Barbara Kogen and her partners at the Beverly Hills, Calif.-based accounting firm NSBN LLP decided to relieve their employees during the "crunch time" of tax season 2002 by outsourcing a few hundred K1s, 1099s and other returns.
Using Outsourcing Partners International - a New York-and Bangalore-based technology and accounting outsourcing company - Kogen found sending their returns overseas was not saving her firm any significant time or money.
"We tried the work on a test basis the first year. The next year, we did a little less to see again how it would work," said Kogen. "However, we did not do it at all this past year for a couple of reasons - it didn't fulfill the needs as we had anticipated. It works really well, where clients' information is really straightforward. However, our clients are very sophisticated and there is more analysis required. It takes a lot of work to get all the paperwork organized for them, and communicating over the phone or with e-mail, sometimes because of the language barrier, it was hard to get your message across."
Most outsourcing companies did not enjoy the growth that they had projected at the end of last year's tax season - placing much of the blame on Democratic presidential candidate Sen. John Kerry's comments about the evils of outsourcing.
However, outsourcing companies insist that the cost savings are there, and the quality of life factor for an accountant is upgraded as the excessive workload during the busiest period of the year is shipped overseas.
Still, outsource providers are hopeful for the upcoming filing season, even with the clarifications to ethics rules regarding outsourcing from the American Institute of CPAs that recently came into effect.
The AICPA made some clarifications to Rules 102, 201, 202 and 301, effective July 1, 2005. CPA firms currently using a third party to process returns or perform other accounting services need to ensure that their clients are told, preferably in writing, about the outsourcing. The accounting firm must also enter into a contractual agreement with the outsourcing company to ensure that their clients' information is kept confidential, and the CPA firm is entirely responsible for reviewing and correcting all work that the outsourcing company performs.
The California Board of Accountancy was ahead of the disclosure curve, and a little stricter, when they made it mandatory for all CPAs practicing in California to notify their clients in writing that their confidential information was being shared with a third party in March 2004. California also required a signature and date from the client as well.
"The California Board of Accountancy recognizes that more CPAs are doing this kind of work, and it's the only one in the country where the majority on the board are not CPAs, so it's very consumer-protective," said Mitchell Freedman, co-founder of CPAs for Reform, a California-based organization of activist CPAs. "Seemed to me this is a no-brainer kind of thing. Why the AICPA took the route it did, I don't know. Perhaps it bowed to pressure from larger firms and felt it didn't need to do certain things [like not get written permission]. But we should be honest and open with our clients."
Richard I. Miller, general counsel and secretary to the AICPA, said that getting signatures was overkill. "We didn't go that far because we didn't feel it was appropriate or necessary," he explained. "All the states were satisfied with our formulation."
Miller added that the clarifications are not meant to hinder outsourcing, but to make sure that each state, like California, didn't formulate its own regulations, leading to confusion amongst CPAs on how to handle their ethical responsibilities to clients if they outsourced.
Offshore providers don't feel that the clarified ethical rules will hurt their businesses for the next tax season.
"It's going to add a couple more steps to get that box checked off, but it doesn't stop the outsourcing industry," said Anand Mahurkar, senior vice president at Mumbai-based Datamatics, an international IT and accounting outsourcing company. "The concept of better, faster, cheaper is not going to change. The legislation is just there to give comfort to the end clients. We respect it, we understand what it means, but outsourcing is not going to stop."
What did slow down the outsourcing industry last year, echoed Mike Sabbatis, vice president of sales and marketing at business software and outsourcing service provider CCH, were Kerry's comments regarding the loss of American jobs to places like India because of outsourcing. For the 2004 tax season, CCH did about 30,000 returns, said Sabbatis.
Kishore Mirchandani, president of OPI, estimated roughly the same number of returns for his company as did Mahurkar from Datamatics.
Xpitax's chief executive officer, Mark Albrecht, claimed about half that many returns for his Braintree, Mass.-based outsourcing company. But all fell at least 10,000 returns short, except for Datamatics, of the projected figures they gave to technology consultant and regular Accounting Today columnist Gary Boomer for a 2004 column.
Albrecht agreed with Sabbatis on why their numbers fell short. "The elections had a real detrimental effect. Every time Kerry was saying outsourcing was the devil, the detrimental effect was being felt in the outsourcing industry," he said. "Firms were sitting on sidelines and thinking, 'I'll give it one more year and see if other firms are doing OK with it.' There has been a tremendous up-kick in the last three months in outsourcing, though. In July last year, mostly a dead month for CPAs, we had a handful of demos - this year we had about 40 to 50."
One CPA partner in an accounting firm who preferred to remain anonymous outsourced a number of his 1040s in the 2003 tax season and found the quality of the services he used to be "really poor."
He claimed that after reviewing the tax preparation work, which was outsourced to India through what he calls a "large national [U.S.] organization," there were numerous mistakes that needed correcting.
"The cost of correcting all the returns was much greater than if I had done them in-house," said the partner.
Willing to give the outsourcing organization another try during the 2004 tax season, the CPA found the same substandard quality of work being done and discontinued outsourcing by February 2005, thereby leaving him and his firm with a mass of clean-up work to do, on top of all the returns not yet completed.
Yet outsourcers are confident that the 2005 tax season will be a very different story from last year's. The above-mentioned outsourcing companies projected significant growth for the 2005 tax season, with OPI revealing a specific figure of 50,000 returns.
"Cost savings is a plus; it's not the No. 1 reason why people outsource, though," said Xpitax's Albrecht. "The No. 1 reason is they can't find people to do all the work. CPAs are sick and tired of having employees working until one or two o'clock in the morning for two and a half months during the busy season. Outsourcing boosts the quality of life for a CPA firm."
