Strengths And Weaknesses Of Employing Outsourcing Accounting Essay

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Outsourcing brings in a lot of flexibility and financial freedom but it also has its drawbacks. It is important for an organization to analyze the strengths and weaknesses of employing outsourcing as a means to solve issues as outsourcing affects each organization in a unique way. Therefore a company looking to outsource must keep in mind the pros and cons of outsourcing and critically evaluate them based on their internal and external environment to reap its benefits. In (1999), Quinn stated according to his opinion that by deliberate outsourcing of academically established system and facility-based financial system, firms can raise their income (Quinn, 1999). To support his opinion, in (2006) Nicholson et al., stated that outsourcing is the effective tools to create a company's standards and obtain a competitive edge (Nicholson et al., 2006). According to Quinn (1999) and Nicholson et al., (2006), the statement can be executed in current years also because it is true that a firm will consider raising income and the firm's standard, by that outsourcing will be a right decision to achieve success. As technology has continued to grow, more complex functions are now being outsourced, for instance outsourcing accounting functions.

According to Financial Services Authority (2005), accounting outsourcing refers to transmitting part of the accounting functions to suppliers or completely preserved subsidiaries in order to cut cost, obtain access to uncommon skills or gain competitiveness. Accounting processes and bookkeeping ; fixed assets accounting ; accounts payable ; accounts receivable ; general ledger accounting ; inventory management ; taxation ; internal controls ; reconciliations ; payroll accounting ; preparation of financial statements ; and financial reporting are the accounting work frequently sent for outsourcing (Krell , 2007 ; Reddy Ramachandran , 2008). A company may use all the functions when outsourcing or only a few from it because it depends on the organization what type of accounting functions they are outsourcing. Krell, found that finance and accounting outsourcing conceals a broad range of methods, varying from highly transactional activities for example accounts payable, accounts receivable and payroll, to processes it better an additional experience and investigation such as financial planning and analysis, tax strategy or treasury are required (Krell , 2007). These methods are also practices in current years because an additional experience and investigation are required in order to perform well and can be used as a guideline in the future. Krell, explains that since year 2000 finance and accounting outsourcing market has raise progressively, and more than 45 percent increase since year 2005 (Krell, 2007). A study from Interactive Data Corp (IDC) in March 2007 estimates that in 2008 the global finance and accounting outsourcing market will go beyond $47.6 billion (Krell, 2007).

However, either to outsource or not includes by the possible cost savings versus the importance of a loss in control over accounting services. Ya Ni and Bretschneider also found that the outsourcing of accounting functions is increasingly widely compared with various types of business functions (Ya Ni and Bretschneider, 2007). Many standard accounting software programs are accessible to encourage accounting functions which includes User Business System (UBS) and Mind Your Own Business (MYOB) (Magiswary Dorasamy et al., 2010). Mainly, accounting functions were utilized to support periodic reporting, assisting with month-end reports and record-keeping. However, according to Magiswary Dorasamy et al., accounting functions has developed to play a significant role in businesses (Magiswary Dorasamy et al., 2010). Many authors found that outsourcing has been practices globally, an organizational practices can be linked with outsourcing practices such as failure preventing practices and performance-enhancing practices (Hartmann, Trautmann, & Jahns, 2008; Narasimhan, Narayanan, & Srinivasan, 2010). Failure prevention practices and performance-enhancing practices are practiced to overcome any failure in the future and also to improve an organizational performance to perform better in the future where appropriate practices are necessary for an effective implement. An organization's outsourcing performance in the earlier years (1980s) are based on traditional performance, currently firms perform outsourcing functions based on other outsourcing performance measurements such as financial reporting, stakeholder performance (Giley & Rasheed, 2000), flexibility or responsiveness (Handley & Benton, 2009), product functionality and time specificity (Bengtsson et al., 2009). Outsourcing in the earlier years may not be very successful due to company's lack of performance but there is a higher chance for an organization to achieve success in the future because outsourcing performance measurements are in wider range now compare to past year.

