Outsourcing accounting services brings various benefits, the biggest of which is reducing fraud and costs by up to 60%.
In today’s world, where technology and business have made everyday life more interconnected and interdependent, outsourcing has become a common trend. It has become so prevalent that in 2022, many companies decided to outsource their services worth more than $700 billion. Of these, accounting outsourcing has increased significantly.
This growth is due to companies looking for strategically efficient and budget-friendly ways to manage their financial transactions. But like any business, the benefits are intertwined with specific inherent challenges (or opportunities), and data security is a critical concern.
In the following discussion, we’ll dive into the common risks associated with accounting outsourcing:
What are the common risks you may encounter when outsourcing accounting?
- Breaching confidentiality
A key problem in accounting outsourcing is the risk of unauthorized persons accessing sensitive financial information. Whether it is customer information, critical financial statements, or even basic payroll information, a breach of that confidentiality can have severe consequences.
The consequences are not limited to the organization itself; it expands its reach to influence customers as well. This scenario is where the stakes are high, and building trust becomes vital.
When it comes to hiring a third party to perform any task – the need to disclose information opens a risk. The possibility of risk theft and fraud in accounting is high. This is not meant to sound alarmist but rather to highlight a genuine concern.
You see, by delegating financial data to third parties, there is a chance – no matter how small – that cunning individuals can exploit weaknesses in the transmission, storage, or processing of the data.
This can lead to them breaking into your confidential information, viewing your financial status, or committing the dreaded identity theft. This is a serious consideration that underlines the need for vigilance and strong safeguards.
- Compliance and regulatory issues
Ethical practices are based on compliance. This is known for its daunting landscape of rules, regulations, and industry benchmarks that organizations must steer when processing financial data. Outsourcing accounting tasks may seem complex to solve according to their requirements.
To avoid mistakes, you must make sure that every “i” is dotted and “t” crossed. Because, let’s face it, a stumble in this department can mean more than just a hiccup — it can land you in legal hot water and even result in hefty financial penalties.
Attention to detail and a clear road map through the compliance maze are necessary here.
Ways to Mitigate Risks when Outsourcing Accounting
- Due diligence
The ultimate strategy for mitigating these risks is based on some good old-fashioned research. While all of these risks are extremely debilitating for any business, they are also easy to avoid if entrepreneurs simply research the outsourced accounting services they are partnering with. A good rule of thumb when choosing the right outsourced accounting partners is to review and verify their client history thoroughly.
All outsourced accounting firms worth their salt have a decent track record of past or current clients who want to get in touch and ask about their experiences with the service.
In addition, you can ask such companies for proof of legality, such as company registration and certification. By doing their due diligence, you should separate the wheat from the chaff. Entrepreneurs should be left with a small but very valuable list of potential outsourced accounting services that they can talk to and negotiate with before the deal.
With such research and thorough investigation, companies can entirely evade the risk of becoming a victim of fraudulent outsourced accounting firms.
- Transparent communication
Communication is the key to a successful outsourcing relationship. Clearly state your expectations and requirements to the outsourcing company and make sure they understand your needs. Create a communication plan and regular check-ins to ensure work is progressing.
In the event of radio silence due to force majeure, investigate and ensure that the infrastructure is in place to avoid possible interruptions of communication and to ensure that all work done is tracked and recorded and that a crime cannot be committed without traceability.
- Explain everything in writing
Once the negotiations are done, and everything is organized, it’s time to write it. NEVER enter into a business deal without putting all the terms discussed into a legally binding contract so that you are liable for breach of trust.
Contracts guarantee that there is no shady business behind the scenes, protecting your business from data theft, fraud, and other malicious actors.
- Data encryption and secure transmission
Encryption is not unlike a superhero protecting valuable financial information. Think of it as a secret code that only the intended recipient can decipher. When you entrust your data to outsourcing partners, you give them something of value, and encryption is a safe deposit box.
Here’s the lesson: It’s to your advantage if your partners use state-of-the-art encryption techniques, like the technical equivalent of Fort Knox. Whether it’s sending files or ensuring security, insist on strong methods like Secure File Transfer Protocol (SFTP) and Virtual Private Networks (VPN). They act as armored vehicles for your data, arriving at their destination without a hint of vulnerability. It should be emphasized that the journey does not end when the information is lost.
Data in databases or storage also needs security. Once it is stored encrypted, what remains are shadowy characters seeking to access private information through an impenetrable safe enriched with mysteries they cannot solve. Confidentiality and Nondisclosure Agreements
- Confidentiality and nondisclosure agreements (NDAs)
These are an integral part of outsourcing. NDAs help protect sensitive information from unauthorized disclosure by preventing the vendor and its employees from sharing or exploiting confidential information. Defining the scope, duration, and consequences of an NDA violation can help prevent potential data breaches.
Outsourcing accounting services brings various benefits, the biggest of which is reducing fraud and costs by up to 60%. In addition, it relieves the business owner / CEO from being limited to maintaining or building a scalable accounting department. They can diversify and focus on various other key roles that require more attention and expertise. As outsourcing firms are focusing more towards data security and confidentiality, businesses shifting toward this trend. It seems that outsourcing accounting will not going to slowdown anytime soon because of its impeccable benefits.