Though most professional services firms check for conflicts, accounting firms must take the added step of conducting independence checks. Managing that risk gets harder as accounting firms get larger and grow faster. How each firm conducts and documents its comprehensive checks can make a difference in firm growth and reputation.
Many firms have built systems to document all client relationships, which often involves mapping the corporate tree to uncover potential causes for conflicts or impairments to independence as each relationship begins. Frequently, firms supplement their process by sourcing corporate trees from external services, including D&B, S&P CapIQ and BvD. Careful reviews require checking several databases with each corporate clearance before cross-checking the firm's individual relationships.
The hours — nay, days — it takes to connect all that information can sometimes make the difference between winning or losing new business to a competitor that was able to run these processes quicker. The most prepared firms realize that prebuilt, or native, integrations of these tree providers into their risk process is the optimal way to confirm independence efficiently and thoroughly.
In addition to native-built corporate trees with parent-and-child organizational structures (roots, trunks and major limbs), the conflicts and independence process should expose shareholder structures and beneficial ownership. Tracking firmographic information of clients offers more detailed conflicts checks and helps to build a client profile that is easy to access, including the appropriate NAICS industry category, stock exchange, stock ticker, number of employees and addresses of the domestic and global parents.
Despite all this due diligence upon client acceptance and intake, client trees change quickly from that initially reviewed structure, often adding a myriad of entities as they grow. The more affiliates a client has, the more opportunity for account growth and therefore complexity in surfacing independence exposure.
The natively integrated system should automatically update a wide and deep view of the corporate tree, what industry it grows in and how it connects to other trees, as well as to the accounting firm's different services and relationships. Maintaining that view across a large firm that spans accounting, transactions, consulting, tax and legal services in multiple geographies around the world is just plain daunting.
Below are five questions to ask yourself about your corporate tree process:
- Does your process of understanding client corporate trees (new or ongoing) allow you to see and document the specific work your firm does for each node of the tree and to compare that to other nodes — including activities and undertakings for the parent, subsidiaries or controlled entities?
- If your risk tool has a corporate tree integration, do your edits get overwritten by the provider's quarterly updates?
- Have you ever lost new business because you couldn't surface or clear your independence impairments fast enough?
- Has your regulator ever issued a finding against your firm for inadequate corporate tree maintenance or processes?
- Have you ever inadvertently caused an impairment by accepting prohibited work because you were unaware of nodes or changes to your client's corporate tree?
Transform third-party data into native insight
Without native integrations, building and searching trees requires connecting the results of several disconnected processes beyond the review of external data sources. The client must be consulted, and the accounting firms' professionals who are knowledgeable of that client's tree must also be engaged. Finding and applying these various levels of knowledge doesn't just add time to a firm's acceptance processes, it also requires significant resources.
That insight is often gathered informally during the course of client intake and activity, and might be limited to recording an individual entity, key individuals and an overall description of service. Any audit trail of conflicts and independence checks becomes weaker if some nuances of a conflicts decision are not sitting in the system.
With a properly structured arrangement that integrates all data, a firm can receive perpetually updated information from corporate tree providers without caps on the number of data pulls, and can prioritize its proprietary edits over the tree provider's updates. Keeping a record of the data and insight can add value beyond a conflicts or independence check. By natively integrating third-party data into the firm's risk platform, corporate trees and firmographic data can surface in any search for an entity and will be available for research and consumption throughout the risk system.
Reduce risk with clarity in clearing
Imagine a private company, X, that approaches three firms regarding some internal audit work.
Alpha Accounting uses a corporate tree service that tracks 400 million private companies and their parents, but is missing some recent updates on affiliate relationships with the parent of X's parent. Alpha has that information in its own database and work history, but clicking from one database to the other and piecing together each twig of the corporate tree takes a week of manual manipulation. That's a week lost in closing the business, a week lost in conducting the work, and potentially a client lost.
Beta Booking has a contract with a corporate tree database provider that limits the number of searches. That access was adequate before the firm's latest growth spurt. Now, they reserve depth and frequency of independence checks for specific attest work. They accept non-attest work without documenting their independence process, thus increasing their compliance risk as they take on X.
Gamma Group CPAs has natively integrated the main corporate tree services — providing search results from all providers with information regarding any client in the firm's database. Certain flags might take additional internal review, but the search, examination and review might be complete in a day and the client is theirs — without independence or conflict risk.
In accounting and consulting, knowing the client's corporate tree is the first step in conflicts or independence clearance. Maintaining the firm's corporate tree creates an opportunity to find every current touchpoint with the client. By combining client clearance with documented work streams, the firm can maintain an accurate accounting of the work it does and new work it can accept. That information can be the source of business growth, risk management and personal career opportunity — but only if the organization has systems that make it easy to see, track and analyze that tree.
Central systems that integrate all information by partnering with resources and sharing institutional wisdom across the organization can help everyone manage risk and explore new business opportunities effectively. It could mean the difference between robust growth and regulatory groveling.
