Ernst & Young (EY) is one of the largest professional services and accounting organizations in the world, with network firms that have more than 700 offices in 150 countries. Specializing in assurance, advisory, tax and transaction advisory services, the EY network has worked with some of the most prominent multinational corporations.
Katie Thayer, BlackLine’s Senior Product Marketing Manager, recently had the chance to interview Darren Rykers, an Executive Director in the EY Financial Services Organization Advisory practice, about intercompany accounting and its impact on finance and accounting organizations.
Rykers has more than 25 years of professional experience in Finance and Accounting, International Tax Operations, Finance Transformation, Finance Systems Implementation and Business Development/Reorganization.
Katie: What are the top intercompany challenges that organizations are facing today?
Darren: With the increase in organizations’ global footprints, intercompany accounting volumes are growing between entities and exposing significant financial, compliance and reputational risk.
Along with the challenge associated with the growing amount of intercompany transactions, we’re seeing that a large number of ERPs brought into organizations as entities are growing through purchases and M&A.
Integrating these systems into the current accounting processes often causes operational inefficiencies and an increased effort to close the books. Unfortunately, a lot of the transactions are manually intensive and have a lack of or inconsistent transfer pricing arrangements.
In fact, 56% of respondents in a recent poll of accounting professionals that EY conducted listed manually intensive processes (heavy reliance on spreadsheets) as the number one challenge facing their organization.
Katie: Has the increase in globalization impacted the regulatory landscape of intercompany accounting?
Darren: The increased corporate global footprint has drawn attention from a number of regulatory organizations, especially the accounting and taxation administrations. This isn’t just happening here in the United States, it is happening all over the world. New regulations have come out over the past 4-5 years with a lot more attention on the tax side over the past 12-18 months.
Two key standards are the Public Company Accounting Oversight Board (PCAOB) Auditing Standard 2410 and the Organisation for Economic Co-operation and Development (OECD) Base Erosion Profit Shifting (BEPS).
Katie: Can you explain why intercompany accounting is essential to think about when understanding PCAOB Auditing Standard 2410?
Darren: Auditors are required to determine whether related-party relationships and transactions have been properly identified, accounted for and disclosed within the financial statements. We see a lot more rigor from auditors around the world focusing on these transactions.
The auditors are trying to obtain an understanding of the company’s processes and performing inquiries around related-party transactions, and trying to identify any risks of material misstatements. They are looking very closely at the transactions with the related parties that are disclosed in the financial statements.
Katie: The OECD has released several Actions as it relates to BEPS. What is most relevant to intercompany accounting?
Darren: The OECD has established rules around the arms-length principle, but what’s of most importance is Action 13, which comes into effect in 2018. This is where reporting of transfer pricing transactions within a related party and related entities is important.
The reporting is going to take place between an organization and a tax authority within the jurisdiction that the entity exists. The tax authority within that jurisdiction will share information across the globe with other tax authorities.
The tax authorities will leverage this information to help them understand whether an enterprise is pricing related-party transactions correctly and ensuring no data or information is being placed in the wrong jurisdiction to obtain any tax benefits.
Katie: How can companies help relieve the burden that regulatory authorities are placing on organizations?
Darren: With the complexity that regulators are bringing in alongside an already complex intercompany accounting process, it is an ideal time for organizations to really look at centralizing and automating the intercompany accounting processes.
This will help address and mitigate any risks associated with an audit with the tax authorities, and make sure that processes are done in a timely and automated manner.
Having a standardized intercompany accounting process across each of the entities within a group of entities will assist in streamlining, cutting down on time spent and assisting in making the closing cycle much shorter than what we’ve seen across a number of organizations.
In 2020, intercompany accounting will be a top consumer of both cost and time for accounting and finance organizations. Watch this on-demand webinar with EY and BlackLine to get a head start on developing an efficient, end-to-end intercompany accounting process with the right technology.