Internal Audit - 2018 Market Report
Tentative progress being made on Brexit
Our last report was published in the summer of 2017, shortly after the result of the general election was announced. We had hoped that by the time our 2018 report was published, the picture surrounding Brexit, its consequences for the UK economy and recruitment landscape would be better known. Recent developments suggest tentative progress is being made.
At the time of writing this report, the UK Prime Minister and Jean-Claude Juncker, President of the European Commission, have just announced an agreement after last-minute talks that paves the way for trade discussions to begin. The agreement covers the rights of EU Citizens already in the UK, the Irish Border and the settlement framework for the UK’s financial commitments to the European Union.
Whilst the shape of the final trade deal will not be known for some time, a key concession towards a future trade deal has been made within the joint report from the negotiators of the European Union and the United Kingdom government on Phase One of the negotiations:
"In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the internal market and the customs union".
Given the firm stance the EU 27 have taken over Phase One of the talks, it is unlikely they will back down on any aspect of the negotiations relating to trade. If the UK is to gain unfettered access to the free market, the UK could yet have to play by EU rules in perpetuity, whilst relinquishing any ability to shape the rules in the future. It will be interesting to see how this plays out politically with some of the more extreme proponents of Brexit.
We reported in the summer that the general election result could lead to what some commentators describe as a ‘soft Brexit’ where access to the single market, customs union and a more relaxed approach to immigration are prioritised. The findings in our previous survey demonstrated a dependence on EU nationals for the day to day functioning of most audit departments. Perhaps this announcement is an indication of this. We take the view that remaining closely aligned with the EU’s rules and regulations in order to maintain existing trade with the Eurozone is in the UK’s, and our clients’, best interests and view this development as a positive, albeit tentative, first step in the right direction.
Growth down, inflation up
On an annual basis, GDP growth divergence between the UK and the Eurozone is stark. The Eurozone expanded by 2.5%, compared to the UK’s 1.5%. In Q3, UK growth was again dwarfed by the growth in the Eurozone economy. Whilst the Eurozone is experiencing a cyclical recovery, after years of rolling financial crisis, the UK has been hit this year by a rise in inflation stemming from the slump in sterling in the wake of the Brexit vote.
Business investment has also been weak in the UK, due to firms’ concerns about trade arrangements after March 2019. Softening economic growth, uncertainty, a lack of stability, concerns about trade and inflation are not the best conditions for a healthy recruitment market.
Recruitment outlook for auditors remains positive
In the summer, we reported that the outlook for auditors appeared to be quite positive. Whilst the long term economic consequences of Brexit are difficult to predict, this time last year we forecast that audit expertise would remain in demand. The recovery in the recruitment market that began in the second half of 2016, continued into 2017. 72% of hiring managers in internal audit reported having recruited during 2017, an increase on 2016. Retail banks were the most active, with 92% of hiring managers having tried to recruit auditors. Structural reform and the need to develop ring fenced operations has been a major factor behind much of this recruitment. Despite the broader uncertainty surrounding the economy, the outlook for 2018 remains positive. This will in part be driven by new regulations, including the General Data Protection Regulation (GDPR), the Markets in Financial Instruments Directive (MiFID 2) and the Payment Services Directive (PSD2).
Whilst Brexit is looming ever larger and is already having significant impact in various different ways, the importance of audit to business is undeniable and the demand for talented candidates, particularly with certain specialist skills, is driving audit recruitment. The deadline dates for MiFID2, PSD2 and GDPR have been and are very much top of mind.
Contingency planning for Brexit well under way
As talks progress, Brexit is becoming ever more of a reality for businesses and our survey reveals that 51% of audit employers have already begun contingency planning for Brexit.
This figure varies considerably by sector, from 82% of Corporate & Investment Banks down to just 27% of consultancies.
Contingency planning includes planning to open additional offices in other locations as a result of Brexit and, for 16% of employers, these plans are already in progress.
