Outsourcing, offshoring, nearshoring: what to do? Whether you outsource locally or globally, you're still responsible for client privacy.

EXECUTIVE SUMMARY

* FANS OF OFFSHORE OUTSOURCING SAY it lowers labor costs; it's efficient; and it lets firms accept new work during periods of peak demand.

* SOME LONG-TERM CONCERNS CPAs VOICE ARE: How will outsourcing affect the traditional CPA career path? How will it affect U.S. employees' training? How will accountants who do not perform the tasks associated with entry-level competencies develop true understanding of the services they provide?

* FIRMS MUST DISCLOSE THEIR USE of third-party vendors to clients whether the outsource provider is located within U.S. borders or in a foreign country.

* PROPONENTS SAY THE PROCESS IS MORE efficient, though firms lose the efficiency that develops when the same in-house staff members service a client from year to year.

* OUTSOURCERS OFTEN USE FIREWALLS that are more secure than those used by many U.S. firms. But focus-group participants said they were uneasy about having their personal information sent 7,000 miles away.

* BEFORE CONTRACTING WITH A PROVIDER, ask how it screens and monitors employees, how a system breach will be handled, where disputes will be resolved and what the firm's liability insurance covers. If there's a problem, liability will rest with the U.S. firm.

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New ideas and services can change a business culture with astonishing speed. A generation ago few CPA firms offered business valuation, litigation support or retirement planning, yet those services are mainstream today. Equally common are formerly cutting-edge ideas such as flextime, cross-selling and firm consolidation. Now, as technology makes it easy to move data great distances, another innovation has its foot in the door. It's tax-preparation and financial-services outsourcing--called offshoring when the work is done overseas and nearshoring if it's done in Canada or Mexico. This article describes some pros and cons of business process outsourcing (BPO)--with the emphasis on work done out of the country-and suggests how interested firms of all sizes can research whether it's right for them.

WHAT IS TAX OUTSOURCING?

The tax-preparation outsourcing process is simple. A CPA firm staff member scans client documents, including W-2s, 1099s and K-1s, into a .pdffile saved in the network, then sends along the prior-year tax file to the outsource provider. The provider, in or outside the United States, then uploads all scanned documents and relevant tax files to a U.S. data center. Outsource workers access the documents via a Web browser, organize them into a Web-based file and prepare the returns. If the provider happens to be in India, chartered accountants using the U.S. firm's preferred tax software follow the same procedures and prepare the returns. Then the firm "picks up" the returns electronically and reviews and corrects them as needed.

WHAT ARE THE GOOD POINTS?

Proponents of tax outsourcing cite these virtues:

It's efficient. Outsourcing provides seasonal labor without the overhead of permanent hires, which is particularly helpful to firms dealing with a staff shortage. Firms with enough people to handle busy season but that worry about a glut of unused hours the rest of the year may see a benefit, too. Indian providers, who are at work while U.S. workers are sleeping, may offer two- to three-day turnarounds during "crunch" time, quicker than most firms can deliver internally.

Fred Shapss, CPA, partner at Rosen, Seymour, Shapss, Martin (RSSM) & Co., New York, says his firm has found tax offshoring helps relieve busy season overload. The firm outsourced about 150 of its 2003 individual returns to India and upped that number to about 600 returns (out of about 4,000) for 2004. It's a straightforward operation with "no complexities" he says. "We get a 48-hour turnaround. But--like anything else--you have to monitor and manage the process."

It lets firms handle more work. Many firms are selective about accepting new work during busy season, and most have had to turn away profitable clients at times. An outsourcing arrangement can accommodate new engagements that come up during periods of peak demand. One firm outsources new clients' returns while preparing core clients' returns internally.

It usually offers lower labor costs. Fees vary, but a firm generally can buy a completed tax return ready for review for $75 to $150. Add to that the firm's internal processing costs of downloading, reviewing, correcting and printing the returns for assembly and delivery. One firm reports that work done offshore costs less than the $600 to $700 it takes to internally produce a return that bills for about $1,000.

CAUSES OF CONCERN

There always are unintended consequences to modifying business processes, so firms should consider the risks, says Joseph Wolfe, who oversees accountants' professional liability at national insurer CNA. BPO has a few issues to consider.

Who is responsible for the work? AICPA ethics rules say members are responsible for all work outsourced to a third party, and CPAs must inform the client, preferably in writing, before disclosing confidential client information to an outsource provider or independent contractor. This year RSSM sent a letter disclosing its offshoring policy with its organizer and got only one comment about it, Shapss says.

