We’ve just returned from Oracle’s CloudWorld event (formerly OpenWorld) in Las Vegas, a great opportunity for networking and exploring new industry developments. So now, it’s time to get back to the daily routine and the dreary British weather.
This transition signals more than just a change of season – while the summer holidays bring all of us some much-needed respite, it's time to face the music and address those lingering problems that have been holding us back.
One such challenge, often overshadowed by more overt issues, is the intricate world of intercompany accounting.
Why Are Intercompany Accounting Issues Overlooked?
Intercompany transactions are complex and cumbersome. They require keen oversight, precise recording, and meticulous reconciliation. They straddle multiple legal entities and can span across various countries with differing tax regulations and currencies.
This complexity intensifies when considering the broad range of internal policies and the ever-evolving global tax environment.
Intercompany transactions are a persistent drain on resources when the processes involved are inefficient, but they often don't get the attention they require.
Amidst the hustle and bustle of daily operations, they remain on the back burner, only to resurface during month-end reconciliations or year-end audits. And even then, the inclination might be to apply quick fixes rather than focus on a comprehensive, long-term solution.
Intercompany accounting is not often considered a critical activity, but this may be because the processes seem too complex to untangle. It may also be due to an underestimation of the risks involved, or a belief that it doesn’t really impact the bottom line.
The Risks of Inefficient Intercompany Accounting Processes
Allowing intercompany issues to fester can have far-reaching consequences, and the risk for large, global businesses is greater in some cases – after all, a more complex system with a greater volume of transactions means more opportunity for oversight and errors. It also means inefficiencies drain resources and waste time on a large scale.
If not managed proactively, these issues become a significant bottleneck, impeding the organisation's agility.
According to The Hackett Group, a typical USD 10-billion revenue company that has poorly controlled intercompany accounting processes are missing out on potential annual savings of USD 1-2 million. They also state that companies that have highly automated accounting processes have 75% fewer full-time equivalent staff.
How much could your organisation save and what could you achieve using those funds?
Poorly managed intercompany accounting can lead to financial misstatements, which may tarnish the credibility of a company's financial reporting and undermine stakeholder confidence.
Misstatements can be due to discrepancies in intercompany transactions, incorrect reconciliation procedures, or human errors in manual processes.
When financial data is not consistently accurate across all subsidiaries and entities, it becomes challenging to provide a reliable and comprehensive financial picture of the entire organisation.
Intercompany accounts that aren't settled promptly can lead to a range of treasury problems. Unpredictable cash flows can hinder financial planning and make it difficult for a company to meet its short-term obligations, while delayed settlements increase exposure to foreign exchange rate fluctuations, potentially resulting in significant losses.
Tax Penalties and Interest
Incorrect reconciliation may cause incorrect tax filings, which can lead to financial penalties, interest charges, and even lead to intensive tax audits. Beyond the immediate financial consequences, a reputation for non-compliance can damage a company's standing with regulators and stakeholders.
Inefficiencies in Intercompany Accounting
A key bottleneck is using separate accounting systems that do not connect well with each other. This can have the following consequences:
- Data inconsistency: Separate systems might categorise or record transactions differently, leading to discrepancies. For example, one unit might record a transaction on a certain date while another might record it a day later. There is also the chance of duplicate or missing data, and different data formats may also be used among systems, making them incompatible.
- Manual reconciliation: When systems do not integrate seamlessly, there's often a need for manual intervention to reconcile differences. This can be time-consuming and prone to human error.
- Compliance risks: Inaccuracies may arise due to discrepancies between systems. This can pose significant risks during audits, potentially leading to non-compliance with reporting standards. A lack of integration can also lead to delays in consolidating accounts, which in turn might delay financial reporting.
- Currency conversion complexity: For global corporations operating in multiple countries, separate systems might handle currency conversions differently, leading to discrepancies in reported amounts.
How Can Software Improve Intercompany Accounting?
The use of automation and integrated systems are two important keys to cost savings, and more companies are starting to replace manual processes as they take strides along the path of digitisation.
This was reflected in a survey by Deloitte that researched the use of automation for intercompany accounting specifically. Their maturity analysis of the participating organisations defined four categories of intercompany maturity: developing, defined, advanced, and leading.
