Accounting outsourcing for Vietnamese small and medium-sized enterprises and its theoretical background

131 International Conference on Finance, Accounting and Auditing (ICFAA 2018) November 23rd, 2018 Hanoi City, Vietnam Accounting Outsourcing for Vietnamese Small and Medium-Sized Enterprises and Its Theoretical Background Tran Quang Chunga, Nguyen Ha Linha aNational Economics University Submission day: 30/10/2018 Review day: 10/11/2018 Acceptance day: 15/11/2018 Abstract Outsourcing has emerged in the 1980s and has become a popular and effective management tool not only for large companies, but also for small and medium-sized enterprises (SMEs) because it could help SMEs focus on its core competencies and confront their competitors within their limited resources. In reality, SMEs in Vietnam, they are a core economic component, accounted for more than ninety percent of the total number of enterprises in Vietnam but face a number of resource constraints, typically is constraint in accounting functions. This study would explore the advantages and disadvantages of accounting outsourcing activities of SMEs in Vietnam based on two background theories: Transaction Cost Theory (TCE) and Resource – based View (RBV). The study supports the tendency of accounting outsourcing for SMEs in Vietnam when they want to focus on promoting their internal competencies but lack of internal resources. Future research for deeper understanding of accounting outsourcing are also discussed in this paper. Keywords: Transaction cost economics, Resource-based view, Accounting, Outsourcing, Vietnam JEL: F32, G41 1. Outsourcing accounting for SMEs in Vietnam Outsourcing accounting is when a business hires an outsider to perform its accounting functions that (may) traditionally were performed in-house by the company's own staffs, it is considered as a solution for cost-cutting method for many companies. 132 Small and medium-sized enterprises (SMEs) play a very important role in the economy of any country, including developed or developing ones. This is also an important economic component that creates jobs for society and contributes significantly to the income of a national economy. It also contribute to mobilization of social resources for development investment, poverty reduction (OECD, 2009, IFAC, 2010). But it is quite difficult for SMEs in recruiting high quality accountants due to the lack of their internal resources in many aspects (training opportunity for employees, low financial budget, time pressure). In order to overcome the constraints on resources, outsourcing is a strategic solution for SMEs. According to a survey of 600 enterprises in 1997 by the American Management Association (AMA), the enterprises initially outsourced business – supported functions such as security services, building management, translation services, car rental.... In current time, accounting and finance activities are also outsourced and the market for outsourcing financial services has become increasingly active. Outsourcing researches have been carried out in large enterprises (Li et al., 2008), and there are also a number of studies that focus on SMEs (Everaert et al., 2010; Kamyabi & Devi, 2011; Shina et al., 2011). In any economy, SMEs are core economic components but also face a number of constraints, especially in the context of resource constraints (Everaert et al., 2010; Kamyabi & Devi, 2011; Shina et al., 2011). This study selected SMEs in Vietnam as research objective for the following reasons: Firstly, SMEs are the mainstay of the economy, accounting for 97% of the total number of enterprises. Every year, more than half a million new jobs are created; employs up to 51% of social workers and contributes over 40% of GDP (Business Registration Office - MPI, 2012). Secondly, SMEs face a lot of difficulties, especially in limited resources, the pressure of SMEs is much larger than that of large firms (Marriot & Marriot, 2000). Thirdly, long- term outsourcing will be an important strategic tool for SMEs to promote their internal capabilities and external resources. In Vietnam, the emergence of organizations such as the Vietnam Association of Certified Public Accountants (VAPAP) and the Vietnam Association of Certified Public Accountants (VACPA) in 2012 has proved that Vietnam is also moving towards and concentrating in development of market for audit and accounting services. Starting from the issue of SMEs in terms of financial resources and human resources, the study found that many SMEs find it difficult to find good people in charge of accounting due to resources constraints. Many managers are unhappy with the quality of their accounting staffs, or if they are satisfied, their accounting employees are likely to find a way to move to bigger or more stable companies when they think they accumulate enough experience. This paper provided an overview about outsourcing in accounting – auditing services, explore the disadvantages as well as advantages in order to identify useful suggestions for developing