DOES OUTSOURCING OF ACCOUNTING SERVICES INCREASE PROFITABILITY OF SMES

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PENTECOST UNIVERSITY COLLEGE
FACULTY OF BUSINESS ADMINISTRATION
DEPARTMENT OF ACCOUNTING
DOES OUTSOURCING OF ACCOUNTING SERVICES INCREASES
PROFITABILITY IN SME’s
OWUSU-SEKYERE BISMARK ADU
10126153
APRIL, 2012

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ACKNOWLEDGEMENT
Several key persons have contributed immensely to the successful completion of this project
work and are highly acknowledged for their invaluable contributions. First is Mr Moses Oppong
the head of Accounting Department Pentecost University College and my supervisor for making
time out of his busy schedule to supervise this whole project work. Secondly is Prof. Stephen
Adei ( Professor of Leadership and Economics, Pentecost University College), who is also my
boss for reading through the manuscript and making necessary suggestions and for his endless
encouragement and support in all areas of life.
Also deserving are the following people Miss Beatrice Hanson, Mr Asare David (Success), Mr.
Philip Asiedu Pascal, Mr. Timothy Adei ( son of Prof. Adei), Mr Tannor Linus (CEO of Lilitan
consultancy and Research) for their support. Most especially Miss Beatrice Hanson who
supported me morally, financially and spiritually. I say may the good Lord bless her. Not to be
left out is the able outgone and current executives of PENSA-PUC for their support.

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DECLARATION
I hereby do solemnly declare that the work presented in this dissertation had been carried out by
me and has not been previously submitted to any other University, College or Organization for
an academic qualification, certificate, diploma or degree.
I hereby warrant that
The work I have presented does not breach any existing copyright.
I further undertake to indemnify the university against any loss or damage arising from breach of
the forgoing obligation.
Signature ………………………………………………
Students Full Name OWUSU-SEKYERE BISMARK ADU(MASTER)
Date ……………………………………
Department ACCOUNTING
Supervisors Name MR. MOSES OPPONG
Signature .....................................................
Date ......................................................

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ABSTRACT
Outsourcing has been criticized as a practice that destroys jobs and praised as a way to cut costs
and remain competitive. The accounting profession has utilized outsourcing to avail itself of
expertise that is not available within the firm and to cut the cost of offering a variety of
accounting and tax services
I investigate the relationship between outsourcing of accounting services and profitability of
SME‟s paying particular attention to the endogeneity of outsourcing. I distinguish outsourcing of
accounting services from outsourcing of services inputs. I find that firms that are substantially
larger than the mean employment size benefit from outsourcing materials and services inputs,
while this does not appear to be the case for small firms. Results for outsourcing of accounting
services are not as clear-cut, however. The study seeks to find out the type of accounting that
SME‟s outsource and to find out if the accounting services outsourced really leads to increase in
the profitability of SME‟s.

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TABLE OF CONTENTS
Table of Contents
Acknowledgements....................................................................................... i
Dedication......................................................................................................ii
Declaration.................................................................................................... iii
Abstract.........................................................................................................iv
CHAPTER ONE: INTRODUCTION
Introduction...................................................................................................8
Background of the study...............................................................................8
Problem statement........................................................................................10
Research objectives......................................................................................10
Research questions.......................................................................................10
Definition of terms........................................................................................11
Organization of the study..............................................................................12
Limitation of the study .................................................................................14
CHAPTER TWO: REVIEW OF RELATED LITERATURE
Extent of Review..........................................................................................15

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Outsourcing and profitability.......................................................................15
Definition and Concept of outsourcing...............................................................19
Outsourcing of services.......................................................................................21
Outsourcing of Tangible Assets.........................................................................22
Outsourcing and organizational performance.....................................................23
Definition and Concepts of SME‟s......................................................................24
CHAPTER THREE: METHODOLOGY
Introduction.........................................................................................................26
Population............................................................................................................26
Research design....................................................................................................26
Methods of Sampling.............................................................................................29
Research instruments..............................................................................................29
CHAPTER FOUR: RESULTS, FINDINGS AND DISCUSSIONS
Introduction...........................................................................................................31
Age ........................................................................................................................31
Level of Education.................................................................................................33

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Outsourcing ..........................................................................................................33
Do You Outsource Some of Your Services?...........................................................35
Why do you outsource some of your Services?.......................................................37
Types of accounting service that leads to profitability.............................................37
Accounting Service that led to profitability .............................................................39
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
Introduction............................................................................................................41
Summary................................................................................................................41
Conclusions.............................................................................................................42
Recommendation....................................................................................................43
REFERENCES .....................................................................................................44
APPENDIX.............................................................................................................47

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CHAPTER ONE
INTRODUCTION
1.0 BACKGROUND OF THE STUDY
We live in an age of outsourcing. Firms seem to be subcontracting an ever expanding set of
activities, ranging from product design to assembly, research and development to marketing,
distribution and after-sales service. Some firms have gone so far as to become “virtual”
manufacturers, owning designs for many products but making almost nothing themselves
Görgand Hanley (2004).
For the past two decades, the outsourcing of small scale enterprises has grown phenomenally. In
the past, firms used to implement staff functions inside, now many activities are usually
outsourced to external companies. According to the Financial Times (Financial Times, 31 July
2001, p. 10.) sub-contracting as many non-core activities as possible is a central element of the
new economy. A fundamental question to ask is whether outsourcing is value enhancing and, in
particular, whether the firm that undertakes outsourcing shows higher profitability as a result.
Has it led to profitability? It has, what services have been profitable and which ones have not.
What services, which industries? etc.
Recent evidence from practitioners casts some doubt on the benefits to outsourcing. A survey by
Manpower focusing on the benefits accruing to firms from off shoring services, found that 68
percent of firms outsource at least some services, the main motivation being cost reduction.
However, in a recent survey, 56 percent of outsource specialists claimed that outsourced work
was at least inferior to that produced in-house Fixler and Siegel (1999). More worryingly;
percent reported that the outsourced work actually induced a setback to the firm‟s production.
For instance low productivity and as a result led to decrease in profit.
We are now at a point where experts beginning to question the validity of outsourcing as a long-
term strategy or even short term as a cost reduction exercise.
There are only a very limited number of more rigorous studies looking at this issue in Ghana.
Elsewhere the evidence that has been produced in such papers, however, suggests that the value-
enhancing link between outsourcing and profitability is not clearly established. Specifically,
Kimura (2002) did not find any evidence that subcontracting leads to higher profits in Japanese
manufacturing firms. Differentiating between outsourcing of services and non-services inputs,