Republic of Ireland most popular destination
The Republic of Ireland and Benelux are the most common destinations being considered, with Germany and France the next most popular.
However, despite the fact that many companies are considering creating new departments outside London and the UK, and banks and financial services companies in particular are adding head count in preparation for Brexit, London still remains the main ecosystem and European centre for financial services. Stronger candidates still see it as offering better career opportunities and salaries than in other EU cities and in light of the recent developments guaranteeing the rights of EU Citizens relocating to the UK before Brexit occurs, we anticipate the numbers of workers coming from the EU to increase in the short term.
EU Citizens (non-UK) remain vital to audit departments
The guaranteeing of rights is encouraging as EU Citizens remain vital to audit in the UK, accounting for 18% of employees. This figure rises to 32% in Investment Banking and 23% in Retail Banking. The number of EU Citizens is lower in Asset Management and Insurance, both 12%, though still significant.
In the summer, we reported that 29% of the candidates who responded to our candidate survey were EU Citizens (non-UK) and that Brexit could have a negative impact on candidate availability. Brexit has indeed had a negative impact on candidate supply during the latter half of 2017: EU candidates in 2017 were more reluctant to relocate away from mainland Europe. However, new vacancies are still being created and the recent announcement guaranteeing the rights of EU Citizens moving to the UK between now and the date of Brexit may ease the situation in 2018 and increase the supply of candidates in the short term. Given the clear reliance on auditors from Europe, it is vital that an efficient immigration system is adopted post Brexit to prevent future skills shortages.
Pressure on resources increasing
Only 48% of managers believe their department is “sufficiently resourced for the demands that are made on it”. This continues the steady decline over the last 4 years.
Historically, the public sector was able to compete with the private sector by offering a good work life balance, final salary pensions and flexible working. However, the private sector has made significant progress in offering more flexible working, hot desking and the ability to work from home. As a result, given that compensation is frequently better in the private sector, vacancies in the public sector can remain live for long periods of time. Coupled with a prolonged period of budget cuts in the public sector, it comes as no surprise that public sector hiring managers feel that departments are not sufficiently resourced.
Banks rarely struggle to attract auditors and are generally able to hire staff when required, especially when there is regulatory concern around a department or area. Fines for mis-selling PPI and Interest Rate Derivatives as well as for the manipulation of Libor have shown how expensive getting on the wrong side of the Regulator can be. A fully staffed and highly skilled audit department can represent a material cost saving if these sorts of fines can be avoided.
Significant levels of recruitment activity
Recruitment activity remained at a high level in 2017, with 72% of employers attempting to recruit during 2017, marginally up from 71% in 2016.
Retail Banking was the most active sector, with 92% of the market reporting to have recruited or attempted to recruit externally in 2017. Commerce & Industry was the least active sector at 36%.
Structural reform, more commonly referred to as ring-fencing has brought about the reorganisation of internal audit departments at a number of the large UK banks. This has resulted in increased audit headcount in these organisations. Challenger banks, which are more retail focused, have also hired auditors in increasing numbers during 2017.
In 2017,somesmaller banks, asset managers and insurance companies brought some of their audit work back in-house. over the past few years we have witnessed the growth of co-source arrangements. These are often expensive and, with banks looking to improve their cost to income ratios, many decided to bring the functions back in-house. The plethora of regulations due to go live in 2018 (GDPR, MIFID 2, PSD2) will keep both in-house and consultancy firms busy.
GDPR has featured on audit plans for all industries, whereas MiFID 2, PSD2 and other regulations are more targeted to financial services which could help explain why Commerce & Industry was the least active sector. GDPR will come into effect on 25th May 2018 and many Heads of Audit have reported not feeling adequately prepared for it. In many cases, employers are turning to contract or temporary resources to assist in the short term.
Insurance and Asset Management firms have come under greater regulatory scrutiny as regulators start to look beyond banking. Both sectors have recruited banking auditors without prior Insurance or Asset Management experience, as banks generally have more advanced audit departments with better established three lines of defence models.
