The Risks of Intercompany Accounting

Published on September 20, 2016

Companies that botch the accounting for transactions between different legal entities within their organizations can make their financial reporting slipshod.

Deloitte polled more than 3,800 professionals, most of them people who work in accounting and finance, during a May webcast. It found 25.6 percent of the respondents indicated their company’s intercompany accounting framework was still “developing.” That is, it was a goal they still wanted to achieve, but their companies had not yet standardized their governance.
Another 42.5 percent said their company’s intercompany accounting framework was “defined.” In other words, they were aiming to achieve consistency in intercompany accounting but were still working on doing so. Only 9.2 percent of the respondents indicated their company’s intercompany accounting could be described as “leading.” That is, it “provides a holistic perspective, with efficient systems and communication across critical functions.”

When they were asked about the greatest challenge to their organization’s implementation of intercompany accounting, the most frequently cited response was disparate software systems (21.4 percent), followed by intercompany settlement (16.8 percent), complex intercompany agreements (16.7 percent) and transfer pricing compliance (13.3 percent).

Some companies rely on a combination of the accounting, tax and treasury departments to manage intercompany accounting. Over half the survey respondents (55.7 percent) said the accounting function took the lead in managing their organizations’ intercompany accounting, while 5.5 percent said tax led the way and 2.1 percent said treasury managed intercompany accounting. Only 24.4 percent indicated a combination of tax, treasury and accounting professionals worked together to manage intercompany accounting.

Improperly managing intercompany accounting can lead to big risks for an organization. “While a lot of accounting, tax, treasury and other corporate leaders are focused on money flowing into and out of their organizations, intercompany accounting—or the money flowing across an organization’s legal entities—can become a real challenge to those experiencing global growth, M&A and supply chain integration,” said Deloitte Advisory partner Kyle Cheney in a statement. “For companies of nearly any size, internal transactions incorporating products and services, fee sharing, cost allocations, royalties and financing activities can create inefficiency, financial exposures and reporting risk.”
(Source: AccountingToday – Daily Edition - Debits and Credits – August 16, 2016)