Examining Accounting Outsourcing Practices in Malaysia

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Outsourcing means subcontracting the strategic use of company's resources outside the company to perform tasks that are usually handled internally. In today's business environment, outsourcing has become an increasingly popular option for many organizations. Organizations in Malaysia are in an enviable position in view of Malaysia's standing as a leading outsourcing hub in the region. Even though that is the case, there is little study on accounting outsourcing practices, risks and control in Malaysia. Therefore, the objective of this study is to explore the practices, decisions involved, processes undertaken and perception of risks and control in accounting outsourcing. A total of 51 companies participated in this study and approximately 47.1 percent of the respondents are involved in accounting outsourcing. The most common outsourcing activities are financial reporting and auditing while the main reasons to outsource are quality service, focus on core competencies and scale economies. This study shows that organizations involved follow very formal and structured procedures in accounting outsourcing relationship including having a contract that describes all material aspects of outsourcing arrangement such as rights, responsibilities, and expectations of all parties involved. Findings also suggest that the size of company influences firms emphasis on behaviour controls.

1. Introduction

Outsourcing means subcontracting the strategic use of company's resources outside the company to perform tasks that are usually handled internally. In this knowledge- and service-based economy, it is said that companies can increase their profits by strategic outsourcing of intellectually based systems (Quinn, 1999). Quinn (1999) argued that successful companies leverage their capabilities and investments of others by exploiting three areas of intellectual outsourcing: traditional service or functional activities performed in-house (e.g., accounting, IT, or employee benefits); complementary, integrative, or duplicative activities scattered throughout the company; and disciplines, subsystems, or systems in which outsiders have greater expertise or capabilities for innovation. Hence, while leaving the non-core activities or functions to specialized third parties, companies can focus on their core competencies and improve overall performance. Outsourcing is one of the powerful tools to generate company's values and gain competitive edge. Generally, there are three forms of outsourcing: (1) internal outsourcing using in house subsidiaries mainly involving large firms, (2) external outsourcing using local outsourcing vendor with global offshore operations, and (3) external outsourcing using foreign outsourcing company who maintain an onshore presence (Nicholson, Jones and Espenlaub 2006).

Accounting outsourcing specifically means transferring part of accounting functions to third party providers or fully owned subsidiaries in order to cut cost, gain access to scarce skills or obtain competitiveness (FSA, 2005). Accounting work that are often sent for outsourcing include bookkeeping and accounting processes; general ledger accounting; accounts payable; fixed assets accounting; inventory management; reconciliations; payroll accounting; taxation; accounts receivable; internal controls; preparation of financial statements; and financial reporting or management information system (Reddy and Ramachandran, 2008; Krell, 2007). Krell (2007) finds that finance and accounting outsourcing covers a wide variety of processes, ranging from highly transactional activities such as accounts payable, accounts receivable and payroll, to processes that require greater and more complex degrees of knowledge and analysis such as treasury, tax strategy, or financial planning and analysis. Krell (2007) explains that the finance and accounting outsourcing market has increased steadily since 2000, and by more than 45% since 2005; and a March 2007 Interactive Data Corp. (IDC) study forecasts that the global finance and accounting outsourcing market will exceed $47.6 billion in 2008. However, accounting outsourcing presents significant risks due to the complexity of achieving suitable management oversight and control from a distance such as risks of opportunisms. In other words, the decision to outsource involves the potential cost savings against the consequence of a loss in control over accounting services. Codes, standards and regulations such as Sarbanes Oxley Act for internal controls (Section 302), ISO9000 (quality) and BS7799 (security) standards are being adopted by some companies for quality assurance and risk notification in accounting outsourcing but require greater management discipline.

