Recession starting to have an impact
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Internal & Comp Audit |
Dec 2006 |
Jun 2007 |
Dec 2007 |
Jun 2008 |
Dec 2008 |
|
|
|
|
|
|
|
|
New vacancies |
80 |
89 |
84 |
79 |
58 |
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Closing vacancies |
36 |
52 |
39 |
37 |
23 |
|
Candidates registering |
297 |
322 |
312 |
356 |
242 |
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Defensive registrations |
12% |
16% |
17% |
19% |
28% |
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Overall salary increase |
14% |
13% |
12% |
12% |
11% |
During the first six months of 2008, the number of vacancies generated in the internal audit recruitment market, although marginally down, was broadly consistent with the previous two years. This was perhaps surprising given the enormity of the economic developments. However, most commentators then believed that the UK and developed world at worst might expect a short shallow recession. It is clear that nothing so benign has transpired and only the depth and length of the recession is in question. The recession has now started to show up in our market data.
- Vacancies sharply down in Q4
During the final quarter of 2008 there was a significant slowdown in the rate at which new internal audit vacancies were generated.
Whilst some comfort might initially be taken from the number of vacancies generated in the second half of 2008, 58 versus 79 in the previous six months - a rather more telling statistic is the closing number of vacancies in our sample companies. This figure had fallen from 37 in July 2008 to 23 in December 2008. In fact, what is not clear from the statistics is that the rate of vacancy generation was broadly maintained into the third quarter of 2008 but then fell away in the final quarter. The trend is now set for a significantly lower number of vacancies.
The budgeted number of internal auditors fell 1% and is continuing a trend that began last year. Some budgets have been cut in response to vacancies that have gone unfilled. Against that, the actual number of internal auditors employed increased. This indicates that companies are filling their existing vacancies and new vacancies are not being created at the same rate. Consequently the number of companies with vacancies in their internal audit departments, at 28%, is the lowest it has been for a number of years.
- Actual redundancies still relatively low
The number of candidate registrations fell in the second half of 2008, although the number of defensive registrations rose. The fall in registrations is not surprising. Changing employer involves risk. Whilst much of this risk is more apparent than real, some feel that entering the recruitment market for purely discretionary purposes is not a risk they wish to take. Defensive registrations are up as the number of internal auditors who feel their position is potentially under threat is rising. However, the actual number of redundancies is still low and remains primarily confined to companies that either no longer exist or are retrenching.
- Salary increases gradually slowing
The average salary paid to internal auditors changing job during 2008 was £53,629, which was 3.9% higher than in 2007 and remains broadly comparable with increases in average earnings. The average salary increase achieved by internal auditors changing jobs fell back to 11.2%. It is becoming clear that factors such as job security and potential career development are becoming more important.
Market commentary
In last year’s market report, we wrote that Northern Rock was likely to be the harbinger of tougher times. The bank we felt was simply the first casualty of a wider failure to recognise risk. We gave an example that is close to home. In the IIA’s 2007 Employment Survey, 90% of respondents believed that hiring in internal auditing would remain unaffected or only slightly decrease in the event of a recession. We speculated that if such thinking was replicated throughout the economy, then vast tracts of the UK population must believe that their future revenue streams from employment were secure and their ability to borrow and consume was unlikely to be impaired. Encouraged by a political mantra that celebrated the end of “busts” this may well account for the unprecedented levels of debt that have engulfed the economy. Unfortunately the belief that hiring in the internal audit profession will only be marginally effected by a recession is in the process of being comprehensively replaced by the grim reality of what recessions do to job creation and security.
Last year we reported that whilst activity levels remained broadly consistent in terms of the number of vacancies and interviews taking place, the number of job offers, acceptances and therefore internal auditors starting new jobs had seemingly started to decline. It appeared to us that some companies and individuals, in response to uncertainty, had started to defer decision making. This trend, against a backdrop of deteriorating economic news continued throughout 2008 until the final quarter. It then surfaced in our survey data, a significant slowdown in internal audit recruitment had commenced.
