Roundtable: Local Compliance in Global Business
Peter Strasser, Compliance Manager, Vodafone Operations Centre
Vodafone operates an in-house, in-country model for local compliance.
Petra Williams, Controller for Emerging Markets, Cisco
Cisco operates a locally outsourced model for local compliance, using a mix of local firms and local offices of global firms, with some central coordination.
Peter Andrisin, General Manager, KONE SSC
In the KONE model the SSC performs the first pass of local compliance centrally.
Carlo Nuvoletta, EMEA VP Accounting, Computer Associates (CA)
CA’s compliance model in EMEA is centrally coordinated outsourcing with local delivery by BDO local offices.
David Lewis, Director, Business Outsourcing and Advisory, BDO
Introduction to participants:
Petra Williams: I’m controller for emerging markets at Cisco Systems, responsible for integration of our back office into shared services and for our statutory outsourcing which we currently do by local third-party accountants throughout Emerging Markets. We have between 70 and 100 countries outsourced and we manage those on a local in-country basis, while our US GAAP P2R is managed by global shared services. We’re looking to see how other companies manage that mix between US GAAP and statutory accounts and different models that they’ve seen for that.
Carlo Nuvoletta: I’m EMEA VP Accounting with Computer Associates (CA), responsible for the shared service centers. We have three shared service centers - in France, Germany and the UK. Our expectation today is to share some ideas and best practices around outsourcing and local compliance requirements.
Peter Strasser: I’m from Vodafone Operations Center in Hungary; Vodafone operates two shared service centers - in India and in Budapest, Hungary, servicing internal customers within Vodafone. I’m the compliance manager responsible for SOX/non-SOX compliance, fraud management, business continuity planning and operations.
Peter Andrisin: I’m General Manager of a captive KONE shared services center; we provide services for European countries. We’re also here to learn what the others are doing because one of our credos is that "there is no finish line": we’re always trying to improve and using 21st-century technology and 21st-century approaches for how to do things easier.
David Lewis: I’m a Director in BDO’s global outsourcing center. We did a study last year into how global companies manage local compliance, so it will be interesting to see how you all do that and what lessons can be learned
LOCAL COMPLIANCE & CENTRALIZATION
SSON; What challenges have you experienced in local compliance arising from the centralization of your finance function?
Carlo: When we centralized accounting functions for European countries, our major concern was – "how do I get updated on changes in local legislation, local taxation; how can I ensure that I will still be able to meet all requirements from a legal standpoint and remain compliant?" We have outsourced most of the local compliance activities to BDO, giving us confidence that this area is properly executed and continuously monitored.
Petra: "We’ve already floated off our standard P2R US GAAP activities to India or Warsaw, so our agenda for this year was to look at other scope. Next on our list was to look at tax and statutory compliance. But the complexities and the risks mean that it’s a slow burn project so we can see what the best way to do this is. We are looking at the task level at what makes sense to move, picking our way through different scopes. We will look country by country and note the potential risks and complexities in each one. Eventually we will build a business case and look if the ROI of moving such scope makes sense.
As Carlo said, it’s the really simple questions that are fundamental: "How do I make sure I’m compliant from Day 1, but also how do I stay compliant?" There’s very sensitive ground between you and a vendor; the whole reason you outsource is to get expertise in those countries, otherwise we’d put our own teams back out there again in a traditional model, but we’re a rapidly evolving company and we’re quite acquisitive, growing in size and scope.
In some regions once you pass a certain size, you may have some additional laws you have to comply with, and you have to worry if the vendors know your company well enough to be giving you that advice. So how do you find the right balance because obviously you want any relationship to be a win-win for both of you - so to have the vendor in a position where they can provide good information, and for you to be in a position where you’re getting the level of information that you need.
SSON: Perhaps, David, that’s an opportunity for you to alleviate some of Petra’s concerns there?
David: I think you can expect your outsourcing provider to keep you up to date with local regulation changes – that’s one of the advantages of a local delivery model - but you need to keep them informed of changes in your business. One of the challenges we’ve heard from people running a multiple local outsourcing model is co-coordinating all the services provided by the different vendors in each country. Petra, do you actually have to deal with each vendor in each country when you need something? What do you mean by "local outsourcing"?
Petra: Well we do have a central coordination point that we channel things through but yes, obviously we expect the local people to keep us informed. The model we have today is that we have local third-party accountants keeping us compliant, so there are two things there: one is, is that the right model to have? Or are there things that can be lifted and shifted to a global SSC?
David: It’s an interesting question as to how much you can do in your own SSC and how much you do need to do locally. The model where you have a single provider who operates in multiple countries, with a single point of contact, allows you to have one conversation and not many.