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Görzig and Stephan (2002) found that outsourcing of materials is positively correlated with
profits, while there is a negative relationship between profitability and outsourced services for a
sample of German small scale enterprises
Motivated by the benefits to outsourcing claimed by some practitioners and the corresponding
lack of any direct evidence as to the truth behind these assertions. The introduction of ICT has
enabled business activities to be conducted in entirely new ways, as well as across large
distances. This has opened possibilities of trade in a variety of services both large and small that
were traditionally non-tradable, outsourcing is increasing as a result including small scales
enterprises.
In today‟s context of globalization and intense competition, outsourcing of accounting services
appears to be a widespread tool applied by companies and small scale enterprises in their effect
to remain competitive.
This strategy provides advantages for outsourcers such as increasing flexibility, decreasing cost
structure or access to advanced technology. Multiple aspects of the trend to externalize or
outsource have been examined to determine whether it increases profitability.
1.1 STATEMENT OF THE PROBLEM
However, the fundamental question whether outsourcing of accounting services affects
positively firms performance has not been solved. Some case studies have reported that firms
tend to underestimate the transaction costs associated with outsourcing (Görzig, Stephan, 2002).
For instance, it has been documented that many firms have again “in sourced” activities that
were previously performed by external firms, because they were dissatisfied with the quality or
because they have underestimated the amount of asset specific investments (Benson, 1999;
Young, Macneil, 2000).
The issue at stake now is that does outsourcing of accounting services increase profitability? Do
small scale enterprises use outsourcing to increase profitability? What impact does outsourcing
have on small scale enterprises? Which kind of small scale enterprises adopt the use of
outsourcing of accounting services? What percentage rate does outsourcing of accounting
services increase the profit of small scale enterprises? What are the answers to these questions?
The study seeks to address these key issues.

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1.2 OBJECTIVES OF THE STUDY
Based on the above analysis, the research has the following as objectives.
 To determine if outsourcing of accounting services has led to profitability
 What accounting services leads to profitability?
 Are customers benefiting from cost saving accruing from outsourcing of accounting
services?
1.3 RESEARCH QUESTIONS
The research questions are as follows
 Has outsourcing led to profitability?
 What accounting services leads to profitability?
 Are customers benefiting from cost saving accruing from outsourcing of accounting
services?
1.4 ORGANIZATION OF THE STUDY
The study was organized into five chapters as follows:
1.4.1 CHAPTER 1
The chapter one of this study will cover the nature and the background of the study; taking into
consideration, the statement of the problem, rational of the study, research questions,
assumptions, limitations and delimitations. Certain terminologies concerning the area of the
study defined.
1.4.2 CHAPTER 2
This chapter will also cover the entire literature review of the proposed topic. Both the
theoretical and empirical literature (prior research and related literature) considered.
1.4.3 CHAPTER 3
Chapter three of the research will cover methodology of the study; where questionnaires, tests,
survey instruments developed. The researcher will define the population and indicate sampling
method used and how data was collected. It will also include the study design and statistical test
that was used to analyze the data.

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1.4.4 CHAPTER 4
This chapter explained the result of the statistical analysis of the data. It states whether the null
hypothesis should be rejected or not. A Statistical table used to analyze the data included here.
1.4.5 CHAPTER 5
This chapter summarized the result of the study and explained any conclusions that have resulted
from the statistical analysis of the data. The researcher cited and explained any shortcomings of
the study. Recommendations obtained from the study were included here. Further study is should
be suggested.
1.5 DEFINITION OF TERMS
1.5.1 Outsourcing
Outsourcing is often viewed as involving the contracting out of a business function commonly
one previously performed in-house - to an external provider. In this sense, two organizations may
enter into a contractual agreement involving an exchange of services and payments.
Simply put, outsourcing is the contracting of a third party to manage a business process more
effectively and efficiently than can be done in-house.
1.5.2 Small scale enterprise
There is no single, uniformly acceptable, definition of a small firm (Storey, 1994). Firms differ
in their levels of capitalization, sales and employment. Hence, definitions which employ
measures of size (number of employees, turnover, profitability, net worth, etc.) when applied to
one sector could lead to all firms being classified as small, while the same size definition when
applied to a different sector could lead to a different result.
The first attempt to overcome this definition problem was by the Bolton Committee (1971) when
they formulated an “economic” and a “statistical” definition. Under the economic definition, a
firm is regarded as small if it meets the following three criteria:
 It has a relatively small share of their market place;
 It is managed by owners or part owners in a personalized way, and not through the
medium of a formalized management structure;

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 It is independent, in the sense of not forming part of a large enterprise.
The Committee also devised a “statistical” definition to be used in three main areas:
(a) Quantifying the size of the small firm sector and its contribution to GDP, employment,
exports etc.
(b) Comparing the extent to which the small firm sector‟s economic contribution has changed
over time;
(c) Applying the statistical definition in a cross country comparison of the small firms‟ economic
contribution. Thus, the Bolton Committee employed different definitions of the small firm to
different sectors.
European Commission (EC) coined the term `Small and Medium Enterprises (SME)‟. The SME
sector is made up of three components:
 Firms with 0 to 9 employees - micro enterprises
 10 to 99 employees - small enterprises
 (Iii) 100 to 499 employees - medium enterprises.

