World Applied Sciences Journal 15 (2): 244-252, 2011

ISSN 1818-4952
IDOSI Publications, 2011

The Impact of Accounting Outsourcing on Iranian SME Performance:

Transaction Cost Economics and Resource-Based Perspectives
Yahya Kamyabi and Susela Devi
Faculty of Business and Accountancy, University of Malaya, Malaysia
Abstract: This paper identifies the factors affecting outsourcing intensity of accounting activities and the
impact of outsourcing on firm performance in term of transaction cost economics (TCE) perspective and
resource- based view (RBV) in the Iranian manufacturing SMEs. Using 658 questionnaires, our regression
analysis shows that asset specificity, trust and degree of competition are key factors influencing outsourcing
decision. Interestingly, our findings suggest the outsourcing intensity is significantly and positively associated
with SME performance. More importantly, our findings also suggest that outsourcing intensity fully mediates
the relationship between trust and firm performance and partially mediates the relationship between degree of
competition and firm performance, but it does not mediate the relationship between asset specificity and firm
performance.
Key words: Outsourcing % Professional accountant % Transaction cost economics (TCE) theory % Resourcebased view (RBV) and performance
INTRODUCTION

limited investigation of factors influencing SMEs decision

to outsource in the area of accounting [1, 5]. Whilst there
has been some investigation of the outsourcing of
financial accounting functions using a transaction cost
economics perspective [5], a comprehensive investigation
of factors (e.g., asset specificity, trust and degree of
competition) on the accounting outsourcing using TCE
and RBV perspectives is missing. More importantly, the
RBV can help to analyse firms' resources and capabilities,
which will connect outsourcing to firm performance [7].
Consequently, benefits of outsourcing affect competitive
capabilities and competitive capabilities produce returns
for companies [8]. While there have been studies of
outsourcing effects on performance in general [9-11], an
empirical research to examine such factors on outsourcing
of accounting activities and their link with firm
performance is missing. Therefore, this study aims to
examine the factors affecting outsourcing of accounting
activities and the impact of such outsourcing on SME
performance by applying a combination of RBV and TCE
perspectives in the context of an emerging economy.
The rest of the discussion is organised as follows:
Section 2 provides the background of study and develops
hypotheses utilising the RBV and TCE to guide the
framework to investigate the outsourcing of accounting
activities and its effect on SME performance. Section 3

Business
environments
are
unstable
and
unpredictable as a result of economic globalization,
technological change, customers increasing demands
and stiffer competition [1]. Hence, business management
has become more complicated [2]. In such business
environment, the sustainability of many Small and
Medium Sized Enterprises (SMEs) is threatened and
SMEs face significant challenges due to resource
constraints [3]. To overcome such challenges, it is
suggested that SMEs should outsource their activities by
shifting what they traditionally handled in-house [4] and
particularly, their accounting functions.
Transaction cost economics (TCE) theory has
become a standard framework to explain why some firms
choose to organize an accounting function internally,
while other firms decide to outsource that function to a
professional accountant [5]. TCE explains asset specificity
and trust in accountant are critical factors influence
accounting outsourcing [5]. Resource-based view (RBV)
has been become a useful framework to outsource
accounting functions when SMEs face with competitive
pressure [6]. Hence, the RBV explains that degree of
competition is imperative factor affecting a firms decision
to outsourcing of accounting functions [6, 3]. There is

Corresponding Author: Yahya Kamyabi, Faculty of Business and Accountancy, University of Malaya, Malaysia.
Tel: +60172821350, Fax: +603 79673980.

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World Appl. Sci. J., 15 (2): 244-252, 2011

explains the research methodology. Section 4 presents the

findings and discussions the implications thereon.
Section 5 concludes with suggestions for future research.

