Accounting is a generic name for a number of different tasks related to the preparation of ledgers and financial statements (table II.3). These services are mostly required by small firms with limited capacities of their own for these tasks. Thus, the involvement of the large firms in this type of services is rather limited. However, for a large number of small accounting firms bookkeeping and accounting services are their most important activity.
Many small firms with limited accounting capacity rely on accountancy firms in the preparation of their financial statements. Clients without expertise in accounting may even outsource the preparation of internal journals and ledgers to an accounting firm. Some smaller firms may also choose to prepare their own financial statements, but subsequently hire a qualified accountant to control, analyse and correct their accounts. Even large corporations demand certain accounting services from external providers. For instance, an accountant may be consulted in matters related to specific accounting problems: how to depreciate a recent investment, how to
accounting capacity, they also operate more advanced and sophisticated accounting systems. Therefore, these firms with their own accounting sections may still request advice from external experts in more complicated matters.
Table II.3. Accounting and bookkeeping services
Bookkeeping • Handling of vouchers and recording of economic
events (e.g. payments)
• Verification and correction of accounts
Preparation of financial statements • Preparation of accounting documents
• Preparation of periodic financial statements (for
legal purposes) Analyses of accounts and financial
statements
Setting up maintenance and procedures for accounting systems
• Organization of accounting systems
• Review of accounting procedures
Source: Based on annex 1.
Although bookkeeping today is highly dependent on computer processing of data, a substantial amount of manual work remains since vouchers must be recorded and checked against the actual payments. Vouchers are not necessarily paper-based, but most firms still have a long way to go before this type of manual work can be avoided. On the other hand, when all economic events are properly recorded, preparation of financial statements can be made more or less automatically once a computer-based accounting system is set up. In addition, more simple standard analyses of accounts can be made automatically. Internal control and audit of a computer-based accounting system will include control of the computer systems applied, control of paper-based vouchers and other documents affecting the financial statements, and control of inventories and other physical assets. Thus internal control procedures include physical as well as electronic processes. As control and audit of computer systems are much more complicated tasks than physical controls and require specialized expertise, firms may choose to outsource this routine.
Apart from controls related to inventories and physical assets, all bookkeeping and accounting procedures can be provided in arm's length transactions without any physical interaction with the client. Therefore, nearly all these services are transportable, i.e. tradable from a technical point of view (table II.4), although, as the discussion below elaborates, some of them may require support from activities undertaken in proximity to the customer.
In bookkeeping, intensive exchange of information is needed for recording of vouchers and other documents. Much of this communication can take place via the telecommunications network, e.g. by use of electronic data interchange (EDI) or by fax. The use of EDI should make it possible to transport data directly from one computer-based accounting system to another. But the application of EDI necessitates common standards for structuring of data, and although standards for accounting information have been developed, in practice, EDI is mostly used for exchange of accounting information between different departments in the same corporation.
Table II.4. Tradability of bookkeeping and accounting services
Major product Service components Tradability
Handling of vouchers and recording of events Verification and correction
Preparation of accounting documents
Good
Preparation of periodic financial statements Possible
Analysis of accounts and financial statements Good
Organization of accounting systems Poor
Review of accounting procedures Fair
Bookkeeping and accounting services
Advice relating to accounting and book- keeping services
Good
Source: Based on annex 1 and other information obtained from industry experts.
The use of EDIFACT messages for transmission of accounting information will increase the tradability of these services.15 Under the EDIFICAS initiative, EDI messages will be tailored to the needs of the accountancy profession: a number of EDI standards are defined for exchange of accounting information of various kinds (e.g. financial statements, ledgers, accounting entries and so on) based on the internationally recognized EDIFACT standard. This work is supported by international accounting organizations such as the Fédération des Experts Comptables Européens (FEE) and the Society for World-wide Interbank Financial Telecommunication (SWIFT).16 But more intensive use of EDI for transmission of orders and electronic payment will also remove the need for manual recording of vouchers and diminish the need for low-skilled labour in the working process. Introduction of EDI will facilitate further internationalization of accounting activities, but the potential for creating jobs requiring only low levels of skills in developing countries will probably diminish in the process. In this respect, electronic ordering and electronic payment are far more important than electronic exchange of accounting information.
Preparation of financial statements is thus a tradable, but also automated, process once computer-based accounting systems have been installed. Nevertheless, a limiting factor is that preparation of financial statements for legal purposes demands knowledge of national accounting rules. An exception is financial statements related to some kinds of affiliates of TNCs. If an affiliate is not established as a legal entity in a host country, the accounting rules of the country of the parent company apply. In this case, costs and availability of qualified labour will play an important role in determining the location of accounting activities.
Moreover, many standard analyses of financial statements are both highly automated and highly tradable, although more complicated analyses are difficult to conduct in an automatic manner. It is possible to trade the implementation of these types of analyses. Often, they will require extensive knowledge in certain specific areas (markets, production technologies, etc.), but this knowledge will in many cases be independent of the host country of the client and an
The organization of accounting activities demands intensive personal communication with the client. The client may have special problems and wishes to which the accountant must pay attention in the design of the accounting system. In addition, careful instruction given by the client is important. Therefore, at least some local presence is necessary. However, certain routines such as programming of software can be outsourced to any location once the basic design according the client's needs has been carefully specified. A review of existing accounting procedures can easily be made at distance, but again it is necessary to obtain detailed information on special conditions related to the specific client before existing procedures can be improved. The tradability of accounting advice depends on the sort of advice given. Advice on accounting matters is closely related to advice on taxation and to advice on legal matters. However, advice on accounting matters is associated with procedures for preparation of accounts rather than the legal and economic consequences of those statements. Advice on purely technical matters related to an accounting system (e.g. how a certain type of accounting software handles a certain type of records) is the most tradable type. Other kinds of advice presuppose at least a certain level of knowledge of the nature and organization of the client; competence in national accounting procedures will in many cases be essential. Both these types of requirements tend to reduce the potential for trade.