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1.5.3 Profitability
Profitability refers to the potential of a venture to be financially successful. This may be assessed
before entering into a business or it may be used to analyze a venture that is currently operating.
A financial gain, especially the difference between the amount earned and the amount spent in
buying, operating, or producing something.
1.5.4 in Source
In sourcing is the opposite of outsourcing that is in sourcing (or contracting in) is often defined
as the delegation of operations or jobs from production within a business to an internal (but
„stand-alone') entity that specializes in that operation. In sourcing is a business decision that is
often made to maintain control of critical production or competencies. An alternate use of the
term implies transferring jobs to within the country where the term is used, either by hiring local
subcontractors or building a facility. In sourcing is widely used in an area such as production to
reduce costs of taxes, labor, transportation, etc.
1.6 LIMITATION OF THE STUDY
There have been some few challenges encountered by the researcher. Some few of the
challenges are outlined below
Time limit; due to lack of time, the researcher restricted himself to only on few small scale
enterprises in Ghana.
Finances; due to lack of finance on the side of the researcher he found it difficult to go in to
details of the project because there was no sponsorship.
Another limitation or constraint is that the respondents were filling reluctant to give out
information for the fear of giving out confidential information of the firm out.
The operators of SME‟s were also finding it difficult to give out information to the researcher.
Most often too the right people were not in the position to give the researcher the data to be able
to carry out the research. These were few challenges encountered by the researcher in the
carrying out of the research.

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CHAPTER TWO
REVIEW OF LITERATURE
INTRODUCTION
2.0 EXTENT OF REVIEW
According to Horngren (2000, pg. 383), Outsourcing is the process of purchasing goods and
services from outside vendors rather than producing the same goods or services within the
organization, which is called in sourcing. Decisions for a producer of goods or services to in source
or outsource are also called make-or-buy decisions, sometimes qualitative factors dictate
management make-or-buy decision.
The most important factors in make-or-buy decision are quality, dependability of supplier and cost.
As a matter of fact, not only are the activities transferred, but the factors of production and decision
rights often too. Factors of production are the resources that make the activities occur and include
people, facilities, equipment, technology and other assets. Decisions rights are the responsibilities
for making decisions over certain elements of the activities transferred.
Calingo (1997, pg. 10), in general, a viable strategy is one where the organization is able to exploit
environmental opportunities and/or ward off the threats it faces by employing its strengths and
overcoming its weaknesses in order to achieve its performance goals and objectives.

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Besides cost and profitability considerations, sourcing decisions also involve consideration of
strategy issues, detailed financial evaluation, and efficiency and risk dimensions relating to supplier
quality, lead times and delivery reliability (Tayles and Drury, 2001). To add to Tayles and Drury,
in any issues of outsourcing the firm needs to critically look at the cost they will incur as compared
to the profit they will make. This will help the firm to ensure that whatever services that they will
outsource will be very efficient and effective and will add up to the firm‟s quality delivery to their
customers.
Essentially, outsourcing addresses the issue as to whether a firm should make or buy
intermediate inputs; an issue that has a long tradition in economics, dating back to the seminal
work by Coase (1937) on the boundaries of a firm. Since then, a large body of literature has been
concerned with analyzing the determinants of this “make-or-buy decision”, focusing on the role
of incomplete contracts, specific assets and transactions costs (Williamson, 1975, Grossman and
Hart, 1986, Bolton and Whinston, 1993). In a nutshell, firms would prefer to “buy” as opposed to
“make” as long as the cost of outsourcing is lower than in-house production. Hence, outsourcing
can be used to economize on production cost, in particular labor cost (Abraham and Taylor,
1996) by substituting in-house production with the buying-in of components. The cost of
outsourcing is not only determined by the price of the bought-in components, but also by
transaction costs due to transport and incomplete contracting costs, and the possible
simplications of asset specificity for supplier and/or customer. In a recent paper, Grossman and
Helpman (2002) provide a comprehensive theoretical analysis of firms‟ outsourcing decisions. In
their model, firms decide whether to be vertically integrated or to outsource production of
components to specialized producers.
This involves a search process, whereby final good producers search for subcontractor‟s and vice
versa. There is incomplete information – subcontractors cannot easily signal their quality – and
therefore a potential for a hold-up problem arises. Grossman and Helpman (2002) show that the
viability of outsourcing is determined by the distribution of bargaining power between the two
parties involved, the degree of competition in the market, and the number of potential partners in
the market.
Taking this as a theoretical background, one may expect that the benefits from outsourcing are
not always the same, but in particular depend on the characteristics of the firm and industry in
question. Large firms may be in a better position to achieve high bargaining power vis-à-vis

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suppliers or small or medium scale enterprises and may hence be better able to benefit from
outsourcing. Also, large firms may face lower search costs as they may be better established in
the market and have better knowledge of competitors and suppliers than small establishments or
enterprises.
In terms of industry characteristics, if there are more potential subcontractors in the industry, if
the bargaining power is tilted towards the final good producers, or if the level of competition is
high among subcontractors, final good producers are more likely to find outsourcing a viable
strategy.
From our data set, we can distinguish outsourcing of tangible materials and components from
outsourcing of services activities. For the latter, one may expect that many of the services are
non-traded and therefore localized with possibly only a small number of potential suppliers and
low degrees of competition. Hence, one may expect the benefits (if any) from services
outsourcing to be lower than the outsourcing of tangible (and tradable) components. The firms
that engage in materials outsourcing experience benefits, in terms of increased returns per
employee, while services outsourcing induces a negative effect on measured returns.
In related work, Kimura (2002) discovers that poorly performing firms (low surplus to sales and
low value added to sales) are more likely to use subcontractors, in an analysis of the Japanese
machinery manufacturing industry. He concludes that profits are highest for those firms that do
not get involved in any type of subcontracting, whether as a supplier or as an outsourcer. These
results, accordingly, are in line with the findings for Germany by Görzig and Stephan (2002).
2.1 DEFINITIONS AND CONCEPTS OF OUTSOURCING
Definitions of “outsourcing” vary widely, ranging from the simple getting someone else to do
your work for you to the complex the acquisition of services from external service providers.
Basically defined, outsourcing is the transfer of an internal service or function to an outside
vendor (Bordeianu and Benaud 1997). Outsourcing is a new name for the old practice of
“contracting out” for services that organizations chose not to provide internally with their own
staff. Whatever the definition, outsourcing has become a standard practice in both the corporate,
the not-for-profit worlds and small and medium enterprises
First a cost cutting measure, outsourcing exploded in the 1990s and became identified as a
method of spinning off unnecessary work in order to focus the organization on its primary goals.
Processes and functions identified as not central to the enterprise are contracted out to other

