18 October 2017
Andy Mellor

Andy Mellor

Andy Mellor - The Logic Group

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Intercompany Recon - The last bastion of manual processes

11 January 2013  |  4494 views  |  0

Now more than ever, robust internal financial controls are a top priority for a financial industry that is fighting to regain the trust of its shareholders. Automation is a sure-fire way to ensure that control can be managed whilst also offering the benefits of saving time and minimising manual errors.

Although it’s commonplace for processes such as invoicing and payroll to be automated, an important process that is often unautomated is intercompany reconciliation. This process is key to sound financial control and when automated can lead to a much faster financial close. Yet, it is still largely accomplished using manual processes.

For large global enterprises with subsidiaries and business divisions that frequently trade with each other, quick and accurate intercompany reconciliation is a challenge. Apart from generating high volumes of intercompany accounting transactions, these subsidiaries and business divisions are usually separate legal entities operating with a high degree of autonomy across geographies, currencies, time zones and using different accounting systems. At month-end, all transactions between these groups must be aligned to ensure the accuracy of company reporting.

The most common types of discrepancies involve:

  • Mismatched order and invoice references
  • Pricing
  • Application of incorrect currency exchange rates
  • Timings of transaction records
  • Additional fees

Most large corporations rely on time-consuming manual and semi-manual processes to reconcile these discrepancies. This can include uploading data from multiple accounting systems, using spreadsheets to track or exchanging emails with colleagues. This is labour intensive, slow and error prone.

Spreadsheet software is often seen as an attractive and low cost approach to delivering the simple matching capabilities that comprise the first step of the intercompany reconciliation process. However, both manual and semi-manual solutions run a high risk of falling short of the level of control that many regulators require.

Fundamental controls that are necessary to ensure the effective segregation of duties, enforce the visibility and traceability of data modifications, and deliver the non-repudiation of reported data include:

  • User authentication
  • Access controls
  • Audit trails

Further, a consistent and formal arbitration process needs to be in place to:

  • Resolve transaction level disputes
  • Deliver visibility and transparency
  • Avoid lengthy email conversations 

The arbitration process establishes clear rules, including identification of accountable parties and encapsulating business practices for automated resolution, such as seller’s preference.

The larger the intercompany transaction volumes get, the more risk is imposed by reliance on manual and semi-manual solutions. Automation is scalable enough to offer effective and timely control of the intercompany reconciliation process.

Automatic identification of discrepancies can be resolved through proactive rules-based workflows that embody best practices and enforce consistency as demanded by financial management, regulators, investors and shareholders. Furthermore, an automated solution should serve as a system of record for the intercompany reconciliation process and provide a centralised information repository that facilitates the monitoring of enterprise-defined Key Performance Indicators (KPIs) and Key Risk Indicators (KRIs), down to the reporting of individual, aged or disputed transactions.

Intercompany reconciliation is not a process that has previously been top of the agenda when it comes to automation. However, large companies are now beginning to realise the importance of addressing this ‘last bastion’ of manual processes and removing one of the greatest barriers to a fast financial close. The stakes are high when it comes to reputational risk so many are now choosing to automate intercompany reconciliation in order to  reduce reconciliation costs, shorten month-end close processes and ultimately reduce financial risk.

TagsRisk & regulation

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Andy Mellor is Product Manager for secure omnichannel payment solutions at The Logic Group, ensuring that whenever and however customers want to pay, it is always secure, always convenient and always...

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