Merger Integration for the Accounting Department (#254)
/In this podcast episode, we discuss the integration process for the accounting department after a merger has been completed. Key points made are noted below.
Issues Relating to Merger Integration
There is no best way to integrate two accounting departments. You don’t necessarily have to go through a long and involved process of working towards two accounting departments that exactly mirror each other. It all depends on the intent of the acquiring company’s management team. If the intent is to let the acquired company operate on its own, then there isn’t a great deal to do. On the other hand, if the intent is to buy a bunch of companies and basically make each one an exact copy of the corporate parent, then there’s a lot of work to do, since you have to rip out and replace the existing systems.
The Low-Integration Option
So let’s start with the assumption that the acquiree is going to continue to operate with minimal interference from the parent. If so, the only critical integration item is making sure that every account in the acquiree’s general ledger is matched up with specific line items in the parent’s financial statements. This is called mapping, and it’s needed to make sure that you can add the acquiree’s financial statements to the parent’s financial statements to generate consolidated financial statements.
There are a couple of related activities. One is to have the acquiree notify you whenever they add another general ledger account, so that you can map the new account to the parent’s financial statements. Another item is to agree on a standard set of definitions for each account, so that each firm is recording the same types of transactions in the same accounts. Otherwise, there can be problems with account names looking the same, but the contents of the accounts are different. And if the corporate parent does a lot of acquisitions, there isn’t much debate about those definitions – whatever the parent says is the official account definition is going to be the definition. There’s just no time to argue with each new acquiree about it.
Another item to address is accounting policies. Both the parent and the acquiree should be dealing with transactions in the same way. For example, both parties should have the same capitalization limit, so that each one accounts for an asset purchase in the same way. And depreciation methods should be similar.
And they should deal with revenue recognition issues in the same way. And so on. Ultimately, the accounting policies should be so similar that each subsidiary of the business will deal with a transaction in exactly the same way.
Another integration item is accounting controls. You really can’t afford to make an expensive acquisition and then have it leak money because some key controls are missing. Those controls don’t necessarily have to be the same as the ones used by the parent company, since the processes used by the acquiree may be different. The main point is just to have a solid set of controls.
And the final really essential integration item is making sure that the acquiree understands the parent company’s month-end closing schedule, so it knows when information is supposed to be submitted and what information will be provided.
Believe it or not, that’s all you need for the simplest possible accounting integration, and it should only take a week or so, along with some occasional follow-up.
The High-Integration Option
Integrations can be monumentally more difficult when the intent is to use the same accounting system across the entire organization, since this involves loading the acquiree’s accounting records into the new system, as well as training everyone to use the new system. The real question is, is it really necessary to do this?
It might be warranted in some very specific situations. For example, if the accounting department of the acquiree appears to be fairly weak, using a central system allows the corporate parent to keep a close eye on what they’re doing. Or, if the parent wants to save money by cutting administrative costs, it can probably do so by centralizing as much of the accounting as possible. And another reason is to have tighter controls by centralizing everything. Of course, those reasons sound good, but is the parent company willing to spend some really serious money to make that happen? You might need to work through a cost-benefit analysis to see if it’s worthwhile.
Cold Turkey Integration
If senior management still wants to centralize accounting, then you have three choices for how to do it. One is the cold turkey approach, which means you turn off the old system and turn on the new system on the same day, and really, really hope that the new system works as planned. This is usually a bad idea. Sometimes, it can be in the really bad idea category, because there’ll be some unanticipated problems that no one sees until the new system has gone live. Management tends to push this approach because the conversion appears to cost less than the other alternatives – at least until everything falls apart.
Parallel Processing
The next option is parallel processing, where you run both the new and the old systems at the same time. This means that the accounting staff has to enter every transaction in both systems, which is wildly inefficient. On the plus side, you can compare the results coming out of the two systems and see if they match. If not, keep tweaking the new system until it works properly, and then shift entirely to the new system. This approach is much less risky and much more inefficient.
Convert One Module at a Time
A midway approach is converting over one accounting module at a time. For example, you could switch just the payroll module to the new system, and then payables, and then billings, and so forth. This approach chops up the conversion process into smaller pieces, which makes it easier to handle. However, the process as a whole takes longer, and also you need to write lots of custom interfaces. The problem is that each accounting module shares information with the other accounting modules, so when you switch to a new module on the new accounting software, you have to write interfaces from that new module back to the remaining modules in the old accounting system, to keep the information sharing going.
Selective Standardization
A variation on these concepts is to convince management that only a few accounting functions need to be standardized, and only concentrate on them, leaving everything else alone. For example, if there’s a centralized treasury department, they may want to control every bank account in the business, so that they can centralize funds for more efficient investing. If so, there can be an implementation process for converting an acquiree’s bank accounts to different ones at the parent company’s preferred bank. This means that only a few, very specific accounting areas are of importance to the parent company, so only those few are addressed. Everything else is left alone.
Concluding Thoughts
In general, I advocate using just those few integration steps that I mentioned at the beginning. Doing so addresses the main goal of the parent company, which is to produce consolidated financial statements.
If management really wants to conduct a massive accounting overhaul at every acquiree, try to convince them to focus on just one or two areas, which greatly reduces the effort.
After all, management always has the option to come back in later years and re-address the integration issue, if it wasn’t completely addressed right after the acquisition. And there’s a side benefit of engaging in a brief set of integration activities, which is that it gives the parent company the ability to move on to another acquisition within a few weeks. And if the parent is trying to roll up a bunch of acquisition targets, that could be a good reason to go easy on the comprehensive integration strategy.