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firms that specialize in providing those products or services, in theory enabling the contracting
organization to concentrate its resources on the core business.
Outsourcing is defined in this paper as a regulated entity‟s use of a third party (either an
affiliated entity within a corporate group or an entity that is external to the corporate group) to
perform activities on a continuing basis that would normally be undertaken by the regulated
entity, now or in the future.
Outsourcing can be the initial transfer of an activity (or a part of that activity) from a regulated
entity to a third party or the further transfer of an activity (or a part thereof) from one third party
service provider to another, sometimes referred to as “subcontracting.” In some jurisdictions, the
initial outsourcing is also referred to as subcontracting.
SMEs should consider several factors as they apply these principles to activities that fall under
the outsourcing definition. First, these principles should be applied according to the degree of
materiality of the outsourced activity to the SMEs business. Even where the activity is not
material, the outsourcing entity should consider the appropriateness of applying the principles.
Second, SMEs should consider any affiliation or other relationship between the outsourcing
entity and the service provider. While it is necessary to apply the Outsourcing Principles to
affiliated entities, it may be appropriate to adopt them with some modification to account for the
potential for differing degrees of risk with respect to intra-group outsourcing.
Third, the SME may consider whether the service provider is a regulated entity subject to
independent supervision.
According to this definition, outsourcing would not cover purchasing contracts, although as with
outsourcing, SMEs should ensure that what they are buying is appropriate for the intended
purpose. Purchasing is defined, inter alia, as the acquisition from a vendor of services, goods or
facilities without the transfer of the purchasing firm's non-public proprietary information
pertaining to its customers or other information connected with its business activities.

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2.2 OUTSOURCING OF SERVICES
Service, is delegated to an external commercial agency (American Library Association
1999a, 3). From my point of view, outsourcing of services is in that nature of the outsourcing
relationships that what is provided by the supplier to the customer is essentially a service rather
than a material commodity.
Most firms especially Small and Medium Enterprises engage in outsourcing of services.
Normally, the services they outsource do not form part of their core businesses and even if it
does they outsource those services because they want comparative cost advantage and enhance
the performance of SME‟s.
Financial firms have entered into outsourcing arrangements for many years, albeit not to the
extent seen in the recent past. For example, in the securities industry, since the 1970s, firms have
outsourced quasi-clerical activity, such as the printing and storage of records. This was
undertaken because of the comparative cost savings.
In recent years, there has been growing interest in what; I will term market-mediated work
arrangements: contracting out for business support services, subcontracting and the use of
temporary employees. Much of this interest has been attracted by the rapid expansion of
employment in the business service sector and by less systematic evidence suggesting that
production subcontracting, shot term hiring the use of on cell workers and a variety of similar
arrangements have become more common as well.

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2.3 OUTSOURCING OF TANGIBLE ASSETS
Many companies which previously considered outsourcing accounting related functions were
unsure of whether to outsource. On one hand, strict legislation had come about that few people
completely understood. The question of what to make in house and what to buy from other
source is an issue as old as the manufacturing activity itself (Robert, 1996). Dubois (1998)
indicates that even in the 18th and 19th centuries, for ship builders and textile industry, sub
contracting was prevalent; Blumberg (1998) points out that outsourcing has been with us since
ancient times, when empires hired troops of other Nations to guard their borders.
2.3.1 COST
Initially, much of the theory on outsourcing produced in the early 1990s made the underlying
assumption that outsourcing can by itself, reduce cost of service / or increase efficiency
(Blunberg, 1998). At a basic level, certainty in the manufacturing sector, outsourcing for cost
reasons can occur when a suppliers cost are low enough that even with added overhead, profit
and transaction costs, suppliers can still deliver a service for a lower price (Kremic et al, 2006).
This higher level of efficiency can be achieved through specialization (i.e. greater technology or
knowledge) or through economics of scale on behalf of the supplier.
Alexander and Young (1996), however point out that large this is not always the case.
Sometimes, large organizations internal economies of scale can be greater than that of potential
suppliers; in other cases a firm expertise or technological knowledge might be so specialised that
no supplier will be able to match it and thus maintain necessary quality.
The notion of being able to lower costs whilst maintaining revenue streams and quality of
product is one that is extremely attractive for any business and cost efficiency was still the
primary explanation for the development of outsourcing of accounting services in 2000
according to Fill and Visser. However, unfortunately, it is also well recorded that failure to
achieve anticipated cost improvement is frequently occurring aspect of outsourcing of tangible
assets (Jennings, 2000). This was looked into further in 2006 by Jiang and Qureshi, who find that
though much has been written on understanding outsourcing, determining the specific impact of
outsourcing on firm‟s performance and value has not been confirmed by research.
2.4 OUTSOURCING AND ORGANIZATIONAL PERFORMANCE