However, whilst the number of vacancies has fallen sharply and there are sectors such as house building and retail where internal audit recruitment has effectively ceased, recruitment and headcount freezes have yet to become widespread. Presently many internal audit departments simply have no requirement to recruit. Vacancies are not being created. As we have already reported, internal auditors are staying with their existing employers and as corporate investment falls, the number of internal auditors transferring internally into other functions has slowed down.
It is perhaps still too early to predict how badly internal auditors will be affected by the recession. In employment terms, it is only getting underway. In fact, as of January 2009, in spite of rapidly rising unemployment, there are still vacancies that some internal audit departments are finding difficult to fill. They are seeking specific skills at a given salary and do not wish to compromise. Given the economic backdrop, many otherwise well qualified internal auditors prefer the perceived security of their existing employment and as our survey data indicates, there has been a decline in the number of internal auditors registering.
On a positive note, we can confidently predict that compared with the last recession, 15 years ago, internal audit will do far better. At that time many departments were closed and internal auditing was seen as an easy target for corporate cost saving. Between then and now, internal audit departments have become smaller and more efficient, they are far better understood and valued and are now comprehensively integrated into the fabric of the management and control of the companies that they reside in. We remain confident that unemployment in internal auditing will be lower than the general rise in unemployment. However, if unemployment rises by 1 million, it is unrealistic to assume that internal auditing will somehow be spared. No matter how valued an internal audit department might be, if a company no longer exists, then all its internal auditors will have lost their jobs.
Whilst the internal audit recruitment market is large and diverse, it can be broadly divided into three major constituents: the public sector, the Big 4 and the financial services industry.
Around 60% of jobs created in the UK economy in the last ten years have been in the public sector. There has not been a proportionate increase in the number of internal auditors employed and there are two reasons for this. Firstly, as in the private sector, internal audit departments have become more efficient. Secondly, and more importantly, large tracts of traditional public sector internal auditing have been contracted out to the private sector.
The public sector
In the short term it is unlikely that the recession will have much effect on the public sector, except to slow even further the number of internal auditors looking to leave and move into the private sector. The majority of jobs will remain safe.
In the medium term, when there will no doubt be a fall in public sector spending, as the sector contracts, internal audit jobs will be lost. Those more likely to be effected will be the large number of internal auditors employed by external providers. It is clear that many of the contracts awarded in local government, health and other areas are awarded on price. With less funding available, what is already a fiercely competitive market, will become more so. Jobs will be lost as fewer people will be expected to provide the same amount of assurance.
The Big 4
The Big 4 have historically moved in tandem. Given the large number of internal auditors they now employ, they have the ability to significantly affect the internal audit recruitment market. Either they recruit or reduce head count at the same time. In the last 15 years there have been a number of occasions when redundancies amongst the Big 4 have temporarily flooded the recruitment market. The slowdown in the economy that caused the redundancies has been short lived and, within a matter of months, those who have been made redundant have been absorbed back into employment.
Whilst there have been redundancies in firms outside of the Big 4, there is at present no indication that they are planning to undertake significant redundancies in internal audit. Fortunately, unlike on previous occasions, the Big 4 have in recent years only undertaken limited external recruitment. They have relied on their graduate recruitment and internal transfers to staff their assurance functions. However, the Big 4 require demand for their services, and if clients no longer exist, then their service is no longer required. If the economy continues to deteriorate into 2009, as it most likely will, we would expect redundancies from the Big 4.
The Financial Services Industry
The last major constituent of the internal audit recruitment market is the financial services industry and it has the biggest influence on the market. The majority of movements between employers in the internal audit recruitment market involve a financial services company. Any other sector in commerce could stop recruiting and it would have a marginal impact on the overall market. However, unlike any other sector, there are now more internal auditors employed in financial services than there were 15 years ago. It does beg the question that for all the investment in internal auditing and corporate governance, why is the financial services industry in the process of losing unprecedented amounts of capital? There are clearly two medium term consequences of this:
- Financial services as an industry will form a proportionately smaller part of the UK economy.