Is client information secure? Respondents to the AICPA's top technologies survey for the third consecutive year have cited security of client data as their no. 1 concern. Some members fear they cannot guarantee confidentiality when work is handled by distant third-party providers. AICPA members must enter into contractual agreements with outsource providers to maintain and assure the confidentiality of clients' information. (For more information go to www.aicpa.org/download/ethics/2004_1028_outsourcing.pdf.)

Will it affect the profession? Other questions that CPAs have are

* In what ways will outsourcing affect the traditional CPA career path?

* How will it change U.S. employees' training?

* Will accountants who don't perform the tasks associated with entry-level competencies develop true understanding of the services they provide to clients?

Preparing individual income tax returns constitutes some of the best on-the-job career training firms can give. The traditional up-or-out system has provided a continual flow of CPAs ready to become partners and of experienced practitioners into industry. Partners whose foundation as tax preparers readied them to move up wonder how young employees will build their base knowledge and whether they will be able to review tax returns effectively if they themselves don't prepare them. Michael Cohen, CPA and partner in charge of J.H. Cohn's Roseland, N.J., office, agrees that training will be difficult. "How can you train seasoned tax professionals unless they do the work early in their career?" he says.

Firms that rely heavily on outsourcing will find other ways to groom staff members, counters Mark Albrecht, CPA, developer of Xpitax outsource software (see "Choose an Outsource Provider," page 60). The 28-year veteran tax partner at KAF of Braintree, Mass., says his 50-person firm reserves its most complex jobs for less-experienced staff members as "training homework."

Is it politically acceptable? The wrenching events of recent years have intensified patriotism throughout the United States and many U.S. workers have lost jobs to cheaper third-world labor. Some CPAs think clients may view offshoring as one more nearsighted approach that needlessly diminishes the U.S. job market.

Saltz, Shamis & Goldfarb (SS&G, Ohio and Kentucky) conducted focus groups to gauge clients' and partners' comfort with offshore outsourcing. The feedback was mixed: Some participants had no problem with it, but other clients and partners were averse. Only a few clients said they would pull their work.

Cohen's 95-partner regional firm outsourced a few hundred tax returns to India in 2003 and 2004 but stopped because they didn't see it as terribly efficient. Clients who were aware of it weren't happy about it, either. "No matter how secure the process is," Cohen says, "you can't convince clients it's foolproof."

Is it more efficient? Proponents say the time-zone factor makes offshore tax work more efficient. A firm's process stays the same, however: CPAs still spend time with clients and examine and organize documents to obtain essential information. Staff still input client data. The firm monitors the progress of returns as providers assemble them and perform calculations, and it still reviews the completed return. To make corrections, the firm may send the return back or fix it internally. In either case it will recheck for accuracy and finish up the same way it handles in-house work.

"It's not very different from hiring temps," Shapss says, "but it's better for us. We found that temps sometimes got bogged down with their own work as April 15 neared. You also don't have to worry about sick days or snow days."

Firms say the process is not cost-efficient for returns that can be completed in one or two hours, but yields savings on those that take longer. But some say partners who manage and monitor the outsource process may find the value of their time makes offshoring more expensive than doing the job in-house.

The providers J.H. Cohn used prepared federal returns with little difficulty, but when it came to handling state tax returns (because of different state rules), efficiencies became significantly less, and offshoring didn't save the firm much money. "I suppose we could have made it cost-effective by firing 20 people, but--patriotism aside--that didn't seem like a sensible move," Cohen says. "To outsource to another country we needed a very good reason. And we didn't see one."

Is quality control fragmented? Some firms are concerned about losing the efficiency that develops when the same in-house staff members service a client from year to year or about BPO employees' level of training. Offshore firms responded by stating they hire only chartered accountants with education quite similar to CPA training.

Even when BPO workers have the best credentials and work-product review process, though, the U.S. firm must check returns carefully--and it will catch material preparation errors. If the firm finds errors but chooses to correct them in-house because of time constraints, the outsource firm may continue to repeat them. Some that outsource say communicating errors to the provider right away helps workers learn and saves time despite the inconvenience.

Is it secure? A range of reliable sources say privacy is not an issue because outsourcers' firewalls are more secure than those of many U.S. firms. Reasonable or not, however, clients who attended focus groups on this topic said they were uneasy about having personal information, including their Social Security and bank account numbers, displayed electronically 7,000 miles away. Outsource firms have responded to identity-theft potential by making it impossible for BPO workers to download, print, scan or copy information. Still, they can't prevent employees from writing down critical information.