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Most firms either concentrate on their core area of operations as much as there are areas that
they outsource. These sometimes happen as a result of time and sometimes limited availability of
resources. Because of resource limitations, few firms have the ability to apply world-class
resources to all areas of competition. Thus, in order to gain competitive advantage they must
select areas in which they will concentrate their resources (Hamel and Prahalad, 1994). By
outsourcing to specialist organizations services not generated by core competences, companies
can see an improvement in their organizational performance (Kotabe, 1989) Gilley and Rasheed
(2000) state that there are three reasons for this. Firstly, the acquisition of non-strategic services
allows the organization to centre on what it really can do well, that is, on the services whose
resources have a high strategic value (Gilley, et. al. 2004). Such a focusing on services not
included in the core competences can increase performance and allow the company to be more
flexible. Secondly, increasing the outsourcing of non strategic services can improve both the
quality and the service (Dess et al., 1995). By this I think that if firms outsource some part of its
service, the outsourced firm will provide quality service that will enhance activities of the
organization.
Lastly, the outsourcing of services of low strategic value enables the company to reduce costs
and improve its competitive position (Gilley and Rasheed, 2000; Espino-Rodriguez and Robaina
2004).
Some research shows that companies that make alliances by trusting external sources have better
results, reduce risks and improve the quality ratio while also increasing their capacity of
innovation and flexibility (Espino-Rodriguez and Robaina 2004). Kotabe et al. (2008) propose a
dynamic perspective, which suggests an inverted relationship between outsourcing and
performance ( Kotabe et al. 2008; Lee and Kim 2010).
2.5 DEFINITIONS & CONCEPTS OF SMES
There is no single, uniformly acceptable, definition of a small firm (Storey, 1994). Firms differ
in their levels of capitalization, sales and employment. Hence, definitions which employ
measures of size (number of employees, turnover, profitability, net worth, etc.) when applied to
one sector could lead to all firms being classified as small, while the same size definition when
applied to a different sector could lead to a different result. The first attempt to overcome this

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definition problem was by the Bolton Committee (1971) when they formulated an “economic”
and a “statistical” definition. Under the economic definition, a firm is regarded as small if it
meets the following three criteria:
 it has a relatively small share of their market place;
 it is managed by owners or part owners in a personalized way, and not through the
 medium of a formalized management structure;
 It is independent, in the sense of not forming part of a large enterprise.
The Committee also devised a “statistical” definition to be used in three main areas:
 quantifying the size of the small firm sector and its contribution to GDP, employment,
exports etc.;
 comparing the extent to which the small firm sector‟s economic contribution has changed
over time;
 Applying the statistical definition in a cross country comparison of the small firms‟
economic contribution.
Tin smiting, ceramics, timber and mining, bricks and cement, beverages, food processing,
bakeries, wood furniture, electronic assembly, agro processing, chemical based products and
mechanics (Liedholm& Mead, 1987; Osei et al, 1993, World Bank, 1992; Gray, Cooley &
Lutabingwa, 1997).
It is interesting to note that small scale enterprises make better use of scarce resources than
large scale enterprises. Research in Ghana and many other countries have shown that capital
productivity is often higher in SMEs than is the case with LSEs (Steel, 1977; Child 1971).
The reason for this is not difficult to see, SMEs are labor intensive with very small amount of
capital invested. Thus, they tend to witness high capital productivity which is an
economically sound investment. Thus, it has been argued that promoting the SCE sector in
developing countries will create more employment opportunities, lead to a more equitable
distribution of income and will ensure increased productivity with better technology (Steel &
Webster, 1991).

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CHAPTER THREE
3.0 RESEARCH METHODOLOGY
This chapter is devoted to methodology. It details the various methods used for the study. The
researcher defines the population considered for the study, and discusses how the sampling was
carried out. Other sub-heading discussed include: survey instruments used, data type and
collection methods, and statistical tools that were used to analyze the data collected
3.1 POPULATION (ACCRA WEST SME’s)
The targeted population for the study is the SME‟s in the western part of Accra Metropolis. This
population was strategically defined to perform the study in such a way that, the sample size
chosen reflected an increase in profitability of SME‟s
3.2 SAMPLING METHOD USED
Amoani (2005) defines sampling as the procedure whereby elements or people are chosen from
population to represent the characteristics of that population. With regards to the accounting
practice in any organization, a stratified sampling of SME‟s was taken to determine their
increase in profitability through outsourcing. Out of the target population, a sample of ten (10)
customers each of the various SMEs and ten (10) staffs of the twenty selected SMEs were chosen
for the project work.
Because the researcher was considering quite a larger number of SMEs simple random and
stratified sampling were used for the research work.
3.2.1 STRATIFIED SAMPLING
It is a sampling technique that involves a break-up of the population into sub groups and taking a
separate sample within each sub group. The subgroups called strata have certain characteristics.
It is after the population have been stratified, that a simple random sample is taken from each
stratum and joined to obtain the total sample

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Amoani (2005) indicates that the stratification can be used on a single criterion such as profit
levels. The researcher adopted stratified sampling method because it has the advantages of;
increasing the precision of the sample; ensuring that different strata in the population are
represented in the sample; reducing the standard error that may be due to chances as a result of
variations between the strata; and its convenience for practical purpose.
3.2.2 SIMPLE RANDOM
A simple random sample gives each member of the population an equal chance of being chosen.
One way of achieving a simple random sample is to number each element in the sampling frame.
The researcher used simple random and stratified sampling method to select respondents from
staff, individuals and business owners of the various SMEs in western part of Accra. The sample
selected is a subset of the population and it was done in a way to ensure fair and equal chance for
all members of the target population.
The researcher will be considering staff because he will want to know from the staff the kind of
outsource services their firms render. This will help the researcher to go into details of the
researcher work.
This is the breakdown of the sample size to be selected for the project work.
Tab 1 Analysis of sample size
CATEGORY
NUMBER OF PEOPLE
Owners
60 i.e. 1 each for each SME.
Staff
40 i.e. 2 each for each SME.
Total
100
3.3 RESEARCH INSTRUMENT
For the purpose of this research, the researcher used questionnaire, survey and personal
interviews. The researcher will be looking out for the following type of information from the
correspondents.

