During busy tax seasons, it’s common for accountants, CPAs, and professional service firms to outsource certain aspects of their work, including bookkeeping and certain audit tasks. When done right, outsourcing accounting services can result in faster service for clients, substantial time savings, and lower costs. However, understanding the risks of outsourcing is critical. Taking shortcuts can be costly and may even damage a firm’s reputation. Accounting professionals should also know that client consent is required before outsourcing work.
Unfortunately, it’s impossible to eliminate the possibility of risk when CPA firms outsource in or out of the country. Understanding the risks and how you can mitigate them enables you to navigate your relationship with third-party providers safely.
Also read: Managing Ethical Dilemmas as an Accountant
The hidden costs of outsourcing accounting services
At first glance, outsourcing may seem like a fool-proof solution to relieve the burden of the busy season for CPA firms. Reduced costs and increased capacity are just a few of its benefits. Unfortunately, hidden risks may cost your firm more trouble than outsourcing saves you.
Outsourcing for your accounting services is inherently risky as it increases the possibility of miscommunication and lack of understanding. The most significant risks are associated with choosing offshore outsourcing. Distance adds potentially unforeseen complications to the work as it becomes challenging to maintain quality control. Ultimately, once you send the work to them, it is in the hands of a third party. Security and quality control are two of the most critical risks to keep in mind.
A few of the most significant potential problems include:
- Confidentiality exposure and security. Accountants deal with highly sensitive information. A security breach could be catastrophic for clients and could compromise your own reputation and integrity.
- Delays and general mismanagement. Delivering high quality work in the timeframe your clients expect is critical to long-term success and preserving client satisfaction. Additionally, delays may result in fines.
- Failures in quality control. Quality control is a critical priority for every CPA firm. It becomes increasingly difficult to manage when outsourcing accounting services. Despite easy virtual communication, what happens behind closed doors is out of your control.
Minimizing outsourcing risks
The AICPA Code of Professional Conduct is an essential resource for CPA firms seeking guidance on managing outsourcing risks. It addresses many issues that may arise while outsourcing accounting services—specifically, Rules 102, 201, and 301 detail the ethical considerations. Additionally, IRS code section 7216 dictates that tax return preparers may incur criminal penalties should they “knowingly or recklessly” disclose or otherwise use unauthorized client information.
Unfortunately, no form of outsourcing accounting services is entirely risk-free. Firms should be aware of ways they can minimize risk during the process.
Select a provider you can trust
Being able to trust your third-party provider makes all the difference when outsourcing accounting services. Failing to call on reputable service providers with proven outcomes may result in lower quality work, delayed turnarounds, and contractual disagreements. Asking for information on employee qualifications and learning about the company’s process will help to determine if you are comfortable entrusting them with sensitive projects and information.
It’s a great idea to learn more about a potential service provider’s reputation before coming to any kind of arrangement. Looking for reviews online and asking for agnostic references are great places to start. First-hand experiences and feedback will give you a better understanding of who you are considering working with and give you confidence in your decision—whether it’s to move forward or not.
Clearly define expectations
Defining your needs and expectations for the outsourcing company and your team can help you avoid potential negative results. Poor communication with strategic partners is the most common cause of adverse outcomes. Firms that choose to outsource should create a governance framework to clearly define how each task should be performed and maintain regular contact with the third-party provider.
An engagement letter allows both parties to determine if the partnership is the right fit for them. Additionally, they give CPA firms the opportunity to establish mutually agreed-upon expectations and quality standards within third-party provider relationships early in the process. Firms should include details regarding company information, scope of services and pricing, length and scope of the engagement, provisions for unanticipated services, and service terms. Importantly, an engagement letter provides legal protections for CPA firms to fall back on should issues arise.
Remember that communication goes both ways. A potential outsourcing partner for accounting services should also be able to define its own expectations, processes, and plans.
Confirm strong security measures are in place
Protecting client information and trust is of the utmost importance. Firms must ensure their provider will adhere to compliance regulations related to security, data retention and virtual desktop infrastructure. Taking this step preserves your integrity and reputation within the community and profession at large.
The potential for security breaches or cyberattacks is the most catastrophic of risks you may be exposed to when outsourcing accounting services. The sensitive client information that CPA firms deal with due to the nature of the work means the stakes are exceptionally high. Firms must ask about and consider the encryption policies and IT infrastructure any potential third-party provider uses. As a precaution, requesting an outline of the company’s security operating procedures is advisable.
Outsourcing protection for accounting firms
CPA firms must thoroughly understand the risks they take when outsourcing their accounting services. When sending confidential client information to a third party, you effectively invite the potential for damages that are out of your control. No matter how diligent your preparation process is, mistakes can happen. Ultimately, your firm’s reputation is on the line.
The most important thing is that you prepare for the unexpected. McGowan PRO’s Accountants Professional Liability / Errors & Omissions Insurance specializes in risk management and protecting you against professional liability claims. In addition to broad coverage options, we offer education in risk management strategy to ensure your protection goes beyond insurance coverage. Our mission is to give you confidence in your coverage to allow you to focus on growing your practice.
Contact the underwriters at McGowan PRO today to learn more about Accountants E&O Insurance.