Compliance. Yet another Anglicism that has penetrated into the German language. Can’t the Germans find their own word for it? Well, they have indeed tried. Contrary to the example of “meeting,” which can be elegantly termed “Besprechung,” the German language does not have a term for “compliance” that aptly encapsulates the concept. Compliance can have a lot of nuances. For example:
Accordingly, the Germans see the English word “compliance” popping up in a wide range of situations.
In its broadest sense, accounting compliance encompasses all obligations companies have with respect to accounting and reporting. Accordingly, compliance measures aim to minimize the risk of infringements via well-matched methods, processes, and controls at companies. Examples here include having a customized risk management system embedded into a compliance-fostering organizational structure, facilitating corresponding training and networking for personnel, and living a mission statement for ethical conduct at a company.
On the beginnings of accounting compliance
You can trace the origins of accounting compliance all the way back in Biblical times. Even then, taxes were levied on “income,” which of course means that people indeed must have been measuring and calculating income. During the era of Charlemagne, in the 8th Century A.D., merchants were obliged to provide an annual financial statement with an asset breakdown. They even had templates for them! The method of double entry accounting wouldn’t be described in detail until 1494 by the Venetian Monk Luca Pacioli – our namesake.
How corporate culture can foster compliance
Anyone who has children in their lives - or can recall their own childhood - will know: Rules tend to be followed
- when they are clear and comprehensible.
- when not adhering to them has negative consequences.
Yet child rearing will also be fruitless if parents themselves don’t provide a good role model. The same can be said for the rules for accounting methods and disclosure. When accounting principles become so complex that nobody at a company understands them except a few financial gurus and there are rewards for those who present solid figures at all costs, then the floodgates are opened for violations.
On the other hand, having the right “tone at the top” provides essential support for maintaining compliance in all business divisions. This translates into a corporate culture that values transparency, honesty, and ethical standards for decision-making. Those points have always been lacking in the accounting fraud cases that come to light.
Accounting compliance: Which rules do you have to know?
In Germany, accounting and disclosure issues are especially governed by the legal provisions laid out in the German Commercial Code (HGB), the Stock Corporations Act (AktG), and the EU Directives on IFRS.
Then there is also the German Law on Control and Transparency in Business (KonTraG) and the minimum requirements set out by the Financial Market Authority, better known as MaRisk (for credit institutes).
KonTraG entered force 30 years ago and primarily spells out specific details with respect to the requirements under HGB and AktG. It specifies an early risk recognition system for companies, as well as the presentation of risks and risk structure in a company’s management report and expands the liability held by the executive board, the supervisory board, and public auditors.
Accounting compliance on minds all over the world due to the Sarbanes-Oxley Act
The scandals involving Enron and Worldcom were large contributors to the ratification of the Sarbanes-Oxley Acts (SOX) by the US Congress in 2002. It applies for all companies that use the US capital market. The law aims to protect investors and creditors against fraudulent accounting practices by implementing much stricter disclosure obligations. Since then, executive management
- has had to confirm that the financial figures being published are correct.
- ensure that an adequate internal controlling system is not only in place, but also working.
The law spells out further comprehensive provisions on points such as documentation and storage obligations. Yet those provisions also touch on criminal consequences based on accounting fraud or similar violations. The Public Company Accounting Oversight Board (PCAOB) represents the first official oversight body in the USA for public accountants. The governments of many countries have now followed the USA’s example and adopted similar laws. Since then, “compliance” has been on the minds of all Chief Financial Officers around the world.
Accounting compliance: What has already been implemented at most companies
The guidelines for accounting methods and consolidation as well as organizational guidelines on accounting represent central elements for ensuring compliance at the majority of companies. Around one-fifth of them are already using modern means to spread information. One example worth highlighting here would be intranet wikis. Only 14 percent of companies have no accounting guidelines at all. In most cases, there is an internal auditing department to examine compliance with guidelines. And accounting departments themselves often perform auditing using the random sampling method.
