Do Companies Lose or Improve Controls When They Outsource Financial Processes? | Article

An Accenture/Economist Study Finds Out

financial controlWhen Congress first passed the Sarbanes-Oxley Act, some companies worried that outsourcing parts of their finance and accounting (F&A) processes might lead to a loss of control. That could lead to breaches in compliance and violation of the law, which includes jail time for transgressors.

Did this happen?

No, according to a new Accenture Finance Solutions/Economist Intelligence Unit study. Instead, the researchers discovered outsourcing and effective governance can co-exist. Forty-three percent of the respondents who had already outsourced a finance process thought outsourcing raised the quality of governance and compliance at their organizations.

“The perception in the market is that outsourcing a financial process will have a negative impact on controls,” says Barbara Duganier, Vice President of Energy Services, Accenture Finance Solutions. The study found 51 percent of the CEOs and CFOs interviewed felt today’s greater emphasis on better governance was “the most significant barrier that stands in the way of a decision to outsource.”

Why Outsourcing Improves Compliance

“Compared to processes that have been retained in-house or ones that have simply evolved over time, outsourced processes are better defined and documented, leading to greater clarity,” says the study, which appeared in February, 2005.

According to the report, 73 percent of the respondents who have already outsourced agreed that outsourcing increases the rigor of business processes simply because they are better documented. More than half of them thought outsourcing made it easier to stay on top of frequent tax and accounting rule changes. Many liked “the increased level of information transparency.”

Duganier says outsourcing improves day-to-day operations because suppliers use standardized tools and document processes at the desk level. In some cases there were no documented desk level processes when the supplier arrived.

The study points out improved control “doesn’t happen by accident.” It happens when both parties “agree ahead of time on key service levels and establish clear lines of accountability.” Another benefit: outsourcing escalates key issues so the two parties can solve them.

In fact, 82 percent of the participants felt the most important success factor was the establishment of service level agreements (SLA). Assigning clear lines of accountability was almost as important; 73 percent said it was critical to outsourcing success. More than half the respondents believe there had to be systematic status reporting, continuous evolution of the control framework, and real penalties for failure to meet SLAs to ensure governance was up to par. The bottom line: outsourcing F&A leads to greater, not less control.

How Outsourcing Improves Legislative Compliance

The Accenture executive adds companies received an added benefit from outsourcing because it was an efficient way for them to meet the demands imposed by Sarbanes-Oxley. “With deadlines rapidly approaching, we helped clients meet their objectives because they just didn’t have the resources,” she says. Also, the suppliers’ experts were available to help companies with compliance; many didn’t have the resources in-house to handle the work.

Some Worries

However, nearly two-thirds of the respondents were concerned about the quality of the financial reporting the supplier provided to the buyer’s management team. More than 60 percent expressed concern about a supplier’s knowledge of their unique financial requirements. (Duganier says suppliers who have several clients in one industry make it their business to stay abreast of the regulatory changes in that vertical.) Just as many were worried about the supplier’s ability to prevent fraud. And 50 percent had issues relating to compliance with relevant tax laws.

In the end, Sarbanes-Oxley may be the best thing that happened to F&A service providers.

How the study was done: The Economist’s Intelligence Unit conducted the studies, talking to 203 CEOs and CFOs from across the globe. Forty-two percent were from Western Europe, 23 percent for North America, 16 percent from Asia-Pacific; 8 percent from Eastern Europe; 6 percent from Africa or the Middle East; and 5 percent from Latin America. More than half the companies surveyed had annual revenues of less than $500 million; 17 percent had annual revenues of more than $8 billion. The participants filled out a questionnaire online and then answered questions over the phone in June 2004.

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