Interim Market Report 2008 - IA&C market analysis

Internal Audit recruitment market holding up well

• The number of new vacancies has fallen during the last twelve months, but remains broadly consistent with the last five years

• Candidate registrations are up, together with the percentage of defensive registrations

• The average salary paid to internal auditors was £51,974, which is 3.9% higher than a year ago and broadly comparable with the current 3.8% increase in average earnings

• The average salary increase achieved by internal auditors changing jobs was 12.8%. This is a small increase from 12.6% in the period to December 2007, but remains historically low in terms of the last five years

Market dynamics

Whether you are looking to evaluate your career or are trying to assess the likely availability of internal auditors you may need to recruit, describing the current recruitment market conditions is relatively easy, but predicting how the market will develop in the future is a far greater challenge.

It is perhaps surprisingly that all the changes in the internal audit recruitment market have been at the margin. Overall, the level of activity - certainly in terms of the number of interviews conducted and the number of internal auditors securing new positions - remains broadly consistent with recent years. The statistics would indicate a general softening in the market, but certainly no radical shift.

The budgeted number of internal auditors has fallen very slightly, because, in those parts of the economy subject to discretionary consumer spending (for example the retail and leisure sectors, and parts of the financial services industry), internal audit departments have closed. This has been a consequence of either the failure or closure of the business area within which these internal audit departments worked. To date this has affected only a very small part of the total internal audit employment market, but enough to show up in our statistics.

However, the total number employed increased:

The rate at which vacancies are being generated would indicate that the internal recruitment markets within companies are still generating vacancies that internal auditors are moving into. Equally, when companies are losing internal auditors externally to other companies, there are no indications of recruitment or head count freezes. Currently, there has been no change in the propensity of the corporate sector to recruit internal auditors.

The total number of vacancies and the number of departments with vacancies have both fallen, but this is primarily because the majority of internal audit departments have found it marginally easier to recruit during the last six months. More internal auditors, some involuntarily, are entering the recruitment market, whilst the government seems intent on continuing to bring internal auditors into the UK under the Highly Skilled Migrant Visa programme regardless of the demand for their services.

The debacle in parts of the banking industry, apart from the direct job losses that have and will result from it, does not appear to have altered the demand for internal auditors. It is clear that under current best practice reporting requirements, the problems were not the result of either too few or too many internal auditors. As we have previously reported, the number and quality of internal auditors that any economic enterprise employs has become far more standardised as a common approach to internal auditing becomes universally adopted. The question that may ultimately be posed is whether internal audit and other governance functions will be empowered to protect executive management and shareholders from their own greed and incompetence.

Fortunately, in many areas of the economy, stakeholders can often be left to deal with the consequences of their decisions. In the financial services industry, with its current capacity to inflict widespread damage to the economy, this is not the case and is one of the reasons why it is subject to significant external regulation. One could imagine, depending on the ultimate damage to the economy and if, and to whom blame is apportioned, that internal audit functions may be empowered to more publicly report the risks that the enterprises they work for are taking. That, however, is for the future.

The more pressing question is the likely course of the internal audit recruitment market. Whilst we are clearly saying so far so good, it is difficult not to be apprehensive about the future.

There is no doubt that much of the success of the UK economy was purchased through debt and the process of paying it back or inflating it away has commenced. It will be painful and the government is, as we have previously reported, through its profligacy, impotent.   

Whilst we have no better insight into the future direction of the economy than anyone else, we would make the following observations:

• Provided the economy continues to grow above 1.5% then it is reasonable to assume that the vast majority of internal auditors will continue to enjoy secure employment.

• If economic growth falls below 1%, the private sector will contract, more companies will fail, internal audit departments will close and auditors will lose their jobs. The two employment numbers to watch are total employment, that is the number of people employed in the economy, and, secondly, the unemployment number. Total employment is currently at record levels and reflects an increase in the total population. Unemployment at 5.3%, from a low base has started to increase. Total employment influences the number of internal audit jobs in the economy and unemployment the level of competition for those jobs. If total employment starts to fall and unemployment rises, then securing positions will become more problematic.

