The reasons for such outsourcing are straightforward, as Jay Soled explains in The CPA Journal:

. . . Outsourced tax returns can be prepared in an cost-efficient manner by a highly skilled workforce. Moreover, outsourcing obviates the need for U.S. accounting firms to hire temporary staff during the busy tax season months of February, March, and April, and pay concomitant expenses (e.g., health-care costs and unemployment insurance). Although U.S. accounting firms’ experiences have varied, many have enjoyed tremendous labor-cost savings, often 50% or more per return.

The second reason is the practical efficiency associated with using an overseas workforce coupled with the advent of secure websites that enable information to be transferred across the globe in seconds. Because of time-zone differences, U.S. accounting firms often can delegate work to overseas accountants before they leave work at night and find the work done when they return in the morning, effectively creating 24-hour operations.

Finally, accounting firms want to maintain their competitive edge. They fear that if competitors use outsourcing and they do not, they may ultimately price themselves out of the marketplace.

This last explanation may be the most critical one. The fees accounting firms charge are constantly being questioned by their clients. Moreover, I’d be willing to bet that a rising number of individuals view tax return preparation as a commodity, and therefore search only for the lowest price. Like any business operating in the “Wal-Mart” consumer culture, therefore, accounting firms are forced to search for ways to cut and control their costs.

With the recent ChoicePoint and Lexis-Nexis security breaches in this country, however, the thought of your accounting firm transmitting your personal financial data halfway around the globe is a bit scary. Ms. Weston notes that:

. . . .Some of the foreign data processors have security systems that would put their American counterparts to shame.

On a recent visit to Bangalore, New Delhi, Mumbai and other Indian cities, for example, Boomer, the CPA, saw guarded facilities that required fingerprint scans for employees to enter. Briefcases, purses and knapsacks weren’t allowed inside, he said, and the workers had no access to printers or the Internet. The computers they worked on even lacked hard drives, disk drivers or other removable media that could be used to store or transport information.

"The places we saw had far more security," Boomer said, "than any (U.S.) CPA firm you’d see." . . .

Michigan State University professor Judith Collins studied more than 1,000 identity-theft cases where the thief was identified and prosecuted. She found that as many as 70% of those cases started with a crooked, usually low-level employee stealing personal data from a workplace such as a bank or health-care provider.

her study vividly illustrates how sloppy many domestic firms are with their customers’ data. Dishonest employees often can easily access, copy and walk away with reams of confidential information that can be used to commit identity theft. Companies are frequently unwilling to invest in security measures such as encryption or restricted access based on fingerprint scans or other biometric identification . . . .

Ms. Weston goes on to recommend disclosure to clients, which apparently has not been required before now. (I stand to be corrected on this.) She indicates legislation may be needed.

In fact, the industry has already addressed the disclosure issue. In his article for The CPA Journal, Soled points to Ethics Ruling 112 (pdf), issued by the AICPA Professional Ethics Executive Committee, which requires disclosure of any use of a “third-party service provider” for services rendered on or after July 1, 2005:

. . . before disclosing confidential client information to a third-party service provider, a member should inform the client, preferably in writing, that the member may use a third-party service provider. This disclosure does not relieve the member from his or her obligations under Ethics Ruling No. 1 [ET section 391.001-.002] under Rule 301, Confidential Client Information [ET section 301.01]. If the client objects to the member’s use of a third-party service provider, the member should provide the professional services without using the third-party service provider or the member should decline the engagement.

A member is not required to inform the client when he or she uses a third-party service provider to provide administrative support services (for example, record storage, software application hosting, or authorized e-file tax transmittal services) to the member.