Eiichi Tomuira stated that an organization will also have to decide where to outsource, either in domestic or in foreign countries (Eiichi Tomuira, 2008). The author also found that generally accounting functions or any functions that uses different standard and regulation will heavily depends on domestic subcontractors while outsourcing overseas is established in apparel (Eiichi Tomuira, 2008). For example; a bar council association firm could not outsource to foreign countries due to the pros and cons of the countries. Outsourcing has its advantages as well as disadvantages (Gulzhanat Tayauova, 2012). The most important advantages of outsourcing are the core activities. Core activities of the business take center stage as it is the hope of any organization to devote its time and resources to focus on their core activities (Fan LL et al., 2006; Lacity MC, Hirschleim R., 1998). Many researches also agreed that cost savings are also important advantages of outsourcing accounting functions. Outsourcing functions to another organization within the country or out of the country is to be able to save on costs. The lower cost of operation and labor makes by outsourcing part of operations makes outsourcing to be an attractive option (Lian KG, Reategui LA, (2002); Lacity MC, Willcocks LP, (2001); Axelrod CW , (2004). The disadvantages when outsourcing accounting functions are the quality problem and hidden costs (Gulzhanat Tayauova, 2012). Problems with quality can arise if the outsourcing provider doesn't have proper processes and / or is inexperienced in working in an outsourcing relationship (Anderson B., 2001). Hidden costs may arise if the outsourcing terms and conditions are not clearly defined. For example; a company sign a contract with the outsourcing company and the details of the service that has to be provided to the company has been hidden (Liao KG, Reategui LA, 2002). Therefore, it is important to align the goal of a company and employee considerations with the objectives of outsourcing before taking the decision to outsource.

Secondary data were used to identify outsourcing accounting functions related articles by tracking down an article using computerized database. Academic journals and articles were searched from the search engines for academic literature research such as Ebsco and Science Direct. The purpose of this report is to address the issues relating to the outsourcing functions and to identify the impacts when outsourcing accounting functions. It also focuses on how an organization makes decision to practice outsourcing currently and the effects to the other departments on the firm. And also to evaluate the outsourcing accounting function used by the firm and will it satisfies the clients as well as the third party.

This paper commence as follows. The next section is the discussion on the literature review which concludes with the evolution, accounting functions and outsourcing accounting functions. The next section followed by the impacts, impact on the accounting standard and regulations, impact to the firms, impact on employees, and impact on the projects. Section continues with the factors, followed by various researches on outsourcing accounting functions which concludes with outsourcing in Malaysia and outsourcing in India. The section continued with outsourcing issues, discussion and finally the paper concludes with the researcher's conclusion of the overall impact of outsourcing accounting functions.


Literature review highlights on the evolution, accounting functions, and outsourcing accounting functions.


In 1776, Adam Smith (taken from 1933) argued that individuals who are expert in manufacturing certain parts of production process should be distributed with the production task, by doing this a company can operate more capably (Jussi Hatonen, 2009). After two centuries (Williamson, 1975) stated that manufacturing not only can be performed individually by the employee's but also by independent specialist organizations. The author was stating that there is another way for an organization to perform. Williamson followed Coase's (Coase, 1937) idea who suggested that transaction cost should be lower than the cost using in the market should be organized within the firm. Philosophies behind outsourcing practices often been referred to transaction cost theory by the merge of thoughts by Williamson and Coase (Jussi Hatonen, 2009). Outsourcing practices was originated in the 1950s and was phenomenon until organizations adopt strategy in the 1980s. For the past two decades, the outsourcing services have grown remarkably. The term outsourcing was familiarized at the end of the 1980's for contracting out information systems (Espino-Rodriquez et al., 2004; Hussey, D. and P. Jenster, 2003). Outsourcing is frequently clarified as the contracting with an outside facility supplier to supply a service function (Carey et al., 2006). According to Everaert et al., (2010), in accounting, both professional accountant and the accounting organizations include the activity of outsourcing involving the external accountant. Everaert et al., (2010) also explains, alternatively the process of adopting consist of the in-house-accountant who is the organization member moving out accounting functions in the organization.

According to Lansdale & Cox (2000) , instead of building core competencies over directing the production activity, manufacturers arose to take into consideration of outsourcing complicated production responsibilities to drop off the charge. Human resources, customer services and the company's information technology functions are the several purposes that an organization can outsource. The most frequently outsourced function is the accounting function (Bragg , S.M , 2006). However, outsourcing turn out to be a thoughtful choice for company's after Eastman Kodak's outsourcing assessment was conveyed in 1989. It was persistence in the 1990's and suited as top ten issues (Clark, T.D., Jr., 1992). According to Y.Kathawala et al., 2005) whether simple or complex, huge or minor, outsourcing can be established anywhere and everywhere in the business field.