- The number of internal auditors employed in the sector will reduce.
Putting aside the huge job losses that are now underway in the City, during the last six months of 2008 alone, the following financial institutions have lost their independence; HBOS, Alliance & Leicester, Bradford & Bingley together with the Brittania, Cheshire and Derbyshire Building Societies. These are all significant, provincial financial institutions that are being taken over. Their internal audit departments will not survive. Internal audit like other functions will be rationalised and absorbed. In the short term, existing internal auditors will be required to help with all the control issues that mergers and takeovers, particularly in the financial services industry, require. In the longer term they will not. Another depressing outcome is that the diversity of internal audit departments outside of London is once again declining. The choice of potential employers is being reduced to an ever smaller number of larger financial institutions.
Redundancies
It is worth making the point that redundancies do not only occur in a recession. Rather perversely, in periods of rapid economic growth, when takeover and merger activity increases, internal auditors are frequently made redundant. In a global business environment, multinational companies relocate their internal audit departments to other countries and companies still collapse and their internal audit departments with them. For those who have worked in internal auditing since the last recession, a significant number will have been made redundant and some more than once. It is an occupational hazard and in an open and flexible economy it is to be expected.
The difficulty with a recession is that whilst internal auditors in secure employment are less inclined to enter the recruitment market, the number who are either forced by redundancy or feel sufficiently threatened that they need to, rises. Once the flow of vacancies falls away, as it is in the process of doing, the number of internal auditors in the recruitment market rises, and for those who are redundant a frustrating and stressful search for new employment develops. In this context, recessions are seemingly unfair. In reality, only a small percentage of the total number of internal auditors employed actually lose their jobs, even though, not unreasonably, many more are anxious.
Contractors
The number of contractors in our survey data at December 2008 has fallen against 2007 levels but remained consistent with our Interim 2008 survey data.
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Dec 2007 |
Jun 2008 |
Dec 2008 |
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| Number of contractors |
11 |
7 |
7 |
| Departments using contractors |
16% |
10% |
10% |
The volume of contract work available to internal auditors has consistently fallen for the last two years and there are now a significant number of out of work contractors. This is resulting is greater competition for the work that is becoming available. Unfortunately, the number of unemployed internal auditors is set to increase, which will increase competition further. On a more positive note, contract work rises in recessions. Companies often do not wish to commit to permanent employment, but still require work to be completed. Further, in the last year, contract IT audit work has been more abundant and this still appears to remain the case. Work on business critical system implementations appears to be providing the stimulus.
Computer Audit
The demand for experienced computer auditors recovered in 2008 and many departments had difficulty recruiting, particularly at Senior Auditor level.
We would make the following observations regarding the skill sets that are currently or are likely to be in demand during 2009:
- Network security remains a priority. Good network security skills, particularly those concerned with firewalls such as Checkpoint Firewall-1, Nokia and Cisco PIX are in demand, as are those for network routers, such as Cisco.
- There has been an increase in the amount of companies introducing biometrics, VoIP and wireless networks, therefore familiarity with the security and control issues is continually important for IT audit personnel, together with a good understanding of intrusion detection and prevention systems.
- Penetration testing (ethical hacking) is also being used by many groups to ensure the security of their network perimeter and a good appreciation of this area is generally considered useful.
- The technical IT platform skills most widely sought remains consistent with recent years. Specifically, a sound knowledge and experience of Microsoft Windows XP/2003 and the various flavours of UNIX, specifically Linux. Technical IBM mainframe and AS/400 skills remain in demand, as do those for HP Non-Stop (Tandem), although on a smaller scale than other platforms.
- Demand for technical database security skills, specifically Oracle, Sybase, and SQL Server remains strong.
- The demand for computer auditors in 2008 also focused on business continuity, resiliency and physical security and we expect this trend to continue into 2009.
- A further point is the increased number of forced takeovers and mergers. This will require systems integration work which in turn should increase the demand for computer auditors with good network security and procedural awareness.