Accounting compliance: Differences between bigger and smaller companies
Some companies, especially large ones, like to rely on centers of excellence for their accounting organization, abbreviated CoE. According to the study, they are usually engaged in the following instances:
- when the respective accounting staff are not sufficiently familiar with the accounting methods for a specific issue
- the first time a specific issue arises
- when involving particularly large transaction volumes
Centers of excellence bundle the knowledge regarding complex requirements in accounting methods. They keep an eye on changes in standards. Moreover, CoEs help to ensure uniform accounting methods for comparable issues throughout the entire corporation. In general, a central department handles the complex accounting issues - such as deferred taxes or the treatment of goodwill - at the majority of companies.
On the other hand, calculation of pension reserves and pension interest is frequently outsourced to external service providers. According to PwC, around half of companies with an annual turnover exceeding 500 million euros maintain a shares service center (SSC). Mass transactions - especially accounts payable, accounts receivable, and asset accounting - are processed there in a largely automated manner. That enables the attainment of two objectives:
- Increase in efficiency
- Reduction in errors
An accounting model as a compass for compliance
Aside from the measures laid out above, corporate culture and employee attitude additionally play a big role in compliance. An accounting model that provides staff with orientation and motivation is always the foundation of accounting compliance. “Quality” and “efficiency” in producing financial statements and reports are the most frequent objectives in this kind of model.
Accounting compliance: where improvement is needed
PwC sees room for improvement in the implementation of specific IT systems beyond the actual ERP and/or consolidation software - such as software for financial instruments or deferred taxes, or when putting together notes and disclosures. Only a minority of companies already use these kinds of systems - and that is the case even they they often have (partial) automation for complex processes and minimize error sources.
Checklist: How much accounting compliance is there at your company?
Check this out on the basis of these aspects:
- Clearly structured responsibilities in (consolidated) accounting
- Bundling of accounting competence, e.g. at a center of excellence
- Automation of mass transactions at a shared service center
- Diligent selection of external service providers, e.g. actuarial reports
- Regular communication between accounting and other departments
- Internal guidelines and monitoring of their compliance
- Implementation of IT solutions for special issues
- Up-to-date knowledge of accounting principles and employee training
- Tone at the top and role model, especially in financial matters
The PwC experts see further room for improvement in the flow of information between accounting and other departments. Communication only takes place on an ad hoc basis at over 80 percent of the surveyed companies. Inconsistencies are the risk. As an example, the public auditors note how assumptions for the management report and tax planning sometimes aren’t coordinated.
Against the background of frequent changes in accounting standards, PwC takes a critical view on the circumstance that more than one-third of companies have no concept for regular staff training in matters of accounting. Relying solely on the self-initiative of staff in order to save costs is risky and short-sighted.
Accounting compliance: the bottom line
Accounting compliance always entails a trade-off between pursuing business goals and complying with applicable rules. The top responsibility in business leadership is to facilitate both of those aspects for employees.
Knowledge of accounting principles can be brought into a company with employee training sessions, the expertise of external service providers, and intelligent IT solutions. Having clear definitions for responsibilities in finance and bundling competences creates transparency for decisions. Internal controls should be performed on a regular basis. That makes it possible to uncover and disarm potential error sources at an early stage. In many cases, professional implementation of these kinds of compliance measures can even lead to increases in efficiency. For it is when accounting compliance is not understood to be a disruptive cost factor but rather a functional component to sustainable management that the risk of intentional or unintentional violations can be successfully minimized.
LucaNet's CPM-software helps you to face the challenges of accounting compliance in a straightforward, thorough, and reliable manner. If you’d like to know how we can support your company specifically, you can use our contact form to reach our experts. We look forward to assisting you.
About the author of “How much accounting compliance is there at your company?”
Alexandra Supper is a knowledge consultant at LucaNet. She has also written a whitepaper titled: “International Accounting – Must-Know Differences Between IFRS and US GAAP” You can request it free of charge.
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