Describe about the Accounting Function for Sourcing of Business.
Outsourcing is a business activity wherein various organizations assign some or all of its tasks to a service provider who specializes in that particular task rather than carrying out it internally to minimize their expenditures. It is an efficient cost-saving approach if used properly. The service provider may or may not be located in the client’s home country. Apple Inc. is major player in the personal computers and smart phones segment, it does all the research and development at its headquarters located in the United States of America, but it has outsource its manufacturing process to Foxconn located in China. (Oshri Kotlarsky and Willcocks 2015).
Accounting Outsourcing is a business approach of subcontracting a part or sometimes all accounting activities essential to keep the business functional. Many small and medium businesses emphasize on outsourcing its accounting activities to an expert service providers, but sometimes large scale businesses also focuses on outsourcing its non-core business areas so that it could enhance its core competencies. Accounting was one of the earliest processes to be outsourced by businesses. Due to the growing complexity and competition in the market, businesses across various industries are looking at creative ideas and pursuing new ways to restructure all its accounting processes. Increasing efficiency is the highest priority and the primary strategic objective of any organization who wishes to outsource its accounting activities (Ramin et al. 2013).
The most commonly outsourced activities within accounting are accounts receivables, account payables, and payroll accounting but the companies seeks to move up in the value chain in the category of functions they subcontract, by moving from transaction processes to more tactical functions such as forecasting, budgeting, and auditing. Standardizing and simplifying its accounting processes is the crucial feature of healthy businesses and by inculcating high quality accounting processes these organizations can accomplish an array of excellent results such as- more services, more cash and more information. Simplification of accounting processes have enabled the businesses to reduce the cycle time for closing its books, and cultivate superior standards and guidelines to assist them meet administrative guidelines (Lebedinskaya and Konshina 2016).
Scope of Accounting Outsourcing
Following are the areas where in accounting outsourcing is useful:
Transaction Processing: It includes bills payables, expenses processing, bank reconciliations statement, disbursement exactness controls, merchants help portal and help desks.
Order to Cash: It includes - Collection of bills receivables, supervision and processing of collections, maintenance of ledgers and application of cash; Management of orders and billings, which includes management of contracts and transaction orders; Management of queries and customers requests; Analytics for sanctioning and administering credit and income assurance functions.
Reporting: It includes - Record keeping of fixed assets, transactions between companies, banking and cash management; Data integrity, master records maintenance, accounts reconciliation and scrutiny; fiscal and government reporting; tax and financial management and legal reporting.
Forecasting: Many businesses authorize its subcontractors to do the forecasting related to its financial performance and future trends of the business.
Budgeting: The service providers can provide many crucial facts and figures based on assessment and analysis of the forecasting carried out, which can turn out to be useful for the client company while planning a budget.
Auditing: Many subcontracting companies provide the service of internal auditing to its clients for the areas they have undertaken (Davis and Davis 2012).
Benefits of Outsourcing
The technological boom and globalization is impacting each and every industry irrespective of its size, which cannot be neglected. Presently, many accountants are considering or have already determined to outsource some of their portion of their financial activities which are not a part of their core business function (Forbes 2016).
Focus on Core Competencies: One of the primary objectives of outsourcing is that it helps the client companies to focus on its core competencies as it frees the employees, managers and owners by freeing them from various sets of responsibilities (Dinu 2015).
Competitive Advantage: By outsourcing a particular function, the service provider enables its clients to gain a competitive advantage over its competitors as outsourcing allows the client company to focus on the business areas in which they specialize (Cesarani 2014).
Enhances Opportunity of Growth: Outsourcing gives the client company a boost to its growth opportunities. Sometimes, a company has growth prospects but does not have sufficient resources, but by outsourcing some of its functions the company can use the same resources to attain its goals.
Increases Effectiveness and Productivity: Outsourcing gives a business an access to set of experts who specializes in the function which is being outsourced. The service provider can offer innovative methods, most recent technologies, and creative solutions which are sometimes not accessible which helps in increasing the effectiveness and productivity of the client company.
Cost Reduction: Outsourcing, to a large extent helps a business in reducing their cost. An expert service provider would provide much more feasible solution at lesser cost as compared to a full time employee as it eliminates the cost of employing and training (Schniederjans Schniederjans and Schniederjans 2015).
Drawbacks of Outsourcing
Accounting outsourcing comes with loads of benefits, but as said in the proverb “every coin has two sides”, it also comes with various drawbacks due to which many companies prefer to perform this function in-house. Some of the drawbacks are mentioned below:
Lack of Control: The client company does not possess direct and complete control over the business function that has been outsourced. Though, the contracts defines all the responsibilities and expectation of both the parties, sometimes a situation will occur when an information is required on an urgent basis but would not e made available, due to which the relationship between both the parties may be disturbed (Sofiah et al. 2013).
Time and Distance Factor: Regardless of how effective and efficient a service provider is in offering its services to the client company, there is no replacement for being actually present in the office. Sometimes, answers to some of the most critical problems do not gets addressed immediately due to different time zones and distance.
