Best practices in entity management
Rudy Escalante, Chief Operating Officer – Global Services, ICSA Software International, looks at the advantages for company secretaries of having a centralised database within an entity management system providing a single source for all entity-related information.
Accurate entity information is crucial to a company’s business function and timely compliance. While managing entity information may seem like a simple task, an ever-changing compliance and regulatory environment requires complicated entity management with coordination of information across time zones, languages and departments.
With limited back-office and in-house resources, many organisations rely on a network of decentralised systems that often result in an inconsistent approach to governance and regulatory compliance across jurisdictions. With separate entity management systems, recent changes may not be entered, data may not be symmetrical, and the entire compliance effort may be doubled or tripled in scope. No company should be expected to manage entity information without a centralised, custom-built entity management system.
However, a comprehensive entity management system is not the end goal. It is simply a starting point to facilitate compliance, acting as a destination and source for all entity-related information. The main objective of an entity management solution is the establishment of a single source for all entity-related information and the implementation of processes and procedures to ensure its precision, accuracy and timeliness.
To achieve this goal, users should have confidence that the entity management system accurately represents the information from all jurisdictions in which the company operates. Moreover:
- processes should be in place to ensure those who are the source of the information are able to communicate it through the system
- the system should track the effective dates of all transactions, it should know the date a company was incorporated, but also the original purpose for the entity and the dates when everyone approved its formation
- processes should be implemented to ensure a regular review of all the core entity information – at a minimum, all the information should be reviewed annually to ensure that it is current and accurate
- an entity management system should serve as the official, central source for all entity information across all departments and should meet the needs of inter-departmental users, and
- the most effective solution will enable information to be shared among core applications and should synchronise between the entity management system and other applications to ensure accuracy.
Global entity management should begin with data input and management at the level that is most appropriate (local, regional, national, departmental, operating division and business unit). Data is then entered into the entity management system where it is consolidated with other entity-related information. A system designed from the bottom-up ensures the greatest accuracy by precisely capturing all the subtleties of the local entity information. Users can then be confident that the system is correct for their location and use.
For example, local variations such as titles and positions must be captured and recorded accurately. An effective entity management system should identify whether an appointment position can be filled by another legal entity or whether it must be filled by a natural person. To achieve the efficiencies and effectiveness of a global, unified system, details like date formats, currencies, company types, appointment titles and ownership information must be accurately and consistently represented.
Furthermore, in jurisdictions such as Hong Kong, Japan and Greece, company and individual names and addresses must be represented in the local language. The system should easily maintain the native alphabet for individual names, entity name and local addresses, in addition to the English representation of that same information. Since translation inaccuracies are commonplace, translation of this information into English and back is not an option. Native information must be stored in a separate field that accepts the native language.
Global systems that do not meet the requirements of local users in all jurisdictions will create many problems. The accuracy of your information will always be suspect. When the global system fails, local data managers will no longer use it and will create or buy a secondary system or simply update a spreadsheet to keep their own information. This secondary (real) source of data can create long-term problems for the organisation. If secondary systems are allowed to exist, accuracy and overall effectiveness of the entity management system will suffer dramatically, and the overarching quality of transparency and reporting will become substantially compromised. Organisation charts and reports produced by multiple systems will be incomplete and inaccurate because errors are cumulative, and the overall problem only grows and becomes worse over time.
Obtaining the basic entity information: ownership, appointments and other core entity information is often considered the end goal. But entity management should not end there, it should provide the framework for all other compliance functions that require entity information. In fact, the entity management system should examine the uses of entity-related information throughout the company.
Many functions are entity-related but are not part of the core information area. The company benefits from extending the system to include other information and processes because a multifunctional system increases efficiency and allows costs to be spread over multiple areas. Moreover, the overall quality of the information improves for everyone. The entity name is consistently used in all applications. All departments can help identify changes to core information, and an address change or a director of a subsidiary leaving the company can be reported quickly and more consistently if all departments are using the same system.
