Multinational companies face numerous financial management complexities right now. Tax authorities around the world are automating their systems and processes and demanding real-time reporting and e-compliance. The economic impacts of the pandemic have increased many countries' appetite for revenue, and cross-border profits face more scrutiny than ever.
To overcome these challenges in the most profitable way possible, multinational companies need to quickly and efficiently evolve their intercompany accounting processes. By doing so, they eliminate many headaches associated with decentralized processes, and they will realize numerous benefits across the organization. Exactly how they will successfully make this change is the question. What criteria sets good candidates for centralized intercompany processes apart? What lessons can you apply to your organization’s transformation?
In this post, we analyze the evolutionary process of intercompany accounting to shed light on how end-to-end intercompany automation can enable your organization to reduce risk, remain compliant, and improve productivity.
Determining an Organization’s Candidacy for Evolved Intercompany Accounting
When considering whether it is worth re-examining your multinational’s processes and systems, you should begin by examining your IT, accounting, and tax complexity. If you find multiple ERP systems, each with its own chart of accounts, then your organization will undoubtedly benefit. The ability to automatically pull together all transaction data from multiple systems into a coherent whole will support consistency in tax compliance and analysis. The same will apply if your organization comprises hundreds or thousands of legal entities, which introduce significant tax and regulatory considerations into intercompany transactions – especially those that span multiple jurisdictions.
Besides complex IT and accounting and tax systems, other indicators of an organization’s urgent need to streamline and automate their intercompany accounting processes include:
- The time required to complete accounting close. According to Ventana Research, one-half of companies with more than 1,000 employees complete the process in seven days or more. Companies with complex, unevolved environments struggle to meet the one-week benchmark.
- Fines for non-compliance due to misclassified profits between countries.
- Financial restatements caused by inadequate accounting and tracking of intercompany transactions.
- An inability to properly reconcile accounts resulting in unsettled balances and untimely settlement
- Added internal complexity and a significant increase in intercompany revenue due to mergers and acquisitions. According to Bloomberg Law, the first quarter of 2021 broke all M&A volume records with 922 currently pending or completed deals that have an aggregate value of $358.3B.
If there is evidence of this within your organization, you need to quickly and systematically address its intercompany challenges. You will need to maximize staff efficiency and accounting accuracy. You need to optimize your organization's tax exposure, minimize tax leakage, and ensure consistent tax and regulatory compliance.
Reaping the Rewards of More Evolved Intercompany Accounting
The modernization of intercompany accounting processes leads to improved intercompany financial management (IFM), which is defined by Ventana Research as the disciplined structuring and handling of transactions within a corporation and between its legal entities. This especially rings true wherever an uncoordinated approach to intercompany transactions or inconsistent/incomplete intercompany data impacts decision-making or outcomes. Successful automation of a multinational company’s accounting processes will improve the bottom line, grant more financial control, and reduce the risk of restatement and reputational damage.
The benefits of IFM transformation, including improved staff efficiency, accounting accuracy, and consistent tax and regulatory compliance procedures, will be felt across the organization. While the finance and accounting departments are obvious benefactors, your IT, HR shared service, Treasury, and tax teams will all enjoy the enhanced capabilities, too.
The intercompany tax function, in particular, will benefit from automating the intercompany accounting processes. Evolved tax accounting processes help companies minimize tax leakage while hardening their tax compliance and defensibility. They allow these teams to optimize total tax incidence across multiple legal entities and to prepare for the increasingly complex tax and regulatory environments on the horizon.
For example, a large multinational recently sought to enhance and streamline the intercompany accounting process by introducing automation and process efficiencies while ensuring visibility to the transaction level details required for compliant Base Erosion and Anti-Abuse Tax (BEAT) reporting. By automatically identifying exemptions-based service categories and buyer-seller relationships, the company was able to reduce its BEAT burden by up to 80%.
Shared services functions incorporating accounting, HR, and IT, being responsible for everyday operational tasks across multiple business units, will also benefit considerably from new efficiencies and transparencies. Standardized and consistent intercompany accounting reduces accounting and tax man-hours, lowers costs per invoice, and improves economies of scale. The business support teams become empowered. The entire organization becomes more customer-service focused and far less time is spent investigating and resolving disputes and exceptions.
Developing your Evolved Intercompany Accounting Roadmap
Most multinational companies begin their intercompany transformation by taking a step back. Intercompany accounting functions should comprise your people, governance structure, processes, and technology working together to achieve the same goals. Carefully consider each of these factors of optimization.
When developing your transformation strategy, you should also examine how other companies have modernized their IFM. Take note of how those proving most successful have gone beyond the basics. It’s no longer just about statutory accounting, intercompany matching and reconciliation, and chargebacks to a specific cost center. Leading multinationals, like General Electric, are setting the pace by making core business processes their new focal point. Automated IFM delivers enhanced planning and decision-making capabilities.
A recent report by Ventana Research asserts that by 2025, 50% of organizations with 10,000 or more employees will have implemented IFM. Those that do – perhaps your organization being one of them – can expect numerous tax, risk management, and financial close benefits.
Establishing your Evolved Intercompany Accounting Framework
To properly envision an end-to-end approach to intercompany accounting requires establishing a framework that provides complete transparency to support audits and gain insight to drive growth, auditability, and compliance while reducing risk. The framework needs to unite the supply chain movements, the exchange of services, the cost-sharing and cost allocation, asset management, and more.
Once defined, your business’ unique requirements should inform the development or acquisition of a software solution that integrates with an organization's existing ERPs. Improved processes should go hand-in-hand with your technology solution to bring together disparate ERPs in a manner unique to your business. This requires specific expertise in international compliance, intercompany invoicing, settlements, invoicing workflows, and scalable technology implementation and maintenance.
With a framework set up and your software in place, your next step is to continuously monitor your people, governance, technology, and process to ensure growth. Your people should have a clearly defined accountability framework, and their duties should be segregated appropriately. Metrics should be actively used to track performance, and management should establish, enforce, and maintain standard policy and procedures.
Let FourQ’s Fully Validated Action Plan Guide Your IFM Evolution
While all of the above may, at first glance, appear to be a somewhat daunting task, FourQ’s 10-Step Guide to Transforming the Intercompany Accounting Function simplifies the complexity. It provides a step-by-step guide to successfully achieving end-to-end intercompany automation that will help your organization reduce risk and improve productivity.
As the number one intelligent platform for multinational intercompany financial management in the world, FourQ’s solution provides flexibility and scale to enable fast adaptation to customer demands, new tax and regulatory requirements, and performance improvements. To learn more, click here to download our 10-Step Guide.