Interestingly, within Commerce & Industry, some companies have looked to completely outsource their departments and others to increase their co-source arrangements where specific project skillsets are required, instead of hiring additional headcount on a permanent basis.
Recruitment levels set to continue
Our survey reveals that the high level of recruitment activity is likely to continue, with 70% of Heads of Audit saying they would need to recruit in 2018.
A number of key regulations will be enforced in 2018, which explains why such a high proportion of Heads of Audit have said they will be recruiting in 2018. GDPR is the area that many firms are not fully prepared for and may have the largest impact on internal audit in 2018. Many legal and cyber security departments began recruiting for GDPR in 2016 and have subsequently tailed off their recruitment in this area. The need for auditors is likely to increase once GDPR comes into force.
Increasing responsibilities taken on by internal audit, such as pre and post-acquisition reviews, providing consultancy services, continuous monitoring and special projects are additional pressures on audit departments’ resources. Given the frequency of new regulation and the change that Brexit will inevitably lead to, there comes a point where audit departments have to allocate space in the diary to accommodate unanticipated work as part of the audit plan.
Recruitment is also being driven by anticipated growth, which is a sign of a healthy market, especially considering the background economic environment.
In line with the observations already made above, the intention to recruit is greatest in the asset management and retail banking sectors; and lowest in the public sector.
Technical skills most in demand
Finding candidates with the required technical skills (39%) was the greatest challenge to those recruiting in 2017, followed by sourcing candidates with the right interpersonal skills (29%). Budget was the main challenge for 18% of employers and 14% cited location as the key challenge.
Technical skills remain the greatest challenge due to the complexity of the subject matter and the level of technical knowledge required. The pace of change in technology and regulation is such that auditors with the required subject matter expertise are often in short supply.
In addition to highly specialised technical skills, auditors also need good interpersonal skills. A successful auditor must build strong relationships and put people at ease in order to achieve objectives. Auditors may be required to deliver a tough message and be credible under pressure whilst maintaining an effective working relationship with their stakeholders. The more challenging the environment, the more important it is to hire auditors with excellent soft skills. Striking the balance between communication skills and a high degree of subject matter expertise is the perennial challenge across all areas of corporate governance.
Wage growth for auditors moving role in 2017 has been modest. The impact of inflation led to wages being compressed. In our compensation trends report, published in the summer of 2017, we reported that dissatisfaction with compensation had increased significantly on the previous year and the number of auditors who reported they would consider entering the recruitment market to improve their salary had increased. Employers wishing to retain or hire auditors in 2018 need to ensure they have suitable budgets in place.
Over the last few years, many large banks have relocated audit staff away from London. However, outside London, banks have found it far harder to recruit auditors, because of the location. The decline in candidates from the EU has exacerbated the problem as people coming to the UK have traditionally been more willing to consider non-London locations.
External resources still key to finding candidates
Whilst the recruitment environment continues to evolve, the primary sources of candidates for those employers recruiting remain little changed. Recruitment agencies, either direct or via an RPO, account for 73% of candidates. External resources are still key.
Internal audit is increasingly seen as a professional career in itself. The risk and control skillset has become increasingly important since the financial crisis and a stint in internal audit is seen as a positive career step for those looking to move into senior executive level roles. Internal mobility into internal audit has improved as a result. Technical specialists, who were previously reluctant to consider audit, recognise the career benefits of gaining experience as an auditor.
Direct sourcing and the use of recruitment process outsourcing has grown over recent years as banks seek to reduce costs. Large banks are the principle adopters of the direct sourcing and RPO model. It’s mainly the larger employers making multiple hires that operate this model, as direct sourcing is easier in a market where there is an abundance of available resource relative to the number of open roles.
However, whilst direct sourcing methods can achieve cost savings, 37% of hiring managers in banks are dissatisfied with their recruitment model, slightly more than the 33% in the broader audit market. In a buoyant market with strong competition for the best candidates, or where a niche specialism is required, many are questioning whether direct sourcing or RPOs offer the most effective recruitment model. There is clearly a place for direct sourcing and RPOs, however, specialist recruitment companies with in-depth market knowledge and strong candidate relationships play a vital role in securing the best talent.
