Growth in business—in revenues, share price, markets, and product offerings—is seen as a fundamental good. But for too many of today’s accounting and finance groups, growing bigger does not mean getting better.
In fact, intercompany accounting is seen as a significant challenge for corporate finance, especially when it comes to mergers and acquisitions.
The reason: so-called tribal knowledge that pertains to local accounting processes, rules, and customs grows thinner over time as accountants, controllers, and other professionals retire or leave for other pursuits.
But that’s only the tip of the intercompany iceberg, according to Chad Soltman, BlackLine’s Product Director of Finance Transformation. He notes that while growth may be good for business, it can be challenging for intercompany accounting.
“When growth is compounded by mergers and acquisitions, companies can end up with a diaspora of accounting systems,” he says. “They inherit different ERP systems, charts of accounts, invoicing and payment systems, and different accounting processes. This creates layers of complexity and impairs visibility, so tracing any issues—and there are plenty—becomes a lengthy, time-consuming task.”
Working Against Trustworthiness
This complexity can add to closing time and labor costs, and it can also work against an organization’s trustworthiness. Industry analysts at Audit Analytics have found that subsidiary and intercompany issues rank fifth in the 23 top reasons behind financial restatements.
Added workload pressures can also affect the quality of a company’s compliance efforts, risking conflicts with industry regulations, such as those promulgated by the OECD BEPS (Base Erosion and Profit Shifting) project. Initiated by the G20 in 2012, the project is intended to prevent multinationals from shifting profits from higher- to lower-tax jurisdictions.
“In some cases, organizations risk exposure to regulatory penalties because, due to weak controls and approval policies, their intercompany transactions take place without any legal agreements at all,” Soltman says.
This is why, according to a 2015 PricewaterhouseCoopers survey, 70% of CFOs surveyed were concerned about the increased burden of BEPS and international tax reporting.
Meanwhile, intercompany transactions keep growing. A 2016 Deloitte poll found that “80% of global trade takes place within the value chains of large, global organizations.”
Automation Is Not a One-Word Answer
The obvious solution to the intercompany morass? Apply accounting automation, of course.
But a collection of tools does not necessarily make up a solution. What’s required is integrating and automating the accounting processes themselves, so management can depend on end-to-end accountability and visibility.
Soltman offers some best-practice automation advice:
Centralize data. Organizations should use a centralized clearinghouse, or hub, to manage all intercompany transaction records, corresponding journal entries, supporting documents, currency rates, transfer pricing rules and policies.
Unify disparate ERP systems. An automation solution should use pre-built connectors to integrate with Oracle, SAP, Sage, Microsoft or other databases, and be able to pull ERP data into a single unified place for processing.
Standardize policies and procedures. Data stewardship, approval processes, charts of accounts and tax management, transfer pricing rules, currency rates, and documentation should all be standardized and applied consistently. Among other benefits, that makes it easier to assess transfer pricing documentation annually, compare it to requirements in each jurisdiction, and make centralized changes.
Define and track process workflows. Move beyond emails and phone calls to create and track data movement. Process workflows orchestrate reviews and approvals to make sure that nothing escapes notice. They bolster trustworthiness—and save auditors’ time and labor—by creating audit trails that are visible and accessible.
Automate high-volume reconciliations. Automated, rules-based matching of high-volume account reconciliations lets the accounting team focus on exceptions in entity-to-entity transactions, without having to bog down in laborious ticking-and-tying exercises. Automated matching should be integrated with the overall accounting process, so it automatically pulls data from account reconciliations without requiring manual effort—a key consideration as multi-entity organizations grow larger.
“By adhering to these practices, organizations can migrate their processes to a Continuous Accounting model,” says Soltman. “This way, they can process transactions as they occur, rather than waiting until the end of the close.
“It’s at the end of the close when reconciliations tend to stack up, work pressures build, and organizations can accumulate write-offs that may end up being material.”
Read our first issue of BlackLine Quarterly for more stories like this, including Instaurer la confiance dans l'entreprise : le nouveau rôle de la finance.