Outsourcing is regularly associated with the term offshoring but neither point toward the other. According to the online version of Oxford English Dictionary, the word offshore has a long history and can be traced at least to year 1985. It means moving away from the shore or foreign. According to Kakabadse & Kakabadse (2000), outsourcing grew more incentive in the 1970's after a huge and varied companies were contemplated to be underachieving, a development that turn out to be more prominent at the beginning of 1980's with the start of worldwide stagnation. Moreover, conversion of direction in business policy witnesses in the 1980's concentrating on less activities (Peters & Waterman , 1982).


According to Meigs and Meigs , accounting referred as financial activity that evaluates and delivers statements or declaration about financial information. The statement can be implement in recent years also (Meigs and Meigs, 1970). Drury found that another definition for accounting is defined as business stakeholder or can be said as investors, managers, creditors and the government are used to convey economic describe as a communication language (Drury , 2005). According to Alan, Accounting function in business has many types such as accounts payable, accounts receivable, general ledgers, internal audit services to lease administration, payroll, property accounting, sales audits, and taxes (Alan , 2002). According to Casale, based on International Data Corporation (IDC) reports, the most outsourced accounting function is accounts payables (Casale , 2004).


According to Shailendra (2004), outsourcing of finance and accounting functions will become widespread and persist to expand. Conferring to a new report from IDC, the global market for outsourcing finance and accounting functions is expected to grow at a 9.6% Compounded Annual Growth Rate (CAGR) and exceed $47.6 billion in 2008 (Casale, 2004). Elements of accounting functions such as internal services, general ledgers and financial reporting are appropriate to be outsourced (Krell , 2006). Other components of finance and accounting services that can be outsourced are general accounting, audits, accounts payable, banking, financial services solutions, credit services, insurance processing, tax services, billing systems, accounts receivable, collection and credit, compliance and management reporting.

Accounting function is generally restricted to few of tasks only within the function but most commonly outsourced among other functions. According to Bragg, S.M. (2006), working with multiple suppliers, a company has opportunities to outsource widely of services in the accounting area. For example, most regional banks recommended cash management services. Ernst & Young LLP and Deloitte & Touche LLP is the biggest auditing firm which provides taxation, financial reporting and internal audit services.

According to Outsourcing Accounting Online to India (2007), companies are able to reduce overhead costs, manage their work well and focus on their core business by outsourcing accounting functions. A part of long-term sustainable business model, every company is making accounting outsourcing because hiring in-house staff members is much more than the total cost of managing accounting work via outsourcing firms (Outsourcing Accounting Online to India , 2007). Data capture, data processing, invoice entry and payment disbursements are accounts payable outsourcing services. Without capital investment, administrative cost can be reduced by the help of outsourcing accounts payable (Outsourcing Accounting Online to India , 2007).

Nevertheless, according to literature outsourcing can affect management and business decision by delays and less of direct control over quality and also leads to additional coordination expenses. Outsourcing should be assumed with concern to avoid the affects (Aubert, Patry and Rivard , 1998 ; Earl , 1996). The assumption was also discussed by Brown and Wilson (Brown and Wilson , 2005) Exposure to data security and customer privacy issues are another anxiety relates to outsourcing. To perform outsource services; firms that outsource also see a fall in their ability. To conclude, requirement on one supplier concessions upcoming cooperation leverage (Bragg , 2006). Overviews of the trends in outsourcing are based on current and future years. In the current years the reason for outsourcing would be for the cost discipline where capital availability and cash flows take into concern first but in the future differentiation of core competencies will be the main reason for outsourcing (Kakabadse and Kakabadse, 2000).