AT Kearney (2007, 2009) ranked Malaysia at the third position after India and China in providing attractive offshore location, while Frost and Sullivan (2007) identified finance sector as one of Malaysia's niche areas. Key strengths pointed out include infrastructure quality, government policies, political stability, and cultural adaptability of skilled workforce. In India, National Association of Software and Services Companies (NASSCOM) plays active role as an interface to the Indian software industry and Indian BPO industry, thus encourage the growth of India outsourcing industry (Raghuram, 2009). In China, most of the western companies are using international outsourcing agents to reach the small and medium sized enterprises (SMEs) that start to outsource their production and related supply chain management (Zheng Liu, 2007). In Malaysia, there are more than 100 shared services and outsourcing companies in Multimedia Super Corridor (MSC) ranging from major local players to multinational. Besides MSC, the Labuan Offshore Financial Services Authority (LOFSA) coordinates efforts to promote and develop Labuan as an International Business and Financial Centre (IBFC). As an IBFC, Labuan offers a wide range of offshore financial products and services to customers worldwide, including banking and investment banking, insurance, captives, trust business, fund management, investment holding, company management and Islamic financing. Kadir (2007) pointed out that Malaysia is a leading destination for the establishment of shared services and outsourcing hubs. Malaysia is known for its attractive outsourcing location and is expected to drive more outsourcing work in various areas such as manufacturing, telecommunications, finance, government and other services (Suhaimi et al., 2007). Malaysia is expected to attract at least US$ 3 billion of the total global outsourcing business worth US$ 0.054 trillion. Furthermore, Malaysia also has strong fundamentals such as economic integration and personal contact with the world as compared with its peers in Asia.

Despite the growth and development in outsourcing activities in Malaysia, there is little study done on the accounting outsourcing practices. Therefore, the objective of this study is to understand the accounting outsourcing practices specifically in the area of outsourcing decisions, process, and perception of risks and control. The main research question is what are the practices of accounting outsourcing in Malaysia? The findings will contribute to the body of knowledge in accounting outsourcing, enhance the understanding of the current accounting outsourcing practices, and provide information for local companies to identify potential accounting outsourcing activities which would encourage the growth of local outsourcers. The findings will also provide inputs to the policy makers in regulating and structuring incentives for accounting outsourcing activities.

2. Literature Review

Literature review on accounting outsourcing includes the accounting outsourcing decision, process, and accounting outsourcing risk and control.

2.1 Outsourcing Decision

Previous studies found that organizations choose to outsource to gain several potential benefits. According to Reddy and Ramachandran (2008), approximately 30-35% of time in accounting work is spent in low-end transaction processing activities. Outsourcing of such repetitive and non-value adding activities allow firms to focus more on strategic activities like financial planning. In addition, it provides advantages such as economies of scale, process expertise, access to capital and access to expensive technology. Cost reduction and focus on strategic activities are often offered as internal reasons for outsourcing (Bendor-Samual, 1998).

Outsourcing decision require proper estimation of cost, the time period involved, and other opportunity costs (Kee and Robbins, 2003). Survey by Kakabadse and Kakabadse (2001) among US and European companies grouped 14 objectives of outsourcing into three categories. First, to achieve best practice, enhance cost discipline and control skills of managers. Secondly, to improve service quality and management by focusing on core competencies, and finally to gain access to new technology and skills, reduce employees, enhance capability to develop new product or services and reduce capital cost. According to Chin (2003), Logical CMG's experience from financial services contracts shows that outsourcing plays a significant role in improving company's performance through increase in profitability, higher return on investments, greater capital efficiency and improved focus.

2.2 Outsourcing Process

Outsourcing process begins with the vendor or provider selection process, when a request for proposal initiates communications with the eventual provider (Krell, 2007). A study by Barthelemy (2003) shows that successful companies in outsourcing work often have clear understanding of their core-activities, have done adequate research and planning and most importantly have developed clear objectives, goals and expectations of outsourcing activities. Trusts or contracts between the companies and their outsourcing partners found to be significant in ensuring successful outsourcing (Elmuti, 2003). The contract is negotiated and signed by both the outsourcing buyer and the outsourcing vendor and should clearly identify items such as the services to be provided by the vendor, terms of payment, an escape clause for each party and methods for making changes to the agreement (Deckelman,1998). In another study, Zhu, Hsu and Lillie (2001) emphasizes on detailed outsourcing transition plan to ensure a successful transition process. An outsourcing effort is not complete until a post-outsourcing review is conducted to determine if the process is working as planned and to identify areas of improvements or changes (Zhu, Hsu and Lillie, 2001). Evaluation on renewal decision on contract is made at the completion phase of outsourcing. Figure 1 depicts the process of accounting outsourcing process.