Theoretical
Framework:
The transaction cost
economics (TCE) theory introduced by Coase [18] and
developed by Williamson [19], conjectures that there
are costs for a firm to provide an activity internally,
which is termed the production cost while the cost of
purchasing an activity is termed a transaction cost [20].
The transaction costs associated with any activity
depend on key factors associated with the function such
as asset specificity and trust in accountant [21, 22].
Resource Based View (RBV) originated by Penrose [23]
and has been employed for outsourcing decisions,
shifting the attention from transaction costs and
opportunism to competitive advantage [24]. However, the
central tenet in RBV is that unique organisational
resources are the real source of competitive advantage
[25]. Hence, the RBV explains that the degree of
competition is a vital factor affecting a firms decision to
outsourcing of their accounting functions [26]. The RBV
analyze firm capabilities, which can link outsourcing with
performance [25]. Moreover, TCE argues that outsourcing
practice is appealing to firms managements since it
develops some of the metrics used to improve firm
performance [27].

Background of Study
Outsourcing Intensity: The term of outsourcing was
created at the end of the 1980s for contracting out
information systems [12, 2]. Outsourcing is usually
explained as the contracting with an external service
provider to provide a service or function [13]. In
accounting, the process of outsourcing involves the
external accountant, including both the professional
accountant and the accounting firm on one hand [5]. On
the other hand, the process of internalizing includes the
in-house accountant who is the business staff member
carrying out the accounting functions in the firm [5]. In
Iran, the term professional accountant refers to
members of Iranian Association of Certified Public
Accountants (IACPA) and the partners of accounting
firms with valid practising certificates who can hold
themselves out as CPAs and set up firms providing
accounting, audit, tax and other services [1].
Accounting Functions in SMEs: Kirby et al. [14]
distinguish
statutory services from non-statutory
services in the SME environment. They reported that
external accountants were the most likely source of non
statutory services. In UK, Sian and Roberts [15] found
fifty-five percent of small firms outsourced accounting
activities including financial statements, tax or VAT
information and accounting system. Interestingly, in
Malaysia, Jayabalan et al. [16] revealed most SMEs
outsource accounting activities including bookkeeping,
financial reporting, management reporting and tax filing
to external accountants. Moreover, in Belgium, Everaert
et al. [17] found that more than half of SMEs use a
combination of outsourcing and insourcing of accounting
functions. Moreover, Everaert et al. [17] reported that
most SMEs outsource routine and non-routine
accounting tasks to professional accountants. In fact, the
role of the professional accountants is moving towards
more involvement in financial management and strategic
planning, management accounting and away from routine
transaction work in SME environment [3]. Most
professional accountants not only give services to
SME sector on matters related to finance and economy
but are also expanding into a broader field such as
management accounting, financial planning, business
strategy and planning, risk management and performance
management [3].

Asset Specificity: Two common types of specific

assets include physical (tangible) assets (i.e., specific
equipment and machinery) and (intangible) human assets
(e.g., human capital) describing transaction-specific
knowledge and skills [7]. Human asset specificity
encompasses any unique knowledge or skill that an
employee develops through training and represents
specialised know-how or experience specific to a
particular employer/employee relationship, i.e. the
knowledge or skill is not transferable as it has limited
relevance to other job situations [28]. Indeed, human
assets are specific when accountants need specialised
knowledge of the specific characteristics of the firm so as
to carry out a specific accounting function [5]. In
accordance with TCE, when asset specificity is low and
transactions are slightly frequent, such transactions may
be subjected to outsourcing [29]. In other words, TCE
argues higher levels of asset specificity of activities, the
lower the likelihood of being outsourced [30]. To
summarize the discussion above, we posit that when asset
specificity of the accounting function increases,
companies will be more likely to insource (internalize) the
function, whilst, low asset specificity would motivate
companies to outsource accounting function [5].
Hence, our first hypothesis based on the above
discussion is as follows:

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H1: The higher the level of the asset specificity of

accounting activities, the lower the intensity of the
accounting activity outsourcing.