the market of auditing and accounting services in Vietnam from both accounting service customers and service providers’s view. 133 2. Advantages and disadvantages for SMEs in accounting outsourcing Outsourcing becomes a common practice among firms and in fact, many advantages and disadvantages should be considered when a company decide to embark outsourcing accounting functions. Kamyabi & Devi (2011) identified some main advantages and disadvantages of accounting outsourcing as the following: Advantages: - Access to professional service: in limited conditions, consulting and accessing professional services from accountants or accounting professional providers could permit business in lowering costs compared to do it internally due to the scale of economies (Jayabalan et al., 2009). - Cost reduction: reducing cost is one frequent reason for accounting outsourcing. It helps business to reduce many types of employment and administrative costs (Everaert et al., 2010) - Focus on core competences and innovation: In operating a business, many types of supporting activities are called non-core activities besides main activities in running business such as accounting, IT, human resource management, and logistics.Many studies provided evidences that outsourcing practices permit company to concentrate and focus on their core activities and do it in a more creative way, shift to innovation (Gilley et al., 2004b) - Managing Time Pressure: In fact, handling time issues especially during peaks accounting periods cause much pressure for SMEs, so that they may outsource with the intention of dealing with their time pressure, use an external accountant to handle accounting affairs (Jayabalan et al, 2009; Gooderham et al., 2004). Disadvantages - Loss of Internal Expertise and Skill: A key disadvantage of outsourcing practice is that it leads to a loss of opportunity to train and develop internal expertise and skills (Everaert et al., 2010). In addition, company may become extremely reliant on outsiders, some require specific expertise and specific knowledge led internal labor can not meet the demand. Loss of Management Control: When firms outsource their functions to external service providers, they may lose control of the process and the outcome to an external service provider (CIMA, 2008). Doubtful Cost Savings: It is not cost-saving when SMEs may suffer from low quality output by external service providers who have low knowledge of the activities and the firms. It is also important to consider the transaction costs in dealing contract, monitoring the performance, and connecting with external providers (Everaert et al., 2010). In total, these added charges may cause outsourcing practice being more costly and it may not meet the goal of cost-cutting (Everaert et al., 2010). 134 Risk taking: Sometimes, advantages may become disadvantages, when you outsource some functions, your employees have no chance to be trained in an in-house training ground, and it can not be a source of competitive advantage in the future (Everaert et al., 2010; CIMA, 2008). Outsoucing, especially outsource finance and accounting functions, it cause the risk of violating the confidentiality of the company 3. Theoretical background for explain outsourcing accounting in business This overview will explore the underlying theories of research such as TCE or RBV. They are theoretical backgrounds for explaining why a business outsource their functions to outsiders 3.1. Transaction Cost Economics Transactional Cost Economics (TCE) was first published the article “Nature of the Firms” (Coase, 1937) and the author received the Nobel Prize in Economics in 1991 for this project. Since then, TCE has been enriched by Williamson (1993) and others also continue to grow to this day. TCE is considered the main theory to develop it to this day. According to TCE, there are costs in using a market. A business could make decision during operating business activities either by self-operated (insourcing) or buy from providers (outsourcing). That decision depends largely on the compared cost between the two options. TCE perspective suggests that firms are existed and organized in order to minimize transaction costs (Lamminmaki, 2007) and a firm has tendency to seek to balance transaction cost and production costs when it decides to internalize (insource) or externalize (outsource) activities or functions transaction (Jiang et al., 2007). From a cost-saving perspective, if the cost of producing a product (labor, capital, fixed assets, management.) costs more than buying from the market (the cost of production by the seller + the cost of the transaction), the business should hire the providers from the business outside. Better to self-produce when (Cost of self-production + Organization costs) < (Cost of purchased products/services + Transaction costs) Better to buy when (Cost of self-production + Organizational costs)> (Cost of purchased products / services + Transaction costs) Transaction cost economics (TCE) is important for