After a fillip earlier in 2016, budgetary constraints are seemingly biting again. There is still no consistency in demand from the sector and no certainty that a vacancy will be filled externally. Opportunities to rationalise are being taken in both local and central government and there has been an increase in shared services, particularly amongst local authorities, a number of which have merged their functions. Demand from the NFP sector ticked up during the second half of 2016 and was skewed towards more junior positions with fewer of the management type vacancies that characterised 2015.

The demand for IT auditors has been notably stronger than for general auditors. Cyber risks are growing, along with those associated with emerging technologies and change initiatives. IT auditors with cybersecurity, data analytics/data assurance, change IT infrastructure and disaster recovery experience are in short supply and highly sought after. Banks are also keen to identify IT auditors who can perform back-office functions and operations, particularly risk and compliance department reviews. Demand for IT audit expertise is currently especially high from the larger UK domestic banks, technology and telecoms companies and the Big 4. As ever, there is a particular shortage of senior/lead level IT auditors.

Internal audit contractors remain in steady demand. Vacancies have been heavily weighted towards financial services, including investment, corporate, private and retail banking and also from buy-side investment management groups. Demand for AML and financial crime experience such as sanctions and PEPs has been notable. This could be a result of the forthcoming changes to the Fourth Money Laundering Directive. Demand has been London/South East centric. Change programmes have featured where end of the project staffing needs are unclear. There has also been demand from industries where there is uncertainty over forthcoming legislative changes. Finally, demand for contractors to backfill permanent headcount has remained strong.

Contract IT audit has been notable for a value for money shift away from the use of consultancies to high calibre contractors. Currently, contractors with project assurance, change management and transition methodology skills are in demand and within retail banking there has been a focus on upgrading current systems and transitioning to new applications. As we look towards 2017, General Data Protection Regulations (GDPR) are likely to feature. Contract IT auditors will probably be employed to assist with the leadership of GDPR projects or to support business as usual reviews and projects in order to free up permanent resource.


Salary Guide

We reported in our main Compensation and Market Trends Report six months ago that the average salary increase achieved by internal auditors changing jobs was 16.1%, an increase from 15.1% in 2015. The increase for those staying with their existing employer also rose from 5.5% in 2015 to 5.7% in 2016.

Despite the uncertainty caused by the Brexit vote and a low inflation environment, there were salary pressures in 2016. Our survey suggests that salary expectations remain high and, if anything, have intensified. 72% of internal audit departments believed candidate salary expectations were either more than expected or excessive, up from 65% in 2015. This pressure appears to be more keenly felt in commerce where budgets are perhaps tighter than they are in financial services.

Going forward, after a period when the UK economy flirted with deflation, inflation is likely to have a greater influence on the recruitment market. We have been surprised at the number of internal auditors who report no salary increase for staying with their existing employer or only a marginal one. In 2016, 15% of internal auditors reported their salary had not increased and 26% that their increase was under 2.5%. In a low inflation environment this is possibly understandable, however, given that inflation is likely to exceed 2.5% in 2017, many of these departments will need to offer their staff nominal salary increases that are at least in line with inflation.

With internal audit budgets still under pressure, there are likely to be a significant number of internal auditors whose real earnings will fall. Whilst many of these may have already concluded that given their poor marketability there is little they can do in terms of changing employer, inflation is likely to have an unsettling effect on the wider internal

audit recruitment market. Clearly amongst more marketable internal auditors there is an expectation that their salary will increase, not only in nominal, but also in real terms. If it does not, entering the recruitment market is the obvious solution.

Given the competition for internal audit expertise, particularly for those internal auditors with the skills and experience companies demand, we anticipate that the pressure on internal audit salaries will continue. Even for those companies that are creative and efficient in their recruitment processes and able to offer career development opportunities and possibly flexible working, it is difficult to successfully recruit without offering at least close to market rate salaries.

Salary guidance

Barclay Simpson analyses the salary data that accumulates from the placements we make in the UK. This provides a guide to salaries for internal audit professionals.

The salary ranges quoted are for good rather than exceptional individuals and take no account of other benefits in addition to salary that usually accrue to internal auditors, such as bonuses, profit sharing arrangements and pension benefits.

Barclay Simpson will release a Compensation and Market Trends Report in July that will include detailed information on salaries.

Banking salary graphs Internal Audit 2017

Insurance salary graphs Internal Audit 2017

This report was published by Barclay Simpson in February 2017. To read the full report and see more information on the Employer Survey results, click here.


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