2.3 Outsourcing Risks

Organizations involved in outsourcing must consider risks such as loss of core activities, leveraged by suppliers, loss of strategic flexibility, suffering interruptions of supply, receiving poor quality of supply, fall in employee morale, loss of internal coherence, confidentiality leaks, and loss of intellectual property rights (Lonsdale and Cox, 2000). The importance of risks and control of accounting outsourcing has been highlighted by recent research (Wood, Barrar, Jones and O'Sullivan, 2001; Nicholson, Jones and Espenlaub, 2006; Nicholson and Aman, 2008). Wood et al (2001) focus on outsourcing of accounting function by UK small to medium sized enterprise. They examine risk and reward mechanisms in maintaining accounting activities internally as opposed to contracting it out to the market. Nicholson, Jones and Espenlaub (2006) draw on the practice of offshore outsourcing (Aman, 2005, Aman and Nicholson, 2003; Sahay, Nicholson and Krishna, 2003). They revealed a broad spectrum of accounting services being outsourced offshore using various innovative contractual and relationship models. Following this, Nicholson and Aman (2008) provide an in depth study and analysis of accounting and finance offshore outsourcing by three UK companies offshoring to India. They focus on both client and vendor sides through their fieldwork in the UK and India and examine the risks and control involved in offshore outsourced accounting cycles.

According to Krell (2007), although most companies pursue single-process arrangements, the use of multi-process finance and accounting outsourcing has surged, growing by roughly 30% year-to-year during each of the past four years, according to The Everest Group and Deloitte Consulting. Despite the growth of all forms of outsourcing relationships, dissatisfaction has remained surprisingly high among buyers, according to numerous surveys of business executives involved in outsourcing relationships. Fifty-four per cent of a group of 228 global CFOs (two thirds of who work for companies with more than $1 billion in annual revenue) indicate that outsourcing does not deliver the benefits promised by the media and outsourcing vendors. However, 73% of those same respondents asserted that they would be interested in outsourcing from a few processes up to every process "that's not core."

Das and Teng (2001) indicate that risk can be considered separately as relational risk and performance risk. The distinction between relational and performance risk is important because it has effect on the strategic decisions (Das and Teng, 1996). Relational risk is, in essence, is the risk of a vendor or client not co-operating in good faith; it embraces the probability and consequences of not having satisfactory co-operation in an outsourcing relationship. Prior research provides instances of potential vendor opportunism in offshore outsourcing such as cheating, shirking, distorting information (Aron and Singh 2005, Aron et al, 2005). Performance risk is concerned with the range of factors that may affect the vendor's ability to perform to the outsourcing agreement such as the availability of capital, technology and skills of vendor staff (Das and Teng, 2001).

2.4 Outsourcing Control

Financial Services Authority (2003) introduced guidelines that cover the outsourcing decision and outsourcing process. Organizations are suggested to follow six steps to minimize risk exposure (1) Strategic decision to outsource by assessing strategic risk and rationale for outsourcing, (2) Due diligence process by ensuring supplier is competent, honest, financially sound, and has relevant knowledge and expertise, (3) Contract and service level agreement through formal contract and service level agreement between the two parties, (4) Change management, as company's risk can increase, firm has to plan and effectively use project or change management, (5) Contract management through appointment of individuals to manage the contract and do periodic review, (6) Exit strategy and contingency planning that need to be prepared for new arrangement with minimal disruption to business.

A new management accounting guideline (MAG), entitled Outsourcing the Finance and Accounting Functions, was recently developed jointly by CMA Canada, the American Institute of Certified Public Accountants (AICPA) and the U.K.-based Chartered Institute of Management Accountants (CIMA). The MAG provides guidance on managing finance and accounting outsourcing opportunities, challenges and risks. This guidance, which targets CFOs, finance and accounting managers, and others responsible for selecting, implementing and managing finance and accounting outsourcing relationships, centers on what might be done at each stage of the finance and accounting outsourcing life cycle to create and manage a successful finance and accounting outsourcing initiative. This guideline identifies processes for managing the challenges, risks and opportunities associated with finance and accounting outsourcing. A company that is considering outsourcing a collection of finance and accounting processes and then conducts its selection processes may ultimately decide against outsourcing because of what it learns about the provider marketplace.

