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What are the challenges of group consolidation accounting?

A considerable number of companies in the UK operate under the partial or entire ownership of a bigger parent company. This means that financial statements must be prepared differently to provide a holistic view of business performance for the board and investors of the parent company. To create a single version of the truth, the financial reports of the smaller subsidiaries need to be consolidated.

Treating organisations as a single entity may be very useful for financial reporting, but for overstretched reporting teams, the sheer volume of information that must be collated and submitted can lead to mistakes and misinterpretation, particularly when last-minute adjustments are required.  

Group consolidation is one of the most technically difficult areas for accountants, particularly when subsidiaries may be in different currencies, on different general ledger systems, or have differing charts of accounts.

While smaller groups may require relatively simple consolidation, many national and international businesses can find group consolidation a logistical nightmare, with the risk of mistakes high and the potential penalties for errors even higher.

So, what are the challenges that accountants face when consolidating group accounts?

  1. Outdated methods of collating figures or inflexible reporting

One of the principal challenges for accountants when it comes to group consolidation accounting is outdated methods and inflexible reporting structures. Often, these issues stem from a “traditional” mindset – accountants accustomed to a certain way of reporting; perhaps using Excel spreadsheets to format data before sending it via email.

While this might work for small departments, these practices make the consolidation process significantly longer for large entities with subsidiaries. Furthermore, as information is contained in emails, that information can be easily lost, misinterpreted or entered incorrectly, requiring accountants to constantly go back and check their data.

This process not only increases the likelihood of error, but also the amount of time it takes for accounts to be consolidated, as they need to be verified more than once to ensure the information is correct. Also, in situations where several accounting sets are being completed and finalised at the same time, information that needs to be fed up to the “final accounting file” can be missed as accountants wait on emails containing spreadsheets to come through, often leading to outdated financial statements.

  1. Keeping up to date with regulations

Ensuring accounts have been prepared according to the correct financial standards is essential. Ensuring that financial statement are updated in line with the latest legislation is a pressure hard pressed reporting teams don’t need.

Another aspect to consider is the iXBRL tagging on the face of accounts – is it being done properly?

Proper management of iXBRL tagging will cut out the laborious and costly process of manual data entry, re-entry and comparison by auditors as it can then be done by computers instead. iXBRL drastically increases the speed of handling financial data, reduces the chances of error, allows for automatic analysis and comparison of data, and helps auditors and accountants to identify potential issues.

The reality is that auditors are under increased pressure to ensure risks are identified as early as possible – take Carillion PLC for example; earlier this year it went into liquidation, according to some press report auditors  “rubber-stamping figures that misrepresented the reality of the business” and missing a number of financial red flags, despite analysing and signing off on the business’ accounts.

  1. Foreign exchange rates

Different countries use different accounting standards, so accounts of each entity in their respective country need to be compiled as per that country’s specific reporting standards.

This can be a major challenge when it comes to group consolidation accounting for foreign subsidiaries, as the financial information across entities and countries needs to be remediated to establish an overall picture of the balance sheet.

Typically, this means ensuring foreign exchange rates are applied to convert local currency to the reporting currency. For extensive financial statements this process can be time-consuming but is fundamental as the information affects all aspects of the entity.

Without software to manage the process of group consolidation accounting, the best approach would be to convert currency manually and then import them all together, directly to the reporting platform of choice.

 

How can software help?

All the above can be readily managed with the right software.

CaseWare’s Working Papers, for example, is an end-to-end solution for auditors and accountants, enabling them to consolidate accounts at multiple levels and in real-time.  CaseWare also has a secure cloud collaboration tool meaning no more waiting for files to be delivered or transferred.

Financial information is held in a central location, allowing for accessibility and transparency. Any last-minute changes to financial accounts across the entire group structure are reflected immediately. Mergers and acquisitions within the financial year, for instance, can be easily added to the face of the account to accurately reflect the business’ financial position, and information can be rolled forward year-to-year to ensure continuity.

CaseWare’s Working Papers give both subsidiaries and groups lead schedules, journal handling and the financial statements, providing a level of flexibility accountants and auditors need to deliver comprehensive and accurate group consolidation accounting.

Finally, CaseWare’s reporting templates are regularly updated to ensure that everyone is working on accounts in line with the most up to date regulations.

With such a solution in place, businesses can benefit from fast, reliable and comprehensive group consolidation accounting. They can minimise the risk of incorrect statements as the software can validate and compare data, securely collect and update data in real-time for last-minute additions and deliver consistent reporting. 

If you want to find out more about CaseWare’s Working Papers and how it can improve your group consolidation accounting, click here.