United States

Meeting challenge global compliance

Second Quarter 2010

MANUFACTURING INSIGHTS  | 

Global compliance is defined as the need to comply with all national requirements that are critical to a company’s ongoing business in foreign countries in which it has operations. This has become one of the most challenging issues facing home office financial managers in U.S.-based global companies

Global companies have hundreds of small units scattered around the world. Traditionally, compliance deficiencies in these operations have had very little impact on parent companies. It is not unusual for companies to rely wholly on foreign unit management to look after local tax, statutory audit and other regulatory compliance requirements and to intervene from the home office only when a compliance failure constitutes a serious threat.

With rare exceptions, U.S. parent companies have not invested the money or manager time needed to understand all of the compliance requirements applicable to their foreign operations, or to monitor whether foreign unit management is meeting those requirements. Often, home office financial managers lack knowledge about what needs to be done in each country, such as when filings and reports are due, who is responsible for the work, whether compliance deficiencies exist, and what is being done to correct them.

The problem of compliance deficiencies is not limited to foreign units under the control of foreign managers. Many U.S. companies attempt to perform the accounting and compliance functions of some of their small foreign units with staff located in the U.S. The initial attraction of this approach is obvious. The foreign operation is too small to justify a business office staff. The company doesn’t want to find and pay a local accountant in the country to do the work. Home office financial staff is available with time to spare, etc.

Unfortunately, this approach usually ends up causing serious compliance problems. For one thing, the U.S. staff has none of the training and preparation in local regulations enjoyed by even the most humble professionals in the country where the business unit is located. The U.S. staff struggles to find, understand and keep up with the foreign country’s compliance requirements, and usually loses the battle.

Four steps your company can take to improve compliance
The challenge in serious global compliance management is caused by the multiplier effect. Many companies have large numbers of small units in different jurisdictions. Since each jurisdiction has its own set of compliance requirements and dates, determining the compliance profile of each foreign unit can be daunting.

When U.S. managers do succeed in pulling back the veil on their operations abroad, their jobs become even more complex, as they find a number of issues. Common issues found, include:

  • Compliance deficiencies in value added tax (VAT) registration
  • Reporting issues
  • Errors and delinquencies in requirements pertaining to employees

These errors, even in small companies, can result in fines and even suspension of business.

There are four steps companies can take now, to avoid potential difficulties in the future:

  1. Develop a comprehensive compliance checklist and compliance calendar for each foreign jurisdiction in which the company has operations
  2. Undertake a high-level compliance assessment for each of your foreign operating units
  3. Prepare and implement a follow-up plan to correct compliance deficiencies
  4. Update the compliance checklist and plan annually.

These solutions are not complicated, but they are tedious, time-consuming and not easily accommodated into the already busy workloads of U.S. financial staffs. As fines begin to rise for some companies, take time to identify your areas of weakness in the countries where your company has operations.

For more information on how your company can meet the challenges of ensuring global compliance, download our free white paper Global Compliance – The Growing Challenge of Global Companies or contact Frank Lebihan, Managing Director at McGladrey, at frank.lebihan@McGladreyus.com

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