Intercompany reconciliation – automating the last bastion of manual processes

March 2013 | PROFESSIONAL INSIGHT | FINANCE & INVESTMENT

Financier Worldwide Magazine

With the finance industry fighting to regain the trust of shareholders, robust internal financial controls are now more important than ever. Automation has long been a hot topic for organisations, with processes from invoicing and payroll to system updates all being moved away from time-consuming and error-prone manual processes. However, one important process that is often neglected from an automation perspective, yet is particularly important for sound financial control and a faster financial close, is that of intercompany reconciliation. Intercompany reconciliation represents a significant workload, yet is largely accomplished using manual processes.

Quick and accurate intercompany reconciliation is a challenge for most large global enterprises, whose subsidiaries and business divisions are frequently trading with each other, generating high volumes of intercompany accounting transactions. Subsidiaries and business divisions are often separate legal entities operating with a high degree of autonomy across dispersed geographies, and are also likely be operating in multiple currencies, in different time-zones, and using different accounting systems. Transactions between these groups must be aligned as part of the month-end financial close process. Any disputes, such as those arising from mismatched order and invoice references, pricing, application of different currency exchange rates, timing of a transaction record, or additional fees, must be resolved to ensure the accuracy of company reporting.

For the majority of large corporations, intercompany reconciliation typically relies on time-consuming manual and semi-manual processes, such as uploading data from multiple accounting systems, tracking on spreadsheets or exchanging emails with colleagues. Not only is this labour-intensive and slow, it can also lead to errors, inaccuracies and inconsistencies in dispute resolution.

Semi-manual solutions, using tools such as Microsoft Excel, can be viewed as an attractive and low cost approach to delivering the simple matching capabilities that comprise the first step of the intercompany reconciliation process. Yet these methods may fall short of the level of control around the processes that many regulators require.

Fundamental controls, such as user authentication, access controls and audit trails 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. Additionally, a company needs to have a consistent and formal arbitration process in place to resolve transaction level disputes, deliver visibility and transparency, and also 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.

As intercompany transaction volumes increase, manual and semi-manual solutions falter. Ambitions to accelerate the financial close process can be thwarted by the time taken to execute the intercompany reconciliation manually. Automation delivers the scalability required to deliver effective and timely control to the intercompany reconciliation process. Discrepancies can be automatically identified and resolved through proactive rules-based workflows that embody best practices and enforce the consistency demanded by financial management, investors and shareholders. Once implemented, an automated solution should serve as the system of record for the intercompany reconciliation process, and provide a centralised information repository that facilitates monitoring parent-company level KPIs and 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.

Andy Mellor is portfolio manager for Financial Controls Solutions, Risk & Compliance at Fiserv. He can be contacted on +44 (0)20 7438 3067 or by email: jhirst@ruderfinn.co.uk.

Andy Mellor

Fiserv