• We would expect any increase in the unemployment rate in internal auditing to be below any general economy-wide increase. Internal audit departments are universally much leaner. If corporate cut backs are to be made, well qualified internal auditors in politically sensitive roles will be less likely to lose their jobs than in the past.   

• Perhaps fortunately, a significant proportion of internal auditors employed in the UK, including those working in financial services, work for global groups. This proportion is much higher than 15 years ago when the UK economy last experienced recessionary conditions. Their prospects are far more dependent on the global rather than UK economy.

Analysis by sector

Multinational groups

Overall, the multinational groups that base their internal audit departments in the UK continued to actively recruit in the first half of 2008. Corporate profitability generally remains strong.

Unsurprisingly, demand has been particularly strong from the oil, energy and mineral extraction companies. This demand has extended into support and related sectors. It is also clear that a number of technology groups have increased their UK based internal audit head count. Defence, telecoms and many of the multinational manufacturing groups recruited steadily on a replacement basis. Media companies were more subdued.

Whilst there appeared to be a greater willingness for companies to consider experienced European candidates without a relevant professional qualification, there was generally still a strong preference from US multinationals for Big 4 qualified internal auditors. The high travel requirements for the majority of these positions ensure that they remain difficult to fill.

Future demand in this sector is more dependent on developments in the world rather than the UK economy.

The City and financial services

Despite the pessimistic headlines, demand from both the banking sector and wider financial services industry remains high. Whilst there may be a small number of major banks who have frozen external recruitment and specialist lenders who have ceased lending or trading, the vast bulk of the industry is recruiting along the same patterns that have become established in recent years.

Good quality candidates, particularly those with specialist skills in banking, investment management, insurance and other areas remain in short supply. However, it is likely, although too early to say, that the rate at which vacancies are being created as a result of either internal transfers or external moves is slowing. The multiple vacancies that many financial services groups still have may be hiding this.

Nevertheless, the number of vacancies ensures that most financial services groups are prepared, particularly for more junior positions, to recruit good quality internal auditors from other sectors and train them.

We have made the point before that the financial services industry is the largest employer of internal auditors in the UK. It is apparent that internal audit remains a highly valued function throughout the industry and, when compared to other areas of corporate governance such as risk, compliance and security, the one where demand has currently been most enduring. The health of the wider internal audit recruitment market requires it to remain so.

Commerce

Demand for internal auditors from the UK domestic commercial market has become patchy and, given that the service sector of the economy has recently contracted, is most likely to deteriorate further.

On the positive side, the major retail groups are generally continuing to recruit, although the smaller or perhaps more specialist groups are not. Redundancies in the sector have been the result of companies ceasing to trade.

The leisure sector is particularly exposed to discretionary consumer spending and demand throughout the sector remains subdued. The same pattern exists in the media and transportation sectors, although to date there have been no material redundancies.

The house building groups, although small in internal audit terms, have experienced redundancies and the outlook for some, without additional funding, remains problematic. However, construction and engineering groups remain buoyant. The business services and domestic manufacturing sectors also appear to be recruiting along established patterns.

Public practice

Demand for internal auditors across the Big 4, mid tier and private consultancies remains subdued. The only exceptions are those consultancies that are winning or are expanding into outsourced public sector work. They are continuing to recruit at a junior level and for those with public sector experience.

The Big 4 are doing very little general audit recruitment. The only exception is internal auditors with specialist experience of specific areas of the financial services industry. IT auditors with good advisory skills are also still sought. However, whatever recruitment is taking place is taking far longer and requires higher level sign off.

Outside of the Big 4, much of the potential recruitment appears to involve acquiring new business. Several mid tier firms are still attempting to gain market share in the financial services and wider commercial sectors. Success and consequent recruitment appears to be patchy. These firms are also potentially recruiting more senior IT auditors with business development experience.

Without doubt, recruitment in public practice remains subdued. There is less recruitment and it is taking longer. To date there is little evidence that public practice firms are shedding staff. However, given the large numbers of internal auditors they employ, any shift in the numbers of internal auditors they employ could have a material impact on the ratio of supply and demand in the recruitment market. 

Public sector

Demand for internal auditors from the public sector is subdued. Recruitment advertising was down almost 50% in the first six months of 2008.