H3: Outsourcing of accounting activities is positively

related to the degree of competition.
Firm Performance: a major concern of the RBV is how
an organisations capabilities develop and affect its
competitive position and performance [35]. The main
tenets of TCT relate to the effect of governance choice on
firm performance given the influence these transaction
characteristics exert on the transaction cost- minimizing
tendency of the firm [36]. Overall, outsourcing will
enhance firm performance for three reasons. Firstly,
outsourcing potentially reduces bureaucratic complexity
[37]. Secondly, outsourcing allows SMEs to meet
production requirements and provides a mechanism for
firms to share economies of scale with specialised service
provider from outside, transfer risk and reduce uncertainty
[37]. For example, outsourcing causes investments in
certain facilities and equipment are eradicated, production
costs decline and overhead is diminished, which in turn
reduces firms break-even points and these enhance the
firm performance [37]. Finally, when outsourcing is more
efficient, SMEs are more likely to integrate and use
specialised resources and capacity [3]. Consequently, the
earlier arguments are summarized in the following
hypothesis:

Trust in Accountant: Trust in the external accountant is

defined as the expectation of the owner/manager that the
accountant (1) can be relied upon to carry out legal
commitments, (2) will act in a predictable way and (3) will
take action and negotiate fairly when the possibility for
opportunism is present [5]. Many claim that the
association between outsourcing and trust in external
servicer should be analysed based on TCE perspective
[31]. Trust between the firm and external service provider
reduces the costs of transaction by diminishing threat of
opportunism [31]. For instance, if the professional
accountant and the management of the SME sustain a
trust-based relationship, opportunism will not be of
concern [31, 21]. Accordingly, TCE supports the view that
when there is trust, the formal control mechanisms may be
reduced and firm tends to outsource their service
functions [32, 22]. Overall, the higher the perceived trust
in professional accountants, the higher is the likelihood
that the owner-managers of SMEs will choose to
outsource their management accounting functions
[5, 31, 21, 32]. Accordingly, based on the discussion
above, our hypothesis is proposed as follows:

H4: Outsourcing of accounting activities is positively

associated with firm performance.

H2: Outsourcing of accounting activities is positively

associated with the trust in accountant.

Lilly et al. [27] argued for the role of HR

outsourcing as a mediator between competition and
firm performance in a conceptual study. Furthermore,
Cho et al. [9] evidenced the mediator role of logistics
outsourcing on the relationship between logistics
capability and firm performance. Hence, we hypothesise
as follows:

Degree of Competition: Espino Rodrguez and PadrnRobaina [2] explained that firms operating in a competitive
environment should consider outsourcing as a
consequence of their internal resource gaps. In effect,
RBV argues, in competitive circumstance, the firm owner/
managers should learn how to exploit the resources
available outside the business to assist their companies
for becoming more competitive [33]. For example, in a
competitive environment, smaller companies cannot
survive because their internal resource gaps do not permit
them to adapt their products [6]. In such circumstances,
outsourcing is a major managerial method to obtain
competitive advantage while competitive pressures
intensify [34]. As accounting outsourcing can help
greater specialisation, a higher degree of outsourcing is
expected for those SMEs that are faced with high levels of
competition intensity [28]. Accordingly, the above
arguments are summarised in the following hypothesis:

H5: Outsourcing of accounting activities mediates the

relationship between asset specificity and firm
performance.
H6: Outsourcing of accounting activities mediates the
relationship between trust in accountant and firm
performance.
H7: Outsourcing of accounting activities mediates the
relationship between degree of competition and firm
performance.

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World Appl. Sci. J., 15 (2): 244-252, 2011

Asset specificity

Trust in
accountant

Outsourcing

Performance

Degree of
competition

Fig. 1: Research model

Based on earlier discussion, the research model is
shown in Figure 1.

type ranging from 1-not at all important to 7-very

important. Then, respondents were asked to indicate their
satisfaction with the seven financial and non-financial
performance goals over the previous two financial years
on a 7-point Likert type ranging from 1-strongly
dissatisfied to 7-very satisfied.

