Accounting outsourcing practices in Malaysia
| DOI | https://doi.org/10.1108/15587891211191380 |
| Pages | 60-78 |
| Published date | 13 January 2012 |
| Date | 13 January 2012 |
| Author | Ruhanita Maelah,Aini Aman,Rozita Amirruddin, SofiahAuzair,Noradiva Hamzah |
| Subject Matter | Strategy |
Accounting outsourcing practices in
Malaysia
Ruhanita Maelah, Aini Aman, Rozita Amirruddin, Sofiah Md Auzair and Noradiva Hamzah
Abstract
Purpose – Firms in Malaysia are in an enviable position in view of Malaysia’s standing as a leading
outsourcing hub in the region. Despite that, little is known about the accounting outsourcing practices,
risks and control in Malaysia. This paper aims to explore the practices, decisions, processes and
perception of risks and control in accounting outsourcing.
Design/methodology/approach – This paper is written based on survey data which were collected
using a questionnaire. The questionnaires were directed to the head of the accounts and finance
department of each company.A total of 51 companies participated in this study and approximately 47.1
percent of the respondents are involved in accounting outsourcing.
Findings – Findings show that the most common outsourcing activities are financial reporting and
auditing while the main reasons to outsource are quality service, core competencies and scale
economies. The decision to outsource accounting services is related to the type of industry and
expertise in the firms. Most of the firms outsource their preparation of account and audit work as well as
tax for better quality services. Firms rely more on formal contracts and concerns about confidentiality
and security of accounting data.
Research limitations/implications – Because of the limited number of responses, the findings may not
be generalized to the overall population. Nevertheless, they can be used as background information for
subsequent research in accounting outsourcing activities. Future research may consider the use of
in-depth case studies for understanding challenges in accounting outsourcing particularly in making
decisions, managing processes and mitigating risks.
Originality/value – While it can be regarded as exploratory, this study makes an attempt to uncover the
risks and control issues in accounting outsourcing.The findings will contribute to the body of knowledge
in accounting outsourcing and enhance the understanding of the current accounting outsourcing
practices in Malaysia.
Keywords Accounting, Outsourcing, Malaysia, Decision making, Process, Risks, Control
Paper type Research paper
Introduction
Outsourcing means subcontracting the strategic use of company’s resources outside the
company to perform tasks that are usually handled internally. In this knowledge- and
service-based economy, it is said that companies can increase their profits by strategic
outsourcing of intellectually based systems (Quinn, 1999). Quinn (1999) argued that
successful companies leverage their capabilities and the investments of others by exploiting
three areas of intellectual outsourcing: traditional service or functional activities performed
in-house (e.g. accounting, IT, or employee benefits); complementary, integrative, or
duplicative activities scattered throughout the company; and disciplines, subsystems, or
systems in which outsiders have greater expertise or capabilities for innovation. Hence,
while leaving the non-core activities or functions to specialized third parties, companies can
focus on their core competencies and improve overall performance. Outsourcing is one of
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VOL. 6 NO. 1 2012, pp. 60-78, QEmerald Group Publishing Limited, ISSN 1558-7894 DOI 10.1108/15587891211191380
Ruhanita Maelah and
Aini Aman are both
Associate Professors, and
Rozita Amirruddin and
Sofiah Md Auzair are both
Senior Lecturers, all at the
School of Accounting,
Faculty of Economics and
Management, Universiti
Kebangsaan Malaysia,
Malaysia.Noradiva Hamzah
is an Associate Professor at
the School of Accounting,
Faculty of Economics and
Management, Universiti
Kebangsaan Malaysia,
Malaysia.
This study was financially
supported by Research Grant
University (UKM-GUP-EP-
07-16-119) and Fundamental
Research Grant Scheme
(UKM-EP-05-FRGS0054-2009).
Received: 6 December 2010
Accepted: 27 May 2011
the powerful tools to generate a company’s values and gain competitive edge. Generally,
there are three forms of outsourcing:
1. inter nal outsourcing using in house subsidiaries mainly involving large firms;
2. external outsourcing using local outsourcing vendors with global offshore operations; and
3. external outsourcing using foreign outsourcing company who maintain an onshore
presence (Nicholson et al., 2006).
Accounting outsourcing specifically means transferring part of the accounting functions to
third party providers or fully owned subsidiaries in order to cut cost, gain access to scarce
skills or obtain competitiveness (Financial Services Authority, 2005). Accounting work often
sent for outsourcing include bookkeeping and accounting processes; general ledger
accounting; accounts payable; fixed assets accounting; inventory management;
reconciliations; payrol l accounting; taxation ; accounts receivable; i nternal controls;
preparation of financial statements; and financial reporting or management information
system (Reddy & Ramachandran, 2008; Krell, 2007). Krell (2007) finds that finance and
accounting outsourci ng covers a wide variety of process es, ranging from highly
transactional activities such as accounts payable, accounts receivable and payroll, to
processes that require greater and more complex degrees of knowledge and analysis such
as treasury, tax strategy, or financial planning and analysis.
Krell (2007) explains that the finance and accounting outsourcing market has increased
steadily since 2000, and by more than 45 percent since 2005; and a March 2007 Interactive
Data Corp. (IDC) study forecasts that the global finance and accounting outsourcing market
will exceed $47.6 billion in 2008. However, accounting outsourcing presents significant risks
due to the complexity of achieving suitable management oversight and control from a
distance such as risks of opportunisms. In other words, the decision to outsource involves
the potential cost savings against the consequence of a loss in control over accounting
services. Codes, standards and regulations such as Sarbanes Oxley Act for internal controls
(Section 302), International Organization for Standardization (ISO9000) for quality and
British Standards (BS7799) for security standards are being adopted by some companies
for quality assurance and risk notification in accounting outsourcing, but these require
greater management discipline.
AT Kearney (2007, 2009) ranked Malaysia at the third position after India and China in
providing attractive offshore locations, while Frost and Sulllivan (2007) identified the finance
sector as one of Malaysia’s niche areas. Key strengths pointed out include infrastructure
quality, government policies, political stability, and cultural adaptability of skilled workforce.
In India, the National Association of Software and Services Companies (NASSCOM) plays
an active role as an interface to the Indian software industry and Indian business process
outsourcing (BPO) industry, thus encouraging the growth of the India outsourcing industry
(Raghuram, 2009). In China, most of the western companies are using international
outsourcing agents to reach the small and medium sized enterprises (SMEs) that start to
outsource their production and related supply chain management (Zheng Liu, 2007). In
Malaysia, there are more than 100 shared services and outsourcing companies in
Multimedia Super Corridor (MSC) ranging from major local players to multinational. Besides
MSC, the Labuan Offshore Financial Services Authority (LOFSA) coordinates efforts to
promote and develop Labuan as an International Business and Financial Centre (IBFC). As
an IBFC, Labuan offers a wide range of offshore financial products and services to
customers worldwide, including banking and investment banking, insurance, captives, trust
business, fund management, investment holding, company management and Islamic
financing. Kadir (2007) pointed out that Malaysia is a leading destination for the
establishment of shared services and outsourcing hubs. Malaysia is known for its attractive
outsourcing location and is expected to drive more outsourcing work in various areas such
as manufacturing, telecommunications, finance, government and other services (Suhaimi
et al., 2007). Malaysia is expected to attract at least US$ 3 billion of the total global
outsourcing business worth US$ 54 billion (Kadir, 2007). Furthermore, Malaysia also has
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