risk and risk management

Outsourced Accounting: Risks and Risk Management

Entrepreneurs beware! While outsourced accounting may seem like the ultimate solution to all your accounting woes, it is not without its share of risks and dangers. 

Outsourced accounting has become one of the most coveted alternatives to an in-house accountant in the US. According to a 2019 report by Clutch, 37% of small businesses in the US outsourced at least one business function, with accounting topping the list of most outsourced business functions. 

These are pre-covid numbers and, with the proven success of the remote work model during the pandemic, outsourced accounting has since only increased in popularity. However, entrepreneurs need to realize that while outsourced accounting does sound like a dream come true on paper, it may not be all that it was cracked up to be in their minds. 

The risks of outsourced accounting are not so obvious these days, with almost every business outsourcing to some extent and reaping great returns on investment. Nevertheless, those risks are still there. In fact, the growing popularity of outsourced accounting coupled with the spike in outsourced accounting service providers has only served to exacerbate these risks. 

This article lays out some of the major risks of outsourced accounting, and helpful risk mitigation strategies to keep your business’ finances safe and secure. Entrepreneurs skeptical of outsourced accounting, or just inquisitive about the idea will surely find their concerns addressed in this article and any myths about outsourcing dispelled. 

The Risks of Outsourced Accounting

risk of outsourced accounting

Compromised Sensitive Financial Data

By far the biggest risk of outsourced accounting is that you are handing your extremely sensitive business and financial data over to someone on the other side of the world. Entrepreneurs would rightfully be immensely skeptical of ever handing over such information, especially to offshore third parties whom they may not even be able to hold liable for any data misuse. 

The accounting function does not just hold data on your business’ finances either, but also on your customer base. Personal information like credit card numbers and expiration dates, names, addresses, and so on are often collected and saved by businesses. In fact, a 2021 survey by Statista found that 71% of businesses in the US collect their customer’s data in some fashion. 

Not just customers, but also information on the business vendors and suppliers is also accessible to the accounting function in the form of invoices and the like. This highly sensitive data is not something that can be handed over to just anyone claiming they will take care of your business’ accounting for you. 

thanks to the booming success of outsourced accounting, fraudulent actors and scammers are keenly aware that there is a great demand for outsourced accounting and, will be on the prowl to pitch a too-good-to-be-true offer to unsuspecting entrepreneurs, only to hijack their data and sell it, or worse, hold it ransom. This is why the biggest risk of outsourced accounting is the potential for your data to be compromised by malicious actors.

Radio Silence

Another major risk of outsourced accounting operations is the communications gap. There is no possible way for entrepreneurs to consistently oversee that their outsourced accounting work is being performed as per their instructions. While frequent monitoring of the accounting personnel may suffice, there is still a degree of separation between the accountant and the entrepreneur, which may step on the toes of entrepreneurs that like to have things under total control and oversight. 

In the case of a Force Majeure halting your outsourced accounting operations, there is no way for you to reestablish communication and keep the business running smoothly. For example, suppose you outsource your accounting to a below-average outsourced accounting firm that does not have the infrastructure to keep steady communications up at all times. In that case, there is an immense risk of total radio silence from your accountant, sometimes even for days if a natural disaster or other large-scale event severed communications. 

With many outsourced accounting firms providing accounting talent from developing countries, these risks are not negligible and, are definitely a concern that entrepreneurs must have addressed by prospective outsourced accounting services before they retain them. 

Compliance with Laws and Regulations

While any competent outsourced accounting service follows the Generally Accepted Accounting Principles (GAAP) and other international standards for accounting, there are still legal and regulatory concerns that need to be addressed. 

The compliance issue is particularly a problem for the US, thanks to every state having different laws and regulations. Businesses are obligated to abide by their state’s laws and regulations. As they differ from state to state, there is a very high likelihood of offshore outsourced accountants not being well-versed in any particular state’s accounting regulations. This is a massive risk to the business, as failure to comply can result in heavy fines and even jail time if there is a breach of tax laws. 

While businesses can recover from data breaches and occasional radio silence, compliance issues can snowball into a business being blacklisted and shut down by the government with no chance of recovery. Such a risk is hardly worth taking, even with all the potential cost savings that can come out of it.

Mitigating the Risks of Outsourced Accounting

Research and Due Diligence

The ultimate strategy for mitigating these risks boils down to some good old-fashioned research. While all of these risks are immensely debilitating for any business, they are also easily avoidable if entrepreneurs simply research the outsourced accounting services they are considering partnering up with.

A good rule of thumb when shortlisting potential outsourced accounting partners is to review and verify their client history thoroughly. Any outsourced accounting firm worth its salt will have a decent history of past or current clients who are open for you to contact and inquire about their experience with said service. 

On top of this, you can ask such firms for proof of legitimacy, such as a business registration and certificate. 

By doing the due diligence required and thoroughly separating the wheat from the chaff, entrepreneurs should be left with a small yet highly valuable list of prospective outsourced accounting services, which can further be interviewed and negotiated with before any deal is struck. Expertise Accelerated publication titled “5 Question to Ask Accounting Firms! Before Hiring Them” provides entrepreneurs with a solid opening salvo of questions to grill these accounting firms on, before diving into more business-specific questions. 

Through such research and rigorous investigation, businesses can completely negate the risk of falling prey to fraudulent outsourced accounting services and be satisfied with the performance of potential partners based on past client experiences and reviews. 

Clear Communication

Communication is key to any successful outsourcing relationship. Clearly define your expectations and requirements to the outsourcing company and ensure they understand your needs. Establish a communication plan and regular check-ins to ensure the work is on track.

In the case of a Force Majeure-induced radio silence, inquire about and ensure that there is infrastructure present to prevent any lapses in communication, and ensure that all of the work done is tracked and recorded, and that no foul play can happen without being traceable. 

Get Everything Down in Writing

Once negotiations are done and everything is sorted, it’s time to write it down. NEVER make a business deal without drafting all discussed terms in a legally binding contract, so you can hold them accountable in case of any breach of trust. 

Contracts ensure no shady business happening behind the scenes, thereby protecting your business from data theft, fraud, and other malicious actors. 

Expertise Accelerated as Your Outsourced Accounting Partner

With all that said, it would be remiss of us if we didn’t recommend Expertise Accelerated’s outsourced accounting operations for all your accounting needs. 

EA is a highly regarded outsourced accounting services provider in the US, led by Mr. Haroon Jafree (CPA), a renowned veteran in the US accounting sphere and the US CPG industry. Haroon possesses invaluable insight into the US accounting landscape and is keenly aware of the needs of US businesses. EA’s unique staff augmentation model of outsourcing is Haroon’s answer to the risks of outsourced accounting. 

By leveraging EA’s accounting staff augmentation services, US small businesses can hire and integrate an offshore accounting professional directly into their team, with no pesky middleman inhibiting communication. Essentially, think of EA’s offshore remote accountants to be of the same quality as an in-house accountant working remotely. Entrepreneurs can directly talk to their accountant, unimpeded by any communication lapses thanks to EA’s provided infrastructure facilitating the connection. 

EA is simply the bridge builder linking the US to the global accounting talent pool, allowing US businesses to harness the power of offshore accounting professionals trained and tailored to suit their work requirements, all under the watchful eye of Mr. Haroon and the upper echelon of EA’s staff. 

Entrepreneurs can book a free consultation with Mr. Haroon today and, if nothing else, get the chance to learn about outsourced accounting from an expert on the subject.