Many large and multi-national enterprises are composed of numerous organizations that belong to differentoperating units and legal entities that conduct business in multiple sets of books. The merger-mania of the80’s-90’s created many business enterprises that appear to be one to the outside but still retained the legalstructure of many smaller companies on the inside. With the growth of the global economy in the lastdecade, many companies have grown beyond national borders and operate with multi-national businessstructures. Many un-related companies have attempted to leverage synergies by creating joint venturecorporations. Quite often, these JVs are managed by one of the JV partners using its production facilitiesand personnel but require separate transactional reporting. Finally, many corporations are simply comprisedof complex legal entity structures intentionally for tax benefits and liability limitation. Despite whatevercomplex and sometimes convoluted legal and reporting structure, the physical or literal structure of thebusiness has become very different from the legal structure. Many public-traded companies are brokendown into divisions based upon external reporting requirements that are based upon industry or marketsegment divisions, even though the products manufactured and sold into different business segments areproduced in the same location. As a result, it is not uncommon for a single enterprise in a single installationof the Oracle ERP applications to operate several companies, legal entities, production, and distributionoperations as independent organizations. Transactions are/must be handled as if they were 3
partytransactions even though the products that are “manufactured and sold” by the different “childcorporations” are in fact produced and shipped from the same production facility using the same personneland transaction channels. The difficulty comes in where these transactions must captured and processedbased upon legal structure considerations.With the advent of Sarbanes-Oxley, there is a greater need to maintain accuracy and transparency for inter-company activities. Recent history has seen the abuse of these complex, convoluted, multi-nationalstructures to create fragmented business transactions that hide the true condition of the enterprise. Theresulting requirement of Sarbanes-Oxley is that a clear and auditable trail of these inter-companytransactions must exist while at the same time support the “legal spaghetti” that make these businesstransactions appear legally to have occurred “arm’s length” between 3
Party companies.The literal and obviously in-efficient process would be for these “companies” to generate transactionsbetween them that suggest totally different organizations. Consider an example of an enterprise operates amanufacturing business and a distribution business under a legal structure of separate companies but arelocated that the same physical facility. Company X gets an order from a third party customer and inresponse, generates a purchase order to Company Y, who acknowledges by creating a sales order toCompany X. When Company Y physically ships to the end customer, they must first “logically ship” theproduct to Company X, who “receives” it into inventory on the books and then executes a shippingtransaction to represent the transfer of ownership to the true customer. This is done strictly to simulate anarm’s length transaction with conveyance of title from Y to X to the customer when it literally did notoccur. But a paper trail of Purchase Order, Sales Order, Receiving Transaction, and Invoice are required.But this paper trail is fraught with pot holes and detours like duplicate or lost transactions, mis-matchedaccounting, unapproved and/or un-matched invoices, timing issues between AR and AP or betweencompany X and company Y, and many other types of dis-connects.
This configuration becomesincreasingly problematic as a considerable number of inter-company transactions are carried out on a day-to-day basis between the two “companies”. The distribution and service organization (company X) sourcesa great many of their inventory items from the production organization (company Y). Because theseorganizations reside at the same physical location and use the same shared-personnel to receive, stock, andship inventory, redundant transactions occur when the items are shipped from the production organizationdirectly to the customer of the service organization.
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