10/11/2015
Categories: Articles

How to reduce the asymmetry of information in the area of outsourcing of accounting services.

History of outsourcing

History of outsourcing itself is rooted in the second half of the 19th century, but, nevertheless, more active development was observed only in the 20th century. The first benefits of outsourcing were discovered by the leaders of the automobile business, Henry Ford (Ford Motors) and Alfred Sloan (General Motors) in the 30s of the 20th century. G. Ford, trying to build a company that could independently provide all the necessary processes, concluded that "no firm can be self-sufficient." A. Sloan also used outsourcing in practice, although the origination of the scientific term came much later, only in the 90s.

Due to the fact that the practical application of outsourcing began to spread in the west earlier for several decades than in Russia, therefore Western companies could evaluate all the economic benefits of this practice earlier. The first outsourcing companies in Russia were security companies. Also, due to the rapid development of computer technology, companies offering IT services have become increasingly popular.

Accounting outsourcing

Let’s consider the category of outsourcing companies, which are still regarded with caution in Russia: accounting companies. In general, these companies can be divided into three categories: large corporations, medium and small companies, and accounting freelancing. It could not be said that the last category is a company, but it was included in the list as freelancers usually work with several customers. First category of companies mainly provides services for customers that are large companies and who are willing to bear the high cost of accounting and are willing to pay more for the brand. The last category of accounting firms usually deals with beginning entrepreneurs and micro business, that is there is no need to hire an accountant, as it is more important to minimize costs and it often leads to quality decrease. The second category of companies is situated between them and offers to its customers, which are mostly small and medium enterprises, the safe balance between price and quality. Let’s consider them in detail.

Benefits of outsourcing and dealing with such companies have already been described in different sources. Let’s list them briefly. Firstly, without hiring the staff accountant, you'll save in the workplace, software and payroll taxes. Secondly, buying services, you can reduce the taxes of your company. And third, for less cost you can work with the team of professionals who have high experience in comparison with one accountant. Outsourcing company will reimburse you the penalties in case of mistakes, and it reduces the risk significantly.

According to the research, it was determined that for the companies that use the services of accounting firms is not so important to save on taxes and expenses, but it is more important to get a quality service from external experts, as it can significantly reduce the risk of mistakes.

Asymmetry of information

Assume that you've determined that second category of accounting firms is best suited for your company. In this case, the following difficulty arises - information asymmetry. The term of asymmetric information was developed in 1970 by the economist George Akerlof and his article about the market for "lemons".

This economic term means that information about a product or service is distributed unequally between market participants, that is between the buyer and seller. In most cases, the seller knows much more about the product, and the task of the buyer is to find more information to make a decision about the purchase. Buyers can take the risk and buy a product or service, thus they can determine whether they made the right choice only after some time after using. In order to fill the lack of information, the buyer need to spend some resources, such as time and money. When choosing the accounting firm, businessman also faces such problem as information asymmetry.

Do not hurry with the choice of the firm, because most likely you will work together with this company for many years. To save you time, this article contains some key points that will help to reduce the asymmetry of information when choosing outsourcing accounting company.

1)      The first step should be the elimination of beginners. Looking through the websites of various companies, pay attention to the fact how many years the organization is on the market. Experience is very important in accounting. If there is no such information on website, pay attention to the prices. Beginners generally underestimate prices to get more customers, but usually they are not able to cope with such volume of work without high experience. Do not try to find the cheapest prices, because as a result, it can lead to enormous problems in accounting due to the inexperienced accountant, and in future you have to bear large costs to correct all errors.

2)      Adverse selection should also be eliminated. This term implies a fact that due to the asymmetry of information and because the market is full of low-quality goods, sellers of high-quality goods are in disadvantageous situation. It is difficult to such companies to convey to the customers their benefits because other companies can imitate the same behavior. In such cases the signals that could not be imitated are usually used.

For example, choosing the accounting firm, find out skills and education of your future accountants and also check references from past customers. Scans of diplomas and certificates can often be found on the company's website or in the office.  

The recommendations should include the details of the customer, as it is a confirmation of the fact that the recommendation was not written by the accounting company itself. Also, do not hesitate and ask if the staff of the company take training courses. Due to the constant changes in the law, a good accountant should constantly update his knowledge.

3)    Another phenomenon that occurs in the presence of asymmetric information is moral hazard. There are companies that during the meeting promise to keep your accounting under strict control (prepare financial statement without delay, pay all taxes, etc.), but in reality it is not implemented. After signing the contract and first payment there appear mistakes and late reporting which lead your company to additional costs and penalties.

To protect yourself from such unscrupulous companies, read the contract more carefully. It should be specified in the contract that your accountants are financially responsible for their mistakes. Also check the existence of such a item in the contract as saving the data of your organization in secret. Also, advance payment system may cause some suspicion because after the pre-payment, the company may disappear from the market.

In conclusion it could be said that it makes no sense to be afraid to use accounting outsourcing. Some entrepreneurs are still believe in archaic principles that the company should have own accountant, because they afraid to transmit information about their company outside. Such strategy in some cases leads to unnecessary costs, and increase the risk of errors. Vast of companies have already taken advantages of outsource services. In future, Russian companies will understand these advantages and will use the services of accounting outsourcing.

Sources:

  1. http://www.alleng.ru/d/manag/man128.htm
  2. http://www.m-economy.ru/art.php?nArtId=3768
  3. http://scorcher.ru/art/any/SEO/border_interactions_and_SEO6.php
  4. Everaert, P., Savens, G., and Rommel, J., 2007. Sourcing strategy of Belgian SMEs: empirical evidence for the accounting services. Production Planning & Control, 18 (8)
  5. Akerlof, George A. (1970). "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism". Quarterly Journal of Economics (The MIT Press) 84 (3): 488–500.

 

10/11/2015
Categories: Promotions

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10/11/2015
Categories: Articles

How to reduce the asymmetry of information in the area of outsourcing of accounting services.

History of outsourcing itself is rooted in the second half of the 19th century, but, nevertheless, more active development was observed only in the 20th century. The first benefits of outsourcing were discovered by the leaders of the automobile business, Henry Ford (Ford Motors) and Alfred Sloan (General Motors) in the 30s of the 20th century. G. Ford, trying to build a company that could independently provide all the necessary processes, concluded that "no firm can be self-sufficient." A. Sloan also used outsourcing in practice, although the origination of the scientific term came much later, only in the 90s.

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