Conducting a proper data security check is one of the most important steps an organization should take when working with an outsourcing provider.
Through this process, organizations can prevent unauthorized data access and reduce the risk of financial loss, regulatory issues, and damage to client trust.
In fact, according to IBM’s Cost of a Data Breach Report 2023, the global average cost of a data breach reached $4.45 million, making it one of the most expensive operational risks businesses face today.
In this article, we'll talk about:
a. Why Outsourcing Is Growing in Finance and Accounting
b. More Reasons Firms Choose Outsourcing
c. Common Data Security Risks in Outsourcing
d. The Importance of Data Security in an Outsourcing Provider
e. Data Security Best Practices in Outsourcing
Many industries today are turning to finance and accounting outsourcing to manage their financial functions more efficiently. Instead of handling every task internally, firms are now working with external providers that specialize in finance and accounting services such as bookkeeping, payroll, tax preparation, and financial reporting.
One of the best examples of this can be seen in the experience of Maxum Foods, a dairy ingredient supplier company. In a case study, one of their executives shared how outsourcing helped support the company’s growth.
“Outsourcing labour intensive practices had allowed our business to scale and grow rapidly in a very cost-effective way and has allowed our [in-house] staff to concentrate on providing a higher level of customer service to our clients which is our competitive edge.”
This example shows how outsourcing can help companies manage growing workloads while allowing internal teams to focus on strategic activities.
Below are more reasons why F&A outsourcing continues to gain traction:
Companies can reduce expenses related to hiring, training, and maintaining a large in-house accounting team.
Outsourcing providers often have trained accountants who already understand financial systems, reporting standards, and compliance requirements.
Routine and time-consuming tasks such as bookkeeping, payroll processing, and financial reporting can be handled more quickly by specialized teams.
Outsourcing allows firms to scale their support team depending on workload, especially during busy periods like tax season.
While these benefits make outsourcing attractive for many accounting firms, they also highlight the importance of protecting sensitive financial data when working with external providers.Below are some of the security issues that may arise when proper safeguards are not in place:
Occurs when sensitive financial information is viewed or used by individuals without proper authorization. This can happen when organizations or an outsourcing provider have weak access controls or when login credentials are shared among multiple users.
• Employees accessing financial data that is not related to their role
• Shared passwords used across multiple systems
• Weak authentication practices that make systems easier to breach
For accounting firms, this can expose client records, payroll details, and internal financial reports.
Another risk arises when outsourcing providers do not follow strong or consistent security standards. If a provider lacks clear data protection policies or monitoring systems, financial information may be more vulnerable to security incidents.
• Outdated security systems
• Lack of regular security audits
• Limited monitoring of user activity
Working with providers that follow recognized security standards can help reduce these risks.
In some cases, outsourcing providers work with additional vendors or subcontractors, often called “downstream” providers, complete certain tasks. When this happens, sensitive financial data may be shared across multiple parties, increasing exposure to third-party risks.
• Limited visibility into who has access to the data
• Different security standards across vendors
• Increased exposure to potential data leaks
Organizations should always understand who will handle their financial information within the outsourcing arrangement.
Cyber threats continue to change, and financial systems are often primary targets for attackers. Criminals may attempt to gain access to financial records through various methods.
• Phishing emails designed to steal login credentials
• Malware that infects financial systems
• Ransomware attacks that block access to data
• Insider threats from individuals misusing authorized access
By having a clear understanding of these risks, your organization can be better prepared to evaluate the security measures used by an outsourcing partner.
Data security plays a major role when outsourcing finance and accounting tasks because these services often involve handling sensitive information such as:
When this data is shared with an external provider, the responsibility to protect it must remain a top priority. In the context of accounting firms, even a small security incident can hamper the day-to-day operations of the organization that can eventually lead to hefty penalties.
Now that we have discussed the common security risks associated with outsourcing, the next step is to understand the best practices organizations can follow to protect their data when working with an outsourcing provider.
When doing your due diligence, take the time to evaluate the provider’s security standards. Reliable providers often hold recognized security certifications that show they follow established data protection practices.
a. ISO 27001, which focuses on information security management
b. SOC 2 Type II, which evaluates how organizations manage customer data
c. PCI DSS, which applies to companies that handle payment card information
These certifications indicate that the provider follows structured processes to protect sensitive information.
Once your outsourcing engagement begins, make sure that the provider’s access to sensitive financial information is strictly limited. This approach enables tighter control over your financial data and reduces potential vulnerabilities.
On top of that, access should only be given to individuals who need it to perform their job responsibilities. Doing this approach helps reduce the chances of unauthorized data exposure.
a. Role-based access permissions, where employees can only view the information related to their specific role
b. The principle of least privilege, which limits access to only the data required for a task
c. Multi-factor authentication, which adds an extra layer of verification when logging into systems.