MATERIALS AND METHODS

Data Collection: Based on the definition of SMEs in the
Iranian context Ale Ebrahim et al. [38], we limit our survey
population to companies in terms of number of employees
in the range of less than 250 employees. We exclude
micro-firms with fewer than 10 employees because they
hardly have any option between outsourcing and inhouse accounting tasks [17]. Based prior studies, a
questionnaire is developed and utilised to collect the data.
Then, we selected a sample of 1750 manufacturing SMEs
randomly, using a systematic probability method. The
questionnaire survey was sent to each SME
owner/manager by post mail. We received 770
questionnaires. However, we finally had only 658 usable
answers, representing an effectual response rate of
38 percent. Finally, we compared early and late
respondents (non-response bias test) as suggested by
Armstrong and Overton [39], but there was not any
significant differences between early and late respondents
in terms of the main variables.

Mediating Variable: Outsourcing Intensity: In order to

achieve the objective of this research, this study
identified nine types of accounting functions (Table 1)
applicable in the Iranian SME sector [1]. We used the
measurement developed by Espino-Rodrguez and
Padrn-Robaina [41, 2] and Espino-Rodrguez et al. [42]
and respondents were asked to indicate the level of
accounting functions outsourcing on a 7-point Likert type
scale, with 1= not outsourced and 7= totally outsourced.
The variable details are seen in Table 1.
Independent Variables
Asset Specificity: Accounting functions are particularly
people-intensive and the human asset specificity measure
was based primarily on human asset [43]. As shown in
Table 1, items 1, 2, 3 and 4 are related to human assets and
are specific when accountants need specialized
knowledge of the specific characteristics of the firm so as
to carry out certain management accounting practices [5].
In addition, item 5 (the accounting software) was included
to capture the extent to which physical assets were
specific to the firm [5]. Hence, based on measurement
proxies from prior studies [42, 5], we asked respondents
whether the accountant needs to obtain firm-specific
information to adequately perform the accounting
functions.

Variable Measurement: The dependent, mediating and

independent variables were measured and rated on a
seven point Likert-type scale and found adequately high
Cronbachs alpha for all variables (above 70%). The
details of the variable measurement are presented in
Table 1.
Dependent Variable: Firm Performance: Firm
Performance measurement was previously tested and
validated by Sarapaivanich and Kotey [40]. Accordingly,
we first asked respondents to indicate the level of the
importance attached to the seven financial and nonfinancial performance goals (Table 1) on a 7-point Likert

Trust in Accountant: Trust in accountant was measured

by asking respondents to indicate the extent to which
they trust the professional accountant with each of
statement presented in Table 1 [5, 21].

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World Appl. Sci. J., 15 (2): 244-252, 2011

Table 1: Variable measurement
Variables

Items

Performance

1.Profitability
2.Growth in Sales
3.Return on Assets
4.Cash Flow
5.Lifestyle
6.Independence
7. Job Security

Outsourcing intensity

1.Bookkeeping work
2.Preparation of financial statements
3.Payroll accounting
4.Budgeting / forecasting
5.Customer profitability analysis
6.Product costing
7.Financial planning
8.Financial management services
9.Design/review internal control systems

Asset specificity

Source

Cronbachs alpha

[40]

0.96

[2, 41, 42]

0.97

1.To perform (process) the routine accounting functions

(e.g. bookkeeping work and preparation of financial statements)
the accountant needs to obtain firm specific information
2.To perform the non-routine accounting functions (i.e. product costing
and financial planning) the accountant needs to obtain firm-specific information
3.The way we perform the accounting functions is unique to our firm
4.t would be costly in terms of time and resources to switch to a
professional accountant at the end of the financial year
5.The accounting software is custom-tailored to our firm

[42, 5]

0.98

Trust in accountant

1.The firm owner/manager has confidence that the (external)

professional accountant will treat us fairly, this means to
correctly charge for the performed duties
2.The firm owner/manager has confidence that the professional accountant
will inform us correctly
3.The firm owner/manager has confidence that the professional accountant
will accurately perform the duties
4.The relationship between the firm owner-manager and the professional
accountant is based on trust

[5, 21]

0.93

Degree of Competition

1.Product characteristics
2.Promotional strategies among rivals
3.Access to distribution channels
4.Service strategies to customers
5.Product variety

[39]

0.84

Degree of Competition: This study used the measure

developed by Rivard et al. [44], asking respondents to
record the intensity of their firm competition on a 7-point
Likert scale (1- very weak competition and 7- very fierce
competition). Details are shown in Table 1.

