A director at your next audit committee meeting asks a simple question: “How do we know our controls actually work?” For a growing number of community banks, the honest answer depends on whether Internal Audit has the people, skills, and independence to say so with confidence. As standards tighten and risks multiply, deciding whether to keep audit in-house, outsource it, or blend the two has become a real strategic choice.

The role of Internal Audit continues to grow in importance as community banks look for credible, outside review and compliance. The principles of risk management and internal controls haven’t changed. But with new professional audit standards, rising cyber threats, AI-enabled fraud, deeper reliance on technology vendors, and a shifting regulatory landscape, community bankers are increasingly turning to their Internal Audit function for expert, independent assurance that operations are working as they should.

In Pinion’s work with community banks, we see bankers looking for a more robust Internal Audit role for several reasons, including:

  • Staff attrition or pressure for better efficiency ratios has decreased the number of operations staff available for optimal rotation, separation of duties, or independent review
  • Regulators are sharpening their focus on material financial risk, but they still expect independent review even for smaller banks
  • The risks and potential costs of mistakes, cyber incidents, or noncompliance are higher than ever
  • Limited in-house expertise in certain areas — especially IT, cybersecurity, and third-party or fintech relationships — warrants independent review
  • The bank has grown, or expects to grow, in size or geographic reach, making operations harder to keep consistent and raising regulatory expectations for a formal Internal Audit program
  • Regulations are more numerous and complex, making it harder for front-line staff to keep up
  • Directors, especially outside directors, are increasingly asking for objective assurances
  • Banks want Internal Audit to shape risk management strategy, not just perform minimum reviews
  • Fraud is faster and more sophisticated — from check fraud and scams to AI-generated documents, voices, and synthetic identities — and the assurance of independent reviews may help deter it

For an examiner’s view, Pinion spoke to an FDIC supervisory examiner. Regarding outsourcing, the examiner acknowledged there is sometimes not enough Internal Audit work to employ a full-time person, or more commonly, there are issues with lack of independence or expertise for all items reviewed. The examiner also stressed the importance of the risk assessment in setting scope and procedures and measuring results. Whether internal audits are performed by bank staff or outsourced, the examiner emphasized the test was the ability to “show sufficient expertise, experience, and independence.”

“The examiner’s test isn’t really about who does the work. It’s about whether you can prove the work holds up,” said Sandy Sporleder, lead advisor for financial institutions at Pinion. “Some banks can do that with their own people. Many get there faster by pairing a strong in-house lead with outside specialists for areas like IT and vendor management.”

When community bankers compare in-house and outsourced Internal Audit, four nonfinancial factors come up again and again:

  • People and capacity: Current staff workload, the local talent pool, training needs, gaps in expertise and experience, and the skill sets Internal Audit requires
  • Scope and expectations: The range of activities Internal Audit will cover, how quickly the program needs to be fully operational, and what directors, shareholders, and regulators expect
  • Program quality: The level of independence, objectivity, and accountability needed; whether an off-the-shelf or tailored program fits the bank; and how the function will stay current on audit standards and required continuing education
  • Risk, growth, and strategic value: Management’s tolerance for financial, compliance, and reputational risk; recent or expected growth; and how much leadership values Internal Audit, including as a resource for other bank staff

How to weigh your options

Start with an honest look at how each factor above applies to your bank, both today and as it grows. Assigning a rating to each area is often helpful, and surveying key stakeholders in the organization is vital to providing a balanced assessment. Only then should you turn to cost. That way, you know how much Internal Audit matters before you put a dollar figure on it.

As with any outsourcing decision, cost is an important part of the equation, including efficiency and time management, build vs. buy, full-time vs. part-time, and absolute dollars. Although price may be one of the biggest influencers, comparing salary and benefits directly against outsourcing fees should not be the only analysis. For example, outsourcing fees may compare favorably to personnel expenses, but supplementing the skill set of existing bank staff may be a higher priority. Conversely, outsourcing may cost more but prove a better long-term fit.

Fortunately, balancing resources against risk is what bankers do every day. The current and projected cost of hiring, training, and retaining capable bank staff is always a challenge. What that cost looks like for your bank will depend on factors such as:

  • Complexity of the bank’s operations
  • Where Internal Audit sits in the bank’s structure
  • Other compensation or benefit strategies
  • Technology footprint, including core, digital banking, and fintech partnerships
  • Objectives and expectations for the Internal Audit function

Should Internal Audit stay in-house?

It depends, of course. Start with the factors above, weigh them against today’s standards, and choose the model that best fits your bank’s culture, growth plans and risk appetite. Then revisit the decision as the bank and its risks change.

The right Internal Audit model isn’t one-size-fits-all. Whether you’re reassessing an existing program or considering outside support, Pinion can help you compare models and build an approach that serves your bank today and as it grows. Talk with a Pinion advisor about your next step.