Before contracting with a provider, find out

* How it screens and monitors employees.

* What regulations apply if a system breach occurs.

* Where disputes over vendor errors get resolved.

* What your liability insurance covers if something happens. (If your insurance covers accountants but third-party vendor employees are not accountants, there may be a problem, for example.)

Can you depend on an organization beyond your control? In the past a firm accepted engagements its staff could handle in a quality way. The equation changes when a subcontractor is on another continent. Some technology lets the firm and the BPO communicate directly, giving the firm a degree of control. But communicating through a tax software provider occasionally overloads network capacity, leading to delays. Research the provider's system capability and look for the most seamless interface.

Most firms view outsourcing as an alternative to hiring seasonal staff. In the thick of tax season, however, the outsource firm also may overcommit and be unable to deliver a timely product. At that point, when it's too late to hire additional in-house help, internal staff will have to pick up the slack. That can affect delivery and damage your reputation.

Will clients demand lower prices--or fire their CPAs? Once clients find out their CPA firms have significantly lowered costs by sending their tax returns overseas, will they demand lower prices and eventually drive down market pricing for tax work? Several SS&G clients already have inquired. Firms already face fee pressure from individual tax-preparation software, and outsourcing may create an expectation that ultimately devalues the market for individual income tax preparation. Wolfe points out an extreme, if unlikely, possibility: "If CPAs outsource, how long is it before clients ask, 'What's the difference if a CPA does this work?' And there goes the profession."

Is Offshoring a good thing?

No: A Cornell University/University of Massachusetts-Amherst study estimated that a total of 406,000 jobs left the United States in 2004, about twice the amount offshored in 2002.

Yes: Overall, we bring in 510,000 jobs through inshoring (foreign companies moving production to the United States) but lose only about 400,000 from outsourcing, said a 2004 Public Policy Institute of California study.

Maybe: Many of the jobs at risk of offshoring, in particular business and financial operations occupations, have started to show gains recently in the United States.

Sources: "Study Shows Outsourcing Statistics Underestimated," The Cornell Daily Sun, October 26, 2004; http://www.qcknightnews.com/ news/2004/10/19/0pinion/The-Myth.Of.The.Lost.Jobs-774184.shtml; Public Policy Institute of California study, 2004.

PRACTICAL TIPS

Before you outsource find out

* How outsourcers screen and monitor employees.

* What regulations apply if a system breach occurs.

* Where and how disputes will be resolved.

* Whether your liability insurance covers outsourcing.

Choose an Outsource Provider

There are hundreds of sources of information about business process outsourcing available online including suppliers, industry bodies, governments, researchers, individuals and consultancy firms offering a wealth of facts, figures and details. Before picking a vendor consider

* Financial issues: Identify likely costs and potential savings.

* Security: How will an outsource company provide data protection?

* Compliance and regulation: Will the arrangement satisfy AICPA standards?

* Systems and communications: What communications hardware, software and licensing are required?

* Client preferences: Who will be affected and how will they react?

* In-house staff: How will your employees react? Will it be disruptive?

* Process: What new processes, documentation, dependencies, training and priorities will it require?

Tax-preparation software

Note: Information about technology products changes quickly, so when researching any product or service, talk to vendors and users to determine what is suitable for both your firm and your clients. The following companies provide BPO tax-preparation software.

* CCH Outsource (CCH Inc.) 2700 Lake Cook Road Riverwoods, IL 60015 Phone: [phone]

* MphasiS 444 Park Avenue South, Suite 503 New York, NY 10016 Phone: [phone] Fax: [phone]

* OPI Global 104 West 40th Street, 20th Floor New York, NY 10018 Phone: [phone] Fax: [phone]

* SurePrep LLC 450 Newport Center Drive, Suite 330 Newport Beach, CA 92660 Phone: [phone]

* Xpitax LLC 10 Forbes Road West Braintree, MA 02184 Phone: [phone] Fax: [phone]

GARY S. SHAMIS, CPA, MAcc, is managing partner of Saltz, Shamis & Goldfarb (SS&G) Financial Services in Cleveland, Ohio. His e-mail address is [e-mail]. M. CATHRYN GREEN, CPA, MAcc, is an associate director in SS&G's tax practice. SUSAN M. SORENSEN, CPA, PhD, has 30 years of public accounting experience and is an assistant professor of taxation at the University of Houston--Clear Lake, Texas. DONALD L. KYLE, CPA, PhD, is a professor of managerial accounting at the University of Houston--Clear Lake. Their e-mail addresses are, respectively, [e-mail] and [e-mail].