No Surprises, No Delays

By Laurence Fritz

U.S.-based subsidiaries of foreign parent companies often face a fast-paced and highly specific audit process, but with the right planning, your business can complete these audits efficiently and on time.

Start with the Timeline for Inter-Office Reporting

Though some of these subsidiaries follow standard audit procedures, others must comply with strict inter-office reporting requirements. In these cases, start by understanding the timing and commit to meeting the deadlines. Foreign parent companies often have strict timelines for consolidating global financials, but they can’t complete their work until the subsidiary completes theirs.

If a U.S. subsidiary, say a South Carolina manufacturing plant, has a December 31 year-end, the audit might need to be finalized very early in the following year and often before the end of January. This tight timeline requires a strong financial close process, and both the parent and the U.S. subsidiary must buy off on the schedule. If not, you’ll cause a ripple effect that will present delays for the parent company. Upfront agreement can set the tone for the entire process.

Align with the Parent’s Accounting Framework

Next, it’s critical to understand the accounting framework the parent company requires and its specific rules. Many foreign companies follow International Financial Reporting Standards (IFRS), while their American counterparts use U.S. GAAP.

The IFRS/GAAP differences can be nuanced, but they may have a material impact on the audit preparation. To help bridge this gap, foreign parent companies often issue a group accounting policy manual – their internal accounting reporting guide for preferred accounting policies across global entities.

Because it enables the subsidiary company to have a clearer picture of what is required, take the time to study this manual in detail. The audit will be based on the parent policies, not necessarily specific U.S. or international accounting standards.

Another potential problem – the subsidiary team may realize mid-audit that it’s working from an outdated or incomplete version of the manual – a disconnect that can be caused by new accounting standards. A recent example is the 2022 lease accounting rules that required companies to recognize almost all leases on the balance sheet. When new accounting standards are in effect, early work should be completed to make sure implementation runs smoothly, avoiding hiccups that delay the audit and cause frustration on both sides.

Expect Prescribed Procedures and Limited Flexibility

When working under agreed-upon procedures (not a full scope audit), don’t be surprised by the level of control exercised by the auditors of the parent company. These instructions might appear excessive – such as auditing dozens of transactions when a smaller sample might pass muster – but local auditors have no discretion to deviate from the instructions that have been provided.

Approval of a change takes a thought-out risk analysis. Generic complaints about workload are rarely successful. On the other hand, you may feel the parent company is underestimating risk in some areas. These discussions must happen early – not at the last minute when there’s little time to adjust.

Another source of confusion that often arises is foreign currency translation. Conversion, especially for cash flow statements, can be complex. Additionally, if subsidiaries use different accounting systems than the parent, generating reports in the required format can be challenging.

Think Upstream and Downstream

Subsidiaries should also be aware of the reporting needs “downward” as well as “upward.” In some cases, a U.S. subsidiary may carry debt at the domestic level that requires a separate audit under GAAP, in addition to the group audit. This means preparing two sets of financial statements, with different standards, formats, and timelines. A foreign parent’s IFRS-based reports most likely won’t meet U.S. lender requirements.

Anticipate Cultural and Communication Gaps

Working with a foreign parent company can involve more than just accounting differences. Cultural expectations, communication styles, and hierarchy may influence how audits are managed. For instance, some parent companies may ask for reporting formalities – such as signing off on every page of a reporting package – a task that doesn’t offer more assurance but is requested anyway.

Understanding and respecting these differences is key. Subsidiaries should ask questions to ensure both sides understand their responsibilities and expectations.

Invest in Communication on the Front End

A successful audit ultimately depends on readiness so start planning well in advance. Early discussions with auditors – ideally in the late summer or early fall – can help clarify expectations and eliminate surprises.

With the right preparation and clear, consistent communication, even first-time audits can be completed efficiently, keeping both the parent company and the auditors satisfied.