Control is generally viewed as a process of regulating and monitoring. It plays the role of checking to ensure that actual activities are performed according to plans. Sohn (1994) propose that any process that is intended to affect the behavior of other people is considered as control. Das and Teng (2001) differentiated control in terms of behavior control, output control and social control. Behavior control and output control are the two modes of formal control (Ouchi and Maguire, 1975). Behavior control is to ensure that the process is appropriate. It consists of rules, procedures and policies to monitor and reward staff, which may be used as reliable assessments of performance. Behavior control, such as policies and procedures, reporting structures and training, works best in situations where work is codifiable but outputs are not easily measurable. Output control is to rely on accurate and reliable assessment of performance. Output control consists of control over the outcomes of a process. Das and Teng posit that output control is appropriate in situations where outputs are measurable and may be used for control where codifying work is difficult. Social control is an informal form of control that focus on developing shared values, beliefs and goals among members so that appropriate behaviors will be reinforced and rewarded (Ouchi, 1979). Social control, in contrast with formal control, involves no attempt to specify behavior or outcome at the start. Goal setting is decentralized and evolves through socialization and consensus building, allowing members to develop shared views to influence behavior. Where work is not codifiable and outputs are difficult to measure, social control is appropriate because it provides the ability for measurement to be avoided at the beginning but still allows control of the group members.

Abdul-Aziz and Ali (2004) use a case study approach to explore outsourcing quality of quantity surveying activities at Malaysia's public works department. The study found that its officers view the consultants' performance as generally unsatisfactory and therefore highlights the importance of monitoring and control in outsourcing activities. Recently, Suhaimi et al. (2007) use a case study approach to provide an understanding of the motivation for information systems outsourcing at a commercial bank. The findings highlighted the challenges faced include managing the partnership and handling staff transition and morale.

In another study, Sohail et al (2006) did a comparative analysis on the use of third party logistics services by manufacturing firms in Singapore and Malaysia. The study found similarities between firms in both countries, in areas such as proportion of organizations using outsourcing service, involvement of functional managers, types of activities outsourced and budget allocation for outsourcing. Differences include process of making decision, benefits received, and types of businesses utilizing the services. Malaysian organizations reported that decision on outsourcing was made at the operational level. They utilize third party logistics services mainly for international businesses. As for the benefits, Malaysian respondents indicated time saving, improved customer services and payment or credit terms as the major benefits.

3. Research method

This paper is written based on a survey data which forms the first phase of the larger study in the area of risk and control in accounting outsourcing. Data was collected using questionnaire and covered both clients and vendors of accounting outsourcing. This survey adopts purposive sampling whereby selection of sample was based on two criteria i.e. size and region. Prior study indicates that large size companies are more likely to adopt accounting outsourcing compared to small companies. Nicholson et al (2006) indicate that high profiles companies of large size such as General Electric (GE), British Telecom HSBC, Duetsche Bank, American Express, Citibank and Hewlett Packard have highlighted the trend of off shoring and offshore outsourcing of accounting and finance activities. Furthermore, large companies with more than 100 employees had been used in research as an indicator for the need of systematic accounting systems (e.g.Chong and Eggleton, 2007), making accounting function more favourable to outsource internally or externally. Thus, companies listed in Bursa Malaysia, which are considered as large companies provide as an ideal sampling frame. List of big four and second-tier audit firms and established accounting outsourcing vendors are then, added to provide more comprehensive sampling frame.

Data collection was concentrated in central region of Malaysia and mainly through enumerators. Both Kuala Lumpur, Malaysia's capital city and Putrajaya, Malaysian federal administrative center are situated in the central region. Majority of the listed companies' headquarters, audit firms and accounting outsourcing providers are in Kuala Lumpur or nearby areas. Nevertheless, mail questionnaire were also send to companies that were located in different regions. The questionnaires were directed to Head of Accounts and Finance Department of each company. A total of 51 companies participated in this study.

