Intercompany transaction reconciliations are challenging on a number of levels - from intermingling to compressed timing for roll-up. This post dives into specific strategies and tactics to help minimize the pain and shorten the time to completion.
Intercompany (I/C) accounting can be a true cesspool of transactions and if done improperly, a driver of financial restatements. Companies in high growth mode that are actively acquiring and/or merging with other organizations or holding companies with multiple independently run companies create an environment with a multitude of teams, processes, systems and reporting cycles that must all connect and align in order to close the books accurately in the shortest period of time possible.
A 2016 Deloitte poll of more than 3,800 accounting and finance professionals suggests that disparate software systems in the different legal entities pose the biggest problem for intercompany accounting (21.4% of respondents), followed by intercompany settlement (16.8%), complex intercompany agreements (16.7%), transfer-pricing compliance (13.3%), and foreign exchange exposure (9.4%).
Managing a fast, efficient and accurate financial close for one company is tough enough, but when adding more legal entities, multiple reporting layers of CEO’s, companies under the same stock symbol located in multiple countries and a multitude of systems - the challenge is exponentially more difficult.
Co-mingling I/C transactions with third-party transactions is often the first mistake companies make in this realm. Keeping a clean delineation between true I/C transactions and third-party transactions requires some best practices such as:
The second mistake is using netting to settle I/C transactions versus full settlement. The result being an inordinate amount of close time and effort being consumed attempting to reconcile I/C. To achieve effective netting and settlement, which is critical for the treasury function, companies need multilateral settlements based on a cash management strategy that defines when settlements require cash transactions versus accounting entries.
Automating your intercompany reconciliations requires three major activities:
A better process to eliminate the co-mingling of transactions and completely separate I/C transactions and accounts. It is always better to stop the problems from happening in the first place vs building protocols to fix later in the reconciliation flow.
In addition to establishing separate and discreet intercompany accounts, you want to ensure third party transactions don’t land in these separate I/C accounts. This requires starting at the end of the reconciliation process and identifying the transactions that are not intercompany and following those transactions back upstream to see how they became part of the intercompany transaction stream.
Utilize technology to evaluate and match intercompany transactions while highlighting exceptions that need further research. Depending on the number and complexity of your intercompany reconciliation process, you have a range of technologies to help in the transaction matching process:
Implement internal controls that enable group companies to reduce the risk of material misstatements in the financial information resulting from intercompany reconciliation issues.
Examples of such internal controls include reviewing posted intercompany transactions by senior specialists, approving of the prepared reconciliation spreadsheets by the financial officers of the individual entities, running automated matching processes in the system regarding debt claims and liabilities, accounts receivable and payable, etc.
Any business process that becomes unwieldy and a time suck can be improved through a combination of better process, the right technology and clear/consistent controls. The trick is to apply the time to do the hard work to clean up the upstream process of transaction coding and then use the right level of technology for your situation wrapped with proper controls to be consistently correct and then iterate for improvement.
If you are interested to learn how Sigma IQ is solving the account reconciliation process with Machine Learning, click here to watch a short video on how we do what we do.
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According to the APQC General Accounting Open Standards Benchmarking survey (2,300 companies participated) - Cycle Time for Monthly close ranges from 4.8 days or less for the top 25% of companies to 10 days or more for the bottom 25% of performers.Learn How To Be a Top Performer
According to a study by Robert Half & the Financial Executives Research Foundation (FERF), only 13% of F&A teams have utilized advancements in technology solutions, with the majority of CFO’s admitting they still struggle with painful aspects of account reconciliation.Read About AI-Driven Cost Savings
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