In general, the main impact of outsourcing is to gather new personnel and to reduce staffs work load. As mentioned in the literature, adapting outsourcing accounting functions is to work on core activity and the outmost parts of the project focus by others (Sofie Alriksson , 2008). There are many significant impact to an external organization when outsourcing accounting functions such as cost reduction, quality of work and access to innovation (Temi Koleowo , 2010). Obviously the main impact when outsourcing accounting function is the personnel related cost of an accounting firm such as recruitment, salaries and other cost synonyms with staff. According to Temi Koleowo (2010), it is believed that 30% of reduction in cost is applied when an organization outsource their business function. Other than that, quality of work also considered as a main impact. To create a prominent business and reputation, an organization must offer a quality of service to the clients. Exceptional services also has to be considered for the quality of service (Temi Koleowo , 2010). The use of an outsource service provider has the potential to impact primarily upon professional competence, due care and confidentiality.

A company's profitability and productivity can have a significant impact from the outcome of accounting task. The other impact of outsourcing accounting function is access to innovation. Currently, in order to maintain a competitive edge, accounting firms has to invest in advanced accounting systems and technique to outsource services and gain benefit from new technology developments (Temi Koleowo , 2010). According to Domberger (1998), transfer arrangement also may have an impact on employment. It is either within the company, on operating situation, on wages and the length of the agreement with new proprietor. In a further assessment led by Duncan and Groves.Rowan , 1997), outsourcing also has an impact on banks. Over 65 percent of banks analyzed shown that as a minimum of one form of outsourcing functions have been included. According to Jennings (1996), cashiering, insurance, taxes, systems and bankruptcy or foreclosures are the five most frequently utilized outsourcing functions. The impact of global rivalry and outsourcing has caused approximately certain controversial revolutions in world's economies (Yunus Kathawala et al., 2005).


Firm's stakeholder's made finance and accounting efficient as an important issue which is caused by the increase of number of scandals in the firm (Y Malini Reddy, 2008). Entitled to the issue, firms attain and authenticate a high level of discipline and transparency in their activities by demanding new standard and regulations such as Sarbanes-Oxley (Alan, 2004). Therefore, to find a substantial competitive advantages, only those firms with enhance finance and accounting organization standard and regulations could find it (Y Malini Reddy, 2008).


A company has direct impact by the way of saving when outsourcing accounting functions. Due to the perceived benefit, outsourcer bargaining power gets weak. Transaction per annum up by 30% and cost per transaction down by 25% which can be gain in reduction when outsourcing accounting processes to its clients (Y Malini Reddy, 2008). The impact can be solved if it is a part of their business strategy to outsource.


According to Richbell (2001); Sparrow (2000), the constantly major requirement by organization to discern from opponents within a variation of processes, as well as how to address at the same time both cost and service quality impact, have spectacularly exaggerated the form of jobs and upheld a reform in the approach work is designed. Job based compliance has now turns out to be a benchmark. Giant firm in the advanced and developed economies are progressively take over associate like relationship, limited term contracts and home based teleworking as fundamental justifiable communication with employees (Standen, Daniels, & Lamond , 1999). Nevertheless, individual also though out to benefit from the greater extent adjustable agreement. According to Tregaskis (1999), in 1998 there were 1.1 million people in the European Union, trained workers of almost 0.8% was employed as the agreement and in year (2000), the amount was estimates at 4.4 million people which mean 3.1% trained workers. For guarantee cost advantage and labor adaptability, organizations are progressively approved part-time, temporary, casual and fixed-term contractual agreement (Mishra, Spreitzer, & Mishra, 1998 ; Shelgren , 2000). The impacts on the employees are the major causes when outsourcing accounting functions.


Cautious approach has been taken by the firms where 70% of the organization had a negative experience with outsourcing projects (Y Malini Reddy, 2008). This may lead to a greater impact if it has not solved quickly and it can also lead the companies by pulling back the processes (Verma, 2005).


There are few potential factors to be considered which may impact the outsourcing decisions. Tibor Kremic , and Oya Icmeli Tukel and Walter O. Rom ,( 2006) discussed that there are four categories of factors which are the strategy, cost, function characteristics and environment. The first factors that need to be considered is the strategy factors. Strategy factors also have a category that has been identified, the first strategy factor is core competence, and second strategy factor is critical knowledge, followed by lack of internal human resources, impact on quality and lastly the flexibility. This are the main strategy factors that been identified (Tibor Kremic et al., 2006). According to authors, core competence attracts more attention and frequently linked to the outsourcing decision (Quinn , 1999 ; Drtina , 1994 ; Jenster and Pederswn , 2000 ; Quinn , 2000 ; Large , 1999 ; Lankford and Parsa , 1999 ; Kakabadse and Kakabadse , 2000(a) ; Prahalad and Hamel , 1990 ; Dekkers , 2000 ; Elliott and Torkko , 1996 ; Brandes et al., 1997 ; McIvor , 2000(a) ).

