And most experts agree that it’s a high-risk activity that when neglected, generates slapdash financial reporting and increases the likelihood of exposure to regulatory fines and fees.
If you’ve ever consolidated, merged, or expanded globally, you know exactly what they’re talking about: intercompany accounting.
It’s time-consuming. It’s labor intensive. And it’s difficult.
Yet because no auditor ever looked the other way because an accounting task was “just too difficult,” every company must eventually address the mess.
Here are the five biggest challenges facing today’s intercompany accountants, and the one solution that meets them all.
Disparate Systems. Manual Processes.
According to Deloitte’s 2016 poll of 4,127 accounting professionals, this is the most prominent and multi-faceted intercompany hurdle.
Entities typically trade with each other through subsidiary specific purchase order and invoice systems, and all too often, it’s much easier to book the transaction over the phone or email. This can lead to the loss of important documentation like proper transfer prices, currency, or the appropriate taxes.
Merger and acquisition activity adds another layer of compounding complexity, with inherited heterogeneous ERPs, charts of accounts, invoicing and payment systems, and different accounting processes. This increases the already tedious manual effort required to complete intercompany transactions.
In turn, systems complexity creates a lack of visibility from corporate to subsidiary or between them, and tracing the issues becomes a lengthy, challenging task, increasing the accumulation of material write-offs.
Challenges with intercompany settlements often arise if one entity questions the correctness of an invoice, or if there are questions about exchange rate discrepancies or different accounting periods that must be settled to achieve balanced accounts.
Disputes between the two parties can lead to e-mail exchanges and spreadsheet attachments, complicating the tracking of transactions and audit trails and risking compliance with government regulations or accounting standards. These disputes often happen after the fact and increase the amount of time required to reconcile the affected accounts.
Complex Legal Agreements
Legal teams are all too familiar with the typical challenges of drafting intercompany legal agreements and setting contractual terms, meeting IRS section 482, and transfer pricing rules.
But the introduction of OECD BEPS project and IRS Section 385 is leading to a new regulatory environment where the stakes are much higher. If an organization has weak controls and approval policies, transactions may take place without any associated documentation, exposing the organization to regulatory risk.
Transfer Pricing Compliance
Transfer pricing compliance is generally the domain of the senior tax manager, but execution is typically a cross-functional task. It is spread out across an extended chain of often distributed internal functions and offices, with multiple hand-offs between tax, regional and global controllers, shared services, and other teams.
Without oversight or coordination, risks can develop, including ambiguities of responsibility, accounting policy or data mismatches, insufficient mechanisms for reconciliation, undocumented interpretations of ambiguous terms in intercompany agreements, and ad-hoc uncontrolled processes.
Foreign Exchange Exposure
With the increase in foreign transactions comes an associated rise in foreign-currency reporting. Since many companies do business in multiple countries, this dramatically heightens the complexity of reporting.
Intercompany foreign currency transactions can create and transfer foreign currency risk between a reporting entity and its foreign entities, and among a reporting entity’s foreign entities.
Accounting teams face misapplying the accounting rules for foreign-currency translations. Misstated financials often lack visibility into foreign party accounting systems and how accounts are translated.
One All-Encompassing Solution
As the only ERP agnostic, end-to-end intercompany accounting management system, BlackLine’s Intercompany Hub (ICH) is the solution for these five significant challenges. It is designed to streamline the complex intercompany accounting process, replacing disparate finance and accounting systems with one integrated, centralized repository for all data.
ICH aligns multiple and new ERP systems with standard global policies governing critical areas, such as data flow and stewardship, approval processes, managing charts of accounts, tax management, transfer pricing rules, currency rates, and documentation. This standardizes the way transactions are processed and issues are resolved, reducing manual reconciliations and the risk of write-offs.
The end-to-end workflow involves stakeholders in finance, accounting, treasury, tax and legal, increasing collaboration across geographies. Foreign exchanges rates are automatically imported, minimizing misapplied accounting rules and misstatement.
Finally, netting and settlement management bolsters cash management processes and hedge currencies, while reducing bank fees and the amount of cash sitting in accounts not bearing interest.
Organizations report significant benefits from automating and streamlining intercompany processes, including a more efficient close, stronger financial reporting integrity, and reduction in risk. Leveraging technology is the most effective way to address the intercompany accounting mess, and restore confidence and trust in your financial data.
It’s time for every global company to address the mess of intercompany accounting—with technology. This will not only alleviate the growing pains of acquisitions and global expansion, but it will set your organization up to continue to scale.