One third of employers dissatisfied with recruitment model
Overall, one third of employers are dissatisfied with their recruitment model, with just 67% satisfied. Public Sector auditors were the least satisfied with 56% reporting dissatisfaction with their recruitment model.
Recruiting auditors in a buoyant market is a challenge and it is interesting to note the levels of dissatisfaction felt by many employers. By comparison, 72% of hiring managers in risk and 75% of hiring managers in compliance in banking reported being satisfied with their recruitment model. The growth of recruitment process outsourcing and direct hiring within banking is seemingly yielding greater results in other areas of corporate governance. In-house recruitment teams with a high degree of staff turnover are highly effective at supporting large sections of the business, however, to fully understand the nuances of recruiting auditors requires a depth of experience that takes time to acquire. Hiring managers who work directly with a specialist recruiter tend to find the process of recruitment less frustrating.
Frustration with a recruitment model is not solely directed at recruitment teams. Gaining headcount and budget approval, lengthy interview processes, offer management and effective on boarding can also present challenges. In a competitive market where there may be little to differentiate employers from a compensation, culture or technical perspective, those employers with the most efficient recruitment processes stand the greatest chance of securing the best candidates.
Contractors a vital resource
Contractors remain a vital resource with 49% of employers using contract or interim resource on a regular basis, also, contractors account for approximately 10% of the teams in which they are regularly utilised.
Given the difficulty of securing candidates with the right technical skills, contract resource can be an effective method of plugging a skills gap within an organisation; with subject matter experts being employed to work on key audits. Employers predominately utilise contract resource as cover. This could be for maternity, sickness or to cover while a permanent hire is made. Increasingly, contractors are brought on board to deal with BAU audit work, due to permanent staff being seconded onto special projects.
As has been illustrated in some of the key findings in section 4, whilst there are common trends across much of the audit recruitment market, there are also differences by sector. Here is a brief analysis of the main market sectors:
2017 has been a buoyant year for the banking internal audit recruitment market and a significant improvement on 2016. Activity has increased as the year progressed with many banks looking to hire candidates at both VP and AVP level. Whilst the supply of candidates is generally good, for those candidates who combine subject matter expertise and hands on audit experience with good communication skills, there are lots of opportunities. At VP level, banks have hired candidates from the second line of defence. Employers have been willing to overlook a lack of audit experience for candidates with excellent technical knowledge. Internal audit is increasingly being viewed as a good career move by candidates in the second line of defence.
Whilst the long-term implications of Brexit are not yet fully understood, most employers and hiring managers are taking a pragmatic view. Audit plans need to be submitted and incoming regulation, technological developments, increased cyber threats and structural reform will continue to drive recruitment.
The volume of roles in the market has led to some roles taking a little longer to fill than would ordinarily be expected. Competition for the best candidates means many roles take an average of 10-12 weeks to be filled. There are always exceptions; some roles are filled in a few weeks, whereas a few other roles have been open for up to 12 months. In these latter cases, employers have appeared not to know exactly what they were after, with different stakeholders having different and sometimes contradictory views of what their ideal candidate looks like. Until internal differences are resolved and a coherent strategy for recruitment is put in place, roles are likely to stay open indefinitely.
Salary inflation is another reason for some roles taking longer to fill. Demand in 2018 is likely to increase in light of a raft of new regulations that come into force. Structural reform, GDPR and MiFID II will all feature heavily in audit plans. Many heads of audit have also put placeholders into their schedules to deal with ad hoc issues as they arise.
