Corporate payments innovation tends to stick with the obvious transactions: payments to suppliers, business partners, employees and the like. It’s all about money flowing outside of the corporation.
But a new research report from Deloitte says there is another kind of transaction that’s tripping up the corporate books: inter-company payments.
These are the transactions that companies make within themselves, between legal entities operating under the single corporate umbrella. Inter-company accounting, says Deloitte, is suffering from a lack of transparency and accuracy, and Tom Toppen from Deloitte’s inter-company accounting team informed PYMNTS how the negative implications of this go beyond a troublesome audit.
The Root Of The Problem
There are a host of reasons why inter-company transactions lead to accounting trouble. With mergers and acquisitions, industry consolidation and global growth all leading to more legal entities within a single business, it’s critical for firms to build out their supply chains or get products to market, Toppen explained.
But this growth leads to an exponential increase in the volume of inter-company transactions.
“That volume is prone to error, and it’s very difficult to manage,” he said. “Oftentimes, it’s unfortunately done manually. When that’s the case, it’s very hard for all of those transactions to eliminate.”
When transactions don’t settle and discrepancies arise, that’s where the trouble begins.
“When you start peeling the layers back, you realize you have a bigger problem than you actually thought,” he added.
Where The Problem Grows
To explain why inaccurate inter-company accounting can be such an issue, Toppen went through what he described as the lifecycle of an inter-company transaction.
From the very beginning, there can be a lack of understanding in how these transactions should be recorded and categorized, for example. Without proper documentation of that transaction, corporations can run afoul of tax regulators and auditors. In this instance, some authorities, Toppen said, may require that the transaction not be treated as accounts payable or accounts receivable but must be written off as debt, which has implications for consolidated accounting and reporting.
Once a transaction is initiated, there can be the issue of how money moves between legal entities of a single company — or if the movement is even necessary.
“I may be in a particular country that says, for a transaction on my books, I actually need to receive cash from you,” Toppen offered in one example. “Some countries may say you can just settle it without cash being moved. There’s a treasury aspect to this, which is how you move cash into a particular country to settle a transaction.”
The case where multinational corporations have multiple entities across national borders can also lead to foreign exchange issues, too.
“There’s a nuance where, particularly if there are foreign currencies involved, you can have a foreign exchange rate difference that is realized or unrealized,” he explained. “If they aren’t properly recorded, that can impact the actual consolidated financials.”
“There are a lot of elements, and particularly when you have all of these moving parts with accounting, tax, treasury, foreign exchange rates, improper or inadequate documentation, it can lead to an impact, certainly, on the financials,” Toppen concluded, “and definitely it could lead to an impact from a control environment perspective.”
How To Fix It
Toppen explained that, through Deloitte‘s research — which found that just 9.2 percent of businesses surveyed said their inter-company accounting framework adequately addresses all of these issues — the company is looking to boost awareness of the matter. But, he added, it’s also the responsibility of regulators and the corporations themselves to get educated.
He pointed to tax regulations, like Audit Standard 18, which increases auditors’ expectations regarding inter-company accounting. There are also policies in the works that deal with how companies handle inter-company transactions and how auditors and regulators approach the issue.
And when it comes to companies taking initiative to streamline their inter-company accounting practices, Toppen said that the biggest step is to align all of the departments participating in the moving parts of inter-company transactions.
“It’s not just a single function within an organization; it’s not just their responsibility,” he said. It requires various units in the enterprise to get connected and communicate. “When we have an opportunity to go speak to a company, if we see accounting, finance, treasury and tax all together, we feel pretty good.”