The reaction of weak management to weak operations is often weak accounting. - Warren Buffett
Why do companies outsource accounting? In a nutshell, it saves time and mitigates risk. In a world of ever-changing tax legislation, growing payment methods and an increasingly complex regulatory environment, it’s hard to place a dollar value on the opportunity potential related to saving time and reducing risk, especially for the CFO.
Two Main Reasons To Outsource Accounting: Risk Mitigation and Lower Costs
Section 304 of the Sarbanes-Oxley Act requires CEOs and CFOs to repay company bonuses and incentive- or equity-based compensation if an accounting restatement is due to negligence or misconduct. It is important to note that misconduct isn’t always intentional and can include negligence. Negligence includes inaccurate billing, tax errors or fraud, deviating from GAAP, failing to follow reasonable standards, failure to detect errors or fraud, and keeping poor records. The list is rather long.
In 2016, Robert Half and Financial Executives Research Foundation (FERF) published their seventh annual bench-marking report on the accounting and finance function. The report summarizes the responses of more than 1,700 financial leaders at both public and private organizations in the Unites States and Canada. Most respondents had between 100 to 500 active general ledger accounts. The report found that 52 percent reconcile accounts manually. What does this mean in terms of risk and costs? First, it exposes your organization to errors which greatly increases risk. Second, a high number of manual reconciliations is indicative of a highly labor-intensive, in-house accounting function. Is it any wonder that the same report also found that the two most commonly outsourced functions within accounting are tax and payroll? These are also the most heavily regulated functions within accounting.
Sometimes the event that triggers a search for outsourced accounting services is broader and outside of the CFO’s span of control, such as the modernization of IT systems or the implementation of a new quality control system. Both require the buy-in of cross-functional teams in support and implementation. Both require a new common language and the adoption of new processes. Both are made easier when accounting is a centralized function. In this way, outsourced accounting contacts take on a consultative role. They also have best practices to share across the organization, from IT to operations.
Misconceptions About Outsourcing Accounting
You have every incentive to outsource your accounting function now that you know how much it can help your organization to reduce business risk and save money, but something is holding you back. Let’s discuss some of the common misconceptions of outsourcing.
Fear Of Losing Control
The most common issue is a fear of losing control. It’s not uncommon for people to have the same fear before a surgery, but would you conduct your own surgery? At some point, the fear or pain of being sick supersedes the fear of being out of control. Even the specialist needs a specialist. Surgeons don't conduct their own surgery and judges don't represent themselves in court. The need for a specialist is a clear and serious matter when your health or freedom is concerned. Outsourcing accounting is like bringing in a specialist that can help to improve the efficiency of one of the most vital and connected support functions within your organization.
Now you’re ready to outsource accounting, but you have trust issues. This is normal and why it’s so important to vet your specialist or outsourcing vendor with IT and operational staff. The best way to allay concerns is to do your due diligence on the vendor. You want an outsourced accounting service that:
- segregates accounting duties between their staff and your staff
- creates a system of checks and balances between their staff and your staff
- can confirm accounting experience in outsourced accounting, not just the field of accounting
- can provide proof of insurance and certification (legitimate outsourcing accounting firms maintain insurance for theft and malpractice)
- allows you to talk to real customers in the same industry
The Cost Is Too High
Congratulations, you found the best outsource accounting vendor, but you’re concerned about the cost. In reality, there will likely be cost savings from the synergies and efficiencies created from hiring an outsourced accounting vendor. These savings come from reduced accounting staff, reduced recruiting efforts, reduced errors through automation, and best practices through a centralized accounting function. You also know that you’re taking advantage of all the tax benefits available to businesses in your industry. Finally, you have the peace of mind knowing that there’s a system of checks and balances in place to help mitigate risk. Suddenly the costs seem extremely reasonable.
Accounting is one of the most vital functions in your organization. It has both a financial and legal component. Failure to submit an important legal tax document or calculating an inflated net income can get your leadership staff in trouble with investors and the government. Outsourced accounting can mitigate this risk while reducing costs. If you can get over your fears and misconceptions, there's a world of advantage waiting for your business on the other side of the decision.