Language Barriers: The language barrier tends to persist if the service provider is located outside the home country of the client company, say a different continent. When an organization is working with an overseas service provider, difference in languages can make it difficult to clarify company’s structures and processes
Risks of Losing Confidentiality: Financial information is treated as one of the most confidential data. When a company is outsourcing some portion or all of its financial activities, some of the most sensitive and confidential information is disclosed to an outsider which can prove to be very risky for the company.
Security Risks: Cyber crime is on the rise across the world, and due to worldwide access of internet hacking can initiate from any part of the world, therefore the security of information technology infrastructure of the service provider is prone to cyber attacks as its possess financial information related to many client companies (Giustiniano and Clarioni 2013).
Use of Outsourcing by Other Accounting Firms
There are many major accounting firms that are reallocating large proportions of their financial activities to foreign countries such as Philippines and India, where workers are paid as low as $5 per hour (smh.com.au 2016). Some of the major Australian accounting firms that outsource their accounting function are Mckinley Plowman and MKS Group of Chartered Accountants. According to the aforesaid companies, outsourcing most of their accounting functions to the overseas service providers located in Philippines has helped in reducing their cost of hiring more full time chartered accountants in their home country (theoutsourcedaccountant.com 2016).
Based on the above analysis, the following recommendations may be followed for successful implementation of an outsourcing program. Firstly, the company should seek to align the business and outsourcing objectives so that the outsourcing activity does not deviate from the path of organizational goals.
Secondly, the company should appoint a dedicated accounting outsourcing experts to carry out their functions to ensure productive results and effective cost.
Thirdly, the company should devise a strong framework for governance for the service provider which also includes performance targets to push the service provider towards better service performance.
Fourthly, the company should understand stakeholder and technological requirements because stakeholders are the people who would invest in the business and expect a healthy return on their investments.
Fifthly, risk reduction policies should be applied to assess and analyze the viability of process or functions being outsourcing so that it does not hamper the profitability of the organization.
Outsourcing is a business approach that can reduce the cost of an organization and it can further help it in focusing on its core competencies and increasing productivity. Outsourcing gives the business a competitive advantage as it enables the business to focus on its core competencies. Accounting outsourcing is a kind of subcontracting where in an organization outsources some portion or all of its financial activities to an expert service provider who specializes in that specific field of operations.
Outsourcing enables an organization to focus on its core competencies, gain competitive advantage, increased chances of growth, increased efficiency, and reduction in costs. Drawbacks of outsourcing are lack of control, time and distance factor, language barrier, risk of losing confidentiality and security risks. Recommendations are stated at the end of the report to help an organization in the process of decision making.
Cesarani, M., 2014. Competitive Dimension of Outsourcing Relations in Global Networks. Journal of Management, 2(4), pp.97-112.
Davis, C.E. and Davis, E., 2012. A Potential Resurgence of Outsourcing.The CPA Journal, 82(10), p.56.
Dinu, A.M., 2015. The Risks and Benefits of Outsourcing. Knowledge Horizons. Economics, 7(2), p.103.
Forbes. (2016). XeroxVoice: The Benefits Of Outsourcing Finance And Accounting. [online] Available at: https://www.forbes.com/sites/xerox/2013/07/12/the-benefits-of-outsourcing-finance-and-accounting/#395d91df3897 [Accessed 14 Sep. 2016].
Giustiniano, L. and Clarioni, G., 2013. The impact of outsourcing on business performance: An empirical analysis. Journal of Modern Accounting and Auditing, 9(2), p.153.
Lebedinskaya, Y.S. and Konshina, A.S., 2016. ACCOUNTING OUTSOURCING: CONCEPT AND SPECIFIC FEATURES. Science Vector of Togliatti State University. Series: Economics and Management, (1 (24)).
Oshri, I., Kotlarsky, J. and Willcocks, L.P., 2015. The Handbook of Global Outsourcing and Offshoring 3rd Edition. Palgrave Macmillan.
Ramin, A.K., Yusoff, W., Fauziah, W. and Nasir, N.K., 2013. Adoption of financial and accounting services outsourcing among small medium entreprises.
Schniederjans, M.J., Schniederjans, A.M. and Schniederjans, D.G., 2015.Outsourcing and insourcing in an international context. Routledge.
smh.com.au. (2016). money/tax/australian-accountants-are-using-offshore-outsourcing-20160601-gp9g5j.html. [online] Available at: https://www.smh.com.au/money/tax/australian-accountants-are-using-offshore-outsourcing-20160601-gp9g5j.html [Accessed 14 Sep. 2016].
Sofiah, Auzair, M., Aman, A., Maelah, R., Amiruddin, R. and Hamzah, N., 2013. Management control in accounting outsourcing services. Business Strategy Series, 14(2/3), pp.43-49.
theoutsourcedaccountant.com/. (2016). clients-commendation/. [online] Available at: https://theoutsourcedaccountant.com/clients-commendation/ [Accessed 14 Sep. 2016].