Whose Accounting System to Use in an Acquisition (#166)
/In this podcast episode, we discuss whether to allow a purchased company to operate its own accounting system, or to require it to use the parent company’s system. Key points made are noted below.
Components of an Accounting System
This is THE question if you’re running the acquiring company’s accounting department, because it impacts a bunch of issues. First of all, let’s define what an accounting system means. It’s not just the accounting software, which is the mistake that everyone makes. There’re also the accounting policies. For example, what if the acquiree capitalizes all assets over $5,000, while the acquirer capitalizes everything over $10,000? That’s a difference in systems, and each policy variation creates different results in the financial statements.
Here’s another one. What about the forms that are being used? A form is really a data entry sheet. You take the information from the form and put it into the computer system. So what if you’re collecting less information in one company’s form and more on the other? That means the computer systems contain different information for the same transactions.
And another systems issue is procedures. What if one company has a tight set of closing procedures that can close the books in one day, and the other company doesn’t. Or, what about controls? The acquirer might be publicly held, and so has great controls, while the acquiree is privately held, and doesn’t have any discernible controls at all.
And, we’re not done yet. What about the definitions of accounts? One company might define accounts receivable as just trade accounts receivable, while another company might define it as also including all receivables from employees. If so, you can’t even compare the line items in the financial statements, because they contain different information.
All of these items are part of the overall accounting system. And I bring them up to point out that this really isn’t just a computer software question. In reality, some aspects of the two company’s accounting systems are probably going to have to be combined.
The Need for Consistent Policies
Just to have some consistency in what the companies are jointly reporting, you’re probably going to combine accounting policies. And the auditors may insist on using a fairly similar set of controls. And the definitions for the accounts should be reasonably consistent. So that’s probably the minimum level of accounting systems that need to be combined.
Differences in Process Flows
But beyond that, the situation is much less clear. Let’s look at it from the perspective of how the two companies operate. If they’re in fundamentally different industries, the entire process flow for transactions could be different, which means that both procedures and forms are different. If so, don’t try to shoehorn the accounting systems of the acquiree into those of the acquirer. The two organizations are simply too different. Instead, buy some consolidation software, and map the results of the acquiree’s financial statements into those of the acquirer, and get on with life.
Accounting Systems from a Strategic Perspective
Also, let’s look at this from a strategic perspective. If you want to completely switch an acquiree over to the parent company’s accounting systems, it takes time. It can take a lot of time. So, what if the parent is a serial acquirer? The management team has figured out how to buy the same type of business over and over again, and it’s buying a bunch of companies every year. If so, and you’re trying to switch everyone over to the parent’s accounting system, it can be pretty tough to keep up the pace. In this situation, you really only have two choices. Either invest in several integration teams that are constantly on the road doing integration work, or – and much more likely – you just let everyone keep their own systems.
Now let’s take it from a different strategic perspective. The parent company is really careful about its acquisitions, and only does so at long intervals. In this case, you have the time to conduct a full integration, so this is more of an option. However, the parent company may be achieving really fine results with its acquisitions because it promises to leave the management teams alone. If so, even though you could integrate the accounting systems, you probably should not do so.
Now in this latter case, you still need to roll out the minimum level of systems integration, which was the account definitions, and policies, and probably the controls. But that would be it.
OK, here’s another strategy issue. What if the parent company is buying up other businesses with the intent of making money from the deals by cutting expenses as deeply as possible? In this case, a key part of the plan might be wiping out the local accounting departments, and shifting all accounting to a central processing center. This is the ultimate level of systems integration, and it takes a fair amount of work. But in this case, there is no choice. Senior management is essentially mandating that you will shut down all local accounting systems.
My Personal Viewpoint
So that’s my general view of how to handle the accounting systems of acquirees. And of course, that’s all theoretical. In terms of what I’ve actually done, I always leave the existing accounting staff in place, because I want local expertise on-site. I also impose common definitions, policies, and controls. I do not mess with localized procedures and forms, since the acquiree’s accounting staff might have good reasons for coming up with them. And also, I really don’t care. It doesn’t matter that much if there’s some divergence between companies in how a process operates. And the same goes for forms.
Enforcement of Accounting Systems
Which brings up a major point, which is how oppressive do you want to be in enforcing exactly the same systems in every subsidiary? That means sending in an internal audit team to conduct investigations, which is expensive. And it means conducting enforcement activities to bring local staff back into line. Which is annoying for everyone involved. I prefer to let local staff do their own thing, within reason. As long as their error rates are low and they close their books on time, I let them do what they want.
Oh, and there’s one other item – I always require everyone to use the same accounting software. That way, all transactions are recorded in a single database, and we can close the books faster. That also means that I don’t allow too many changes to the corporate system. We have the same account structure for all subsidiaries, and there has to be a really good reason to change it.
But – what I do is based on having had a number of acquirees over the years that were roughly in the same industry. If I’d been dealing with radically different subsidiaries, I certainly would have let them operate their own software, and we just would have used consolidation software.