The questionnaire items were initially constructed based on previous studies' instruments and refined based on feedback from a group of 15 MBA students whom hold managerial positions. Their inputs used to improve the clarity, comprehensiveness and relevance of the research instrument. This eight-page questionnaire consists of six sections 1) About the organization, 2) Outsourcing decision, 3) Outsourcing process, 4) Risk and pitfalls, 5) Outsourcing control, and 6) About the respondents. For sections two through five, respondents were asked to indicate the level of emphasis for each item using 5 likert scale ranging from 1 = none to 5 = very high.

Accounting decision section includes adoption of accounting outsourcing, person initiated, reasons for accounting outsourcing and type of accounting outsourcing. Question items for accounting outsourcing decision were adapted and modified from Logica CMG white paper in association with Cass Business School and works of Reddy and Ramachandran, (2008), and Krell (2007). European Central Bank survey of European banks found that financial services companies outsource primarily to reduce costs and focus on core activities. Other reasons cited in the survey include generate change/ flexibility, quality/ service, free resources, scale economies, and access to new technology/ better management (Logica CMG, 2004, 2007).

Instrument for accounting outsourcing process was adapted and modified items from Nicholson and Aman (2008). The accounting outsourcing process started with selecting vendors and end with completion of the outsourcing. Issues on vendor/ client characteristics, content of outsourcing contract, staffing arrangement, periodic review and arrangement of termination are of high interest to this study.

Perception of risk is adapted from instrument developed by Das and Teng (2001). They identified two types of risk in relations to accounting outsourcing; relational and performance. Relational risk arises because of the potential for opportunistic behaviour on both parties due the probability and consequences of not having satisfactory cooperation. These include cheating, shirking and distortion of information. Performance risk exists because of other factors such as intensified rivalry, new entrant and changing government policies that may adversely affect alliance performance.

The instrument to measure controls were adapted and modified based on measures suggested by Das and Teng (2001) and Auzair and Langfield-Smith (2005). Behavior control focuses on the process which turns appropriate behavior into desirable output while output control on the other hand focuses on the outcome of a process. Social control is more appropriate when organization does not specify task related behavior and outputs. It focuses on developing shared values, beliefs and goals among members so that appropriate behavior will be reinforced and rewarded.

4. Findings and Discussion

The discussion on the research findings are divide into three parts. The first part discusses the accounting outsourcing decision, followed by accounting outsourcing process, and finally perception of risk and control by accounting outsourcing adopters. Prior to findings discussion, demographic profiles of the respondents and organizations between adopter and non-adopters of accounting outsourcing are presented. From a total of fifty one organizations participated in this survey, only twenty four organizations, or approximately 47.1 percent practice accounting outsourcing

4.1. Sample profiles

Profiles of respondents and organizations in accordance to adopters and non-adopters of accounting outsourcing are presented in Table 1 and Table 2 respectively.

The respondents of both accounting outsourcing adopters and non-adopters have similar background in managerial position and years of experience. They are mainly managers and executives years of working experience mostly around 1 to 10 years. Table 1 show that respondents from firms that do not adopt accounting outsourcing consist of more qualified accountants than firms that adopt accounting outsourcing (25.9 compared to 12.5 percent). Adequate resources in accounting knowledge with qualified accounting staffs may be the possible explanation of the decision to handle accounting function rather than outsource. Gender varies in both groups, whereby accounting outsourcing adopters were represented mainly by male respondents (58.3 percent). In contrast, the respondents of accounting outsourcing non-adopters are dominated by 70.4 percent female. Survey respondents profile on accounting outsourcing adopters show respondents have the knowledge of accounting function and process and hold managerial post that is required to answer questions appropriately in other sections.

Both accounting outsourcing adopters and non-adopters are mainly local based and their business location concentrates in central region. Type of business includes corporate headquarters, subsidiary and single business units. Table 2 shows that companies involved in accounting outsourcing were from finance and other industry. The trend of using accounting outsourcing among finance companies is similar to those highlighted by Nicholson et al (2006), where majority of the companies are banks and are involved in finance industry. It also aligns with growing interest of commercialization of banks' back office functions in order to reduce costs (Lacity et al 2004). Non-adopters of accounting outsourcing are mainly companies from trading/service. Both accounting outsourcing adopters and non-adopters are established companies within 5 to 20 years establishment. Accounting outsourcing adopters has lower percentage of less than ten accounting employee than non-adopters companies (55.5 percent and 66.7 percent respectively).

