It’s not uncommon for CPAs, accountants, and professional service firms to outsource their work during tax season. When outsourcing is done right, it can result in substantial time savings, lower costs, and faster service for clients. However, if certain risks are ignored, accounting outsourcing can be extremely costly and can even result in damage to a company’s reputation.
Accounting firms take on the biggest risks when they choose to outsource offshore. The further away from home a service provider is, the harder it becomes to maintain quality control. In-country service providers typically have stronger reputations and higher security standards with the trade-off of costing more.
When CPA firms choose to outsource in or out of the country, there is no way to escape every risk that comes with using a third-party provider. Accounting professionals should also know that client consent is required before outsourcing work.
Also read: Third-party Claims Against CPAs and Accounting Professionals
Understand the costs and benefits of accounting outsourcing
On the surface, accounting firms can quickly see that outsourcing results in reduced costs for the work done and frees up capacity to take on more work. However, many fail to properly consider the hidden costs of outsourcing. These hidden costs can pop up when firms fail to set clearly defined expectations for their providers. Once the work is sent out, the firm puts control into the hands of a third party. When firms fail to outsource to reputable and proven providers, quality suffers, turnarounds are delayed, and contractual disagreements develop.
The biggest risk that comes with accounting outsourcing is the risk of a security breach. The stakes are high with the type of sensitive information CPA firms send out. Firms need to understand the IT infrastructure and encryption policies their third-party service providers use. The best thing to do is get the security operating procedures in writing.
Quality control risks
Maintaining quality should be at the top of any accounting firm’s priority list. This becomes very difficult when a firm outsources. Virtual communication has helped to some degree, but what happens when behind closed doors is what matters most. Firms that rely on accounting outsourcing should develop a clearly defined governance framework that covers how each task is to be performed. Most negative outsourcing experiences result from poor communication. This can be exasperated when outsourcing offshore, where language barriers can be an issue.
Also read: What CPAs Should Know About File Retention in the Digital Age
In-Country vs. Offshore Outsourcing
The biggest known risks for accounting professionals that choose offshore outsourcing include:
- Confidentiality exposures
- General mismanagement
- Delayed delivery
- Fines for delays
Any firm considering outsourcing should be familiar with the AICPA Code of Professional Conduct and how it addresses the issue. Rules 102, 201, and 301 cover the ethical considerations in detail.
In addition, IRS code section 7216 makes it clear, stating directly:
“Criminal penalties on tax return preparers who knowingly or recklessly make unauthorized disclosures or unauthorized uses of information furnished to them in connection with the preparation of an income tax return.”
Firms that partner with in-country accounting outsourcing typically have better luck and less risk of misunderstandings. However, in-country outsourcing is not entirely risk-free. Before partnering with an in-country provider, firms should check:
- The provider’s process
- Qualifications of employees
- Communications policies
- Willingness to adapt to governance guidelines
- Industry reputation
Also read: How to Deal with Ethical Dilemmas as an Accountant
Third-party outsourcing protection for accounting firms
Firms need to have a clear understanding of all the risks they take on when using third-party providers. After they send confidential client information to a provider, they’re effectively opening the door for a wide array of potential risks that are out of their control. Even with the greatest due diligence, mistakes can happen. When they do, it’s the accounting firm that’s on the hook.
Contact McGowan Program Administrators for more information on Accountants E&O Insurance and how it can protect accounting and CPA firms from the unexpected.