"Outsourcing Tax Returns is not in the Public Interest"

Steven M. Mintz
Claremont McKenna College

The practice of outsourcing income tax returns threatens to tear away at the fabric of ethical standards that has been unraveling in accounting ever since the culture in the profession shifted from one of putting the public interest first to emphasizing commercialism, economic gain, and just plain greed.

We all know about the change in ethical standards during the decades of the 1980s and 1990s that now permits competitive bidding, advertising and the solicitation of clients. That was followed by a dramatic shift away from providing audit services to clients to "selling" nonaudit services, especially consulting services such as providing advice on information systems and other management issues.

Also, in the 1980s and 1990s business failures at ZZZZ Best, ESM Government Securities and the S&L debacle prompted the question asked in Congress: "Where were the auditors?" Perhaps the mantra in the 2000s will be "Where were the corporate governance systems that should protect against the failures in companies such as Enron, WorldCom, Tyco and Adelphia?" Alas, that is a subject for another day.

Outsourcing is just another example, like allowing illegal immigrants to receive driver's licenses, of putting economic and political interests ahead of doing the right thing. We need to examine issues like these from an ethical perspective. You know, is it right or wrong? Is it consistent with the values in our society?

Most writers on the subject present a one-sided view of the issue justifying outsourcing based on economic issues and the potential future market demand for American products by consumers in "outsourcee" countries that result from the benefits derived by job transfers. One problem with this analysis is the failure to consider the social costs of job displacement. For me, the issue is: Should I, as a college professor, advise my students not to study computer programming or software development because in four years, when they are ready to graduate, those jobs will be handled primarily from India?

What should they study in college? How about accounting? Now there's a novel idea. Maybe they can emphasize taxes. Everyone pays taxes — right? Yes, but as CNN's anti-outsourcing guru, Lou Dobbs, recently reported: "Tax experts estimate between 150,000 and 200,000 American tax returns were prepared in India this year." What if it was your tax return? Would you want to know that the sensitive personal tax information given to your American preparer might be transmitted to someone in India (or wherever) who put the return together and transmitted it back to the U.S.? I sure would.

The California legislature recently found that the US has lost nearly 3 million jobs over the last three years, with at least 15 percent being outsourced to a foreign country. Outsourcing by the state and local technology sector is a growing trend, with an estimated $10 billion in net contract value having been outsourced to foreign countries in 2003. By 2008, an estimated $23 billion in net contract value will be subject to outsourcing by this sector. According to Cynthia Kroll, Senior Regional Economist at UC Berkeley, at least 14 million service sector jobs are at risk of being outsourced over the next decade.

The ethical issues of outsourcing became clear when it was disclosed in an article in the San Francisco Chronicle on October 22, 2003, that a Pakastani transcriber of medical information threatened a medical center in San Francisco with posting patients' medical records online unless she received more money for her services. While the matter was ultimately resolved, the dangers are all too apparent. Outsourcing potentially compromises the confidentiality of patient and tax information and the practice is unethical unless the consumer of the service is given the right to "opt out" of the arrangement.

So, what has the powers that be in the accounting profession said or done about the trend towards outsourcing? Well, the AICPA has formed an "Outsourcing Task Force" to consider the appropriateness of current guidance related to the legal and ethical considerations in using overseas entities to perform tax work for clients.

In an article by Richard I. Miller and Alan W. Anderson that was published in the Journal of Accountancy in March 2004 and is referenced to on the Institute's website, the authors provide good advice when they state that CPAs must satisfy themselves about the competence, practices and procedures of the third-party provider and that reasonable steps should be taken to ensure the confidentiality of client information. However, they fall short when they conclude that the Institute's Code of Professional Conduct does not require CPA-members to advise clients regarding their use of a third-party provider.

Miller and Anderson's narrow interpretation of the Code places the technical form of the rules of conduct over their ethical substance. While disclosure may not be required by the rules, the Principles of the Code do obligate CPAs to place the public interest above all other interests, including their own self-interest. The Principle of Integrity requires CPAs to be honest and candid within the constraints of client confidentiality. It calls for "doing what is right and just and, when conflicts exist, making decisions by observing both the form and the spirit of technical and ethical standards." The right thing to do is fully disclose the circumstances of the engagement and let the client decide whether to "opt out" of the arrangement.

I'm reminded of the basic tenet of ethical behavior that says, "Ethical people often choose to do less than the maximally allowable, and more than the minimally acceptable." The AICPA Task Force would be wise to consider these words in developing appropriate guidance for outsourcing and reject the "don't ask, don't tell" advice of Miller and Anderson. If the Institute does not, then it will be missing a golden opportunity to prove to the public the tide has changed in the profession and CPAs are, indeed, looking out for the public interest as is the profession's mandate.

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