Size of companies was measured using sales turnover and number of employees. Highest proportion of sample for both categories adopters and non-adopters, are companies with sales turnover more than RM50 million, followed by RM10 to RM50 million, RM1 to RM10 million, and less than RM1 million. However, it appears that the adoption of accounting outsourcing was not affected by the companies' size. With regard to size, about 54.1 percent of accounting outsourcing adopters was large companies that is, employing more than 100 employees.

4.2. Accounting Outsourcing Decision

For accounting outsourcing adopters, their roles include vendor or provider of the accounting outsourcing services, and client or consumer of the service, or both. Most organizations (70.8 percent) indicate that top management initiates the idea to outsource accounting activities. For the other companies in the sample (25 percent), the idea was initiated by either consultants or the clients.

This study shows that organizations outsource their accounting activities for multiple reasons. The most frequently cited reason is quality service; with at least 50 percent of the respondents choose it as the reason to outsource accounting works, followed by focus on core business (37.5 percent), and scale economies (25 percent). Other reasons to outsource include flexibility, release of organization's resources, cost reduction, existence of new technology, and to achieve competitive advantage. In a study on British firms, Fan (2000) found that cost reduction, and focus on core competencies, quality, lack of internal skills or expertise, entry barriers, and capacity are the major reasons for outsourcing a particular activity. This finding slightly differs from Logica CMG (2004) study that found banks, equity trading firms and insurance companies' reasons for outsourcing are mainly to focus on core competencies, increasing shareholders value and removing risk. While the literature had highlighted cost reduction and focus on core competencies as the major reasons for outsourcing, it appears in this study quality of the service is regarded as a priority.

This study also shows that organizations outsource multiple accounting activities. The most frequently outsourced accounting activities are preparation of financial report and audit, with 58.3 percent of the respondents outsource these activities respectively, followed by determination of tax (45.8 percent), and account payables (33.3 percent). Other activities being outsourced include transaction processing such as account receivables and preparation of payroll. Table 3 shows the reasons for outsourcing and the accounting activities being outsourced.

4.3. Accounting Outsourcing Process

Prior to entering accounting outsourcing contract, organizations undergo vendor and client selection process. Outsourcing vendor (client) must meet certain selection criteria prior to entering the outsourcing contract. Table 4 show the ranking of each selection criteria on vendor or client. The means for all criteria are between 3.92 and 4.17, indicating in general these criteria are given high emphasis by respondents. Having relevant knowledge is considered as most important by respondents in selecting vendors, followed by honest, reputational endorsement and expertise. Their mean score is more than 4 which indicate high level of implementation. This findings shows that the practices of outsourcing organizations in Malaysia is consistent with The Joint Forum (2004) guideline that entity should conduct appropriate due diligence in selecting third party service providers. Allen and Chandrashekar (2000) highlighted that outsourcing vendor should have technical and managerial capabilities to provide the required level of service, and also understands and committed to the outsourcing expectations. In addition, choosing the right vendor can mitigate the risks of outsourcing.

This study finds that all organizations that practice outsourcing has formal contract with their vendor (client). Table 4 shows Malaysian companies give high emphasis on confidentiality and data security in accounting outsourcing contract. Subsequently, the results also suggest firm give high emphasis on items such as right to access, control and responsibility in the contract demonstrating the need of proper development of formal governance of accounting outsourcing in order to reduce outsourcing risks. Items such as service penalties, penalties, use of subcontractors and liability are less emphasised (mean score of the items below 3.5). A similar emphasis of accounting outsourcing has been raise by Reddy and Ramachandran (2008). Their study reveals that privacy and data protection and rights to intellectual property are of the significant concerns for clients when outsourcing accounting and finance function to the service providers. Maintaining the accounting integrity in providing information for decision makers seems to be a central focus of companies when implementing accounting outsourcing, consistent with the major reason to outsource, high service quality.

