Research indicates that intercompany accounting deficiencies can have a profoundly negative impact on your business.
It is a major challenge to preemptively identify intercompany issues within a multinational organization with complex business processes. How specifically do you identify that an organization has intercompany issues? What warning signs will alert senior management to problems before they get out of hand?
This article provides you with the answers you need. It delivers a summary of the most common intercompany warning signs. Keeping an eye out for them will help reduce costs and improve efficiencies.
Intercompany, the management of financial transactions between separate legal entities belonging to the same corporate group is complex and difficult. If done correctly, it should be an asset, not a liability. However, as research by FourQ (recently acquired by BlackLine), in conjunction with Dimensional Research, titled “The Reality of Intercompany,” reveals intercompany deficiencies are more widespread than believed.
Findings from the survey highlight intercompany as the source of all kinds of problems affecting business. Key findings include:
- 96% of survey respondents reported challenges with intercompany
- 97% said that their intercompany issues affect finance and accounting operations
- 98% said that intercompany issues negatively impacted their employees
FourQ maintains that many of these problems arise because intercompany is expected to simply “work.” Rather than adding any revenue or expenses to a company’s books, intercompany should net to zero. This latter assumption is the reason why no one looks at intercompany until issues arise. This often occurs during the close period when employees find themselves alienated from their families, holed up in the office, for days on end.
7 Key Intercompany Warning Signs
- Warning Sign #1 – Unreconciled intercompany accounts: Intercompany counterparties cannot be readily identified if your organization is carrying a significant intercompany balance or data is not fully updated.
- Warning Sign #2 – Disputes: It’s a sign of an intercompany issue if you find yourself going through disputes every month or every quarter.
- Warning Sign #3 – Tax audit issues: Intercompany issues continuously turning up in past tax audits or internal auditors regularly tuning into intercompany vulnerabilities.
- Warning Sign #4 – A large intercompany Center of Excellence (COE): An intercompany problem and an opportunity to streamline things arises when you have a costly COE team that is larger than necessary for the number and interoperability of corporate entities.
- Warning Sign #5 – Transfer pricing reviews: You may need to restate your accounts if you experience constant reviews of transfer pricing.
- Warning Sign #6 – Lack of transparency and collaboration: It’s more than likely problems abound if you don’t know which team or department is working on intercompany transactions.
- Warning Sign #7 – Unsettled Balances: Keep a close eye on balances sitting unsettled for lengthy periods of time.
In addition to these seven key intercompany warning signs, you should also look out for department-specific warning signs like those highlighted below.
Accounting Warning Signs
Noticing a lot of variances while attempting to tie out multiple reports will alert accounting to an intercompany issue. Unreconciled accounts and variances in accounts that remain completely unresolved are other accounting-specific warning signs.
In addition, accounting could also see a lot of reclassifications. Regular transaction corrections in the ledger are a sure sign that there are problems upstream. Identifying which transactions are regularly reclassified helps identify the trouble spots.
Intercompany issues are easy to spot because they typically bleed out into other areas during close.
Another warning sign to be aware of is if your accounting team is spending a lot of time on emails and calls about intercompany as close approaches.
Treasury Warning Signs
To heed intercompany warning signs, your treasury department needs to monitor what is and isn’t being settled. They must examine each of the foreign exchange (FX) contracts they have, as well as how much they’re spending. If they have multiple FX contracts, they need to remain aware of where their intercompany is going, how they are transacting, and in what currencies.
Cash flow should also be examined by treasury. Where is cash moving? Is it not being moved? Is it getting stored in a certain area? Transaction fees should also be scrutinized. How often and how much is treasury paying to settle invoices? Are they able to net invoices together into one payment rather than hundreds of individual payments? Your treasury team will identify intercompany systems that need improvement by answering these questions.
Operations Warning Signs
97% of the respondents to FourQ’s survey say their intercompany issues impact their finance and accounting operations. Everything during and after the close is analyzed by accounting operations. It makes sense that intercompany problems will have an effect on them. Their analysis of the tax impacts, the people impact, the costs, the cash, and anything financial will alert them to the impact of any intercompany issue.
Financial Planning and Analysis Warning Signs
It is the FP&A team’s responsibility to reach forecast targets and to ensure they’re in line with whatever they estimated or budgeted for. It stands to reason that if your numbers are off, and you can’t explain it, they need to start digging in. This is typically a sign of an intercompany issue.
Tax Warning Signs
The intercompany process can trigger multiple tax warning signs due to the nature of the process itself. One warning sign arises when the tax team cannot defend the tax deductibility of an intercompany service transaction. Other warning signs are inappropriate or inconsistent transferprice markups and if the portion of the total invoice is not allocated proportionally to all entities involved.
A lack of sufficient documentation on intercompany charges can be another tax warning sign. An automated process guided by robust technology can ensure that intercompany services are detailed with more specificity, the transfer price is arrived at properly, the costs are allocated across entities appropriately, and the right indirect tax is applied and paid. In addition, automation can reduce or eliminate warning signs by giving detailed and immediate insight into the cost details of the services provided and their allocation, which greatly enhances the ability to defend the tax deductibility of the charges.
HR Warning Signs
90% of FourQ’s survey respondents reported that all-nighters are a regular occurrence as a result of intercompany. So, it makes sense that a big warning sign for HR is seeing burnt-out, frustrated finance employees working around the clock to close the books at the end of the month or quarter. HR also plays a key role in helping companies build out shared service centers. They are also responsible for the planning and staffing of the shared service centre. They should have insights on how well that team is working.
It pays to catch intercompany problems before they escalate!
Having read this article, it’s certainly easy to agree with 81% of the survey respondents who said that intercompany was complex and messy. However, knowing which warning signs can affect your close better prepares you to deal with the issues as they arise and prevent them from getting out of hand.
Built by finance, accounting, and tax experts, FourQ, from BlackLine, is Intercompany Financial Management software that streamlines the global operations of the world’s largest companies. Providing automated intercompany processing seamlessly integrated with global vendor invoice management, FourQ helps multinational companies increase efficiency and improve global business operations. This increases operational productivity while saving millions of dollars annually through improved intercompany billing and payment and tax optimization.