The volume of internal audit hiring witnessed in the latter half of 2017 will continue in 2018. Demand for VP level auditors with subject matter expertise will remain high, as will demand for candidates with regulatory expertise. Employers without a clear recruitment strategy, efficient processes and a willingness to be flexible with budgets where necessary, may lose out to
Asset and wealth management internal audit has been busy in 2017. Recent guidance from the Institute of Internal Auditors recommended the maximum length of tenure for a Head of Audit to be seven years. This has led to a number of the large institutional asset managers hiring new chief auditors during 2017. Historically, a typical Head of Audit in asset management in the UK will have been in post for many years, so this recommendation is having an immediate effect. In addition to making senior hires, several major asset managers also significantly increased their audit coverage in 2017.
The actual content of the audit plans of many asset and wealth managers hasn’t changed materially from 2017 to 2018. MiFID II and GDPR are two key areas in the 2018 plan along with IT Security, Culture, Third parties and CASS. However, with new Chief Auditors being recruited, that bring with them experience and ideas from more advanced banking audit departments (e.g. continuous monitoring and providing consultancy services) there has been an increase in demand for good calibre internal auditors, often without the need for prior experience in asset and wealth management. In 2017, we have seen some smaller asset and wealth managers looking to bring more audit work in-house, away from expensive co-sourcing arrangements, which has also been partly driven by SMCR. The outlook for internal audit in asset management is very positive.
The audit market within insurance continues to see fierce competition at the newly-qualified level with many large insurers seeking to hire junior auditors. This has created inflationary pressure on salaries and bonus structures. Big 4 candidates looking for their first move into industry have plenty of opportunities. The opposite is true for more experienced auditors. Employers seeking to hire experienced auditors have a healthy pool of candidates to choose from. This situation is exacerbated at the Senior Manager level, with even fewer roles being created.
Auditors with a sound understanding of Data Analytics, IFRS 17 or actuarial skills will continue to charge a premium. Vacancies arising in London are filled rapidly while vacancies in the regions are much harder to fill and can often be advertised for longer than 3 months before a suitable candidate becomes available. Candidate expectations at Senior Auditor level continue to be out of step with the market, with many feeling their years of service at one company should afford them either greater salary or responsibility. To progress, auditors need to possess experience of a niche or valued specialism or have exceptional performance levels, combined with excellent stakeholder management skills.
70% of hiring managers who recruited during 2017 said that replacement hires were the main driver for recruitment. Although questions remain as to how the insurance industry as a whole will react to Brexit, audit departments, so far, have not implemented contingency plans. Some larger companies are preparing to move some staff to other European hubs should the need arise, but this may not include audit. Data Analytics use in audit functions is becoming increasingly commonplace as it can provide 100% coverage where such sampling wouldn’t have been possible only a year or two ago. Knowledge of Solvency II remains key while SOX is of equal importance to audit departments in companies with significant US interests.
We anticipate the market for auditors in 2018 to remain buoyant at the junior end, with fewer roles at manager or senior manager level.
Public Sector & NFP
Demand from the Public Sector is currently subdued. Budgetary constraints remain an issue and staff retention is also a major problem. Changes to working patterns in the private sector, such as flexible and remote working has afforded auditors in the private sector a better work/life balance. Coupled with more generous compensation, it is no surprise that auditors are leaving the public sector. Continued restructuring, new partnerships and a move towards a shared service model has led to a drop in anticipated recruitment in 2018. Some audit departments have been relocated and others have merged, leading to some redundancies in the sector.
In order to retain staff, more audit departments have been willing to develop entry level staff or to encourage staff from other departments to perform secondments within internal audit. This provides an opportunity for progression from the wider business as well as raising the profile of internal audit by utilising subject matter experts from other areas.
We expect demand in 2018 to remain subdued.
The Big 4 and mid-tier 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 also 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, GDPR, MiFID II and Structural Reform on a co-sourced basis. Their recruitment has been directed towards expanding their lower level audit pool to replace leavers moving out of practice and into industry. Consultancies are often seen as a great place for auditors to begin their career, gain accreditation and valuable experience before they move into more lucrative roles in-house. Consultancies have begun to increase salaries, both as a means of retaining staff as well as attracting auditors from in- house teams.
