Accounting and Decision Metrics in Business Process Management and BPO
What is Accounting?
Accounting is the process of recording, analyzing, classifying and expressing the results of business transactions for a relevant time period. In services businesses, accounting principles help the parties interpret such results. Relying on a vendor’s audited financial statements, investors choose whether to buy, sell or hold investment securities, customers choose which service provider to hire, and consultants and lawyers choose how to structure the business relationships.
Who Regulates Accounting?
Regulation of accounting principles falls into two universes: financial accounting and tax and other regulatory accounting.
Financial accounting principles are intended to provide information to investors, suppliers, customers, employees, and other constituencies entitled to see the financial statements.
“Generally accepted accounting principles” are set forth by the Financial Accounting Standards Board of the Financial Accounting Foundation.
The Public Company Accounting Oversight Board is a private-sector, non-profit corporation, created by the Sarbanes-Oxley Act of 2002, to oversee the auditors of public companies (whose securities are listed or traded on U.S. securities exchanges) in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports.
Certified public accountants are licensed by individual states. In addition to local state accountancy organizations, the American Institute of Certified Public Accountants establishes rules of practice, ethics and provides services to accountants.
The Securities and Exchange Commission strives to maintain the integrity of financial statements for companies whose listed companies. (For SEC Chairman’s views on needed reforms in the accounting system, see http://www.sec.gov/news/speech/spch530.php). The SEC maintains rules of auditor independence. Other similar organizations exist in other countries.
Tax and other regulatory accounting principles differ from financial accounting. Regulatory accounting provides information to the government for measuring compliance with law. Financial accounting focuses on providing information to management, investors, lenders and other private parties.
Regulatory accounting principles are established by regulators for the particular regulated industry. Such principles may differ from financial accounting principles due to particular compliance requirements of public policy, statutes, regulations and other governmental rules. For example, in a regulated industry, a company’s “rate of return” would be computed using special rates of amortization of certain expenses, special exceptions for the inclusion or exclusion, or timing of inclusion or exclusion, of different types of revenue.
Tax accounting is a compliance process for calculating tax liability and the tax attributes of financialand business transactions. Tax accounting is regulated by the Internal Revenue Service or other competent taxing authority.
Why is Accounting Important in Outsourcing?
Most outsourcing participants make decisions based on accounting, to compare “apples to apples.” A good understanding of accounting issues helps inform outsourcing participants in their decision-making at all phases in the life cycle of the relationship.
Who Should Do the Accounting Analyses?
Typically, internal finance department personnel and consultants perform the assessments and accounting analyses involving potential outsourcing. Expert consultants are helpful in identifying hidden “value” and hidden costs beyond simple comparison of costs.
Key Issues in Accounting.
Accounting issues affect the structure and pricing of outsourcing deals that involve bundled provisioning of equipment, technology and personal services.
For service providers, effective accounting treatment can impact Wall Street stock valuations, the credit ratings and market image, profitability and shareholder benefits.
For customers, accounting issues can impact vendor selection, scope, service level, allocation of responsibilities, pricing, taxation, termination, renegotiation,
The integrity of financial statements for each party is essential to planning, managing and terminating outsourcing contracts. Accordingly, the parties may need to discuss such issues as related-party transactions, off-balance-sheet transactions, acceleration of income, the classification of different components of income in a bundled services transaction, viability of the vendor, the independence of auditors, or conflicts of interest by accountants in certain cases, and other important concerns that frame the business and legal environments for outsourcing relationships.