New York (March 9, 2004) -- Companies with third-party suppliers, business partners or vendor relationships that are based on the concept of “self-reporting” lose millions of dollars every year because of insufficient controls over such business models, according to a report by KPMG.
KPMG said that corporate risk has grown unnecessarily in a burgeoning $300 billion “self-reporting” economy in which each business partner provides the other with pertinent financial and other information used to measure activity, such as sales-volume figures. Poor internal controls and oversight cause the majority of self-reporting information to be wrong, thereby propelling companies to lose millions in potential revenue, according to the report, The Self-Reporting Economy: A Matter of Transparency and Trust.
“Companies with these relationships often find it difficult to control them effectively, because they are exposed to the weaknesses in the reporting processes and business ethics of the business partner,” said Robert S. Pink, a partner with KPMG’s Risk Advisory Services practice. “Misreporting financial or other information in these relationships is usually not deliberate, but often the result of management’s wrongly interpreting complex agreements, unclear lines of responsibility, computer system weaknesses, or just plain clerical errors, causing certain aspects of the reporting between the companies to be inaccurate.”
Most companies don't realize the number of self-reporting relationships they have or how they can extend beyond the obvious royalty or licensing agreements into every facet of their supply chain, KPMG said. And, driven by expanding global competition, shrinking profit margins and spiraling costs, companies continue to enter new collaborations based on self-reporting.
“The accuracy of reporting, together with a sense of mutual trust among partners, is especially important in the current climate of intense regulatory scrutiny, because deficiencies in reporting could signal lax internal controls, contrary to new U.S. laws for corporate accountability,” noted Pink. “A weak reporting link adds risk unnecessarily.”
KPMG advised companies to protect themselves against self-reporting risks by business partners by conducting a comprehensive review of a prospective partner’s internal controls before entering into a self-reporting relationship; determining if there are sufficient two-way communication and ongoing reporting mechanisms and controls to help ensure effective contract management and compliance; and involving all parts of the company in managing the performance of such self-reporting relationships.
-- WebCPA staff
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