Auditing Business Process Outsourcing Industry PDF

MODULE 2 Auditing Business Process Outsourcing Industry Overview: Today, many multinational organizations are going through finance, tax, or IT transformation project to drive efficiency and reduce costs. Often, these transformations include the use of technology to automate...

MODULE 2 Auditing Business Process Outsourcing Industry Overview: Today, many multinational organizations are going through finance, tax, or IT transformation project to drive efficiency and reduce costs. Often, these transformations include the use of technology to automate processes or centralizing common functions using shared centers. No matter what delivery model that your organization finds best to support statutory reporting or other compliance tasks, there are four elements that must work together in harmony to enable success: people, process, data, and technology. Business process outsourcing (BPO) remains a strong trend among organizations regardless of size. As early as 2010, 60 percent of CEOs at global enterprises believed that BPO played a very important role in supporting business models (Forbes Insights survey). Today, nearly all companies outsource some part of their operations. Oxford Business Group predicts that the global business process outsourcing industry will be worth $250 billion by the year 2020. Business process outsourcing in the Philippines accounts for 10 to 15 percent of the global BPO market, where the local BPO sector has grown at a compound annual rate of 10 percent over the past decade. The Philippines has also consistently ranked among the top five outsourcing destinations in the world. Module Objectives: Know the nature and background of the particular specialized industry; Learn the overview, statistics, and updates of the specialized industry in the Philippine setting; Identify the different audit considerations and trends for the industry. Nature and Background of Specialized Industry Business process outsourcing (BPO) is the practice of contracting a specific work process or processes to an external service provider. The services can include payroll, accounting, telemarketing, data recording, social media marketing, customer support, and more. BPO usually fills supplementary — as opposed to core — business functions, with services that could be either technical or nontechnical. From fledgling startups to massive Fortune 500 companies, businesses of all sizes outsource processes, and the demand continues to grow, as new and innovative services are introduced and businesses seek advantages to get ahead of the competition. BPO can be an alternative to labor migration, allowing the labor force to remain in their home country while contributing their skills abroad. BPO is often divided into two main types of services: back office and front office. Back-office services include internal business processes, such as billing or purchasing. Front-office services pertain to the contracting company’s customers, such as marketing and tech support. BPOs can combine these services so that they work together, not independently. The BPO industry is divided into three categories, based on the location of the vendor. A business can achieve total process optimization by combining the three categories: 1. Offshore vendors are located outside of the company’s own country. For example, a U.S. company may use an offshore BPO vendor in the Philippines. 2. Nearshore vendors are located in countries that neighbor the contracting company’s country. For example, in the United States, a BPO in Mexico is considered a nearshore vendor. 3. Onshore vendors operate within the same country as the contractor, although they may be located in a different city or state. For example, a company in Seattle, Washington, could use an onshore outsourcing vendor located in Seattle, Washington, or in Huntsville, Alabama. Each BPO company will specialize in specific services. They may be grouped as follows: Customer interaction services: The BPO company would cover a business’s voicemail services, appointment schedules, email services, marketing program, telemarketing, surveys, payment processing, order processing, quality assurance, customer support, warranty administration, and other customer feedback. Back-office transactions: This includes check, credit, and debit card processing; collection; receivables; direct and indirect procurement; transportation administration; logistics and dispatch; and warehouse management. IT and software operations: These technical support functions include application development and testing, implementation services, and IT helpdesk. For example, manual data entry can be replaced with automated data capture, increasing data intake and reducing cycle time. Finance and accounting services: These functions include billing services, accounts payable, receivables, general accounting, auditing, and regulatory compliance. Human resource services: BPOs can help address workforce challenges. They can also cover payroll services, healthcare administration, hiring and recruitment, workforce training, insurance processing, and retirement benefits. Knowledge services: These higher-level processes may include data analytics, data mining, data and knowledge management, and internet and web research, as well as developing an information governance program and providing the voice of customer feedback. How does BPO work? Organizational executives arrive at the