Core competencies in turn are utilized by core functions. An organization uses to sustain a competitive advantage by core competence. Quinn suggests that "intellectually-based service activities or systems that usually performs better than any other enterprise" are core (Quinn , 1999). It is said that in general, an organization that is less likely to be outsourced has a function that is more core and become as an obstacle to outsource. Second strategy factor is critical knowledge which is intended to describe some function in an organization that may not in-and-of themselves be core but the unique data or technology they generate and feed into other processes is critical. Overall, if a function provides critical knowledge it is less likely to be outsourced (Tibor Kremic et al., 2006).

Another strategy factor is lack of internal human resources. Mainly by lack of resources, public organizations will be impacted more than private-sector organizations. In hiring and termination practices public organization is more restricted to replace those who are retiring or quitting and this makes more workload for those remaining employees. The main issue for this factor will be access to the people with specialized skills in both public and private firms. In general, if there is a lack of internal human resources to perform it, a function is more likely to be outsourced (Green , 2000). The next strategy factor is impact on quality. Creating demand and establish reputation is based on the quality on an organization's service, therefore quality is a relevant factor and can be either a positive or a negative influence on outsourcing (Anderson , 1997).

The last strategy factor in this category is flexibility. Like quality, flexibility can be impacted positively or negatively by outsourcing. Sometimes loss of flexibility resulted when long contracts outsourced into a limited market (Antonucci et al., 1998 ; Bryce and Useem , 1998). According to the literature, to increase flexibility sometimes organizations consider outsourcing. The next factor category is cost. According to Meckbach , 1998 ; Hendry , 1995 ; Welch and Nayak (1992), organization's efforts to reduce cost has motivated most outsourcing accounting functions. It is assumed that to purchase the service, the current in house costs are higher the expected cost. Literature suggested that "the higher the internal cost to perform the function relative to the expected cost of purchasing the service, the more likely the function is to be outsourced". And the fact is many company outsource to reduce costs.

The third factor category is characteristics of the functions. Complexity and degree of integration is a characteristic of the function which is complexity refers to the difficulty of recognizing or understanding the variables and the interactions that surround a function. In general, the less of a candidate it is for outsourcing, the more complex a function is. Another function that influences the outsourcing decision is integration. It is defined as the degree the function is linked into other functions and systems within the organization. Literature suggests that function that is heavily integrated is less of a candidate to outsource (Prencipe , 1997 ; Paoli and Prencipe , 1999). The final category factor is environment which relates to the internal and external environment faced by an organization. Many organizations could not assume this function because it needs unique missions or specialized skills and only few outside suppliers possessing those skills. According to Antonucci et al., (1998), a function that requires skill is less likely to be outsourced because it is difficult to find externally.



Malaysia is seen as an attractive location for outsourcing contracts due to our strong infrastructure and our multilingual skills (IDC Malaysia , 2003) and also the culture in Malaysia. Many companies are encouraged to outsource their businesses and also to focus on their core business based on the current volatile global economy. The Central Bank of Malaysia (Bank Negara) realizes the benefit of outsourcing and start to encourage local banks to seek for an outsourcing partner. By seeking outsourcing partners the local banks can handle the non-critical functions of the businesses they were started to deal with. This helps the growth of the economy in our country (Ainin Sulaiman (2005). According to Kakabadse and Kakabadse (2002), the reason for outsourcing is the cost reduction shows in the literature on outsourcing. For many reasons, small and medium-sized enterprises (SME's) in Malaysia are outsourcing accounting functions increasingly more so than the large companies (Magiswary Dorasamy et al., (2010).

Based on a research conducted by Domberger (1998) ; Gilley , Rasheed and Al-Shammari (2006) ; Ang and Straub (1998), accordingly they hypothesizes that "There is a positive and significant relationship between firm size and the decision to outsource accounting functions". This can be determined that differences in firm size in Malaysia have impact on the decision to outsource accounting functions (Magiswary Dorasamy et al., 2010). Currently, Malaysia's aspiration in the outsourcing section is to focus more on high-value export orientated outsourcing activities. While Malaysia has been recognized as one of the preferred global destinations for outsourcing, it does face some challenges which is the visibility and talent scalability which is manageable by the government (News Straits Times, 2010).


