We routinely come across a recurring problem where a client’s foreign accounting team is more focused on local tax compliance than on corporate reporting compliance.
The issues we commonly see include the foreign subsidiary (i) not fully closing a period end with accruals as their accounting is often cash-based for tax reporting rather than accrual-based for financial reporting; (ii) not adhering to key internal controls due to time constraints, a feeling of disconnect from the parent as to its importance, and that the hierarchy of command in some foreign jurisdictions enables a boss to easily override a process; and (iii) innocently mis-classifying entries for accounting such as expensing items for tax which the parent capitalizes under their IFRS policies.
Three Solutions We Suggest:
1. Random Control Testing at Site: Always conduct ICFR testing at your foreign location/office, and while there you should select a random sample of documents for testing. This helps mitigate the risk that all the required sign-offs and reconciliations are done after the fact. We commonly find that pre-requested “PBC” documents are ‘cleaned up’ for us.
2. Monthly Close a Must: Ensure you implement a monthly reporting calendar with enough time for the corporate parent to review the foreign subsidiary's work. A regular monthly close process helps train the foreign team, increases collaboration, improves the closing cycle, and identifies problem areas for remediation in advance. This also helps ensure that key controls are in place throughout the year, not just at period end.
3. Regular Visits: Regularly visit your foreign location/office to ensure a high level of collaboration and understanding between the parent and the foreign accounting/finance/operations teams. This helps bring the tone from the top to the field (and foreign office), but most importantly builds trust and fosters a sharing of ideas.
We’d love to hear some of your ideas and feedback on these issues as well. Please feel free to add your comments and thoughts.