decision to outsource a business process through a variety of avenues. Startup companies, for example, often need to outsource back-office and front- office functions because they do not have the resources to build the staff and supporting functions to preform them in-house. On the other hand, an established company may opt to outsource a task that it had been performing all along after an analysis determined that an outsourced provider could do the job better and at a lower cost. Management experts advise enterprise executives to identify functions that can be outsourced and then evaluate that function against the pros and cons of outsourcing to determine if shifting that task to an outsourced provider makes strategic sense for the organization. If so, the organization then must go through the process of not only identifying the best vendor for the work, but also shifting the work itself from in-house to the external provider. This requires a significant amount of change management, as the move to an outsourced provider generally impacts staff, established processes and existing workflows. The shift also impacts the organization's finances -- not only in terms of shifting costs from the internal function to the outsourced providers, but often also in terms of taxes and reporting requirements. The organization may also have to invest in a technology solution to enable the smooth flow of work from the organization itself to the outsource provider, with the extent and cost of that technology solution dependent on the scope of the function being outsourced and the maturity of the technology infrastructure in place at both enterprises. Scope of work As an organization moves a function to a new outsourced provider, it must identify the scope of the work shifting from in-house staff to the external partner. Executives should identify the workflows and processes impacted by this shift and adjust, if necessary, those workflows and processes to accommodate the outsourcing of the work. Executives should also identify the key objectives for outsourcing a function -- whether it's cost savings, increased quality, quicker turnaround or some other objective -- and then use that criteria to determine which provider would be best suited to handle the work. Those objectives should also serve as the basis for contractual obligations that can be used to help assess the performance of the outsourced provider and success of the function once it is outsourced. Overview, Updates, Statistics of the Specialized Industry in the Philippines Globally, the BPO sector is worth over $300 billion. BPO vendors employ more than 3 million people in India, and more than 1 million people in the Philippines. Millions more are employed by BPO companies in Europe and the United States. BPO vendors are located all over the world, especially in developing nations with low income tax. South Africa has shown recent dominance in the BPO market, notably in call centers. Over the years, one of the key reasons behind the growth of BPO in Philippines has been the extended support of the Government led Philippines Development Plan, which ensured incentivized local and international investments and other tax benefits. Also, there have been other contributing factors as well which have played a huge role in how the BPO industry has changed the face of the island nation's economy. Let's have a look at them - 5 Key Factors that Contributed to the Growth of BPO Industry in Philippines 1. In the initial years, when the BPO industry was still in its nascent stages, Bill Gates, the then CEO of Microsoft, donated free Microsoft Apps Licenses to the PCPS program, ensuring the government could hit the ground running with its initiative for fast and effective BPO industry growth in the country, while avoiding huge capital expenditures 2. Investors in the Philippine BPO industry are offered a sizeable number of incentives, including tax holidays, tax exemptions on imported equipment, simplified import procedures, and freedom to employ foreign nationals. 3. Filipino employees are not only fluent in Western-accented English as compared to their Indian counterparts but are also more patient; a trait which comes in handy when facing irate customers. Their close affinity to Western culture, and high problem-solving capabilities also set them apart from other similarly skilled workforce. 4. The government is always quick to pass key legislative changes which favor global organizations looking to outsource to Philippines. A recent example for the same would be the Data Privacy Act, which puts into place stringent international quality data privacy standards, thereby ensuring that sensitive information being handled daily remain secure. 