By strengthening your access controls, you can better manage who can access financial records, client information, and internal reports, helping you strengthen the overall data security in your outsourcing arrangement and reduce the risk of sensitive information being misused or exposed.
You must also prioritize the use of encryption to protect sensitive financial information when outsourcing.
For accounting firms, this is especially important because financial records, tax documents, and payroll data are often shared between internal teams and outsourcing providers. Without encryption, this information may be exposed during data transfers or while stored in digital systems.
a. Data at rest – This refers to financial information that is stored in databases, servers, or cloud platforms. Encrypting stored data helps prevent unauthorized access if systems are compromised.
b. Data in transit – This refers to data that is being transferred between systems, networks, or users. Having a secure transfer protocols can help protect information while it is being shared with outsourcing providers.
Adding another layer of security will help you reduce the risk of data breaches throughout your outsourcing engagement.
Continuous monitoring of financial systems allows organizations to detect unusual activities early and respond before a security issue becomes more serious.
Accounting systems often store valuable financial information, which makes them attractive targets for cyber attacks. Because of this, organizations should regularly monitor system activity to ensure that data is accessed and used properly.
Monitoring tools can help organizations identify issues such as:
a. Unusual login activity, such as logins from unknown locations or devices
b. Unexpected data downloads or large transfers of financial files
c. Multiple failed login attempts, which may indicate unauthorized access attempts
By having a dedicated IT team track system activity, organizations can quickly detect unusual behavior and respond before a security issue becomes more serious.
Conducting regular security audits within the organization and with your outsourcing provider helps ensure that proper data protection practices are being followed. These audits allow companies to review their systems, policies, and procedures to confirm that sensitive financial information remains secure.
Over time, security risks and technology continue to change. Because of this, organizations should regularly assess their security controls to identify possible weaknesses before they become serious problems.
a. Reviewing access permissions to make sure only authorized users can access financial data
b. Checking compliance with security policies and industry standards
c. Evaluating how financial data is stored and transferred between systems
Some organizations also work with independent security specialists to perform third-party security assessments. These reviews can help provide a clearer view of whether current security practices are effective.
Aside from evaluating the provider’s security credentials, organizations should also establish clear agreements on how financial data will be handled throughout the outsourcing relationship.
These agreements help define the responsibilities of both the organization and the outsourcing provider when it comes to protecting sensitive information.
A clear agreement should outline:
a. How financial data will be accessed, used, and stored
b. Who is responsible for managing and protecting the data •
c. What actions should be taken if a security incident occurs.
Many organizations include these requirements in service agreements or data protection clauses. Doing this helps ensure that both parties follow the same security expectations when handling sensitive financial information.
Technology alone cannot prevent security incidents. Employees also play a key role in protecting sensitive financial information. Hence, organizations must educate their employees about the importance of cybersecurity.
Staff members must understand their responsibilities when handling financial data, especially those who regularly access accounting systems.
Some ways to improve security awareness include:
a. Creating a security awareness program that explains the company’s approach to data protection
b. Providing training sessions so employees can recognize common cyber threats such as phishing emails
c. Sharing guides or handouts that explain proper procedures for handling financial information
d. Encouraging managers and partners to participate so they can help promote security practices across the organization
Educating employees and involving them in the process can create a shared responsibility for protecting financial information and maintaining strong cybersecurity practices within the organization.
Lastly, utilizing big data analytics or cutting- edge tools can help organizations strengthen their cybersecurity efforts. These technologies allow businesses to analyze large volumes of system activity and identify unusual patterns that may indicate potential security threats.
Instead of only monitoring activity, data analytics tools help security teams understand patterns in how systems are used. This makes it easier to identify weak points in the system and improve protection before problems occur.
These tools can support security efforts by helping organizations:
a. Analyze system behavior over time to understand normal and unusual activity patterns
b. Identify weak areas in the system that may require stronger security controls
c. Improve decision-making by providing data that helps security teams respond faster
When organizations use advanced tools and data analytics, they can strengthen their overall cybersecurity strategy and better protect sensitive financial information when working with outsourcing providers.
Outsourcing works best when security comes first. This is why choosing outsourcing partners that follow strong security standards is an important step for organizations that plan to share sensitive financial information.
On top of that, doing your due diligence is a must. And it should not be treated as a one-time task only but a regular process that organizations should carry out when working with outsourcing providers, whether it’s a new outsourcing partnership or an existing one.
Consider outsourcing with D&V Philippines. Our accounting professionals work with modern, cloud-based accounting systems to support efficient and secure financial operations. At the same time, our dedicated in-house IT team helps ensure that cybersecurity practices are properly followed across the organization.
If you would like to learn more about our accounting outsourcing services and how we protect our clients' data, get in touch with us today.
You can also visit our D&V Philippines website to learn more about our services or download our Solutions for Australian Accounting Firms whitepaper to learn more about our reliable suite of services.