Forming formal contract in accounting outsourcing is consistent with The Joint Forum (2004) guidelines, which highlights that written contracts should govern outsourcing relationships. In addition, the guidelines also set out principles for managing outsourcing to balance risk and support good governance. This finding is also in line with Kadir (2007) remarks on the importance of control and oversight on the external parties in outsourcing activities. Similarly, Platz and Temponi (2007) find that there is a common set of key contractual elements covering the functions of performance, financial, human resource, and legal that exists between most outsourcing contracts. Therefore, the challenge is to write a contract that is specific enough so that it can protect both parties in outsourcing and flexible enough to accommodate unexpected events (Allen and Chandrashekar, 2000).

During the outsourcing process, organizations typically place high emphasis to reengineer their internal process, establish formal outsourcing teams, transfer company's staff, appoint individuals for outsourcing relationship, perform periodic review, and makes arrangement in case of termination. Table 5 presents the frequency analysis for the implementation phase until completion phase in accounting outsourcing. This study shows that half of the organizations reengineer their internal process to accommodate the outsourcing activities. In addition, 75 percent establish formal outsourcing teams and make arrangement in case of termination of outsourcing contract, and 62.5 percent transfer company's staff, and appoint specific individuals in charge of outsourcing relationship. Study by Allen and Chandrashekar (2000) argue that outsourcing can be broken into three major categories of labor contracting, mixed outsourcing, and complete outsourcing based on what and how much of the service mix the vendor and client provides. The service mix consists of a combination of management skills, employees, technology, systems, procedures, materials, equipment and physical facility (Allen and Chandrashekar, 2000). The findings from the study indicate that 79.2 percent perform periodic review of the outsourcing arrangement. The emphasis on periodic review is in line with The Joint Forum (2004) guidelines that outsourcing vendors should establish and maintain contingency plan including periodic testing of back-up facilities. Throughout the outsourcing process, effective communication and commitment have been identified as an ingredient for successful outsourcing (Allen and Chandrashekar, 2000).

4.4. Perception of Risk and Control

This section describes the differences of perception of risk and emphasis of controls between (1) local and foreign based, and (2) small and large size companies measured by number of employee. Number of employee has been used in many controls study as a proxy for size (e.g. Merchant, 1981, Ezzamel, 1990, Auzair and Langfield-Smith, 2005). Since the survey involve only small number of respondents (24 companies), a non-parametric of Mann-Whitey U test is used. Z-scores less than 0.05 indicate there are significant differences between the groups. Table 6 summarizes the results of the test.

This study shows that local based companies that are involved in outsourcing activities perceive higher level of risks and thus emphasize higher control on that their accounting outsourcing activities as compared to foreign-based companies. However, there are no significant differences on perceptions of risks between these two types of companies which may be due to small sample size.

As mentioned earlier, this study uses number of employees as a proxy for size. Companies with employee less than 100 are considered small companies and vice versa. Based in the data, mean scores for companies categorize as small are higher for both relational and performance risks. Therefore, it appears that small companies perceive higher level of risks compare to large companies. Nevertheless, the z-test scores are not significant at the level of 5 percent. While it can be concluded that firms size does not influence the perception on accounting outsourcing risks, it should be noted also that small sample size could contribute to the insignificance of the results.

The data also indicate that small companies emphasize higher level of controls compared to large companies. Although the difference is not significant for all types of controls, except for behaviour controls, this finding is consistent with firms' perception on risks. Smaller firms perceive higher level of risks, thus, smaller firms emphasized higher controls. A closer look at the data also suggest a support to prior study by Das and Teng (2001) whereby behaviour controls would be emphasised to mitigate relational risks.

The results thus, offer useful insights for future studies. Prior studies using contingency approach suggest that size could influence the design of firms' controls systems (Merchant, 1981; Ezzamel, 1990; Auzair and Langfield-Smith, 2005).

