When managing global operations, companies must prepare two different accounting books for each country: one for internal reporting and one for local compliance purposes. weConnect’s Matthew Kyle explains how companies can avoid huge headaches and audit issues by marrying management and statutory accounting.
The Difference Between Management Accounting and Statutory Accounting
As you may know, “statutory accounting” is the process of ensuring compliance in financial reporting within a particular country. This involves the recording, verifying and reporting of assets, liabilities, debts and expenses in statutory accounts. Statutory accounts are mandated for the main purpose of reporting to local governments and filing tax returns. They follow country-specific accounting principles; depending on the country, they may need to be prepared monthly, quarterly or semiannually (Korea has quarterly VAT filings, while Israel, Mexico and Colombia have monthly), in a particular language (Germany, China and Vietnam require financials to be kept in their local language) or in a particular format, as is the case in United States, Singapore, Switzerland and Poland). In some countries, including Singapore and Hong Kong, a statutory audit, which is based on statutory accounts, is also required.
This is just one aspect of accounting that a business must manage. Another important accounting field is management accounting. While statutory accounting provides financial information to parties outside of the company, management accounting is used by internal stakeholders to best inform business decisions. They follow the company’s global accounting policy and are prepared monthly for internal decision-making purposes, enabling businesses to make smart choices about strategy and direction.
Management accounting is used often, while statutory accounts are only top of mind once a year at best (once a month at worst) and rarely, if ever, referenced internally. Given the different audience, purpose and guidelines for management and statutory accounting, they are often completed in silos. Businesses typically leverage outsourced accounting firms to do their statutory accounting and use in-house accountants for management accounting.
Expanding Overseas: Disconnected Accounting Becomes Problematic
Most finance executives know the difference between management accounting and statutory accounting. However, they may not know of the major pain events and extreme levels of stress that could arise when expanding globally if these two accounting books are handled in silos.
When it comes to international accounting compliance, every country is different. To ensure compliance, companies must maintain statutory accounts in accordance with local generally accepted accounting principles (GAAP) in local currencies for each country they operate in, and also respect local tax requirements. If a company’s activity is solely local, it makes sense to work with a single outsourced accounting firm on statutory accounts. However, expanding overseas complicates this as the employed accounting firm may not know how to operate in other countries.
For international businesses, this often results in the reliance on multiple local accounting firms for subsidiaries’ statutory accounting while the business’s in-house financial department is responsible for management accounting. After years of different parties handling the management accounting and statutory accounting, it is often challenging to reconcile the two financial books. When internal stakeholders cannot tie the statutory accounts and filings back to their management accounting, they feel that the statutory accounts are incorrect and are confused about how this came to be.
There is nothing inherently bad with outsourcing statutory accounting. In fact, outsourcing makes a lot of financial and practical sense in most cases. Outsourced accounting is a sound option for companies that cannot justify the cost of a full-time, in-house accountant in every country they operate in. Even if your company does have in-house accountants, they may not have the experience, capacity or language capabilities to complete the statutory accounts for each subsidiary of a global business. If you think managing receipts and source documents in English can be chaotic, try doing so in Chinese, French, German and Japanese.
Also, if you are just working with a tax firm, communication can be an issue. Clients typically only worry about statutory accounts once a year when they are filed and, without daily communication, assurance of response time and employee turnover from the firm, they become disconnected from this process and the tax firm is disconnected from the business in general. The impression that there’s little connection between the statutory and management books may not come until an audit is needed – imposing extra work, stress and chaos on top of a full workload. Further, if the team managing the management and/or statutory accounting changes over time, it may be impossible to reconcile them both in the event of an audit.
Marrying Management and Statutory Accounting
In order to ensure uniformity between the management and statutory accounts at any given moment, the focus should be on process, communication and technology. This means creating a global financial process that includes both management accounting and statutory accounting together, allowing for 100 percent tie-back for any historical period. Of course, you can do this on your own, but if you want help, weConnect’s global compliance solution guarantees your subsidiaries’ management accounting book and statutory accounting book will always tie in any country. weConnect, a global expansion and compliance company, marries together the excellence of large multinational centralized finance operations and the discipline around statutory compliance through experienced, integrated local teams around the world. Today, our workforce includes over 200 global team members and over 1,000 local experts in 55 core countries. Even with 55 core countries, the weConnect team has supported over 3,000 clients in expanding their businesses to more than 120 countries by leveraging partners and affiliates and managing the technology, communication and process to ensure a consistent experience for our clients.
At weConnect, we structure accounting so that there’s a 100 percent tie-back from management accounting to statutory accounting at any given time. By basing the statutory accounts off of the management accounts and making adjustments from there, weConnect offers clients a simplified, integrated solution that allows accounting activities to be completed comprehensively, accurately and promptly. Rather than working with multiple local tax accounting firms, clients can depend on weConnect for all international subsidiaries.
weConnect brings a full team to the table, composed of handpicked accounting and tax specialists who understand the value of reliable communication, fitting into the client’s culture and integrating into their processes and technology. With a history in shared services, our accounting team has an understanding of what’s most important to you. Our goal is to act like an in-house team as much as possible with communication tools like Zoom or MS Teams to connect immediately for discussion, remain compliant and allow our clients to focus on business growth and activities.
We also recognize the convenience of working out of our clients’ management accounting systems, particularly enterprise resource planning (ERP) systems such as NetSuite, and have the capabilities to do so. NetSuite is the ERP we are seeing our clients most drawn to, as it can manage many international subsidiaries well. Companies still using older technologies for their management accounting experience outgrowth and inefficiencies and are inconvenienced by the disparate systems. NetSuite offers an integrated solution that streamlines business processes and increases efficiency. weConnect takes these advantages one step further by integrating clients’ management accounting in NetSuite with statutory accounting requirements across the world.
Even if NetSuite is not your system of choice, we have countless clients running Xero, Quickbooks, SAP, Oracle, Dynamics, Navision, Sage, Intacct, Paprika, Hyperion, Zoho, ECOUNT and many other internationally capable systems. We can assist you in performing management accounting in any of these systems while simultaneously respecting and complying with compliance and statutory accounting and tax laws in any country around the world. This way, if you are ever audited − financially, by a potential buyer, as a new requirement from a shareholder, after a merger, by a foreign tax office or through any other financial review − we can ensure the experience is as stress-free and smooth as a Sunday stroll in the park. Let us defuse silent accounting compliance time bombs now so they never blow up in your face in the future.
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