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3.4 QUESTIONNAIRE
3.4.1 QUESTIONNAIRE DESIGN
Credibility was given to the questionnaire administered as a result of carrying out the following
activities after its design. They were subjected to peer review where valid opinions were given
and the necessary corrections effected; the resultant questionnaires were then given to some
senior lecturers, lecturers and my project supervisor to comment on them, they scrutinized the
questionnaires and where needed, corrections were made. Consequently, they were finally
approved to be administered.
Questionnaires administration, interviews and observations were carried out on different dates
and times to ensure that differences in response affected the results of the study to give a true
picture of what is on the ground.
It must be mentioned however that, the researcher booked appointments with respondents to
ensure that they make enough time to give accurate data in their best capacities.
3.4.2 QUESTIONNAIRE STRUCTURE
The questionnaires administered consisted of two main sections
 Section A headed background information; sought to gather data about the vital statistics
of the respondents such as highest qualification, job position, etc). These were to be used
to assess the caliber of respondents and give credibility to the data used in the study.
 Section B was devoted to face-to- face interview questions, to gather descriptive form of
respondent‟s opinions. The data gathered under this section was to consolidate that of
section A to wholly arrive at the results of the study.
Since the researcher is looking whether outsourcing of accounting services increase the
profitability of SMEs? However different set of questionnaires were sent to the twenty SMEs
selected for this project.

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The reason for this was that the use of the questionnaires was one way of reaching to a wider
proportion of the people. It was once more cheaper in terms of cost. The questionnaires were
both structured and unstructured designed in a more moderate or simplified form, to pave way
for respondents who might not understand and express their view on the issues that may be
raised in the questionnaires. Equally, questions that needed closed respondents were adhered.
3.4.3 PERSONAL INTERVIEWS
In addition to the questionnaires, personal interview was conducted in gathering detailed
information. It is centered on how the two groups (owners and operational staff of the twenty
SMEs) upon which the study is conducted would be interviewed.
3.5 ANALYSIS OF RESULTS
.A survey is a procedure in which a data is collected through some form of solicitation. It is often
used to collect data on opinion, attitudes and reasons for certain behaviors, (Amoani, 2005). An
observation on the other hand involves gathering fresh data strictly by observing the attitudes and
action of the group of people or persons under study. By observation, the people under study
must be in their natural certain (not be aware of the observation) or their actions will be distorted.
The data collected for the study will be presented and explained using frequency distribution
tables, pie charts and percentage tables. The rates of responses will be gathered from the
interviews and questionnaires to exhibit clear analysis for easy explanations. The percentages
helped to reduce the frequencies to a common base making comparisons of the result easier and
also helped giving clearer interpretations to the research findings. The discussions of the findings
and the interpretations of the result were related to the literature review and also based on the
researcher‟s personal objective view of the results obtained.
According to Yin (1994), the main aim of analyzing data is to treat the evidence fairly, to
produce compelling analytical conclusions and to rule out alternative interpretations, which
involve examining, categorizing, tabulating or otherwise recombining the collected data.

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3.6 STATISCAL TEST
3.6.1 PERCENTAGE FREQUENCY TABLES
This involves the presentation and analysis of data in a tabular form. The researcher adopted this
statistical tool to group data, classify and present data gathered for easy analysis. They aid easy
analysis and also serve as a basis for graphing.
3.6.2 GRAPHICAL REPRESENTATION
Bar graph, pie chart and line graphs were used to illustrate and compare data. Graphs arrange
numerical information into a picture form, which gives an illustrative view of overall patterns or
trends in the information. Also, it worth‟s mentioning that Effah (1997) resorted to the use of
graphs which proved simple and successful for his data analysis.
3.7 DATA COLLECTION METHOD ADOPTED
3.7.1 PRIMARY DATA
Primary source of data collection is where data is expressly collected for a particular enquiry.
They are those data collected for the first time; hence, they are fresh and happen to be original in
character.
Interview, questionnaires and observation were the three method used for the primary data
collection..

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CHAPTER FOUR
RESULTS AND DISCUSSION OF FINDINGS
Introduction
The results of the data analyzed as well as the discussion of the findings are presented in this
chapter. In the discussion of the findings, attempts were made to give their possible implications.
DEMOGRAPHIC CHARACTERISTICS
4.0Age
Table 4.1 showing age distribution
Age (Yrs) Frequency Percent
Up to 20 2 4%
21-30 2 4%
31040 33 66%
Above 45 13 26%
Total 50 100%
Source: Survey data, 2012
Figure 1 A graph showing Age distribution
010 20 30 40 50 60 70
Up to 20
21-30
31-40
Above 45
0
percentage
frequency

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4.2 LEVEL OF EDUCATION
Table 4.2 illustrates the level of education of respondents
LEVEL OF EDUCATION
RESPONDENTS
PERCENTAGE
Up to JHS
18
36%
Up to SHS
17
34%
Up to degree or diploma
5
10%
Up to postgraduate
10
20%
TOTALS
50
100%
Source: Survey data, 2012
Figure 2 A graph showing the level of education of the respondents
From the data analysis above the highest level of education people who operate SME‟s are those
who have normally completed JHS. From the data I gathered from the field, those who are
operating SME and have educational level to JHS are 36% followed by SHS graduates who were
LEVEL OF EDUCATION
UP TO JHS
UP TO SHS
UP TO DEGREE OR
DIPLOMA
UP TO POST GRADUATE

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34%. Therefore what it means is that most of the SME‟s operators who outsource their
accounting services are partial literates who can read and write.
4.3 OUTSOURCING
This chapter investigated the outsourcing culture of the respondents. The study analyzed whether
respondents outsource some of their services. The result is shown in Table 1.
Table 4.3 Do you outsource some of your services?
Responses Frequency Percent
Yes 47 94.0
No 3 6.0
Total 50 100.0
It is interesting to note from Table 4.3 that about 94 percent of the respondents outsource
accounting services, implying that the significance of outsourcing has been appreciated by the
SMEs. To further explore the culture of outsourcing, the study investigated whether the
outsourcing of accounting service by respondents is dependent on their educational background
or period for which they have been in business. Generally, there was no significant difference in
the outsourcing of accounting service across the educational background of the respondents.
However, the results suggest that respondents with higher educational backgrounds are more
likely to outsource accounting services than those with lower backgrounds. For example, all
(100%) of those with at least Diploma outsource some of their services.

