AICPA Committee Calls for Outsourcing Disclosure

An ethics committee of the American Institute of Certified Public Accountants (AICPA) has proposed a bylaw change to its code of professional conduct that would require accounting and tax businesses to disclose to clients when services are outsourced to third-party service providers.

Until now, the AICPA has allowed its members to determine whether to inform a client of any work being outsourced to third parties. However, the increase in outsourcing projects for tax and accounting services, particularly overseas, has required AICPA officials to reevaluate member obligations.

"Firms, most notably in India, are offering these services," says Robert Becton, vice president at AICPA. "It’s economical for many accounting firms,” to send data entry and other back-office work to third-party providers so the firms can focus on “the higher-end needs of clients."

In response to the burgeoning outsourcing trend, the Professional Ethics Executive Committee (PEEC) of the AICPA began a project early this year to assess whether its code was due for an update. PEEC released its exposure draft for review on Monday with a deadline for comment by October 8. The rules would apply equally to work outsourced to third-party service providers located domestically or abroad.

The proposed mandate also comes in response to recent discussion and debate by members of Congress, the media, and state and federal regulators about businesses’ responsibility to disclose to clients when they outsource services or production to other countries.

It appears, however, that the rule would simply formalize industry best practices. Ernst & Young spokesman Kenneth Kerrigan told CFO.com that disclosing to clients that some or all of a project may be outsourced "is part of our standard agreement with clients for tax work."

"We’ve done it for a long time, though it's not required," noted Kerrigan.

PEEC is considering amending the following:

• The ethics ruling under Rule 102, Integrity and Objectivity, to require that a member inform the client that the member’s firm is using a third-party service provider for professional services -- before sharing confidential client information with the service provider.

• The ethics ruling under Rule 201, General Standards, and Rule 202, Compliance With Standard, to clarify, to clients, the application of rules 201 and 202 to members who use a third-party service provider for professional services, making clear the PEEC’s position that the member is responsible for all work performed by the service provider.

• Revisions to Ethics Ruling No. 1, “Computer Processing of Clients’ Returns,” under Rule 301,Confidential Client Information, to update and broaden the application of the ethics ruling beyond that of an outside tax-service bureau, and make it applicable to any third-party service provider used by the member.

The revised ethics ruling also would make clear that disclosing confidential client information to a third-party service provider for the purpose of providing professional services to clients, or for administrative support purposes, would not be in violation of rule 301.

The member, however, would be required to enter into a contractual agreement with the third-party service provider to maintain the confidentiality of the client's information. The member would also be required to use reasonable care in determining that the third-party service provider has appropriate procedures in place to prevent the unauthorized release of confidential client information.

AICPA’s Becton said the proposed bylaw changes would addresses a transparency issue, while also strengthening the trust between CPAs and their clients, some of who may not be comfortable with having their information shared with third-parties.

The committee has scheduled an open meeting for October 28 and October 29 to consider the responses.