Analysis by sector
Here is a review of how the key market sectors fared in 2008, along with predictions as to likely recruitment activity in 2009.
The City & Financial Services
In spite of the myriad of problems that has beset the financial services industry, up until mid 2008, the industry consistently recruited. Demand and skill shortages were widespread. Without doubt, the failure of Lehman’s was a pivotal event, not just for the financial services industry, but for the wider world economy. The partial nationalisation of the British banking system, which would have seemed inconceivable before, became inevitable. Even now, there is little certainty that the banks will not require further capital injections, particularly once the losses of what now looks like a deep recession start to mount. Unfortunately, the insurance industry has not been immune. The industry has been hit by credit crunch related write-downs and, in the short term, by significant reductions in investment income, asset management fees and the sale of savings products.
We have made the point that the financial services industry is the largest employer of internal auditors in the UK and whilst banking is centred in London, the wider industry is represented throughout the country. It has become clear that towards the end of 2008 the rate of vacancy generation was falling significantly and redundancies were starting to emerge.
Banking
Within the City, the pure investment banks have lost their allure. Internal auditors who would have previously only considered pure investment banks, now want the perceived safety of the big retail banks. There has been a steep fall in the number of vacancies in the banking sector and a number of existing vacancies have been put on hold or frozen. The main bulk of the vacancies in the sector are becoming concentrated in a relatively small number of large banks. Recruitment is taking longer as both hiring managers and candidates have become far more cautious. Whilst redundancies to date have been limited to those banks that have failed or been restructured, numbers are starting to rise as rationalisation processes gather pace. Not surprisingly, particularly when banks are undertaking forced redundancies, vacancies in internal auditing have a greater likelihood of being filled internally from other areas.
Insurance
The insurance sector is faring better than banking. To date there have been no recession related redundancies and the propensity of insurance companies to recruit externally is far higher than any other area of the financial services industry. Within the general insurance market, including the numerous Lloyds managing agents and other insurance, reinsurance and broking groups based in the City, whilst demand has slowed, internal audit vacancies are being actively filled as they arise. Whilst companies in the life market have probably been hit harder than the general insurers, a similar pattern has emerged. Although the number of vacancies being generated has fallen, headcounts are being maintained and vacancies actively filled.
Mortgage banking, building societies and credit companies
Recruitment amongst the mortgage banks, building societies and credit companies broadly ceased in the final quarter of 2008. These companies are primarily based in the regions and are spread throughout the UK. There is now extensive rationalisation taking place in the sector which is likely to continue into 2009. As companies and societies merge and rationalise redundancies are likely. There is little likelihood of any significant recruitment at least in the first half of 2009.
Multi-national Groups
The multi-national groups that base their internal audit departments in the UK recruited strongly during the first half of 2008, seemingly unaffected by the problems in the financial markets. Not surprisingly, this included oil and related energy sectors and the technology sectors. However, from mid-year onwards there was a noticeable decline in the number of vacancies and this decline accelerated in the final quarter.
More recruitment freezes are starting to emerge, a trend that appears to have started with US based multinationals. On a positive note, within those companies that have blanket wide recruitment freezes, internal audit staff are increasingly being solicited to join other functions that have vacancies that cannot be filled externally. A further positive is that it is clear that many multi-nationals are still continuing with group wide efficiency initiatives such as ERP implementations. These are major implementation projects that in recessionary conditions are vital to get right and as a consequence the increased assurance work that is being undertaken is positive for internal audit.
Multi-national groups, at least those outside of the financial services industry, are invariably large well capitalised businesses. Whilst their revenues and profitably are going to be badly affected by the recession, they are more likely to retain the integrity of their internal audit departments. Going into 2009 we expect both limited recruitment and redundancies.
