Outsourcing complex, professional tasks

One of the questions that CPAs ask frequently is “My clients pay me for my professional expertise, how can I outsource that to some clerk in India?”

The answer is that while the CPAs work needs professional skills, not every part needs equal skills. Let us take the bread and butter of CPA practice – income tax.

An income tax practice provides the following services:

1.     Strategic tax planning and counseling, such as entity choice.

2.     Projections of taxable income and preparation of estimated taxes.

3.     Preparation of income tax return.

In every case, if we segment the work into its component parts, we find that there are areas where a less experienced person can do the job just as well. Let us look at the preparation of tax returns.

Here is how one of our clients analyzed the process of doing the job in-house.

Step	Description	Time taken in minutes
1	Clerical staff time copying files	6
2	Time on data management, indexing the documents, preparing control totals etc.	57
3	Time on data input	52
4	Time on review by the preparer	16
5	Review time by partner	18
	Total time in minutes	149

 

Clearly items 1, 2, and 3 can be done by a non-CPA. Steps 2 and 3 account for 109 minutes of the 149 minutes or 73%.

This 73% can be efficiently outsourced. It is very economical since the fee for tax return preparation by the outsourcer usually approximates 15-20% of the fees the CPA charges the client.

The client gets the same valuable service from his CPA. In fact by outsourcing the CPA has now freed up the time to devote to less obvious areas where the CPA’s expertise can add real value

One can go one step further. Let us take the case of a really complex tax return. The truth is that much of the data organization and data input work can be outsourced.

Consider a much more complex tax return that we prepared for the same client.

On this project the CPA’s client did not complete an organizer, and we had K-1s from 21 different entities, and 1099’s from 12 separately managed stock brokerage accounts.

In this case, the CPA sent us the 21 K-1s for summary and input first. As the reader might guess, there were a multitude of different types of income and deductions contained on the K-1s.

Ten Commandments Working with an outsourced accounting and bookkeeping service

Once you have selected an outsourced accounting and bookkeeping vendor be prepared to invest some time in defining the relationship. At a minimum you should have a written agreement defining the following:

1. The accounting statements that you expect and the time when you expect it. Whatever it is it must be defined.
2. You also need to define what quality means. Not all defects have equal consequences. We will cover quality in accounting in another article in this series.
3. The outsourced accounting and bookkeeping vendor and you need to agree on a quality level. 100% accuracy is unattainable. Even the most advanced companies like Toyota target one defect in a million. Confusion on this point creates most of the difficulties in an outsourced accounting relationship.
4. How will the outsourced accounting and bookkeeping vendor work? There are several ways it can be done:

a. You upload your data to the vendor’s server, and they process it. They will email you the reports.

b. You transfer your data to the vendor by email, fax, or secure file transfer. They keep the books on their machine and send you the reports.

c You give them remote access to your server and the outsourced accounting and bookkeeping vendor work on your server.

5. Pricing – I highly recommend fixed price contracts. If the accounting and bookkeeping vendor is inefficient you should not pay for it.

6. Payment terms – there should not be any upfront payment. You should pay the same way as you pay your staff.
7. Term of contract – It should be month-to-month or at will on your part. If you are not satisfied with the outsourced accounting and bookkeeping vendor’s service, why should you pay for it?

8. What happens in a termination – the outsourced accounting and bookkeeping vendor must agree to hand over all files to you and provide reasonable

9. Money-back policy – the outsourced accounting and bookkeeping vendor should have an unconditional money-back guarantee for defective work.
10.Confidentiality clause.

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A common sense approach to data security as applied to offshore accounting service

One of the first things you hear about offshoring is that it would increase the potential for data theft. Let us assess this perception in a common sense way.When we talk about any “increase” we have to say compared to what. In this case the CPA has to assess the data security for on-shore operations before he can assess the increased risk posed by offshoring.

What is the typical level of data security in a small business or a CPA office? Since there are few staff members, there is little separation of duties. Such lack of separation encourages internal security problems. The data resides in paper files. Paper files are vulnerable to fire and water damage. The office is not physically secure. Staff members, leasing office personnel, and janitors have keys to the office. Any of them can copy confidential data. Paper records are not shredded before being discarded. The computers have no protection from unauthorized users or have relatively weak password control. Often the password is taped to the workstation. Any email communication is done in the clear. Workstations have recording devices which makes it easy to copy data. Usually all workstations have email and internet access. It makes unauthorized transmission of data easy.