Peter, with the Vodafone model, with your shared service center in Hungary, how much of the local compliance work are you doing there? What’s the model in the local countries?
Peter S: We took quite a bit of work from the op-co's: we are running AP, some parts of the supply chain, some financial accounting according to IFRS. However the statutory reporting is not prepared in the SSC. Each op-co has it’s own CFO and core financial roles like a chief accountant. All the transactional stuff is in the SSC and op-cos are doing the statutory side locally based on the IFRS provided from the SSC
Peter A: There’ll always be a question mark from the auditors. We look to define how to be as close as possible to legal compliance. When most transactions are reported, they’re reported in one way or another: local, US GAAP, CIS, but it’s still only the output of what’s happened. You don’t plan transactions in advance, mostly in SSCs we process transactions and each transaction we allocate to executable tags. We then create two sets of reports. One is company, or corporate, and one is legal statutory.
So then the tags are linked into these reports, and the linking doesn’t always need to be the same. If it’s a fixed asset for example it might be linked to E1000 for corporate and for statutory it’s going to E4000 or whatever difference is needed. So it’s posted to the correct account, but at the reporting stage it goes to a different classification.
The end result is, for each country there is still one person, who is either a controller or above, who knows all these legal requirements, and he’s responsible for defining what the rules for posting in this or that report are. And then at the year end, he’s responsible for validating what has been posted according to transaction type. Then hopefully any statutory changes that come through from the responsible individual, we can change the tag at the SSC side.
Finally, we use a 16-period system on SAP, using the excess periods to assign transactions that occur post-year-end but which need to be posted to pre-year-end. That way, it’s clearly visible to the company what we’re supposed to do as we close our books on the 2nd or 3rd of January for the previous year, and there are some clear deadlines. This way helps us quite a lot to have clearly statutory and corporate books clear and correct, without having to do any double-posts or corrections. You just report the same transactions again, but in a different way.
Carlo: Peter, you mentioned the technicalities and the support that a strong ERP can provide like SAP. Now, there’s still a major issue - the knowledge of US GAAP requirements. When you are in a shared services environment, obviously you have a strong organization that knows US GAAP requirements very well for their particular entity. But the concern for us is: ‘yes, I can use a parallel ledger; yes, I can use period 13; but the people that are doing the posting, do they know enough of the local legal requirements?’
That’s largely why I believe there will never be 100% outsourcing - you’ll always need at least a liaison within the country to go between the SSC and the local authorities; someone that can interact with the local auditors, the local outsourcer and any other local authority. At the same time, you need someone to understand that outsourcing does not mean abdicating: in other words, you need a way to make sure that you have strong processes to monitor what’s happening in each country, for controlling deadlines, making sure accounts have been filed; a good understanding of the differences between US GAAP and local GAAP.
How to reach that? I’m envisaging, and in the process of building, a very strong reconciliation between local and US GAAP for each country, in a standard format, that can easily be monitored by someone in the SSC with a good understanding of the differences between statutory and US GAAP. So you need processes; you need a liaison in the country; but you need to ensure first of all that your outsourcer has a good understanding of your company so they can help you, at country level, to make sure that you aren’t making mistakes with regards to compliance.
Peter A: We have captive centers, so we know that we are processing invoices mainly to do with servicing and production of lifts, so mostly the transactions are quite repetitive. If they are standard transactions posted in one way, we get it posted in the SSC. With all these rules, maybe 90% are documented correctly without additional information from the country. Then, if there are any specific cases, probably we’re talking about those exceptions, then this is discussed and again the requirement for each country could be different. For example, in one country it could be tax-exempt, but in another it is not. This will probably be bigger for 2010, because there is this ‘big bang’ in EU VAT, legislation change. So each country will try to interpret the law and create their own rules for how to do it. So we ask for guidelines, and when we get them, whether from the country, or from our own corporate departments, we try to standardize, as much as possible. We don’t need US GAAP experts because we have specialists who know well the differences for major countries. But for Poland, for example, it’s harder because their rules are so specific.
I go back to the process: you have to have a person who people can go to and ask if they don’t have the proper regulations for this or that transaction. That person should either know it by heart, or will find it in his instructions, or if not that then will contact the global tax or whichever department, and then filter that back down. And then we try to standardise what we have done.
Carlo: It depends a lot on the type of business. CA is in the software business and there are many differences between US and local GAAP. How you post maintenance revenue or license revenue is different in some countries. And that’s probably the easiest one! But revenue recognition, for a software organization, is critical. You need to rely upon an expert - it could be the outsourcer, someone in your own country, but you need to know exactly how to measure that difference.
