Outsourcing accounting information systems: Evidence from closed-end mutual fund families

• We identified a distinctive setting in which many companies (fund families) outsource their entire accounting information system.
• Decision to outsource was made by groups of funds, not on an individual fund basis.
• The ability of the outside or internal service provider to create economies of scale was found to be a significant factor in outsourcing decisions.
• Funds using more complex valuation processes for their financial reporting are less likely to outsource their accounting information systems.
• Younger fund families are more likely to outsource their accounting, suggesting that they wish to focus on developing their core competency in portfolio management.

This study examines the factors associated with the decision of closed-end funds to outsource their accounting information systems. Using data from 2010 and 2011, we find that the outsourcing decision is made by groups of funds with common service providers (called “fund families”), rather than by individual funds. Our results indicate that fund families containing a larger number of funds and older fund families are less likely to outsource their accounting functions. These types of fund families may have greater internal economies of scale, diminishing the potential cost savings from outsourcing. We also find that fund families with more good-faith-valued assets are less likely to outsource accounting information systems than those with more market-valued assets. Valuing these good-faith-valued assets is both an important investment-management process and a key accounting task, reducing the need to outsource accounting to focus managers on their core competency. This study is of potential importance to investors and regulators in evaluating closed-end funds' decisions on outsourcing accounting functions.