India is one of the main countries in outsourcing accounting functions with overseas companies getting everything from their customer support, India has experienced explosive growth in outsourcing accounting functions. According to (Bhowmik , 2004) more than ten years ago, software industries started outsourcing in India. It can be generalized that its impact can be felt in different areas and spread over several countries. However, outsourcing services and institutions has the impact on the society.

Largely, the impacts of outsourcing on economy were discussed frequently. But however, the impact on the society also has been considered equally. Outsourced projects makes the people to know and help them to work in multinational corporations. Maintenance of infrastructure, building and by employing a large number of people, outsourcing industry has improve the indian society. India is slowly adapting to the change on several culture and traditional benefits. From previous reports, it is stated that from the twentieth century until just recently, outsourced call centers clear destination at that time was India (K. Tyler Marvin , 2011). To many foreign companies such as Dell Computers, American Express and many other companies, India is a call center in outsourcing industry (Abudallah Aldarrab , Sandeep Jagani and Tauseef Iqbal , 2006).

Foreign firms are willing to outsource in India because of highly quality level of talented Indians who can speak multilingual languages and especially English and as well as the telecommunication infrastructure in some parts of the country (Abdullah Aldarrab et al., 2006). This makes it an ideal choice for many companies to outsource their non-core competencies to foreign firms like India itself. Focusing more on reducing cost could be a great benefit to the outsourcing company in India and therefore, India has a leading edge to attract foreign companies to outsource with.


The main issues when outsourcing will be the communication problem (Filip Ekberg, 2008). The main problem of communication is that there is no visual perspective over the work (Sofie Alriksson, 2008; Jeff Atwood, 2008). According to (Jeff Atwood, 2008) the problem which the organization will face are the cancelation of the project without the knowledge of the client, deliver poor results or work has never delivered by the consultant who bid on the outsourcing project work. Solution for this issue is that the clients company must give detailed information to the outsourcing company and always keep track them (Filip Atwood, 2008). The other frequent issue is the culture problem. According to (Sofie Alrikssons, 2008), culture differences are also a main issue has to be stated. It is important that the hiring company to outsource has the knowledge and understanding about the culture of the other company. By knowing the culture, they might not face difficulties when communicating to each other.


The results of this study indicate that strategy, cost, function characteristics and environment are perceived as dominant impact in the decision to outsource accounting functions. Many forms involve when the term outsourcing used widespread (K. Tyler Marvin , 2011). It is also important to define what is implied when discussing about outsourcing. Organizations need to track record of their third-party providers and the source of the accounting functions that they are outsourcing so that they can evaluate risk levels if they aim to successfully outsource accounting functions. When business operations are less effectual a firm is more likely to outsource accounting functions in terms of resource use and less effectual in terms of meeting customer necessity (Magiswary Dorasamy et al., 2010).


This paper determines to provide an overall view of the impact of outsourcing accounting functions. According to Yunus Kathawala (2005), the impact of global outsourcing competition can brought some of the most conservative changes to accounting functions. Financial reporting and auditing are the main accounting functions outsourced. According to Reddy & Ramachandran (2008), accounting activity is commended with exact consent and agenda, the major responsibility of clients when outsourcing accounting functions is to assure confidentialness and surveillance of accounting data. Currently, the growth of accounting outsourcing will encourage more firms, to consider outsourcing accounting related functions. According to Magiswary Dorasamy et al., (2010), from this study an analytical improvement assemble by approaching past research conducted, improving the awareness of the organization to outsource accounting functions. Organizations are performing various outsourcing than ever before and are in critical requirement of information in a structured outline that will assist to recognize the impact related to outsourcing. According to Aoki & Dore (1996), convention of long-term cooperation, faith, information replaces and reducing the impact of competitive pressure on suppliers is built. From the literature there were worthy of investigation which a number of areas of concern were identified as being central to the impact of outsourcing accounting functions. Overall, result concludes that impact of outsourcing accounting function is important when outsourcing a certain functions.