Putting intercompany accounting on the straight and narrow
Why ignoring the problem is increasing corporate risk
It’s an unsettling trend: More and more companies are experiencing serious problems and real financial costs as a result of improper or insufficient intercompany accounting (ICA) practices. Several factors are contributing to the issue including, increased industry consolidation, growing globalization, and integrated supply chains. But the problems are also a product of continued denial and neglect.
What is intercompany accounting?
Intercompany accounting (ICA) refers to the processing and accounting for internal financial activities and events that impact multiple legal entities within a company. ICA can include sales of products and services, fee sharing, cost allocations, royalties, and financing activities. It’s a broad area that, while rooted in accounting, has extensions into various functions, including tax, treasury, and finance.
The root of the problem
Many companies have significantly expanded their global footprints, building multinational value chains that generate an enormous volume of intercompany transactions. Operating in multiple countries introduces the need for compliance with country-specific regulations and tax policies. There is a growing level of regulatory scrutiny, and regulators are increasingly focusing their attention on the cross-border transactions of multinationals.
As if that weren’t enough, ICA has been further complicated by:
- Industry consolidation, where stronger players snap up weaker competitors, frequently inheriting heterogeneous financial systems, charts of accounts, and accounting processes with each new acquisition.
- Company growth, which often introduces centralized business service centers that increase the number of intercompany transactions processed.
- Increased enforcement of global accounting and tax regulations, exposing companies to greater risk if they fail to streamline their intercompany transactions.
- Mounting pressure for companies to achieve a more efficient financial close in order to support filing deadlines and internal control assertions.
With substantial challenges to performing effective and efficient ICA, companies need a holistic and proactive approach in which the primary stakeholders work together to create a vision for the future that streamlines ICA, from governance to reporting.
Want to know more on intercompany accounting and financial risk? Please contact Koen Dessens or Jeroen Jansen via their contact details below.