Regulatory compliance has long been an accepted cost of business, with companies spending huge sums of money and dedicating countless hours to the task. With requirements regularly changing and the global economy still struggling – and Europe in particular facing a volatile economic environment – the burden of meeting compliance requirements is only going to increase in the coming months and years.
However, achieving compliance across an organisation while also striving to delight customers and grow the business can be a real headache – particularly when expanding into new international regions. Each new country comes with its own currency and set of rules and tax regulations, meaning that the cost and time spent on compliance will continue to grow. Any CFO who can find a way to cut through all the red tape and deliver compliance, without spending a fortune on consultants, will be a hero in the eyes of the board.
The spiralling cost of compliance
When it comes to international tax and compliance, businesses have traditionally faced the same challenges – different regulatory requirements in each country or business unit, and different or disconnected systems in each territory. The extent to which it differs between regions can be extreme. For example, take the average time required for preparation, filing and paying activities to do with VAT.
In Switzerland it takes eight hours and in Finland it takes 22 hours, but Bolivia requires 480 hours and Brazil is as high as 1,374 hours. To put this into perspective, the latter figure equates to employing one full time finance professional just to meet government imposed regulatory reporting requirements in just one country.
Companies turn to their enterprise resource planning (ERP) for help in reducing the regulatory burden, but the unfortunate fact is that most traditional ERP packages don’t support international compliance effectively. While they may function well enough in a domestic environment, they struggle to handle the complexity that comes with multi-national requirements and the result is a hairball of disparate ERP systems in each country, and/or a network of spreadsheets and external systems.
And, when combined with the time required for each and every corporate entity in each country, the cost of compliance rapidly adds up. This situation has been commonplace for so long that businesses have come to accept the increasingly high cost, with those operating in multiple countries suffering the most.
If the problem wasn’t bad enough already, organisations are now bracing themselves for this cost to increase further still in the face of new regulation. There are things that we know about, such as mandatory e-filing of VAT returns for UK businesses from 1st April. Many businesses were unprepared for this, with one well-known software company going so far as to email its customers to warn them that their systems didn’t support this requirement.
In addition, there is the looming threat of changes that could be made to help the volatile economy, particularly in Europe. Much like the recent changes in UK VAT, a number of new regulations could come into effect and businesses will face the challenge of quickly adhering to a different set of processes. Complying with these new rules is a technical challenge, and one that needs to be addressed early to avoid a last minute rush.
The consequences of non-compliance aren’t limited to losing ground to competitors; large fines and even jail terms are possible – and a recent well-publicised case demonstrates that the governments themselves aren’t motivated to proactively help companies avoid them!
A new approach to regulation
However, by taking a different approach to the way finance departments are structured, it’s possible to streamline the administrative process and reduce the time needed to achieve tax compliance, submit returns and maintain full auditability. Instead of locking a business unit or subsidiary into a specific system, multinational companies should look at the possibilities internet based systems offer to consolidate multiple regional subsidiaries into a single financial platform.
This will provide the ability to correctly calculate taxes in the first instance during the normal course of business and subsequently produce accurate country or region-specific tax reports at the click of a button. Cloud-based ERP also brings a major benefit in compliance efforts by being automatically updated to reflect any changes in regulation. For example, if the VAT rate were to change again, you wouldn’t need to wait for patches or upgrades to be installed manually – the software would simply be ready without you worrying any further.
Take a company like Groupon, the daily deals company which now offers its services in 500 cities and 46 countries around the world. It needs a financial infrastructure to maintain its current operations and be flexible enough to easily support its continued growth. Each time the company entered a new market, the amount of time and effort needed to close the books grew, turning financial reporting into a time consuming and labour intensive process.
The collection of different programmes, processes and spreadsheets made it difficult for Groupon to understand the full scope of its international operation, and made standardisation of accounting and reporting practices impractical. Recognising the inefficiencies of this approach, it adopted cloud-based ERP, which allows it to embrace the benefits of real-time global financial consolidation and management, as well as support for multi-currency management, local taxation compliance, reporting and analytics.
Within three months, the ERP solution was live in 26 regions, with the rest following within the first year. As a result, Groupon now has global visibility on all aspects of its business at any given time, confident in the knowledge that compliance is being achieved across the business at far lower cost than before. By removing the headaches around compliance in each new region, Groupon has been able to expand at a phenomenal rate, and is now widely regarded as the fastest growing company of all time.
With many organisations facing increasingly tough trading conditions, extra regulatory requirements are an unwelcome additional outlay – but the high cost of compliance no longer needs to be blindly accepted. In fact, by removing this cost, and wielding compliance as a weapon for growth, rapid international expansion can be enabled.
Organisations need to review how their ERP systems work and how they are handling compliance – and consider what savings could be made by switching to an alternative. As Groupon has shown, the CFO that does this can get rid of the unproductive burden, allow that time to be focused instead on growth and become the hero of the boardroom.