A large number of organizations are expanding their businesses internationally, either growing organically or via mergers and acquisitions. With growth comes change and additional reporting processes, often followed by confusion and delays in the reporting of financial statements.One area that frequently seems to be an issue is the inter-company accounting process.

Unfortunately, many organizations do not see inter-company accounting as a core function of their finance department, due to other pressing initiatives that appear to add more value. However, as organizations undertake other process improvement initiatives, particularly around improving the financial close, they are discovering that their inter-company processes are less than desirable.

In fact, many companies are realizing that their complex and inefficient inter-company processes can give rise to increased costs, as well as potential internal control and reporting issues, including restatements or significant write-offs. And streamlining inter-company processes doesn’t just help prevent mistakes and reporting issues — it also can help an organization realize a wide range of benefits.


There are several common inter-company challenges faced by organizations, including:

* Lack of process ownership. From the corporate level through to the subsidiary level, many organizations lack a network of professionals with clearly defined roles and responsibilities focused on inter-company processes. This lack of ownership leads to breakdowns in communication during transaction processing, all the way through to the financial close process. This, combined with the lack of an authoritative body to oversee the process, means that the inter-company process is broken before it even starts. In the end, organizations are left with imbalances and no structure to support improvements to the process.

* Lack of enterprise-wide policies. Without a strong policy governing inter-company accounting — or no enforcement of the policy — individuals have no guidelines to follow. Compounding the problem is the fact that oftentimes companies’ policies do not reflect the current business environment or the day-to-day operations of the organization.

Examples of basic components that are often missing or not enforced include materiality thresholds, dispute escalation/resolution processes, seller rules, transfer pricing, and foreign currency.

* Non-integrated systems. As companies grow inorganically through mergers and acquisitions, they often find that they are utilizing multiple systems across their organization. Rather than leverage functionality within existing systems or in consolidation applications, organizations have created manually intensive processes that add steps, risk and time to the inter-company process.


To efficiently improve inter-company accounting processes, one needs to first understand the process. Only then can an organization start to identify the changes that are necessary to achieve the future state. Any other approach runs the risk of using incomplete information and wasting valuable time, energy and resources on a still-broken process.

The process of improving inter-company accounting has to embody consistent policies, processes and controls. This means assessing the current situation, defining the optimal process, and then arriving at organization-wide guidance and consistent procedures that can be applied and enforced across the organization.

In the assessment phase, basic information has to be gathered concerning the types of inter-company transactions and their attributes. First, one must understand the demographics of inter-company transactions. Inter-company activity can span many different areas of the business, in addition to the traditional sale of products or services between entities, including activities such as investments in subsidiaries, debt relationships and related interest income and expense, cost sharing, treasury and cash pooling, and royalties.

Classifying inter-company transactions into groups makes it easier to articulate what needs to be achieved in terms of organization, processes, data and application systems. Each grouping may require different procedures, tools and levels of ownership, depending on their attributes and level of complexity.

Only after classifying the transactions should one move on to the task of dissecting the specifics of the transaction types to understand:

* Who is involved in the inter-company process;

* What they do during the process;

* Why they do what they do;

* How they do it; and,

* When they do it.

Understanding these attributes and the related moving parts will allow for a more effective design of a future inter-company process.

By its nature, inter-company process improvement cannot take place in a vacuum. For example, it has to take account of key business processes, which inevitably cut across many other initiatives — such as financial close, legal entity rationalization, the Sarbanes-Oxley Act, etc. — with which it needs to be closely co-coordinated.

Therefore, inter-company process improvement efforts are multi-dimensional, crossing not only geographies and organizational structures, but also demanding close integration with business processes, control and compliance, technology systems, and change initiatives. A systematic, phased approach is essential if the full benefits are to be realized.


There are many different attributes or features of a leading inter-company process. However, experience shows that four key attributes are present with companies that have cracked the nut when it comes to inter-company accounting:

1. Strong organization: A well-defined network of inter-company champions with the appropriate authority and support from senior management can facilitate policy enforcement, communication, issue resolution and continuous process improvement. Organizations with such a network of professionals have experienced an immediate increase in accountability that can function as a springboard for the initial improvement program and a foundation for long-term changes.

2. Leveraged technology. While the inter-company process alone does not justify a system upgrade, existing ERP systems and consolidation applications have features that facilitate the process — for example, ERP systems that have the ability to “auto post” a trading partner’s portion of the entry to eliminate the possibility of imbalances.

Recognizing that very few companies with significant amounts of inter-company transactions are on the same ERP system, consolidation applications can facilitate the matching and reconciliation of transactions through enhanced reporting and transaction tracking.

3. Standardized policy and procedures. Inter-company accounting is only a small component of an organization’s broader accounting policy manual. However, the policy is critical to establishing a common understanding and laying the foundation for which transactions are accounted for across the organization. A well-defined and enforceable inter-company policy (including sellers’ rule, cutoff dates, escalation procedures, etc.) is necessary to provide the structure and discipline required to support the people, processes and systems.

4. Removing non-essential activities from the close cycle. One of the early signs of an inefficient inter-company process is the level of effort required during the financial close process in order to eliminate inter-company imbalances. Having a strong inter-company policy, a defined network of professionals, integrated technology and standard procedures across the organization can negate the need for this activity altogether.

Implemented alone, these activities may provide individual improvements to the process, but they will not result in a sustainable and repeatable process. Inevitably, a change in the business environment or staff turnover will result in additional work to ensure that the process is maintained. However, undertaken together, they will provide the foundation for an inter-company process that is transparent and consistent.

Streamlined inter-company processes offer a wide range of benefits. Most obviously, they can reduce costs and improve bottom-line profitability. They can not only remove the costs associated with “managing” the process, but can also help an organization avoid the potential monetary and reputation costs associated with embarrassing restatements due to careless internal accounting matters.

With careful preparation, buy-in from all internal stakeholders, and a systematic approach, significant benefits can be gained from inter-company process improvements.

Davis Bradford and Paul Tetrault are a senior manager and a manager, respectively, with KPMG’s business performance services practice. The views and opinions are theirs and do not necessarily represent those of KPMG LLP.

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