Financial Reporting & Accounting

Avoiding Surprises in Intercompany Account Reconciliation Prior to ERP Implementation

The cleanup process for intercompany accounts can be labor-intensive and overwhelming, which many companies do not fully calculate when planning new ERP implementations. They are normally aware of their intercompany accounting issues if they exist, but often, they don’t have enough resources to address them. Naturally, these issues don’t become a priority until they must be addressed – usually prior to new ERP implementation.

I have seen companies estimate a few weeks to clean up their intercompany accounts, only to spend several months or longer working on unreconciled intercompany account balances prior to data migration. In these cases, data migration in new ERP implementations must be put on hold until their intercompany accounts are untangled.

The Problem of Compounding Discrepancies

Auditors question balances in intercompany accounts when they become significant. It’s often at this point companies discover their accounts out of control and fail to substantiate if those accounts have never been previously fully reconciled.

If discrepancies are insignificant, they can be written off – no sweat! If not, accounting teams can plan on sorting them out in the next period. If they make an attempt, they can find it a bigger issue than initially estimated, resulting in no resolutions. Or they may be so busy with book close each period that they have no extra time for ad-hoc time-consuming projects. And then the discrepancies grow bigger and bigger over time.

ERP Implementations Force Substantiation

When companies plan new ERP implementations, large-discrepancy and unreconciled balances in intercompany GL accounts should not be migrated to their new ERP systems as-is. So, companies have no choice but to resolve those discrepancy issues. Companies must then take a close look at each transaction in their multiple yearlong books – sometimes all the way back to inception – and try to come up with fixing entries.

And unfortunately, those discrepancies have often been compounding for such long periods that a few aggregate entries may not fix them all at once.

Root Causes and Complexities

The complexity of the cleanup projects depends on the number of currencies, entities, locations and the training level of their accounting teams. Cleanup projects are often multi-faceted even if the root cause is simple enough.

Let’s say the root cause is that the staff is inadequately trained. However, that lack of training might have led to the staff making mistakes in the preparation of intercompany entries. Perhaps they did not think about how the other side of the entry needed to match when multiple currencies were involved, or perhaps they did not fully understand the nature of transactions to begin with.

Or let’s say the root cause is a system setting or limitation issue. Perhaps the staff did not know how to configure settings in their ERP systems, or perhaps they were unaware of the limitations or capabilities of their ERP systems. (For example, it’s common that some old systems don’t offer functionality to disallow a single-side entry hitting intercompany GL accounts.) Though the resolution for moving forward might be as simple as adjusting settings, the complications of reconciling the past impacts can be vast.

Even in new ERP systems, foreign exchange functionalities are sometimes not utilized to full capacity, which results in fluctuating discrepancies each month when two or more currencies are involved in transactions.

Preventing Issues Sooner

As a preventive measure, companies should check periodically whether intercompany accounts are reconciled. It is important particularly when you’re exploring an IPO or a new ERP implementation in the near term. If intercompany accounts are not reconciled, identify issues and figure out their root causes.

In my experience as an accountant at big and small companies, I find intercompany account issues often remain on long-lasting to-do lists, and teams only end up executing reconciliations when they become obligated to do so.

In line with a useful article from PwC, I believe that there are two critical points to keep financials clean and organized:

  1. Intercompany transactions should reconcile. It is not about whether the books of each entity are in balance.
  2. Automate processes. ERP systems can support intercompany in many ways but often don’t to.

Most intercompany problems result from disorganization in system and process. Data migration of the balances of intercompany accounts from your old system to your new system needs to be thoroughly planned and carefully executed. 

If your intercompany accounts are out of control by the time you try to reconcile, it is wise to have your accounting team continue to focus on book close. Unless you have extra resources who can focus on intercompany cleanup project alone, you should also recruit external assistance well before you need to have the issues addressed. Surprisingly, it takes much longer to completely clear discrepancies in intercompany accounts than many people realize – as each transaction often need to be looked at and gets more complex based on how many currencies, entities, locations and so on.

Learn More

It’s common that accounting departments are overburdened, which can lead to projects like intercompany account reconciliation to be put on the backburner. If your company plans on implementing a new ERP, recruiting supplemental support early – ideally prior to system selection – can be the difference between success and failure. Experienced professionals can help you manage the implementation project, and they can help you identify and mitigate risks early to avoid costs later. You can learn more about how we help our Clients through such engagements on our Financial Systems services page.

You can also learn more about process improvement, accounting department health and project management in the related resources below. They offer extensive insight from our diverse team of consultants:

About the Author

Sunny has more than 15 years of hands-on financial experience in diverse industries, such as investment banking, global asset management, hospitality and entertainment. Her roles involved Controllership and Financial Reporting manager positions at various organizations ranging from startup to multi-billion-dollar public companies. She has strong international experience, including cross-border operations and taxation, with time spent in Europe, Asia and South America. Her experience and expertise encompass managing internal and external (including SEC) financial reporting, streamlining the financial close process, supporting a successful IPO, implementing new ERP systems, leading finance and accounting teams and building up an offshore team in India. She holds a B.A. in Business Administration from Ewha Woman’s University in Seoul, Korea and an MBA from UCLA Anderson School of Management. She is a CPA licensed in California.

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