Hopefully in three or four years when IFRS is implemented it’ll be a different story, but so far it’s an area of concern for us and that’s why we’re relying upon a strong liaison, a strong finance organization in the field, and a strong consultant in BDO.
Petra: Just picking up on that IFRS comment. Obviously at the moment we have our US GAAP books, and today within our systems we transfer all the transactions from US GAAP to the legal books, and adjust as necessary. I guess with one benefit is to reduce the number of books and we can, use our legal books to do tax: where now we have three books, if US GAAP is stat aligned under IFRS, we won’t need that second set of books.
Carlo: That is pretty optimistic, yes! I’ve been told that with IFRS the most difficult element at the moment is the United States; European countries are all very much in agreement with the implementation. It’s the US that are resisting, but it looks like things are changing. The last meeting I had with KPMG and some BDO representatives, it looked like in three year’s time, we’ll probably be there, but like you Petra, I’m very much in doubt.
David: Do any of you have issues with people in-country where the role has been reduced because of centralizing the other finance functions?
Petra: Yes, that’s top-of-mind the alignment of resources. When we had the country structure there’d be a number of people in each country, so you could start off as a junior accountant, then become an accountant, and end up as a controller or something like that. Now, having lifted and shifted the transactional activities, those entry level roles aren’t there anymore. There’s less activity going on in-country, so maybe the country controller role is gone too, so we’re left with a manager level role without much room for personal growth, and no cover if they’re off ill or on holiday. They can feel isolated because they haven’t got a physical team to work within. So we’re looking at how to ensure these ‘orphans’, or ‘lone soldiers’, aren’t so isolated and thinking about bringing them into centers of excellence, or hubs, in order to achieve that as the organization evolves, as well as leveraging our communications technology such as Telepresence and Webex in the meantime to manage virtual teams.
Carlo: To add to what Petra said about isolation: this problem of finding experts with the right skill. You can’t have an expert that just works one month at a time and is still a very good expert. The question becomes, what do I do with this person in the other months of the year, after my taxes and accounts have been filed? It’s a very difficult equilibrium to reach, in terms of expertise and your contract with that person. That’s why in my opinion you need to work with consultants in each country.
Petra: Another challenge for the country manager: we expect them to be able to do the very nitty-gritty small things, and know lots about working with compliance. But they may also have to do some high-level things, working with the general manager, supporting the sales teams on bids and deals. Having someone with such a wide scope is maybe not realistic.
David: Carlo, has your move to an outsourced model helped you with that issue? Do you find your local people now don’t need that detailed knowledge?
Carlo: It depends a lot on the country-by-country situation. Where you have a large country with a larger workload, you can also afford to employ a local expert. And obviously we have a centralized tax team here in the UK that serves at country level. For smaller countries, you really need to depend on local consultants. You can’t have necessarily an expert in all local compliance matters – i.e. local GAAP, in local direct and Indirect tax -, for all your small and medium countries. You need to establish a good network between consultants and your outsourcer, and have a strong centralized process for monitoring their activities so you don’t over-depend on them. You also need a good reporting system, clear documentation, and a process for capturing the most important things so that you’ll always know what’s happening in countries. But again it’s impossible to rely only on your internal resources- because if there’s one expert, there’s that problem of "What if this person leaves?" That’s why you rely on the consultants or the outsourcers because there at least is a team of people, an organisation, which make sure that they have processes in place so that the "knowledge" doesn’t reside with one person only.
SSON: Peter, has Vodafone had any experience in this area or any challenges similar to Petra and Carlo?
Peter S: We kept local guys in the op-cos, and they keep providing us with the local statutory information so we don’t face these challenges, as per our operating model. I can agree with you that the lower level stuff was moved to the SSC, but those with the knowledge and experience remain there and can act as a liaison for us if anything occurs.
During the migration, during the definition of the activities, the tax and statutory is also reviewed, so if anything occurs just because of the existence of the SSC, then it’s captured there in the process of the migration.
David: Peter, you’re using an in-house, in-country model: so you have teams in-country taking data from your SSC and preparing your local accounts and tax. Are you looking to bring more functions into that SSC, or reduce your headcount in-country? Or do you think you’ve got enough critical mass in all of your countries to continue to do the tax and the statutory accounts in-country?
Peter S: So this is the current operational model, and of course we’re looking for opportunities to get more, how to bypass some of the op-cos and bring it in to the SSC. So far, local compliance isn’t an area that’s been considered. We have a tax team that deals with all the transactional level, sets up returns and so on, but we keep our tax managers in the op-cos in order so that they know the local laws and requirements and keep us informed of changes.