Commerce & Industry2017 was a transitional year for audit departments in commerce & industry. The market was sluggish although candidate availability remains good, with many passive candidates who aren’t active in the market, but who are open to hearing about new opportunities. The manufacturing and FMCG sectors were busiest during 2017 and the outlook for 2018 is for much of the same.
International companies operating in the UK are still assessing what their post Brexit audit functions will look like. Until businesses are given clarity on the shape of any potential trade deal, many firms have adopted a wait and see approach. A transition period, should one be agreed, will help companies adjust to the new trading environment and make any necessary adjustments to their audit functions.
Candidates with good communication skills and the ability to engage with stakeholders are a prized asset for any audit department and some employers have prioritised communication skills over specific technical and product knowledge. However, specialist skills remain important and, increasingly, firms are relying on co-source arrangements to plug specific knowledge gaps. The need to manage costs and the lack of available technical skills has led to some companies completely outsourcing all audit work.
The majority of hiring has been at the more junior end of the market, where skills shortages exist. There is particular demand for senior or lead auditors from a Big 4 background who have some experience in industry. At the very senior end of the market, however, there is an oversupply of candidates, and far fewer available roles, due to employers choosing to promote staff as a means of retaining them.
We expect 2018 to follow on in a similar vein, with pockets of activity and demand concentrated on the more junior end of the market.
After a subdued start, demand for IA contractors increased strongly in the latter half of 2017, primarily to meet year end targets. Furthermore, a number of project teams have been created to provide assurance on new initiatives going into 2018, particularly around new regulations. We expect to see demand continue into 2018, in particular following SMCR and a requirement for better oversight, assurance and mitigation of risk following an increased personal accountability at the top leadership level. This will particularly be the case for banks and financial institutions and will be driven further by the revision of the IIA code.
The interim IT Audit market has followed a similar pattern with the volume of roles increasing as the year progressed. Some projects that involve moving parts within Europe have been put on hold until guarantees can be given by the EU/British Government. As technology becomes ever more integrated into our working lives, the role of IT Audit to ensure it is working properly and optimised for business needs becomes increasingly important.
Key areas of demand
Demand for internal audit contractors with strong regulatory compliance audit experience in the light of new regulation remains high and this will continue into 2018. We also expect high levels of demand for internal audit contractors who have project change experience. This is driven by businesses looking to provide oversight and assurance over various regulatory driven projects, plus anticipated changes to business models and strategy due to Brexit.
Internal audit contractors who possess data analytics/analysis experience will also be in demand in 2018. These skills and techniques can be utilised to great effect, allowing a far higher level of coverage when testing large data sets offering greater overall assurance to the business, which is gratefully received by audit committees. Internal audit contractors are in a unique position to share new techniques and insight across multiple companies and offer organisations a means of upskilling.Most demand is in London and the South East with fewer internal audit contracting roles available within the rest of the UK. The demand from outside London and the South East is largely arising from back-filling permanent vacancies which may take longer to fill than desired.
Information & cyber security concerns have rightly been given a higher profile by most businesses and internal audit has had to keep abreast of this growing business area. A significant part of the remit of IT audit contractors engaged during 2017 has been IT Security, with a number of audit departments engaging specialist cyber security auditors.
Candidate availability in business audit has been fairly steady throughout 2017, with Q4 roll-off on assignments helping to boost supply as we reach the end of the year. Those contractors with regulatory compliance focused audit experience have been in demand, leading to rate increases due to a shortage of supply. The availability of IT audit contractors has also remained steady in the latter half of 2017. Going into 2018, there is a good supply of highly experienced contractors available who add value on projects. Contractors with between seven and ten years’ experience have also been in demand, which has increased rates by approximately ten percent. Contracting still provides candidates with an excellent way to gain experience of different organisations, build their personal brand, add value to projects and be rewarded financially for their efforts.
Within the Banking & Financial Services sector, we have seen a rise in day rates, particularly in the high demand areas such as regulation, project change, data analytics and cyber security.