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However, regarding the period of been in business, the results shows that respondents who have
been in business for at least 6 years outsource their service more than those of lesser years. For
example, of the 27 respondents who have been in business for at least 6 years, 24 representing
88.9 percent outsourced their service. This difference could be attributed to the fact that, as the
business grows, it is expected that revenue accrued will be higher hence the need to outsource
some accounting service. The study further assess whether the ability to outsource some services
by respondents is dependent on the cost of outsourcing the service using the chi-square test of
independence. The results shows a significant chi-square (χ2 = 11.270, p=0.024, α = 0.05). Of the
47 respondents who outsource some of their services, 75. 6 percent described the cost of
outsourcing to be in the range of Ghc 200-500, while only 13.3 percent outsource above
Ghc1500. This implied that the ability to source some accounting service by SMEs is statistically
and significantly dependent on the cost of outsourcing. In other words, the high cost of
outsourcing to a very large extent could prevent many SMEs from outsourcing some of their
services. Figure 1 shows the distribution
Figure 4 showing how some SME‟s outsource some of their service

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Figure 1: Accounting of service across cost
4.4 Has accounting service led to profitability
To test the hypothesis that accounting services led to profitability, the study employed the simple
linear regression analysis to determine the effect of outsourcing of accounting services on the
profitability of SMEs. In this case, the independent variable used was “do you outsource some of
your services”, while the dependent variable was “has the outsourcing of accounting service led
to profitability”. The results obtained from the regression analysis shows an R. square, thus the
co-efficient of determination as .75 which is equivalent to 75 percent. Thus, about 75 percent of
the variation in the dependent variable „has outsourcing led to profitability‟ has been explained
by the independent variable (do you outsource some of your services). Table 2 shows the results
of the coefficients from the analysis.
Table 4.4: Coefficients

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Unstandardised coefficients Standard coefficient
Model B Std Error Beta t Sig
Constant 1.170 0.179 6.552 0.000
Has outsourcing
Led to profitability -0.085 0.164 0.75 518 0.000
In Table 2, it is observed that the outsourcing of accounting services has a significant effect
(b=0.75, p=0.000) on the profitability of SMEs. In other words, there is a strong positive
correlation between the outsourcing of accounting services and the profitability of SMEs. This
implied that, the more SMEs outsource accounting services, the more likely it is that their profit
will increase.
Further analysis shows that of the 47 respondents who indicated to outsource their services, 43
representing 91. 5 percent said outsourcing has led to the profitability of their business. In other
words, a significant proportion of the respondents who outsourced their services have confirmed
its positive impact on the profitability of their business confirming the result of the regression
analysis.
The study also investigated why respondents outsource their services. Table 1 shows the results.
Table 4.5 Why do you outsource some of your services
Responses Frequency Percent
Get profit 33 66.0
Breakeven 11 22.0
Reduce workload 6 12.0

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Total 50 100.0
Obtaining profit seemed to be the most dominated reason for which respondents outsource some
of their services. Thus more than half (66%) of the respondents outsource their services to obtain
profit, while reducing of workload is the least (12%) reason for which outsourcing is done by the
respondents.
The study also analyzed how respondents determine if there is an increase in profitability of
outsourcing of which the following indicators dominated in a hierarchy form:
 Through increase in profit (38.8%)
 Through increase in output (34.7%)
 Through Increase in selling price (26.5%)
4.6 To determine what accounting services led to profitability
To determine the kind of accounting services that led to profitability of SMEs, the study
employed the cross tabulation and the chi-square test of independence. Table 2 shows the results
of the analysis.
Table 4.6: Types of accounting service that leads to profitability
Has outsourcing led to profitability?
Yes No Total
Kind of accounting service f % f % f %
Accounting 30 63.8 0 0.0 30 60.0
Tax 17 36.2 2 66.7 19 38.0
Audit 0 0.0 1 33.3 1 2.0
Total 47 100.0 3 100.0 50 100.0

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Source: Survey data, 2012
In Table 1, it is observed that of the 47 respondents who indicated that outsourcing has led to
profitability, more than 60 percent (63.8%) outsourced accounting services, while none
outsourced auditing services. In other words, outsourcing of accounting service has led to the
profitability of SMEs. The study further tested how significant the results are using the chi-
square test of independence. The result shows that the profitability of SMEs is significantly
dependent (χ2 = 18.272, p=0.000, α = 0.05) on the outsourcing of accounting services. Figure 2
also shows the graphical distribution.
Figure 4: Accounting service that led to profitability
In Figure 4, you will notice that none of those who indicated that accounting service led to
profitability outsource auditing, which further gives the indication that auditing is not an

Page 36 of 48
accounting service being practiced by SMEs. This could possibly be due to the small nature of
the business.
The study also analyzed the relationship between the frequency at which accounting services are
sourced by the respondents and their profitability. The result obtained suggests some significant
relationship. Of the 47 respondents who indicated that outsourcing of accounting services led to
profitability, 70.2 percent outsourced their services annually, while only 4.3 percent outsourced
above 10 years. Table 2 shows the relationship.
Table 4.7: Relationship between the frequency of outsourcing accounting service and
profitability
Has outsourced led to profitability
Yes No Total
Frequency of outsourcing f % f % f %
Annually 33 70.2 3 100.0 36 72.0
2 years 8 17.0 0 0.0 8 16
5 years 4 8.5 0 0.0 4 8
Above 10 years 2 4.3 0 0.0 2 4.0
Total 47 100.0 3 100.0 50 100.0
The results in Table 4.7 shows that the more a respondent outsource accounting services, the
more it is to obtain profit. For example, the percentages which outsource annually (70.2%) and
indicated that outsourcing led to profit is over 61.7 percent higher than those who outsourced 5
years. This implied that the more frequent one outsource accounting services, the more profit
likely to be accrued.

