Intercompany accounting and process management: Survey results
Insights into leading practices
Deloitte Risk and Financial Advisory is pleased to report the results of our intercompany accounting and process management survey. Recent headlines have highlighted several instances of companies restating prior year financial statements due to errors and fraud discovered within the intercompany accounts. As such, regulators have responded by focusing on intercompany transactions and accounts, such as the Public Company Accounting Oversight Board amending Audit standard No.18—Related Parties. Many organizations still view the intercompany process as something that just needs to "get done," despite increased regulatory focus and news reports of companies that are required to restate prior year financial statements. As a result, organizations are struggling with the time-intensive requirements to effectively manage intercompany programs that are frequently driven by inefficient processes and systems.
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- Overcoming key challenges
- Technology is only part of the solution
- Intercompany maturity levels
- Intercompany capability maturity model
More than 3,800 professionals participated in a May 2016 Deloitte Dbriefs webcast, “Cleaning up intercompany accounting: Driving efficiency while managing risk.” When polled, they told us that insufficient accounting of transactions between various legal entities within an organization can lead to inaccurate financial reporting, yet only about nine percent of respondents said their organizations have holistic, efficient, and well-communicated intercompany accounting frameworks. Learn more here.
Demands of the marketplace
Even as challenges persist, there is a minimal amount of information available in the marketplace that provides insights into intercompany leading practices and what other companies are doing. Deloitte Risk and Financial Advisory’s survey was designed to provide insight and perspectives on the current environment of intercompany accounting practices and the barriers to optimal performance. A primary goal in preparing the intercompany survey was to close the knowledge gap between common and leading practices across a diverse group of companies by exploring:
- What challenges exist in the intercompany environment?
- How have enabling technologies affected the intercompany process?
- What are leading companies doing that others should be considering?
Overcoming key challenges
Many companies have been actively assessing ways to optimize their intercompany process by leveraging an internal center of excellence; increasing automation; and improving organizational alignment among accounting, tax, and treasury. Despite these efforts, several key challenges persist:
- 50 percent of respondents noted a lack of defined ownership of the intercompany process and challenges with visibility into the process and key activities
- 54 percent have manual intercompany processing with limited counterparty visibility to support reconciliation and elimination
- 47 percent indicated only ad hoc netting capabilities with no defined calendar
- 30 percent of all respondents noted significant out-of-balance positions that require frequent use of “plugs” to balance
- Many noted significant manual top-side adjustments during period-end close
Technology is only part of the solution
Maximizing the total potential of intercompany programs remains a challenge, according to many respondents, despite having sophisticated enterprise resource planning landscapes supported by many capable financial systems.
The top three challenges cited were:
- Lack of/poor use of technology
- Non-standardized processes
- Transaction matching/account reconciliation
Key causes may include the following:
- Intercompany not viewed as a critical finance activity
- Rapid growth due to acquisition leading to disparate systems and processes
- Multiple disparate legacy systems
- Multiple charts of accounts that have not been standardized
- High volume of disorderly transactions
Intercompany maturity levels
Based on survey responses, we observed four levels of maturity that companies typically fall into: Leading (4 percent of respondents), Advanced (26 percent), Defined (55 percent), and Developing (15 percent).
Organizations with Leading or Advanced programs cited having the following qualities:
- 71 percent have standard intercompany policies and procedures that are supported by a center of excellence that clearly defines ownership and accountability across the organization
- A majority have systems-based pricing element controls that support intercompany transaction reporting and analytics
- 82 percent have deployed an integrated transaction flow across multiple platforms supported by a standardized chart of accounts
- Many have implemented an automated and dynamic settlement and clearing of intercompany transactions
- 46 percent have fully automated transaction-level matching, reconciliation, and elimination processes
- Reporting capabilities support financial, tax, statutory, and regulatory requirements with minimal manual intervention
Intercompany capability maturity model
Drawing on our work with clients, we have developed an intercompany capability maturity model that helps organizations understand their current capabilities and target improvements across key elements of the end-to-end intercompany process:
- Governance and policies
- Intercompany pricing
- Data management
- Transaction management
- Netting and settlement
- Reconciliation and elimination
- Internal and external reporting
To learn where your organization may fall on the intercompany capability maturity model and to gain insights into leading practices, download the full survey report at the top.