SSON: What other challenges do participants wish to put to the forum?
Petra: David, one of the things that I’m aware of: while we want to evolve and maybe move to new models and so forth, I feel a tie-in to my current providers who would have done all of the transactional processing in all of our countries before. So at the moment we’ve left all of the statutory and tax accounting with those local providers. If thinking of moving away, not necessarily to our SSC but to another provider, I’m cognisant of the fact they’ve known our company for a number of years, have done all this work, and have that immersion that hopefully gives a better quality of response.
What can you suggest? How does BDO do transitions when companies come on board with you? Say if we wanted to move from our current providers to BDO, how would you get up to speed?
David: We believe that whole transition period is extremely important. Whether we’re moving from a model where the company previously did local compliance in-house, or whether the company has already outsourced to a different provider, the approach is similar. First, we have a workshop for each region where we get all the people involved from our side into one place and have you brief our teams on the Cisco model and what the important aspects are - how we do things, where we get our data from. So then your teams benefit from meeting our teams, and this gives us a good knowledge of your business and importantly a personal relationship. We know each other, we’re communicating.
Secondly, we have our Client Portal as a communication tool, as a document repository, and as a task management system. When that’s running we’ll have the milestones: who needs to do what by when, and the system sends out reminder emails and so forth. You have a central view of the status of compliance for each country, and each process.
So that whole transition period is usually done over three months - sometimes we have to do it faster - and that allows us time to get up to speed on all your systems and vice versa so everyone’s ready to go when we go live. Carlo will tell you that even though it’s done over three months, even after that you’re still getting to know one another, ironing out wrinkles in the process and the scope. We put a lot of importance in the central coordination and as issues do arise then we can spot them before they become problems.
Carlo, you’ve had direct experience of that process - could you add anything to that?
Carlo: You do need to be cautious in the transition period. You need to have strong knowledge transfer - make sure that before people leave the organization, the outsourcer has gained all their knowledge. You need to follow a strong process, and monitor it closely. Before you centralize, you need to make sure that you have a champion in each country. And it depends on the specific country’s situation - you can’t have the same timeline. For example in the Nordic countries, because their accounting is very close to UK GAAP and the people have a very good knowledge of English, it’s easy to centralize those countries. But in Southern European countries, Portugal, Spain, or Italy, you are a lot more cautious and you realize that there will be a nine-to-twelve month period before you complete the centralization.
David: To add to that, we have a dedicated project manager throughout the process who manages the transition and who will virtually live on the client’s site for at least a month of that.
Petra: There are hidden costs sometimes involved in these transitions, both on the vendor and company side. As a result of the investment you need to make, would you say that there’s a minimum commitment to be made in terms of the number of years you need to make such a model worthwhile?
David: I think you need to plan on doing this for a certain number of years: I know it’s difficult contractually to agree to a set minimum because we all know there are changes we don’t foresee to our business models. But you wouldn’t want to be going into it if you didn’t think it was the model that was right for at least the medium term.
Carlo: I tend to agree with David there. This is a critical project and you need to have top management fully involved. It’s not a finance decision, nor a tax decision, it’s a business decision and management need to understand that there’s no way back. You can change your outsourcer, yes, but to go back to the country model is very hard. You’d have to hire local resources, go through an enormous amount of costs if you change your mind in the middle. You have to ensure you have a strong process and project management to avoid all the headaches, but in my opinion there’s no other way.
Petra: I completely agree- you wouldn’t do this just for a 12-month period. I was thinking about alignment and IFRS, thinking in two or three years would there be a window to do things differently and get that kind of ROI.
David: I think within three years you’d definitely have that ROI, and probably sooner.
Carlo: Petra, you’ve made a very good point about the implementation of IFRS and what will follow. I think that once IFRS is accepted worldwide you can reduce your service level agreements, but you’ll still need to file accounts, file taxes, those won’t go away, you still need some kind of local support. Having centralization prepared now will prepare the ground for an implementation of IFRS with fewer problems. Because you will not need each country to go through an IFRS transition, you will already have done the transition and then it will be a lot easier to implement a new accounting system.
Petra: And I do agree that there will always still be something locally.
David: We also have a central master services agreement that applies to all of our services around the world, and that does include performance clauses. It makes it clear who’s supposed to do what, and gives you a lot of flexibility in case you decide to go into a bunch of new countries. They can just be tacked on to the services agreement- no need to renegotiate each time.
SSON: We’d like to thank you all for your participation.