Intercompany transactions in a group that keeps acquiring

Most groups assume that once a reconciliation tool is implemented, intercompany problems will be sorted — and are surprised when the same issues recur.

Why does this happen? To understand it, we need to understand what happens during the consolidation process.

1. Subsidiary companies are usually expected to submit an audited group pack within 15 to 30 days of period end to the holding company, and this pack typically includes details of intercompany transactions.

2. Intercompany reconciliation is rarely part of a subsidiary’s own monthly close process. It is usually triggered on a quarterly or annual basis, depending on the reporting cycle of the ultimate parent.

3. The corporate controller or head of consolidation, or their team, ends up trying to figure out differences between, say, Subsidiary A’s and Subsidiary C’s submissions — and it effectively becomes their responsibility to mediate between the two and resolve the differences.

4. Closer to the reporting deadline, a decision is usually made to compromise: the selling company is considered to be providing the correct information, and the buyer is forced to record a goods-in-transit entry (in the case of a purchase), which is reversed once reporting is complete.

5. The real issue is that, unless the transaction-level reconciliation is completed, the goods-in-transit entry starts ageing. It is not unusual to see intercompany sale invoices still recorded as goods in transit going back a couple of years — which is usually when the group realises the process is completely broken. This can become an audit issue, as small differences can balloon into a material adjustment.

6. When we finally get down to detail and try to understand who is accountable, and ask the subsidiary accounting team for details, they usually push back and say the entry was posted on the advice of the corporate consolidation team — so nobody ends up accountable for the issue, and it ultimately results in the receivable going uncollected in the subsidiary’s books too.

7. Because intercompany receivables are low risk, they slip under the radar of the group and even the subsidiary auditors, and the cycle starts again.

Reconciliation tools are, in our view, only helpful if the group has also implemented a process of intercompany reconciliation as part of the monthly close. In groups where subsidiaries operate in different locations with a fair degree of autonomy over daily operations, this takes significant effort to implement. At a minimum, there should be a process during financial reporting that holds subsidiary teams accountable for intercompany differences and surfaces those differences to the respective entity controllers in real time. For an acquisitive group, while a reconciliation tool does add value, a workflow that establishes accountability and forces group companies to communicate and resolve intercompany differences on a timely basis matters more. Intercompany differences have to be owned by the transacting entities — they should not become the corporate controllership’s problem by default.

We at FINAHQ understand these problems, and our intercompany reconciliation and workflow tool provides real-time notifications of intercompany differences to subsidiary controllers — enabling better coordination across teams and reducing the effort and stress on the corporate consolidation team.

Part of Intercompany. Matching balances between group companies, the eliminations that follow, and the transactions that never match on the first pass.