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With the help of our members, this thought-leadership series explores the acceleration of “digitalization” due to COVID-19 on both sides of the Atlantic, and across various industries.
In an increasingly digital world, the need for instant, automatic information is at an all-time high. Accounting and financial reporting processes are no exception. While the automation of accounting services and financial reporting can streamline and optimize business operations, it can also present legal challenges that businesses need to be aware of. Amesto Global’s US Practice Leader, Mike McCumiskey, CPA, and transactional attorney and counselor with experience in financial regulation and technology, Anne Wolfson, of Anne Wolfson, PLLC, discuss “How to Navigate Digitalization & Automation from both an Accounting & Legal Standpoint”.
Digitalization & Automation: The View from Accounting Expansion Experts
When companies look to expand out of their domestic territory and into a new market, there are many different hurdles that need to be overcome. It’s best when both legal advisors and accounting expansion experts get involved in the process early on. Whether the company is setting up operations in the US from scratch or revamping their already existing operations and structures for optimization, the company’s need for automated, streamlined systems and processes is crucial. However, achieving this optimization poses a major obstacle for companies when expanding domestically or internationally. The threat is especially heightened for companies using analog accounting and finance operations, leading to major back-office trouble and potential looming legal issues.
To illustrate these issues, consider Amesto Global and its client’s experience. Amesto Global is a global expansion firm, assisting startup companies and established organizations operating and expanding both in Europe and the US. The client is a specialized technology firm with multiple offices around the world, including the US. The client’s antiquated reporting process was causing stress on the accounting and back-office teams, and inhibiting the firm’s growth. The client was interested in improving its processes and transforming operations to ensure streamlined, accurate financial reporting and optimization of the accounting staff.
Amesto Global first performed a comprehensive assessment of the client’s back-office functions. From systems, to software, employee responsibilities, banking facility, control environment and growth plans, Amesto Global fully analyzed the client’s current operation to identify inconsistencies and inefficiencies. The team then reviewed the company’s compliance with respect to US Sales Tax, payroll, US GAAP (including deferred revenue), and US tax filings in applicable states.
Once assessed, Amesto Global devised detailed budgets, which were essential in holding leadership accountable for both long- and short-term growth. The team also implemented changes that would sustain growth efforts and ensure system accuracy. Amesto Global automated many of the client’s previously manual processes, including payroll, commissions, Accounts Payable, and financial reporting. Accounting functions were streamlined, and inefficiencies were identified. These efforts brought the accounting staff from six (6) employees to four (4), producing higher levels of accounting functionality with a more concentrated workforce. Additionally, they streamlined the process of calculating the borrowing base for the weekly bank facility with the client’s US bank. The client’s cash flow profitability increased by reducing expenses, unprofitable divisions, nonproducing sales staff, and reliance on additional professional services, such as legal, outside accountant, consultants, and similar third-party providers.
Amesto Global then reviewed the client’s sales agreements and employment agreements, paying close attention to highly compensated individuals as it related to compensation. New software platforms were integrated into internal systems, including a company-wide Microsoft Teams deployment within a matter of hours during the early days of the COVID-19 lockdown. As a result, employees experienced an increase in communication nearly instantly, allowing for easier sharing of data and an overall more efficient work from home environment in the midst of the global pandemic.
Additionally, Amesto Global was keen to eliminate the client’s need for manual time sheets. An electronic time sheet system was integrated, allowing consultants to enter time, and customers to approve that time. This system eliminated the need for consultants to use manual checks to avoid fraud and time spent by staff to produce, mail, track, and confirm these manual checks. Moreover, the in-house HR lead was planning to retire, and the Amesto team replaced and onboarded an outsourced US HR service provider prior to the HR lead’s retirement to ensure future continuity.
After working with Amesto Global, the client’s back-office headaches were minimized, internal information was more organized and secure, and the time to complete accounting and financial reporting was reduced significantly. The client’s internal business operations were digitally transformed into a more streamlined, automated process that maintained accuracy and availability, highlighting the importance of automation within accounting and financial reporting.
Digitalization & Automation: The View from Legal
From a legal perspective, there are two significant legal aspects companies should be aware of when implementing a comprehensive digitization or automation strategy. As an initial matter, whether manual or automated processes are used, the information must be absolutely accurate. The new processes must not create potential for unexpected, undetected, or uncorrected inaccuracy.
The protection of all confidential or protected information, whether under the GDPR (which as a practical matter applies worldwide), California, Massachusetts and similar US states’ data protection and privacy law, Gramm-Leach-Bliley, and HIPAA should be considered first.
The potential liability from unauthorized disclosure is so significant, that depending on the size of the client and the type and volume of information being exchanged, processed and stored, it may require establishing the client’s own private encrypted cloud and encrypted communications with prospects, customers, vendors and business partners. Setup and compliance would be driven by those concerns. In one sense, this is not Legal’s concern – it would be relying on the company’s own internal or external risk managers, IT/Infrastructure or InfoSec organizations to identify and mitigate the risk. Legal would be interested in how the mitigation is performed, because it would want to limit or eliminate the company’s legal exposure in the event of an unauthorized disclosure. There could be an additional compliance review or analysis if the company has among its own clients highly regulated entities, such as those in financial services, healthcare, energy, defense, and certain mission-critical government operations.
Second, companies should maintain the accuracy and availability of the systems and information through redundancy or failover protocols. Sales agreements in some ways pose less of a risk if automated, as compared with systems in which each one is negotiated and executed individually, with sales reps authorized to make changes or customize the sales agreements without significant oversight or review. Customization without oversight could lead to inconsistencies and thus increased liability, or unanticipated liability if there is inconsistent risk reduction or risk management in the negotiation or execution of sales agreements.
True employment agreements (with guaranteed compensation for guaranteed periods of time) should never be automated. They should be offered only to the most senior executives, and any binding employment agreement should be reviewed at the highest levels of the company. No single person should have the authority to negotiate, approve or sign a binding employment agreement. Standard agreements that are required of all employees in order for an offer to become binding and final (Nondisclosures, Noncompete Agreements, Inventions Agreements) should be standardized regardless of the company’s automation or digitization strategy.
Authors:
- Mike McCumiskey, CPA, U.S. Practice Leader, AMESTO GLOBAL
- Anne Wolfson, Owner, ANNE WOLFSON, PLLC
Stay tuned for more on this series! We hope you enjoy this Thought-Leadership pieces written by Amesto Global and Anne Wolfson, PLLC – both are members of the EACCNY.