Page 37 of 48

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CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 INTRODUCTION
The chapter focuses on the summary, conclusions and recommendations arising from the study.
Thus, the major findings from the study are presented in this chapter as well as the directions for
policy making and future research.
5.2 SUMMARY
The study assess assessed if outsourcing of accounting services has led to profitability in SMEs,
the accounting services that lead to profitability among SMEs, and whether SMEs are
benefiting from cost saving accruing from outsourcing of accounting services. Data for the study
was obtained using structured questionnaires. In all, 50 SMEs selected randomly from the
Greater Accra Region participated in the study. Quantitative data analysis was performed using
the Statistical Products and Service Solutions (SPSS).
The first objective of the study assessed if outsourcing of accounting services has led to the
profitability of SMEs. The following major findings were noted:
 About 91. 5 percent of the respondents indicated that outsourcing of accounting services
has led to the profitability of their business;
 Outsourcing of accounting services has a significant positive effect on the profitability of
SMEs; and
 The more SMEs outsource accounting services, the more likely it is that their profit will
increase.
The second objective identifies the accounting services that led to the profitability of SMEs and
the following key issues emerged:
 Accounting service recorded the dominant service (63.8%) that leads to the profitability
of SMEs followed by Tax; and
 Auditing service however recorded the least service that leads the profitability of SMEs.
In other words, none of the respondents outsourced auditing services

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Whether SMEs are benefiting from cost saving accruing from outsourcing of accounting services
was examined in the third objective. The key findings include:
 The ability to outsource some accounting service by SMEs is statistically and
significantly dependent on the cost of outsourcing; and
 Though SMEs are benefiting from cost saving accruing from outsourcing of accounting
services, the high cost of outsourcing to a very large extent prevent many SMEs from
outsourcing some of their services.
5.3 CONCLUSIONS
The study concluded that the outsourcing of accounting services has led to the profitability of
SMEs, and that auditing services have not been adopted by SMEs, as a result of the small nature
of their business. The high cost involve in outsourcing accounting service have prevented many
SMEs from benefiting from the prospects associated with outsourcing of accounting services.
5.4 RECOMMENDATION
Based on the major findings arising from the study, the following recommendations are made for
policy making:
 SMEs are advice to engage in outsourcing of accounting service from the onset of their
business, and not rather when the business starts growing.
 Education program through campaigns, seminars, brochures on the relevance of auditing
of SMEs accounts should be done by stakeholders such as the Ministry of Trade and
Industry to adequately equip them.
Direction for future research

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Based on the major findings and the limitations of the study, it is recommended that future
research on the impact of the years for which SMEs have been in business has on their
willingness to outsource accounting services be conducted.

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APPENDIX
QUESTIONNAIRE
PENTECOST UNIVERSITY COLLEGE
(ACCOUNTING DEPARTMENT)
I am a final year student of Pentecost University College researching into the topic “Does
outsourcing of accounting services increase profitability of SME’s?’’ as partial fulfillment for
the award of a Degree in Accounting. I shall appreciate if you could assist me by answering the
following questions. Any information provided would be used for academic work only and shall
not be disclosed to any third party.
Please tick the appropriate response or option corresponding to each question.
QUESTIONNAIRE FOR THE OWNERS AND STAFFS
1. Age. Up to 20 [] 21 -30 [] 31 – 40 [] Others ……………….
2. Gender. Female [] male []
3. Level of education. Up to JHS [] up to SHS [] C. up to Diploma [] Graduate []. Post
graduate [] others []
4. What is your occupation?.................................
5. How long has this business being operating? [] 1-3years [] 4-5years []5-6years []6-
10years [] more than 10 years
6. Why do you outsource the above services? [] to get profit [] to breakeven [] to reduce
work load others.........................................
7. What is the range cost of outsourcing of services? [] GHS200-GHS500 [] GHS600-GHS
800 [] GHS1000-GHS 1200 [] ABOVE 1500
8. How much does it cost if not outsource?[] GHS200-GHS500 [] GHS600-GHS 800 []
GHS1000-GHS 1200 [] ABOVE GHS1500
9. Is the difference due to increase in work or quantity? [] work [] quantity
10. What is the range of profitability? [] 5%-10% []10%-20% [] 20%-30% [] above 45%
11. Has outsourcing led to profitability? . Yes []. No []

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12. What kind of accounting services do you often outsource? [] Accounting [] Tax []
Auditing Others....................................................
13. Which services are repeatedly outsourced? [] Accounting [] Tax [] Auditing
Others....................................................
14. Do you outsource some of your services? []. Yes []. No
15. How often do you outsource your services? [] annually [] 2 years [] 5years [] above
10years others...............................................
16. What is the range of cost savings? 5-10% []. 15-20% [] 25-35% [] .40-55% [] more
than 75% []
17. Have there been changes in cost price?. Yes [] No []
18. What have been the changes in the cost price of your goods and services? 10-15% [] 20-
35% [] 40-55% [] .60-75% [] more than 75% []
19. How did the change in the cost price affected the business? [] negatively [] positively
20. How do you compare output with profitability?......................................................
21. In what percentage will you compare increase in output in relation to increase in
profitability? []5%-15% [] 20-35% [] 40- 55% [] 60-75% [] more than 75% []
22. Does the increase in cost price affect selling price? Yes [] No []
23. In what range does the increase in cost price affect selling price?[] 5%-10% [] 15%-20%
[] 25%-30% [] above 45%
24. How do you indicate that there is increase in profitability of outsourcing?[] through
increase in profit [] through increase in output []through increase in selling price
25. How will you range the increase in the indicators? [] 5-15% [] 20-35% [] 40-45% [] 50-
55%

Page 43 of 48
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