5. Philippines focuses on growing industries in both voice and non-voice sectors such as global in-house centers (GICs), healthcare information management, animation, and gaming also ensured future BPO growth in the country. BPO Philippines Statistics 2020 and the Effects of the Pandemic The ill-effects of COVID-19 have left most SMEs cash-strapped. Some struggled to survive, while some have taken the challenge to ride the tide of change brought by this pandemic. Larger businesses with bigger cash buffers, on the other hand, also experienced a sharp drop in revenues. This is especially true for businesses under the travel, hospitality, and tourism industries. The decline in demand directly affects the BPO industry in the Philippines. Some clients pulled out their accounts, leaving employees on floating status. While these challenges delay the growth of the outsourcing market, many Philippine BPO companies still stand strong. Key points: 16  Investment pledges for January to July 2020 are 37-percent higher compared to the same period in 2019. IBPAP CEO Rey Untal said the pandemic will significantly affect the 2020 headcount and revenue projections. He added that it will also cause changes in the existing work and service models within the industry. The IT-BPM industry continued its business operations and increased its capacity amidst the community quarantines with the support of different government agencies — Department of Trade and Industry, the Philippine Economic Zone Authority, and the Inter-Agency Task Force on Emerging Infectious Diseases. According to UNESCO, the Philippines has an average of 98.2-percent literacy rate — 98.2% for females and 98.1% for males. There are 788 BPO companies composed of large and SMEs, according to PEZA. Effects of COVID-19 3 out of 5 BPO employees are still employed as outsourcing companies utilized the work- from-home strategy. 22% of employees continue to work from the office. The government ordered BPO companies to provide accommodation, shuttle, and meals to employees who work on-site. Before the lockdown, 40% of workers are already working from home. 18% of IBPAP member companies are looking at the option to retrench some of their employees. 36% of IBPAP member companies do not expect any growth while 3% to 7% are still expecting some growth. Globally, the travel, hospitality, and tourism industries got the heaviest hit of the pandemic due to travel restrictions and community quarantines. Enforced community quarantines, which restrict people from going outside their homes, boost the growth of e-commerce-industries, financial services, and logistics To adapt to the new normal, companies invest millions of dollars to facilitate the work-from- home setup. 17 Audit Considerations The Risks of Business Process Outsourcing Security: In outsourcing, especially when information systems (IS) are involved, companies face communication and privacy risks. Security is more difficult to maintain when the business taking care of your IS is not in the same country, especially one with different security requirements. Potential data privacy breaches and vulnerability disclosures are a real threat, particularly with the current prevalence of hacking. The internet, which makes BPO for IT feasible, also may offer a portal through which hackers enter. Underestimating the costs of services: Companies that employ BPO vendors often underestimate the running costs, especially in upgrades and contract renegotiation. Other hidden costs include vendor selection, currency fluctuations, hardware and software upgrades, internal transitions, layoffs, and the potential decrease in individual worker productivity. Overdependence on service providers: Once a company designates a vendor for specific processes, the vendor becomes a part of the workflow. The company can incur extraneous costs and decreased productivity when the vendor encounters problems or lapses in its work — for example, when the cost of hiring workers increases. Vendors often replace veteran employees with less experienced workers to keep costs down, and quality suffers as a result. Communication issues: Language barriers can limit activities when your company hires individual service providers spread across the globe. This can result in delays in new processes and curbs on feedback from different departments, and it can potentially magnify current problems in your business operations. Further, customer-facing services may present language barriers to third-party vendors. When outsourcing your processes and parts of your business, you face significant risks, depending on the type and structure of your company. For example, in very large segmented companies, outsourcing only the back data entry can carry a low risk. But for a small business that is reliant on BPO as part of its manufacturing, the risk increases. Other possible risks associated with outsourcing include: Data breaches Quality control 18  Operation restoration Nonlocal employees Maintenance of strategic alignment Political instability Changes in technology and exposure to hacking Specialization to the point that the niche demand is no longer necessary Tax Considerations A form of government support for the Philippine BPO industry is the Special Economic Zone Act that provides tax incentives, exemptions, and other privileges to foreign investors. Income tax holiday or corporate income tax exemption for four to eight years Option to pay a 5% gross income tax in place of all national and local taxes after the tax holiday. Tax-free and duty-free import of capital equipment, spare parts, supplies, and raw materials Permanent resident status for foreign investors (and their immediate family members) with an initial investment of US$150,000 Assessments: 1. State the nature and background of the specialized industry. 2. What are the relevant statistics, and updates of the specialized industry in the Philippine setting? 3. Identify the different audit and accounting considerations and trends for the industry. 4. Look for at least 2-3 audited financial statements of companies under the specialized industry in the Philippines and list down your observations from audit report to the financial statements. 19