Besides implementing appropriate controls in mitigating outsourcing risks, there are several others alternatives to manage outsourcing risks efficiently. Elango (2008) did a study that offers small and medium-sized firms an opportunity to innovate strategically through core-enhancing outsourcing. While admitting many risks associated with outsourcing of core activities, this study highlights five suggestions to avoid those risks (1) specific guarantee that information is not shared with others, (2) monitoring the quality of outsourcing vendor, (3) not to lose in-house capabilities of core related activities, (4) cost of managerial time and commitment is high, and (5) collaborative approach through finding an outsourcing partner that has high operation and ethical standards, reputation, trust and competence. Logica CMG (2004) suggests that best practice of managing outsourcing risks is by implementing risk assessment and risk management. Risk assessment is a formal and systematic method that looks at the likelihood and significance of outsourcing risk and the organization's level of tolerance. Risk management involved having proper governance mechanisms, source of expert advice on operational improvements, and continuous performance review.


This paper intended to provide an overall view of accounting outsourcing practices in Malaysian environment. While can be regarded as exploratory, this study makes an attempt to also uncover the risks and control issues surrounding the accounting outsourcing relationships. Risks and controls are suggested as important factors determining the survival of the outsourcing relationship (Das and Teng, 2001). Despite growing interest in other parts of the world, the study of accounting outsourcing practices in Malaysia is still considered at the initial stage. From a total of 51 respondents, 47.1 percent of the respondents are involved in accounting outsourcing. Most firms are from the finance industry. The survey highlights several interesting findings. In Malaysia, it appears that organizations adopt accounting outsourcing regardless of their sizes. The most common outsourcing activities are financial reporting and auditing. Since accounting work are govern with specific compliances and procedures, the main concern of clients when outsourcing their accounting functions is to ensure confidentiality and security of accounting data. This finding is consistent with study by Reddy and Ramachandran (2008). Indeed, the emphasis on the concern are reflected through providing high quality services as the major reason to outsource and place highest importance on relevant knowledge and honest criteria in vendor (client) selection. Organizations that outsource accounting works follow very formal and structured procedures in accounting outsourcing relationship including having a contract, act as structure governance which detailing all material aspects of outsourcing arrangement such as rights, responsibilities, and expectations of all parties involved.

Additional analysis of the data suggests local based companies perceived higher level of risks and accordingly emphasize higher level of controls compared to foreign companies. Prior studies have found that culture influenced firms management control systems (see Tsui, 2001). The results of this study thus provide evidence on possible cultural differences between local and foreign-based companies. It is also interesting to note that in Malaysia, small firms perceive higher level of risks and thus, emphasize higher level of controls. Contradict to the contingency-based literature, in this study, emphasis on behaviour controls was found to be significantly higher in small compared large firms. The literature suggests that the nature of behavior controls was associated with larger firms that tend to be formalised and more specialised (Merchant, 1981; Auzair and Langfield-Smith, 2005). The survey also indicates that the emphasis of output and social controls are not significantly different between small and large firms. This finding again contradicts to most studies associated with controls but, is similar to an exceptional prior findings such as Ezzamel (1990). Earlier studies in organisational life cycle literature found, large sized firms emphasize formal controls such as behavioural and output controls while small sized firms, in growth stage are more innovative and thus emphasize less formal controls such as social controls (Burns and Stalker, 1961; Miller and Friesen, 1984). One possible explanation for the higher emphasis of behavioural controls among small firms compared to large firms is due to ease of monitoring and supervising actions by staffs involved in the outsourcing relationship. It should also be noted that these firms are higher adopters of accounting outsourcing, thus it is only rational that they are more concerned with the controls aspects.

Prior literature lacks evidence on risks and controls of accounting outsourcing activities. Possible explanation for the findings as highlighted earlier should be further investigated as theories explaining prior findings may not be applicable in this situation. Future studies that include larger sample of firms practicing accounting outsourcing could be undertaken to confirm the initial results found in this study.

Due to limited number of responses, findings from this study should be interpreted with caution. The findings may not be generalized to the overall population. Nevertheless, they can be used as background information for subsequent research to study accounting outsourcing activities. Future research might consider the use of in-depth case studies as methodology for exploring relationships. Such methods would add significantly to our understanding of the relationships between various factors that influence accounting outsourcing relationships.