Let us look at how these factors change when Offshore Accounting is done. Internal control improves because the people who are authorizing the transactions are separated from the people doing the record-keeping. All files are maintained electronically. Such data is backed up to an off-premises secure server. So threats from fire, water, and copying are significantly reduced. Offshore contractors restrict physical access to keep unauthorized people out. Workstations have access to only the data that is processed on that workstation. Email communications are encrypted. All recording devices on the workstations are disabled. Only supervisors have access to email and internet. We believe that best security practices can be installed when the client, the CPA, and the offshore contractor work together. The first line of responsibility lies with the client. The Better Business Bureau has an excellent pamphlet on how to protect data theft. http://www.bbb.org/securityandprivacy/SecurityPrivacyMadeSimpler.pdf As the pamphlet points out technical solutions are not enough. They must be combined with good practices in everyday management of the company.

The CPA should advise the client to implement the common sense measures advocated in this pamphlet.The offshore contractor must apply the same real world as well as technical solutions to security. The offshore contractor must consider the sensitivity of the data being entrusted to them and take appropriate measures to safeguard the information. A responsible contractor would only accept data than is essential to the task.Let us now look at whether popular offshore destinations like India are more vulnerable to data theft. According to a March 2007 Symantec report entitled “Symantec Internet Security Threat Report Trends for July- December 2006”, US was the country with highest level of malicious activity. China was next and India did not make it into the top ten. http://eval.symantec.com/mktginfo/enterprise/white_papers/ent-whitepaper_internet_security_threat_report_xi_keyfindings_03_2007.en-us.pdfAnother common sense conclusion one can draw is that the thieves concentrate on high value targets. You can look at the data compiled by the Privacy Rights Clearinghouse. http://www.privacyrights.org/ar/ChronDataBreaches.htm#CP. During 2005, 2006, through June 20, 2007 they reported 155 million records having been compromised. Out of that less than 1000 records were compromised in attacks that netted 100 records or less. Thus records from an offshore contractor serving small businesses are less likely to be a target of identity thieves. The CPA needs to assess the sensitivity of the data and put a value on it. The CPA can have the contractor include a liquidated damages clause if the said data is compromised. If the contractor is not willing to agree to a reasonable liquidated damage figure, find another contractor. Data security is a complex issue. However, we can enunciate certain principles that can be applied by a small business: Collect the least amount of data needed to serve the customer. Since a large proportion of data theft involves the employees, screen them carefully. In addition, the employees need to be trained to recognize various strategies used by criminals to facilitate data theft. Take security measures in the office; for example use a locked mailbox, lock the office when it is empty even for a short period of time, shred any paper records before disposal, reformat hard drives before donating, selling, or returning a computer etc. Take common sense precautions against cyber attacks. Encrypt the sensitive data, use firewalls, and keep your internet security software updated. Comply with any specific security standards that are applicable to your business. For instance credit card information needs to be secured to a specific standard. Providing security costs time and money. In a competitive world no business can spend more on security than what the market would pay for. Ultimately security is determined by the customers’ willingness to pay. While more money can buy more security, one must remember that no security is absolute. Just think about how many times classified information has been stolen from the US government. Eventually there will be a security breach. How do you deal with such a breach? It seems that the best approach is to inform the individuals or businesses whose data have been compromised, notify the law enforcement authorities, and support the affected parties to monitor their credit reports. Security is a multi-faceted problem. The key to success is co-operation between the client, the CPA, and the offshore contractor. No one party can be effective without the others.

Outsourced Accounting Services for CPA

CPA firms suffer when their business clients cannot provide professional accounting records. The CPA has to spend precious time to recreate the books so good financial statements and tax returns may be prepared.

With Indevia, CPAs help their small business clients improve their bookkeeping at an attractive price while improving their own margin.

Indevia is the solution. Indevia becomes the CPA’s virtual office in India, providing quality bookkeeping services at a substantially lower cost.

For more information please visit http://www.indevia.com

Welcome to my Accounting Laboratory

Today’s Experiment is Outsourcing.

Wash your hands and put your lab coat on. 
Today’s experiment:  Outsourcing an income tax return.

