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Outsourcing raises issues for accountants

20th Jan 2006
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Outsourcing of accountancy work is increasing at a phenomenal rate around the world. It does, however, raise a number of significant issues for firms using third party providers and these important issues must be given the consideration they deserve.

Outsourcing is neither new nor is it the sole province of accounting firms. For several decades companies have used outsourcing to transfer non-core technology-intensive functions to specialist providers set up to handle them. Among the professional services currently being outsourced are:

  • The preparation of business and personal taxation returns,
  • Bookkeeping services including payroll and balance sheet preparation,
  • Some audit services (where allowed by applicable legislation),
  • Preparation of reports on investment performance,
  • Salary packaging, and
  • Financial planning and advisory services.

The principal benefit for a practice that outsources these or any other functions is to reduce the costs of providing them, thereby improving the firm's profitability. Other gains include an ability to focus the firm on higher margin services, access to the latest accounting technology and software, and a better ability to cope with peak periods of work.

Responsibility remains with the practice

Heading the list of issues related to outsourcing is that any practice using a third party provider remains responsible for all aspects of the work, just as if it had been completed it in-house. For this reason, a firm considering a third party for outsourcing its services should conduct due diligence on a third party provider before entering into any agreement with it.

Under the legislation that applies to accountants in most countries as well as the various codes of practice that now exist in most professional accounting bodies, firms that outsource work must assure themselves that all outsourced work is complete and accurate, and that confidentiality of data isn't compromised. Before outsourcing work to any provider, a practice must be satisfied that the third party selected can meet these requirements and that no laws relating to privacy will be breached.

The question of whether or not to inform clients that some or all of their work is being outsourced the third parties is generally a decision for the firm itself, but it must take into account all legislation that applies to the aspect of providing confidential information to third parties. There may even be some commercial benefits ' reduced fees or a broader scope of services, which result from outsourcing and could be used in marketing the firm to existing and prospective clients.

Data transfer methods are critical

There is a fundamental weakness in outsourcing when client data is transferred between the firm and a third party provider. Controls should be in place at both ends to safeguard client information, especially where data is transferred over the Internet.

The security of both the firm's and the third party's networks must be absolute. All data should be encrypted for transmission, and networks regularly checked by independent experts to prevent breaches.

The human element of confidentiality is equally important. All staff performing work at the third party's premises, whether directly involved with the firm's work or not, must sign nondisclosure agreements with their employer. All personnel should be given thorough security checks before hiring, and comprehensive office procedures that prevent theft of data should be in place.

Jay A. Soled, professor of taxation at the Rutgers University School of Business, outlines some of these procedures: 'In order to safeguard the privacy of their clients, accounting firms generally insist that the staff of the outsourcing entity not have printers connected to their computer terminals, nor a means of saving the relevant documentation onto computer discs.

'They hope that this inability to print or save information will curb the likelihood that outsourcing staff members will use confidential information in inappropriate ways.'

Review all work carefully

Because the accounting firm remains responsible for the accuracy and completeness of all outsourced work it should be doubly careful about reviewing the quality of this work before it is presented to the client. Just remember that no system is foolproof. In a paper about outsourcing accounting work overseas presented at the 17th Annual Meeting of the International Academy of Business Disciplines in April, 2005, Robert W. McGee of Barry University warned:

'If the preparers are Chartered Accountants, which are the equivalent to CPAs, the risk of giving data to incompetent individuals is supposedly minimized, although it is a false assumption that certified accountants are better able to prepare tax returns than are non-certified accountants, according to several MONEY magazine studies, which found that American CPAs almost always make at least one mistake on tax returns and often make serious mistakes, presumably because of the complexity of the tax laws (McGee 1999; 2004).'

If a dissatisfied client believes it has a reason for complaint about the work performed, the firm must be able to prove that it has taken every reasonable step to ensure both the accuracy and security of their outsourced work and the organization(s) that have completed it. Neither this nor any written agreements between the firm and a third party provider will excuse a practice from responsibility for any errors or security breaches, but it will aid the firm's defense in the event of a fraud or negligence by the third party.

Ongoing monitoring is essential

The firm should initiate a system of ongoing monitoring that will ensure client information is protected and outsourced work is being performed to the correct standard. These monitoring procedures should incorporate regular testing of the security systems in place and competency assessments of the third party's personnel for their levels of ability and knowledge.

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