67% of leading companies and 43% of advanced companies used automated processing. In addition, none of the leading companies used manual transaction processing with limited counterparty visibility, while only 14% of advanced companies did.
Modern intercompany accounting software such as Virtual Trader drives efficiency by automating the whole lifecycle, from initiation to settlement. Some of the ways it assists are outlined below.
Automated Intercompany Transactions
Virtual Trader gives organisations flexibility when it comes to the rules that govern automation. As such, the solution can be configured in line with each company’s unique needs. Should legislation change, reconfiguration is easy – no coding required.
Here is a snapshot of the ways in which it automates intercompany processes:
- Automatically raises invoices and journals.
- Minimises duplicate entries, reducing manual corrections.
- Triggers entries via systematic or manual business events.
- Entries are created simultaneously for all parties – in the same place, for the same amount, and with a common reference.
- Entries are automatically posted back to the ERP system.
- All transactional data is retained for reporting purposes.
The Intercompany Reconciliation module identifies all unreconciled intercompany relationships and the items causing the imbalance within the transactional activity. As a result, staff spend less time resolving things, and the closure of accounting periods are less likely to be delayed. The module also carries out pre-reconciliation, through transaction-matches and auto-reconciles.
Another advantage of Virtual Trader is that it’s designed to function in multi-ERP system environments. Many providers offer solutions that assume organisations are using the same ERP across the board, but we understand the reality of the situation. This means our software works at the transaction level, which enables the quick identification of unreconciled items.
Our solution automates high volume settlement. It centralises intercompany activity through an intercompany subledger, providing a single source of truth about intercompany activity, no matter which ERP systems are in use.
The settlement process is automated through automatic journal entry creation, and entries are interfaced to the corporate GL. Companies can then settle invoices that are balanced and reconciled.
In addition, the software integrates with treasury management systems, improving efficiency when it comes to handling cash and non-cash settlements, journal postings, and currency FX.
Virtual trader produces invoicing for all intercompany activity and can be configured in line with varying needs such as including indirect tax details, gapless invoice number sequencing, and AP voucher numbering. All invoices are recorded in subledgers.
Performing transfer pricing agreements and calculations offline – and without standardisation – is risky these days due to increased scrutiny by authorities. Again, the centralised nature of our solutions means that all activity, including transfer pricing, is easily accessible.
Our software also provides supporting evidence for general ledger entries, attributes invoices to intercompany cash settlements, and supports SOX compliance with segregation of duties
Benefits of Cloud Based Accounting Software
Legacy systems come with many inefficiencies, which cloud based software overcomes in the ways listed below:
- Centralised data: Cloud-based solutions store data in one central location, making it easily accessible to all systems and entities within a company, ensuring consistent and updated data across the board.
- Easy integration: Cloud-based systems offer integration tools that allow them to connect seamlessly with other enterprise software.
- Real-time, remote access: The cloud enables users to access data in real-time from anywhere.
- Scalability: Adding new entities or handling increased transaction volumes is easier with cloud solutions, without the need for significant changes or new installations.
- Enhanced security: Reputable cloud service providers offer advanced security features, including data encryption, multi-factor authentication, and regular backups, ensuring the safety of sensitive information.
- Regular updates: Software updates are rolled out automatically, ensuring that the system is always up-to-date with the latest features and requirements.
- Cost efficiency: Cloud based solutions eliminate the need for large upfront investments in infrastructure and software licenses. It also reduces costs associated with IT maintenance and support.
- Data backup and recovery: Automatic backups ensure data integrity, and in case of any accidental loss or system failures, recovery processes are faster and more reliable.
The cost of inefficient intercompany accounting is high – not just in financial terms, but the risk of tax penalties and compliance issues is always lurking around the corner. Automated, integrated solutions save the day, eliminating the need for manual reconciliation and other cumbersome tasks, while providing new levels of transparency.
Virtual Trader is a global leader in automating intercompany functionality in ERP and financial accounting processes. Our software helps the world’s largest companies solve everything from supply chain and inventory accounting through to royalties, share options and much, much more.
To discover how we can help you overcome your most pressing intercompany issues, request a demo today.