Transaction costs and control of outsourced accounting: Case evidence from India

Abstract

This paper adopts a transaction cost and management control theoretical framework to advance our understanding of offshore outsourcing of all, or elements of, the accounting function. Interviews with vendors of offshore accounting and finance (AF) outsourcing services based in India and one UK-based client provide a number of case studies of the control of this relatively novel activity. We describe cases of three offshore relationship types including fully owned and operated offshore subsidiaries, vendors servicing former parents, and third-party outsourcing vendors; our analysis focuses on the latter two. The paper identifies potential transaction costs and control problems at successive stages of an outsourcing relationship that crosses both time (zones) and institutional boundaries, and is characterised by high levels of uncertainty and potential opportunism. We examine the practices and controls available (particularly to vendors) to limit the transaction costs due to high uncertainty and potential opportunism, and facilitate the offshore outsourcing of a wide range of accounting activities. This includes highly specific activities that one might expect to be provided in-house according to transaction-cost economics.