Demand has also changed as an increasing amount of internal audit work is being outsourced. In many of the larger teams in local and central government, vacancies are being covered by co-sourcing agreements. Vacancies are then left open as a precaution against budget cuts and resulting redundancies. In smaller departments without co-sourcing arrangements, vacancies have been filled with relative ease.

During the first half of 2008, demand has therefore shifted away from the public sector to a range of service providers. As they have won contracts, they have actively recruited at internal and senior internal auditor levels together with more specialist fraud investigators. Manager and senior managers with business development skills have also been in demand.

More generally, the recruitment cycle in the public sector has slowed. Fewer people are moving and confidence appears low with most preferring the security of their existing positions.

There has been noticeable demand from the not for profit sector and charity sector for Chief Internal Auditors.

Other observations

Salaries

Average salaries for internal auditors during the course of the last six months have increased on average by 3.9%, which is only marginally above the 3.8% headline annual growth of average earnings across the economy. With the supply of candidates in the recruitment market improving and corporate costs likely to be closely controlled, it is unlikely that salary increases in internal auditing will significantly exceed those in the general economy. It is also clear that in terms of base salaries, increases in the private sector are now running higher than those in the public sector. Considering the state of government finances both in absolute terms and against their own rules, increases in public sector salaries will be subdued for the foreseeable future.

For internal auditors currently seeking new positions, the current level of economic uncertainly has led to salary levels becoming marginally less important, and the perception of future job security marginally more important.

Interim Internal Auditors

The demand for interim internal auditors has been subdued for a number of quarters. The recent introduction of Japanese and Canadian style Sarbanes-Oxley requirements has seemingly done little to replace the demand generated for contract staff by the original US Act. There are now a number of under-utilised contractors, which is resulting in far greater competition for the work that does become available.

IT audit interim work has been relatively more abundant as a consequence of project work associated with major systems implementations. Interim work within the public sector has been particularly subdued, as many departments have fallen back on co-sourcing arrangements.

It is likely that, if the economy slows further, and if corporate profitability comes under pressure, then some companies may substitute contractors for permanent recruitment. This may be of little value to those who are seeking contract work as the likely increase in redundancies will only further increase the competition.

Computer audit demand

The recruitment market for computer auditors has been more liquid during the last six months than for some time. Whilst the number of vacancies being generated has remained constant and a reflection of the ongoing investment that both the corporate and public sectors are making in technology, the supply of computer auditors in the recruitment market has improved. For many internal audit departments there has been more choice available, particularly in London and the South East, than there has been for some time.

Heads of Audit

The number of Heads of Audit who are unemployed is currently at a historically low level. However, not unreasonably, at any given time there are a number who are looking for a new challenge. We have reported that the number of vacancies has been at a low level for some time. During the first six months of 2008, there were indications that the number of new positions was rising, which only confirms that the number of Head of Audit roles at any point in time has little to do with wider developments in either the internal audit recruitment market or the economy.

Business Investment

The growth in business investment is currently slowing. However, it remains sufficiently strong to engage internal auditors and provide vacancies for internal auditors to move into the new areas of business that it creates. We have identified business investment and exports as areas that the economy needs to grow into. Should business confidence fall to the extent that investment materially drops, it will be an ominous leading indicator for the internal audit recruitment market.

Summary / predictions

As an update on the internal audit recruitment market, the tone, if not the content, of this report, is the most cautious we have issued for some years.

During the last ten years, there have been a number of instances where, in response to global events, the internal audit recruitment market has stalled. Redundancies, recruitment and headcount freezes have quickly materialised and then, almost as quickly, disappeared. Monetary and fiscal levers have been pulled or pushed and the internal audit recruitment has marched onwards.

Curiously, to date, for all the gloomy news, there has been no material change to the internal audit recruitment market. There is more caution, but no significant redundancies, headcount or recruitment freezes. This is perhaps not surprising when total employment in the economy is continuing to rise.

If you are looking for a prediction, then internal audit recruitment, although faring better than other areas of recruitment, will move with developments within the wider economy. Should the economy reach a tipping point, the mood and direction of the recruitment market will change. If it does, then the market will remain subdued for a longer period than at any time in the last fifteen years.