The self-reporting economy is increasing both globally and in Australia. It is our experience that businesses need to better understand the nature of self-reporting relationships in order to ensure they are maximising their returns.
Most self-reporting relationships involve a trust-based arrangement written into a contract that requires the reporting of information – such as sales under a license, the disclosure of expenses or records of payments. Organisations must have financial and management information that is reliable, however these self-reported statements can often be inaccurate because of misunderstandings, mistakes and the occasional deliberate misstatement, all of which lead to financial risks.
Because of the risk and the impact on the bottom line, organisations should proactively manage their self-reporting relationships and ensure contract compliance. This should include:
- Developing a strategy
- Creating the contract consistent with the strategy
- Initiating the controls and processes to ensure compliance and transparency
- Managing the relationship between the two parties
- Ensuring there is a planned exit strategy from the relationship
Many organisations are seeking help with these elements of the self-reporting relationship from objective and independent third parties that have experience dealing with inaccurate self-reported statements. Warfield & Associates can bring transparency to the relationship and improve internal controls for both parties.
In particular, the contract that governs a self-reporting relationship is the key to managing the relationship successfully. When those who write and negotiate the contracts overlook the practical management aspects of a self-reporting relationship, this may result in weak internal controls and either lost revenue, increased costs or both.
The contract should contain an enforceable clause that helps a business monitor and audit self-reporting relationships. It is imperative that a business makes clear at the outset that the audit clause will be enforced and applied uniformly to all self-reporting business relationships.
Warfield & Associates recommends that a business with self-reporting relationships should seriously consider engaging in a systematic program focused on improving the standard of compliance. This should include:
- conducting a stock take of how many relationships involve self-reporting;
- incorporating automated and preventive controls into those relationships; and
- adopting a policy of regular compliance visits to the self-reporting entities. In particular, conducting an early-stage visit to the business partner’s or customer’s location to consider controls and reporting processes, because this is the easiest time to address practical problems and misinterpretations.
By taking a Forensic Accounting approach to reviewing the self-reporting economy, Warfield & Associates obtain relevant information to help clients improve their bottom line and ensure contract compliance.