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Intercompany Reconciliation-How to Gain Control

Intercompany Reconciliation-How to Gain Control

For any organization that has ever gone through M&A, expansion, consolidation, reorganization, general ledger conversion, or gone global, intercompany accounting management can seem quite daunting – but it has the potential to become the monster that no one ever wanted to face down. When companies evolve and expand their reach, the volume of intercompany transactions that are generated can spiral out of control. The speed of business coupled with generation of this high volume of data is further made murky by local tax policies, regulators, transfer pricing, currency, and disparate systems that various companies within one single entity may use.

So, where did this monster come from?

Let’s begin by defining what an intercompany transaction is. Simply stated, it involves the identification and removal from all financial statements any transactions that occur between a company’s entities. These transactions can include (but not limited to) cost allocations, sales or services, or fee sharing. while one child company may be the seller, the other child company will be the purchaser. Neither of these are real revenues nor expenses from a consolidated or external view but will show up on the books of two child company financial statements. Upon consolidation, all of these should be matched, and ‘eliminated’ at the top of the house. The challenge is the matching at a transactional level can become an impossible task for any mortal human being. In Deloitte’s Intercompany Accounting and Process Management Survey54% of respondents still rely on manual intercompany processing, 47% had only ad hoc netting capabilities with no calendar, and 30% reported significant out-of-balance positions swept under the bed with plugs.

There are risks hiding around the corner for companies that sweep under the bed, and do not address taming the beast head on.

First off, restatements.  Deloitte calls it ‘the mess under the bed’. It’s actually the fifth most common cause of restatements of financial results, and shareholders are not the biggest fans of restatements. For many CFOs, the thought of restatements is terrifying and career threatening. The implications are that internal controls, and processes are lax, and confidence in financial results can be shaken beyond repair. Additionally, SEC levied fines can be overwhelming, and the media exposure can be highly embarrassing resulting in additional microscopic regulatory scrutiny. Attempts to remedy intercompany accounts that are not synced can be draining to accounting teams, treasury, and tax departments. Coordination of efforts, if not centralized, can lead to internal conflict between entities, and drawn out close processes. No one wants this.

Scared yet?   So, what’s a Controller to do?

Process (and policy) is the foundation of an effective management program for intercompany. Ownership should rest with the controller, or if a high volume, a team responsible for full reconciliation of intercompany transactions. This group will govern internal controls, standardized treatment and formats, foreign currency, close cut off policies, transfer pricing rules, and finally (and most importantly) confirmation and dispute resolution.

But manually reconciling once a month does not cut it, and it will get much worse if ignored, not better. Organizations ultimately need technology and applications to automate the process of ongoing reconciling, netting, and settlement.

Optimally, a shift to continuous and rules driven technology such as Robotic Process Automation (RPA) is where best in class companies are headed. Matching transactions based upon user driven criteria, with exception reporting can replace the tedious and heavily manual process that bogs down accounting, treasury, and tax departments. This is enabled further by a centralized DataMart of all entity transactions to facilitate the RPA to match within a whole population of periodic data – one to one, one to many, many to one, and many to many. The higher the volume, the higher the complexity. Leveraging the governance and RPA processes, organizations should maintain a central warehouse for documentation (such as SharePoint) as backup.

In summary, as in many cases, the thoughtful merging of process, procedure, controls, and technology is the logical blend to ensure that intercompany transactions are reconciled and in sync, but in the end doing it correctly can reap the rewards of solid financial reporting. Left unchecked,  Intercompany reconciliations can yes, be a monster.

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