understanding the effect of different types of costs in the business (Williamson, 1983; Kang et al., 2009). This theory becomes the standard theoretical framework for explaining why some SMEs transfer accounting functions to external accountants, and hiring professional accountants in reducing costs and it can explain how are transaction cost handled? (Carey et al., 2006, 135 Everaert et al., 2010). TCE is also used to explain the economic efficiency achieved when accountants provide professional services to the firms (Carey et al., 2006). The biggest purpose of accounting outsourcing is to maximize the cost savings while improving the quality of accounting information. If the outsourcing cost is lower than the cost of retaining the internal staffs, there is no reason for business for not consider outsourcing. Outsourcing is also the tendency that shows the specialization in the doing businesses. 3.2. Resource-based View Barney (1991) is considered one of the pioneers for Resource-based View. It is widely used and proven in a variety of fields and industries. Basically, RBV posits that a business can gain competitive advantage if it implements value-creating strategies that can’t be achieved by its current and potential competitors. In order to implement such strategies, enterprises need to have resources to ensure some basic conditions of the VRIN standards as follows: valuable, rare, can not be completely imitated and no substitution. RBV has derived from economics and management where we could find the common point of view in implementing a strategy for enhancing competitive advantages, promoting internal strengths, curbing external challenges as well as improve internal weaknesses of enterprises (Wernerfelt, 1984). According to IFAC (2010) and Report of the Business Registration Office (MPI, 2012), the majority of SMEs entering the economy face many difficulties in competition due to "the lack" in internal resources. Thus, the RBV describes that small firms are more likely to be eliminated than large firms because of resource shortages that make them difficult for sustaining their existence and prospects. Especially, in emerging and developing economies, they are facing a number of issues such as the quality of human resources, the lack of transparent mechanisms and the lack of knowledge capital (McClvol, 2009; Daou et al., 2013). Many studies using RBV (Gooderham, 2009; Kamyabi and Devi, 2011, Daou et al., 2013) in analyzing the shortage of SMEs. In the time of intense competition, small businesses must be proactive in seeking to reduce costs and create new opportunities by making the most of the support of external resources. SMEs with limited capabilities but with core competencies need access to external support. RBV assists us in analyzing the capabilities of SMEs to determine whether a particular business function should be outsourced or self-produced (Melvo, 2009). The RBV approach is similar to the "Competency Approach" (Sinha et al., 2012) RBV supports the analysis of SMEs’s resources, thereby creating a link between outsourcing and business performance (Mclvor, 2009). RBV is the theoretical basis for SMEs in outsourcing accounting functions and handling financial information of enterprises (Gooderham, 2004). RBV shows that professional accountants will be an important bridge for supporting business (Lowe &Talbot, 2000). In practice, the reasons of outsourcing can be explained based on both RBV and TCE (Melvor, 2009). RBV helps businesses analyze the organization's ability to connect external 136 resources with the inherent competitive advantages and business efficiency (Melvor, 2009). While TCE gives us a deep insight into whether we should outsource or perform a particular function (Stratman, 2008). In a nutshell, if businesses find themselves in lacking internal conditions for supporting some activities, they should consider to outsourced solutions (Melvor, 2009). TCE argues that outsourcing will help SMEs save costs rather than trying to do it themselves in a limitation of capacity both in scale and experience (Gilley et al., 2004b). In the same view, Melvor (2009), Everaert et al. (2010), also stated that "outsourcing is a powerful means of cutting costs, improving performance because we do not have to invest more in equipment or hire more staffs” (Jiang et al., 2006). 4. Discussions and conclusions In today's knowledge age, companies focus on their core competencies and outsource accounting functions to professionals. Financial service providers and accountants, based on their strengths in management, experience in accounting will help clients reduce their costs effectively. For example, General Anderson signed a contract with Arthur Anderson worth up to $ 335 billion (in dollars annually) to handle annual transactions and saved 60% of the cost. (Tom, 2001). This paper has only reviewed some main points related to accounting outsourcing for SMEs in general and for Vietnamese SMEs in particular. 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