How Your Global Enterprise’s Largest Risk Is Being Hastily Ignored

Blog post

How are you currently handling your intercompany accounting? If you’re like most international companies, it’s a messy, inherently risky process with an innate lack of visibility into the key details, but you’ve developed at least some way of dealing with its challenges, and historically that has allowed you to at least complete the process. Intercompany accounting is no one’s favorite task, but, to some degree, it is manageable.

However, in today’s global economy, due to the rapid growth of complex organizational structures and record years for mergers and acquisitions, companies are now handling this increasingly intricate process with outdated or manual solutions that are no longer acceptable.

The Intercompany Challenge

Partially because it’s unpleasant, and partially because there are several other important things to do, most accounting teams tend to wait until the last moment to tackle intercompany accounting. Still, once it begins, the process is notably sluggish compared to others that can be handled more centrally, and unraveling the discrepancies between subsidiaries can quickly degenerate into a blame game.

Additionally, the intercompany accounting process has several uniquely complicated pain points:

·         Various entities with incompatible ERP systems and general ledgers due to mergers and acquisitions

·         A lack of standardization across one or both parties

·         Grey areas with the relationships between the companies involved

·         Currency exchange complexities

·         Differing year-end periods that can cause confusion within AR/AP ledgers

Ultimately, these issues create a bottleneck of employees from the receiving entity waiting on the employees of the paying entity to respond before they can finish their work, and a lot of companies have come to accept this as a necessary complication. In fact, according to The Hackett Group, 64% of companies that handle intercompany transactions list timely agreement with counterparties as one of the largest hold-ups during their reconciliation process.[1] They’ve grown accustomed to painful “he said she said” situations that eat into their valuable time, resources, and affect cash liquidity just because, so far, it’s worked for them – at least to some degree.

The Typical Quick Intercompany Fix

How have companies chosen to handle this complicated undertaking that poses a significant threat to the integrity of their financial reporting? A lot of companies elect to create their own home-grown system, use manual spreadsheets, and employ other “best practices” that heavily rely on their strapped-for-time accounting department to produce risk-free results – results that if done incorrectly, can lead to a multitude of problems.

Let’s not forget that any issues in your balance sheet caused by intercompany transactions can lead to restatements, shareholder lawsuits or fines because of SEC, BEPS or some other similar regulations, just like any other reconciliation that results in a misstatement. All of these scenarios can cost hundreds of thousands of dollars in fines while simultaneously lowering consumer and investor confidence. After all, if a company can’t process the transactions within their organization accurately, what’s to make people believe that they’ve been handling the sales outside of the organization correctly?

Solving the Intercompany Challenge

There’s good news though. The vast majority of these transactions only really require a simple matching procedure, meaning that most of your tedious yet risk-filled intercompany business can become predictable and reliable through the use of automation. While the potential errors in these transactions can be challenging to catch, especially between transnational entities, financial automation can quickly be put in place to save your reviewers time and effort in finding those discrepancies.

The top-performing companies that have implemented automation have seen 25% decrease in process cost when compared to their peers[2]. Simply because automation allows reconcilers and, eventually, auditors to safely and efficiently review the transactions between companies, it quickly produces notable time and cost savings for the office of finance.

How to Start Evolving Your Intercompany Accounting Today

All of this information leads itself to one central question – how can you overcome these challenges and reliably evolve your process? Well, the first thing your company needs to do is a little self-reflection. How is your company currently doing their intercompany accounting? Are you happy with its reliability, visibility, and the best practices you’ve established? If so, then congratulations!

However, if you think there’s some unrealized risk mitigation to be gained from a streamlined version of your company’s current intercompany process, it’s time to take an in-depth look at exactly how other companies like yours have already benefited from intercompany automation.

Discover how automating your non-product and product transactions can help you start your journey toward a world-class intercompany process.

Intercompany Accounting

Written by: Caleb Walter

[1] Source: Account-to-Report Performance Study, The Hackett Group, 2015
[2] Source: Account-to-Report Performance Study, The Hackett Group, 2015