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Accounting Outsourcing Risks: What You Need to Know

CPAs, accountants, and professional service firms are known to outsource work at times, especially during tax season. It’s common practice and often necessary. When done right, outsourcing work can save a lot of time and money. If done wrong, it can be extremely costly and could even ruin a company’s reputation.

The biggest risk of outsourcing accounting work comes when you outsource offshore. The further away from home the services you use, whether using in-country or out-of-country services, the harder it is to know the quality and security of the provider you’re sending work to. Local and in-country service providers have strong reputations for quality work and security practices but tend to cost more than out-of-country offshore options.

Whichever type of outsourcing service provider you choose, you can’t escape the risks that come with sending work to third-party providers, no matter how good you think they are. Additionally, you must always get client consent before outsourcing. Understand best practices and make sure you’ve properly managed the risk.

Start with a cost-benefit analysis

Accounting firms outsource as a way to reduce costs and as a solution to capacity issues. When you outsource to a third party, you don’t have the overhead costs of hiring an in-house employee – a big benefit. The hidden costs occur when you fail to have clearly defined expectations, and scope creep sets in.

Business gets most hectic for CPAs during tax season, so having the ability to outsource the extra work is a massive benefit. But the highest cost of third-party outsourcing is the loss of control. If you’re not outsourcing to a skilled service provider, quality can suffer, schedules can get delayed, and contractual disagreements can develop.

Cybersecurity risks

The risk of a security breach is always at the forefront of outsourcing, especially with the type of sensitive information accounting firms often deal with. Before outsourcing, it’s critical to have a firm understanding of your provider’s IT infrastructure and encryption policies. You need to know their processes, methodologies, and personnel that will be handling the work you send them. Get their security operating procedures in writing and keep them on file.

Quality control

Maintaining quality control is always a risk with accounting outsourcing. Today, virtual communication has made it much easier to connect with service providers quickly, and that has helped to some degree with the quality control issue. Defining a set of governance frameworks over how outsourced tasks are to be performed is critical for controlling risks when outsourcing.

The reality is that most negative outcomes in outsourcing deals are a result of poor communication. This is especially the case when you choose to outsource services offshore. Spend time with your outsourcing partner before you send them any work. Make sure they understand exactly what you need, and establish how you will communicate, check-in, and deal with questions when they arise.

Outsourcing in-Country vs. out-of-country

 Outsourcing accounting data out-of-country most commonly brings with it the risk of:

  • Confidentiality exposure
  • Mismanagement
  • Delayed deliveries
  • Fines for delays  

The AICPA Code of Professional Conduct puts significant weight on the subject of tax outsourcing. Rules 102, 201, 202, and 301 go into detail about the ethical concerns and considerations CPAs must think about and be aware of before outsourcing. Additionally, Code section 7216 of the Internal Revenue Code “imposes 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.” Stay updated with the IRS information center.

In-country outsourcing is typically easier to control, and communication is easier and has less potential for misunderstandings. However, many claims have their origin in-country. Just because it’s in-country doesn’t mean you shouldn’t do your due diligence and check for:

  • The service provider’s processes
  • Qualifications of employees
  • Communications systems and policies
  • Their willingness to adapt to your work framework
  • Their overall reputation

Protect your business from third-party outsourcing risks

Being aware of all the complications that come with third-party outsourcing can help you significantly mitigate your risks but not eliminate them completely. Once you send confidential client information to a service provider, you open the door for new risks that you cannot always control.

In many cases, the benefits of accounting outsourcing outweigh the costs, but mistakes happen, and when they do, you’re responsible. McGowanPRO specializes in providing Professional Liability Insurance / Errors & Omission (E&O) nationwide.