Outsourcing was presented to me as a cost savings alternative:  wages in India are comparatively low to wages in the U.S.  So, I’ve tried outsourcing with QuickBooks accounting and I’ve been pleased.  Cost savings do result.But what I discovered is that I am also saving time.  And I have even less time than I do money (as for lack of money, I think that has something to do with having two teenagers and an eleven year old…)And I can use more time very productively:  marketing, meeting with my best clients, staff training, going to the beach more often, etc.But outsourcing tax returns?  Thinking out loud, it would seem that outsourcing tax returns would produce efficiency by separating data management (1099’s, K-1’s, organizers) from data input (I’ll be using Lacerte in our experiment) from providing a great service and doing great work (what CPA’s do).So, here we go!  I started with outsourcing first.  My client’s tax return is on extension.  He does a great job of completing his organizer.  And he gives me all of his 1099’s and K-1’s and so on.  His tax return is average in terms of complexity, and average in terms of how long it should take to do.  He pays us $1,000 for his tax return.I first electronically sent my client’s 2005 data file to the Chartered Accountant in India, so she could start from where I’m starting from.Next, I organized my client’s input (1099’s, K-1’s etc.) in the same order as these items appear on his organizer.Third step:  I scanned all of the source documents and the organizer, and I electronically transmitted same to the Chartered Accountant.  COMMENT:  If we go to outsourcing, I will have my clerical staff do the scanning part…they are faster than me. Well, that was easy…33 minutes. So now on to doing this tax return myself.  First, some background:  My CPA firm is small:  Four CPAs, one entry level staff, and two clerical team members.  Thus, the partners do a lot of their tax returns themselves. First, I have one of the clerical team members copy the source documents. They come back in no particular order.  This took my lab assistant 6 minutes. Then, since I’m doing this tax return myself, I follow the firm’s protocol, starting with the indexing of all source documents and the organizer.  We use letters (A to Z). I first index the lower right hand corner of the organizer in red from page one (“C1”) to the last page (“C22”).

Next, I index each source document in the lower right hand corner in red, in order similar to where items appear on the organizer for example,  “D1” through “D8” for 1099-Int’s and 1099-Div’s, “G1” through “G6” for my client’s K-1’s, “L1” through “L7” for itemized deductions, and so on.I then reference the source number to the particular organizer page, in red.  For example, for interest income of $57 from Wells Fargo, I put a “C9” (the organizer page) to the right of the $57, and on the organizer I put a “D2” to the left of the $57 (the place the number came from).After all indexing is done, I do control totals on appropriate organizer pages.  For example, for interest income, for dividend income, for home mortgage interest, etc.COMMENT:  This is slow.  And my client actually filled out his organizer.  One-half of the clients don’t.  I can’t believe the staff does this during tax season.  No wonder everybody gets so grumpy…COMMENT:  Why can’t we at least index the organizer pages (“C1” through “C22”) in red in the lower right hand corner BEFORE tax season, like in early January, BEFORE we mail the organizers to the clients.  The clerical team members could do this.  Or better yet my 2 teenagers and my 11 year old and other team members’ children.  This would save so much time during tax season.COMMENT:  I was slowest on the K-1’s.  One K-1, from a trust, had as attachments the 7 partnership K-1’s that flowed into the trust.  My “G3” exhibit was 47 pages (“G3.1” to “G3.47”).  I had to re-sharpen my red pencil.  Way too slow…FURTHER COMMENT:  We should stop indexing K-1’s:  too many pages.  Consider side tabs with the K-1’s going in the file in order of organizer appearance with a bottom “K-1’s” tab.COMMENT:  I thought the firm listed “going paperless” as its number one priority by 2008 year end…I think the Chicago Cubs will win the World Series before we achieve paperless-ness. COMMENT: I can’t believe partners here actually do quite a bit of this. COMMENT:  I indexed a lot of immaterial numbers.  Witness the $57 of interest income from Wells Fargo. Consider setting materiality limit, where all we do is make sure the number gets on the organizer. COMMENT:  I may be getting delirious.  Does the client see any value to such amazing precision and attention to detail?  I doubt it:  the client just wants to feel like they are my favorite client.  And I haven’t ever gotten to the data input yet.  No wonder good staff are getting harder to find.  I’m actually starting to think about converting to Ron Baker’s accounting religion.  I think I see Rod Serling hiding behind the fake plant in the corner…c’mon man, get a grip on yourself.