Commerce
By mid 2008, internal audit recruitment had already become patchy across the UK commercial sector. By the year end, the number of vacancies had fallen heavily and in some sectors the number of internal auditors employed was falling. The two sectors worst effected were housing and retailing. Housing is a tiny sector, retail is not. The difficulty for the retail sector is not the number of redundancies - many internal audit departments were already running below budget, but the number of companies that have ceased trading. However, given the current environment further redundancies can be expected and only limited recruitment.
Other sectors where the number of vacancies have fallen heavily and recruitment freezes are becoming more common include traditional media, transport, distribution and leisure. Areas that are less affected to date include technology, telecoms and FMCG.
Whilst many UK commercial companies are cutting jobs and more redundancies will follow in 2009, the vast majority of internal audit positions should remain safe. Their internal audit departments are staffed by relatively small numbers of well qualified internal auditors doing what is a widely regarded valuable job. Internal audit positions are most likely to come under threat when the survival of the entire company is threatened.
Public Practice
Public practice is dominated by the Big 4. As we have already noted, given the number of internal auditors they employ, they have the capacity to significantly change the character of the internal audit recruitment market. Recruitment amongst the Big 4 was subdued throughout 2008. The only exceptions were internal auditors with specialist experience of certain areas of the financial services industry and IT auditors. Whilst IT auditors were sought at various levels of seniority, those with the ability to win or develop business were most in demand.
It is clear that whatever plans the Big 4 had for significant expansion in the provision of IT assurance services during 2008, these were substantially curtailed during the second half of 2008. In the last quarter of 2008 there was little movement either into or out of the Big 4. The question going into 2009 is whether they can retain staff at existing levels. If not, then the number of internal auditors in the recruitment market could rise significantly.
Outside of the Big 4, several mid tier firms attempted to gain market share away from their more traditional public sector focus, into financial services, commerce and particularly the provision of IT assurance and advisory work. Success in the first half of the year was patchy and it became clear in the second half that most recruitment plans had been shelved and even recruitment into their traditional public sector practices had slowed significantly.
Although not strictly public practice, the internal audit consortiums that provide services to the NHS actively recruited during 2008 and will possibly continue to do so into 2009.
Public Sector
Internal auditing in the public sector will not be immune from recessionary influences. The rate of external recruitment in central government has fallen away quite significantly and has hit a low compared with recent times. The Department of Work & Pensions and the Ministry of Justice are high profile departments that have cut numbers. Many internal audit departments are holding open vacancies, not wishing to recruit in anticipation that their budgets will be cut. It is likely that internal audit recruitment in central government will be limited during 2009.
Whilst the number of vacancies will fall during 2009, internal audit recruitment within local government is holding up.
During 2008 there was significant recruitment in the not for profit sector. In 2009, recruitment in this sector will be more dependent on their source of funding and the market they are operating in. For example, environmental and humanitarian organisations that are not directly reliant on government support or fundraising will, in our experience, be more likely to recruit.
The charity sector actively recruited during 2008, with many larger charities seemingly wishing to “right size” their departments rather than be dependent on a limited service from perhaps one person. The bigger charities prefer in-house departments to outsourcing. However, donations and income are likely to come under pressure during 2009 and some redundancies could be expected.
The housing sector was, not surprisingly, subdued during 2008 and this will continue in 2009. In education, recruitment was undertaken on a replacement basis during 2008 and we expect this to remain the case in 2009.
Summary / predictions
In last year’s report we predicted that the outcome for 2008 would be finely balanced, depending on whether the damage to the financial system would be contained. If it was not, then we predicted that the prospects for the employment of internal auditors would be more closely tied to developments in the wider economy than many might otherwise like to believe. Unfortunately, the damage has crossed into the wider economy and is worse than even the most pessimistic predictions. It is clearly not simply a local UK problem but is affecting the global economy, making any solutions more difficult.
Whilst internal auditors are without doubt in more secure jobs than they ever have been, that safely is relative rather than absolute.
There will be fewer internal auditors employed in the UK economy at the end of 2009 than there are now. Too many companies will be in a fight for their survival. In 2009, it is going to be a tough recruitment market, but there will still be a market. |
