In the latter half of 2002, finance and accounting outsourcing (FAO) took an unexpected turn. Prompted by several major corporate accounting scandals, American lawmakers passed the Sarbanes-Oxley Act of 2002, which imposed new rules regarding a company’s financial integrity and its public disclosure of auditing practices. The law affects US companies and any multinational company doing business in US that has to file SEC reports.
The law requires that senior management personally attest to the veracity of company accounts and prohibits consulting practices with conflicts of interest. That impacts the practice of outsourcing the internal audit function, especially if it is bundled with other F&A functions to one provider.
Understandably, this has made executives nervous. This personal liability puts new pressure on chief financial officers and makes their outsourcing decisions more complex. “The legislation put unprecedented visibility on internal accounting and financial processes and measures,” explains Dan Reiff, senior vice president of SourceNet Solutions, a College Station, Texas-based service provider.
How will the new law affect outsourcing decisions? Marc Schwarz, principal in Deloitte’s outsourcing practice, based in New York City, says Sarbanes-Oxley has added to the complexity of outsourcing decision-making. “Chief financial officers understand that as a result of Sarbanes-Oxley, they will still bear the responsibility for accounting, even if it’s outsourced.”
“Sarbanes-Oxley is good for outsourcing,” believes Michael Gantt, president and chief executive officer of Ephinay, an F&A service provider based in Charlotte, North Carolina with service centers in Phoenix, Arizona, and Delhi, India. “Outsourcing always works well when government introduces new regulations because management will look for someone to help it keep up with those changes,” he says.
Gantt says the heart of Sarbanes-Oxley “requires companies to be more circumspect in their financial affairs.” He notes the law’s requirements “are so time-consuming” that it will lead companies to delegate the more routine and repetitive accounting functions to an F&A outsourcer for whom accounting is a core competency. “To paraphrase Jack Welch former CEO of GE Corp., accounting is our front office, not our back office,” says Gantt.
“This law is not a reason to delay or shy away from outsourcing,” agrees Tom Eubanks, global leader for Business Transformational Outsourcing for Finance and Accounting at IBM, the Armonk, New York service provider. He points out outsourcing requires strict service level agreements (SLA) and codified procedures, which adds a “framework of control and can assist with documentation requirements.”
Outsourcing can improve the visibility of controls and demonstrate companies are adhering to the required practices, says Anoop Sagoo, a London-based partner with Accenture Finance Solutions, a BPO supplier headquartered in New York City. Buyers now need “very clear documentation of their processes and procedures and a framework for complying with the law.” He says outsourcing providers “will have to have absolute clarity on what they are doing and how they are doing it.”
Michel Janssen, president, Supplier Solutions for Everest Group, says his discussions with buyers finds them split along the familiar 80/20 divide. He says 20 percent feel they don’t know enough about the impact of the law to make an informed decision and have decided to postpone their outsourcing decision for that reason. The other 80 percent, he says, feel outsourcing this non-core process would help them comply with the law. Having an independent third party handle financial transactions makes fraud more difficult, he points out. In addition, outsourcing’s increased documentation makes compliance easier.
Outsourcing also facilitates process change for small and mid-size companies with few resources to take on the added requirements of the new regulations.
Editor’s note: The Outsourcing Journal will update you on how outsourcing is faring under Sarbanes-Oxley in July.