(S.D) and correlations among the independent variables.

The correlation between independent variables was such
that multicollinearity is not a concern.
Hypotheses Testing
Testing for Direct Effects: Table 3 shows regression
coefficients and standard error (S.E) for each of the
predictor variables. The multiple linear regression analysis
in Model 1 of Table 3 shows a significant negative
coefficient for asset specificity, suggesting that asset
specificity is negatively associated with accounting
outsourcing, thereby confirming H1 (p<0.001). It also
indicates that the accounting outsourcing also is
significantly positively associated with the trust of

RESULTS
Descriptive Statistics: Our sample included 78 percent
male and 22 percent female. Most of the respondents were
quite well educated and the common level of managerial
experience was high with nearly three-fourth of
respondents having over five years of experience. In
addition, Table 2 shows means and standard deviation
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Table 2: Descriptive statistics and correlations
Variables
Mean
S.D
1.Performance
4.03
1.655
2.Outsourcing
4.40
1.670
3.Asset Specificity
3.33
1.614
4.Trust in accountant
4.69
1.933
5.Competition
4.73
1.461
**Correlation is significant at the 0.01 level (2-tailed)

1
1
0.428**
-0.211**
0.344**
0.391**

2
1
-0.403**
0.701**
0.504**

-0.294**
-0.322**

1
0.474**

Table 3: Results of regression analyses for direct effect

Outsourcing
Model 1
Variables
Coefficient (S.E)
Asset specificity
-0.372 (0.068)***
Trust in accountant
1.505 (0.098)***
Degree of Competition
0.369 (0.84)***
Outsourcing
Constant
11.596 (2.932)
R2
0.526
Adjusted R2
0.523
F-value
181.938
DF
3
Note: n=658. Unstandardized coefficients reported. Numbers in parentheses are Standard Errors (S.E)
*** Significant at 0.001 level
Table 4: Results of regression analyses for mediation effects
Outsourcing intensity
Firm Performance
Model 1
Model 2
Variables
Coefficient (S.E)
Coefficient (S.E)
Asset specificity
-0.372 (0.068)***
-0.107 (0.082)
Trust in accountant
1.505 (0.098)***
0.586 (0.118)***
Degree of competition
0.369 (0.84)***
0.636 (0.102)***
Outsourcing
Constant
11.596 (2.932)
47.728 (3.548)
R2
0.526
0.203
Adjusted R2
0.523
0.199
F-value
181.938
44.952
DF-Model
3
3
Note: n=658. Unstandardized coefficients reported. Numbers in parentheses are Standard Errors (S.E)
*** Significant at 0.001 level

owner/manager of SME in the external accountant, which

supports for H2 (p<0.001). In addition, H3 receiving
support which posits a positive relationship between
degree of competition (Competition) and outsourcing
intensity (p < 0.001). Besides, we examined direct effect of
outsourcing intensity on SME performance in Model 2
of Table 3. Therefore, support is also provided for H4
(p < 0.001) which posits accounting outsourcing is
significantly positively associated with SME performance.

Firm performance
Model 1
Coefficient (S.E)
0.410 (0.039)***
55.200 (1.856)
0.183
0182
111.555
1

Model 3
Coefficient (S.E)
-0.003 (0.088)
0.198 (0.152)
0.572 (0.110)***
0.276 (0.057)***
43.248 (3.806)
0.261
0.255
40.137
4

thereby confirming the first condition. Second condition

is also satisfied for two independent variables as trust in
external accountant and degree of competition are
significantly associated with firm performance, but asset
specificity is not related to firm performance (Model 2).
Results (Model 3) shows a significant association
between outsourcing (mediating variable) and firm
performance (dependent variable), confirming the third
condition.
As a consequence, it shows that asset specificity is
not associated with firm performance (Model 2 and 3).
Therefore, the results do not support Hypothesis 5.
Outsourcing has a full mediating role on the relationship
between trust and firm performance because trust has no
significant effect on the performance when the mediating
variable is included in the regression equation (Model 3).
Hence, Hypothesis 6 is fully supported. Furthermore, the