Okay, okay, I’m coming back to reality.  Subtracting 3 minutes for my brief departure into the Twilight Zone all that took 57 minutes.Next, I input all data into Lacerte.  I’m not the slowest one here…the two youngest staff are the fastest, but I think I take 3rd place.COMMENT:  I can’t believe partners here actually do quite a bit of this as well.  I spoke with another CPA who once told me he does all of his own input because he’s just as fast as junior staff and clerical staff.  When I inquired about billing rates, the response was:  he’s at $250/hour, junior staff are at $125 and $140 respectively, and clerical staff is at $60/hour.  If you don’t get my point here, please stop reading this right now….Anyhow, that took 52 minutes, with no time off for a reality departure.COMMENT:  So where’s my tax return from India?  I’ve been at this now for 2 hours…how slow can these people be?COMMENT:  The last comment is a joke.  I’m just killing time while I’m waiting for the printer to finish.  The outsourcing company told me the tax return would be back in 4 days.  (My firm’s average turnaround time approximates 15 days…could outsourcing actually lead to better service?)The printer stops.  I grab the tax return. I copy the summary pages for federal and California (which I index “A1” and “A2”) and I reference all of the line totals to and from the organizer pages on which my calculated totals appear.I’m off on dividend income.  I discover one input item where I inputted $282 as $228.  I fix this.  I compare it to the year-end tax projection I did in December. All of this takes 16 minutes. Then the tax return goes to another team member for review:  he spends 18 minutes.  So that’s 34 minutes of review. In summary, we spent:           1.  Clerical staff time copying     6 minutes 2.  My time on data management                       57 minutes 3.  My time on data input                                   52 minutes 4.  My time on review                               16 minutes 5.  Review time on review                                 18 minutes       Total   149 minutes That’s 2 ½ hours.  At this point, there should be no difference in subsequent time compared to outsourcing:  the tax return gets assembled, a partner signs it, we send it to the client.Three days later, I get the electronic tax files back from India, which include the organizer with control totals on it.  I’ve saved my scan of the input data for reference.   I reference organizer totals to tax return (no, I’m not going to look at the tax return that I’ve prepared yet…I’m a scientist, not an accountant).  I take the extra step of reviewing my scanned files, and comparing totals that I add manually to the tax return totals.  I do interest income, dividend income, and home mortgage interest and charitable contributions.  Bingo!COMMENT:  I need to upgrade to dual screens.  That will make review faster.Total time:  25 minutes.  Not too bad.  Next, before final review, I take a deep breath, and (drum roll please…) grab the tax return that I prepared.  I start hyperventilating.  I am not tracking my time on this (the hyperventilation or the tax return comparison, because this step would not happen if we outsource tax returns.)COMMENT:  Maybe I should just file the tax return with the lower balance due.  Maybe we should do all tax returns twice, and pick the better one.COMMENT:  The last comment is a joke.   Really IRS – I’m just joking.Anyhow, I put the tax returns side by side, and (oh, wait a minute, I have to use the restroom…and, I forgot to call my wife back…I’ll hurry, I promise…do you watch “Deal or No Deal” too?…)…and, and, and… taxable income and refund are the same!!! Lastly, onto review.  I pick another team member for the review:  21 minutes.  COMMENT:  Hey the other guy took  only 18 minutes…what gives??? Here is the outsourcing summary:           1.  I scan and transmit data         33 minutes 2.  My time on review                                                        25 minutes  3.  Reviewer (the slow one…) time on review                                21 minutes       Total   79 minutes That’s just over 50% of the firm prepared time (149 minutes)!! COMMENT:  And I went from 125 minutes down to 58 minutes, and if I use clerical staff to scan, I’m down to 25 minutes…plus they scan faster than I do…wow! COMMENT:  The areas where I will spend more time if I outsource are on data organization and review, in particular on spending time on the scanned files as “input.”  But significant time savings do indeed get created by reducing data management and data input applications.  The outsourcing hypothesis is correct. By the way, the Chartered Accountant in India spent just over 4 hours on this project. I promised I wouldn’t disclose my team members hourly pay rates, which are too high (just kidding…) but the outsourcer says their tax return rate is $15/hour.  So yes, a cost savings also results, but I’ll take the extra time please. Thank you for participating in my outsourcing experiment.  Don’t forget to join me for next week’s experiment:  trying to get an actuary to laugh. http://www.indevia.com/articles/accounting-laboratory.html

Outsourced Accounting Services for CPA

CPA firms suffer when their business clients cannot provide professional accounting records. The CPA has to spend precious time to recreate the books so good financial statements and tax returns may be prepared.

With Indevia, CPAs help their small business clients improve their bookkeeping at an attractive price while improving their own margin. Indevia becomes the CPA’s virtual office in India, providing quality bookkeeping services at a substantially lower cost.

Send us a QuickBooks data file or an Opening Trial Balance and transactions file for one month. We would prepare the statements free and quote you a price per month. We provide a full money back guarantee.

For more information, please visit http://www.indevia.com