Intercompany Accounting Risks that Result due to Mergers
The latest report from Deloitte has warned that acquisitions and mergers are motivating entities to embark on risky accounting operations. In the report dubbed as ‘Cleaning the mess underneath the bed- why corporate risk is increased by intercompany accounting’, the intercompany accounting impact is discussed here. This entails accounting and processing internal financial events and activities affecting various legal entities in a company. ICA may include sale of services and products, cost allocation, sharing of fees, financing activities and royalties. This is a broad area which if rooted in accounting extends into various functions like treasury, finance and taxation.
Intercompany accounting is also faced with other pressures due to enhanced regulation in the area of accounting and taxation across the globe. Investigations have recently exposed the use of insufficient tactics in ‘band aid’ by multinational companies in streamlining their transactions. Organizations are urged by the report to pay close attention in cleaning any mistakes they may have conducted in the past through adoption of a preventative approach comprising of taxation, accounting and treasury functions. Those companies that fail to take action may be exposed to steep corporation risk that includes expensive lawsuits, loss of brand reputation, regulatory investigations and investor confidence.
Some examples cited by the report include an anonymous manufacturing company that is currently facing investigations of grand jury and that involves intercompany cash transfers relating to tax planning and also an insurance company compelled to restate financial results due to the fact that it failed in eliminating particular intercompany transactions relating to variable interest companies.
The improper intercompany accounting for an oil company led to restatement of the financial statements which were followed by a lawsuit that accused the company in misleading investors of the internal controls effectiveness. The weak internal controls of another unnamed company with respect to transactions of related parties enabled insiders to overstate stock fraudulently which consequently led to imposed fines on Securities and Exchange Commission and lawsuits as well.
The report stated that one of the greatest challenges that faced ICA is the institutional knowledge required in cleaning the unreconciled balances historically.