Benefits of Using Outsourced Accounting Services for Historical Cleanups
Outsourced accounting services have become increasingly popular for businesses looking to streamline their financial operations. This practice involves hiring external CPA firms or individuals to manage various accounting functions, including bookkeeping, payroll processing, tax preparation, and financial reporting.
One specific area where outsourced accounting services can be particularly beneficial is performing historical cleanups, which involve rectifying and organizing past financial records.
This article explores the following:
- What are outsourced accounting services?
- Why should you use an outsourced accounting service?
- Common pitfalls your accounting department may encounter
- Benefits of an outsourced accounting service for historical cleanups
- Timing of a historical cleanup
- What recommendations can an outsourced accounting service provide?
- Methods of conducting a historical cleanup
By leveraging third-party expertise in accounting and financial reporting, organizations can achieve a clean and accurate financial picture and mitigate the risk of non-compliance or financial misstatements.
What Are Outsourced Accounting Services?
Outsourced accounting is the practice of hiring an external CPA firm or individual to manage and perform your business's accounting functions.
This can include tasks such as:
- Bookkeeping
- Payroll processing
- Tax preparation
- Financial reporting
- Accounts payable/receivable management
The main advantage of outsourced accounting is that it allows businesses to focus on their core operations while leaving complex and time-consuming accounting tasks to experts. It can also be a cost-effective solution, as it eliminates the need for hiring and training an in-house accounting team.
Why Should You Use an Outsourced Accounting Service?
Throughout an organization’s life cycle, many major events take place that encourage an organization to make changes so they can be taken more seriously by having better and more accurate financial records.
An organization may need cleaner books and records for one or more of the following reasons:
Investments
- A startup getting their first round of investors beyond family and friends
- Applying for a new loan from the bank
- They’re hoping to be acquired
- Complex equity structure with multiple investment classes
Accounting Methods
- Generally Accepted Accounting Principles (GAAP) compliance is required
- A need to switch from cash/tax basis to accrual basis
Growth or Succession
- A prior accountant has left the company and left account balances that cannot easily be tied out
- An expanding company looking to hire first official employees
Financial Records
- Financial records weren’t regularly maintained and there’s a deadline quickly approaching
- They’ve been keeping financial records for tax return purposes only and are looking for more sophisticated and frequent reporting packages
Specific Accounting Issues
- Accounts receivable or accounts payable with large, inaccurate outstanding balances
- Payroll reconciliations, including payroll liability balance sheet accounts that are negative and may not be used correctly, such as when account balances continue to grow
Technology
They’re looking to switch to a bigger enterprise resource planning (ERP) system—currently have Quick Books and want to switch to NetSuite—and they want to bring reliable data to the new system.
What Are Common Pitfalls Your Accounting Department May Encounter?
Your organization may lack the adequate resources and expertise to conduct an accurate historical clean up.
- Time. The historical cleanup process takes a lot of time and would take time away from the existing workload as day-to-day tasks don’t stop during the cleanup process.
- Lack of expertise. Your accounting team may not have the knowledge or technical accounting expertise needed to clean up the books. Third-party outsourced accounting services often have industry-specific knowledge. They can provide insights and recommendations based on their experience with similar projects and help facilitate a cleanup that’s done correctly and efficiently.
- Objectivity. An outside service provider can provide an objective perspective on the cleanup process, which can be particularly valuable in situations where there may be internal conflicts or disagreements about the best approach. They can provide an independent assessment of the situation and help ensure that the cleanup is done in a fair and unbiased manner.
Benefits of an Outsourced Accounting Service for Historical Cleanups
Outsourced accounting teams can do the work of cleaning up your books and help you save time and headaches, but there are other benefits as well.
Maintain Accuracy
Organizations may not have employees with the skills needed to conduct a historical cleanup and maintain accurate books. Third-party services will often continue to check in after the initial cleanup to help train employees to maintain ongoing, accurate records.
Rather than just a one-time service, third-party providers can help the organization with the back work, which can then help ensure the books going forward are accurate.
Establish Processes
In addition to identifying the cleanup areas, third-party providers can help create processes, so the company doesn’t repeat the same issues.
Generally, third parties will create efficient processes and augment the current team, train them in these new processes, and have ongoing communication so that processes are effective.
Provides a Backup Team
Outsourced accounting services can provide a team who can work with you to accomplish your accounting needs as well as provide project management. They’re able to take on the work, make sure it's being done accurately, on time, and keep things moving along efficiently instead of trying to use internal resources or hire new employees.
Third-party services can provide more manpower and more technical accounting expertise and GAAP knowledge. Hiring a full-time employee with the same level of expertise could cost more than outsourcing the service.
Timing of a Historical Cleanup
Organizations will usually have an outsourced accounting service team project manage the cleanup process and have them clean through a specified date. Typically, this is done at a year end, but it can also be quarter or month end.
Sometimes a cleanup of two periods needs to be conducted simultaneously. This can happen at year end and again at the end of the prior year so there are consecutive years to compare.
What Recommendations Can an Outsourced Accounting Service Provide?
During a cleanup, or after it’s completed, the service provider may recommend reassessing a few aspects of your books or finance processes.
- What’s showing as outstanding in accounts receivable or accounts payable, such as an account that could be written off because it’s more than 120 days old
- Accuracy of lease agreements
- Deferred revenue and revenue recognition policies
- Fixed asset recognition and depreciation policies
- Business process and policies, such as, order to cash, procure to pay, production cycle, cash management, and month end close and reporting
Methods of Conducting an Effective Historical Cleanup
CPA firms can approach a historical cleanup differently. A common approach is to focus on two reports: the balance sheet and the income statement.
Balance Sheet
A firm may start with tying out balance sheet accounts to any third-party documentation that’s available, such as:
- Bank statements
- Loan documentation
- Lease agreements
- Capitalization tables
- Physical inventory counts
They may also review other balance sheet accounts for accuracy and pose the following questions:
- Accounts receivable and accounts payable. Are the open transactions still valid?
- Fixed assets. Is each asset still in use and being depreciated appropriately?
- Clearing accounts. Do these accounts appropriately go to a zero balance?
- Intercompany accounts. Do these tie out to their intercompany counterparts?
Income Statement
The second focus turns to the income statement. By reviewing the income statement by month, the firm can look for trends in account balances and review high risk accounts for common miscodings. They’re able to make adjustments, including moving transactions to the balance sheet as accruals or prepaid amortizations, as needed.
We’re Here to Help
To learn how outsourced accounting services can benefit your business and support historical clean up needs, contact your Moss Adams professional.