Can Accounting Systems be TOO Integrated?

Systems like SAP, Oracle Financials and PeopleSoft attempt to integrate all aspects of a business, regardless of the number of countries, industries, product lines they operate in.  They address all areas of the business, from accounting, to manufacturing, to planning, to human resources, to management.  There is no question that large corporations have benefited from this integration, but is it possible that we’ve gone too far?

The larger the computer system, the higher the cost of change.  For example, one of my clients was an international oil company which wanted to experiment with a new subsidiary.  The company found it cost effective to do a whole installation of Microsoft Dynamics (and throw it away when the experiment proved to be a success) than to integrate the new subsidiary into their main system right away.

But, more importantly, large systems become increasingly complex, reducing their ability to adapt to change.  I don’t have an inside track, but I have noticed that my telephone company’s billing system seems to be unable to keep up with changes in cellphone services and fees.  In any competitive industry, even large companies need to be nimble and respond to changes in the marketplace quickly.

Finally, there is the “best of breed” problem.  You may have the biggest, most integrated system, but there are other systems that handle specific functions better.  You then are faced with the choice of the one-vendor-solution versus assembling a system from the best of breeds by several vendors.  So, you get your basic General Ledger, Accounts Payable, Banking and Accounts Receivable from one vendor, your Point-of-Sale system from another and your document imaging from a third.

A good example of this type of thinking was a client who wanted to connect his ordering system to his web site.  Both systems claimed to be able to handle the sales tax, but in testing, the engine in the accounting system proved to be more robust than the web site.  The client decided to process the order in the web site, but have it pass the information to the accounting engine to calculate the taxes and send the result back to the web site.  The result was a better system with no tax discrepancies.

Transfer pricing: inter-company charges/ inter-company sales or purchases/ management fees/

Transfer pricing is a hot topic among accountant in almost every countries. Transfer pricing become a significant topic following the globalization foot-step, where cross-border transactions become more and more common. Your audit client may have a head office in Singapore, a packaging plant in Malaysia, while a main manufacturing plant in China. The supply chain of the audit client can span accross different countries.

Of course, when a inter-company / related company rendered service for other inter-companies / related companies, a price will be charged. The question is: how much to be charged? on what basis should the audit client determine the pricing / gross margin ( in circumstances of cost plus company) on inter-company transactions.

It is important for us to highlight to client to have a basis on determining the inter-company charges (including: sales transaction, purchase transaction). The inter-company transactions should be conducted on an arms length basis (i.e. the pricing should not differ materially from the market price). This is because local tax authority is concern on potential tax manipulation to record higher margin at lower tax rate country / region.

Hence, a proper documentation on transfer pricing is important to support all inter-company transaction. Management should always make reference to market price to assess if transfer pricing is conducted on an arms length basis.

In addition, it is common for holding company / other entities within the Group to charge managment fee to other inter-companies for certain centralised function  (e.g. shared service centre)/ corporate service. Likewise, a proper documentation and computation is required to support the basis of determining the management fee.

As auditor , we need to understand the basis of management in coming up the transfer pricing documentation and  to reivew for high level reasonableness.