Testing for Mediation Effects: We perused the three

conditions suggested by Cho et al. [9] and conducted
multiple regression analyses shown in Table 4. Therefore,
the results (Model 1) indicate a significant association
between independent variables (asset specificity, trust in
external accountant and degree of competition) and
mediating variable (outsourcing) (p<0.001, respectively),
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World Appl. Sci. J., 15 (2): 244-252, 2011

positive effects of degree of competition reduce in

strength (0.636 to 0.572) and remain statistically
significant. Therefore, the finding suggests partial
support for Hypothesis 7. Overall, the above results
indicate that outsourcing fully mediates the
relationship between trust and firm performance and
partially mediates the relationship between degree of
competition and firm performance, but it does mediate
the relationship between asset specificity and
performance.

More importantly, this study has examined the

relationship between the outsourcing of accounting
activities and SME performance and revealed that a firm
performance improves directly to the extent to which
the firm outsource accounting activities. This is in
agreement with previous research in other service
functions [2, 10, 11] which revealed a positive the
association between outsourcing and firm performance.
Finally, we examined the mediating role of
outsourcing of accounting activities on the relationship
three independent variables (asset specificity, trust and
degree of competition) and firm performance. Thus, our
analysis also suggested that outsourcing fully mediates
the relationship between trust of the SME owner/manager
in an external accountant and firm performance, but it
partially mediates the effects of competition on firm
performance. Furthermore, result shows that outsourcing
does not mediate the relationship between asset
specificity and firm performance. One reason for this
result could be that the SMEs in emerging economies tend
to rely more on external human asset and capabilities due
to internal resource gap and so the direct influence of
outsourcing on firm performance are stronger than its
indirect effect (mediating effect). Another reason can be
that human asset is in the form of embedded knowledge,
skill, expertise, norms and etc and these (knowledge and
skill,) are still not well developed and formalized within
most firms in the emerging economies, so the relationship
between asset specificity and outsourcing intensity is
relatively more pronounced than is the case with trust in
external accountant or degree of competition. However,
this result is in line with prior study in other service
function [9] found that the logistics outsourcing variable
is not a mediating variable but an independent variable.

DISCUSSION AND CONCLUSIONS

This paper examines the factors influencing a firms
decision to outsource accounting activities and
outsourcing effect on firm performance in terms of TCE
and RBV perspectives from an emerging economys
context. This study shows that the outsourcing of
accounting activities in SMEs support TCE and RBV
predictions. Therefore, our empirical analysis indicates
that asset specificity was negatively associated with
outsourcing. Therefore, this result provides empirical
validation of prior studies [45, 5] which indicated asset
specificity was statistically and negatively associated
with outsourcing of accounting and audit functions,
Additionally, this study found that outsourcing intensity
is positively associated with trust of the SME owner/
manager in an external accountant. This result
corroborates previous study [22], which posits that
outsourcing was positively associated with trust in
external service provider. Interestingly, our finding shows
outsourcing intensity is positively associated with the
degree of competition. This finding contradicts with a
prior research conducted in Norway [6], which indicated
that the use of external accountants services was not
associated with the degree of competition. We believe
this could be stated for three reasons: Firstly, the
preceding research was conducted in a more developed
country, whereas present study was performed in lesser
developing country, Iran, hence emphasising the
importance of the RBV theorization and its applicability in
an emerging economy context; Secondly, the sample of
this study included small and medium sized enterprises
whereas previous study [6] focused on micro and small
enterprises (20 employees), hence suggesting an impact
of size on the need for outsourcing of accounting
activities; Finally, we examined accounting activities
provided by external accountant, whereas preceding
study tested external accountants advisory services,
clearly this indicates the importance of accounting
activities for an emerging economy.

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