Entity management and tax solutions
Taxation compliance relies heavily on entity information. In many companies, tax has its own database of entities that duplicates much of the information found in the company’s other system(s). When two systems with similar information are utilised at once, the quality of the information will be compromised. This problem can be addressed by synchronising the databases and bringing the tax information into the entity management system, creating a unified system for use by all departments.
There are many instances where the officers/directors of the organisation need to be surveyed for compliance or conformance with company policy. These surveys can be managed and the answers tracked as part of the entity management system. Compliance with the US Foreign Corrupt Practices Act is also facilitated by an entity management system.
Advanced business alerts
Proactive, automatic email notifications to individuals or groups are critical to the success of business process management. Notifications may be triggered based on:
- changes to entity information
- pending events launched by other people or systems
- approaching compliance, review or due dates
- escalation issues where designates have failed to respond, and
- exceptions such as vacant fields or other parameters.
A well-conceived, well-built system is a ‘compliance engine’ that automatically creates jurisdiction-specific documents such as minutes, consents, resolutions, resignation letters, forms and reports. Using the entity management system to generate these documents ensures consistency and compliance with local requirements. For example, when appointing a director, the system can generate jurisdiction-specific resolutions and forms, queue a pending event and wait while the resolution is signed by the shareholders or other representatives. Using the system to generate forms creates additional value for users.
History and audit trails
An audit trail provides historical perspectives and offers review and remediation of entity transactions and processes. An audit trail ensures that the system automatically records time, date and name for actions taken (that is, additions, changes, deletions, etc).
Timely and effective decision-making, regulatory reporting and process management rely on effective reporting. Users need an intuitive yet powerful ad-hoc report writer to explore and find answers to critical questions without deep technical knowledge. Therefore, an inbuilt ad-hoc report writer is necessary to empower users to create and save searches and reports. Security should be essential to the ad-hoc report writer so users cannot bypass the security mechanisms built into the system when running ad-hoc reports.
Regulatory reporting and global corporate compliance rely heavily on the accurate and timely representation of organisation charts which must conform to a wide variety of users’ needs. Generating these reports manually is labour intensive and prone to error. The process can and should be automated. Organisation charts which automatically roll up from share or capital ownership help reconcile legal and tax information and ease auditing.
Entity life cycle management
Entities typically have a life cycle: formation, activity and dissolution. When a new entity is formed, it is important to record who requested the new entity and why, who approved the entity and who was informed that the entity was created. Once created, a review process may periodically ask individuals or groups (the business owners, local managers, interdepartmental staff, record managers, etc) to verify that the information is current and accurate. Finally, when it is time to de-activate the company, the system should assist by assuring that all facets of the entity, like contracts and ledgers, are properly closed.
Implementing a best practice process will incorporate all stages of an entity’s life cycle. All actions impacting an entity will be recorded in its history, from who first had the idea of creating the entity to the entity’s final dissolution.
In addition to conducting a basic entity information review, this is an excellent opportunity for the company to learn more about the entity by asking questions like whether the business purpose for this entity is still justified and/or valid. This process often identifies entities that are expensive to maintain or are no longer necessary and, thus, can be closed.
Integration with other systems
Major data integrity issues arise when changes to the data occur without the entity systems’ knowledge. For example, what happens when a senior employee who lives in a foreign country and also an officer/director of several subsidiaries suddenly leaves the company? People within the organisation will struggle to get this information and it is often not communicated across all departments. The company then generates inaccurate reports showing this individual as an officer/director for weeks or months after they have left the company.
To improve accuracy and timeliness, the entity management system should exchange information with other internal systems. For example, information captured from your human resources/payroll system may alert you when officers/directors have left the company.
The entity management system should query the human resources/payroll system daily to look for employees who have left the company. When there is a match of the name and employee number of an individual who has left the company with the name and employee number of an officer/director in the system, the entity management system should automatically:
- create a pending event to review that officer/director in the system
- add a calendar task for follow up, and
- send an email alert instructing the custodian of that individual’s record to review the officer/director status.
In today’s highly regulated corporate environment, it is critical that the tax and legal ownership structures are synchronised for accurate financial and compliance reporting. Historically, separate tax and legal entity systems were rarely synchronised, meaning both systems had incomplete and inaccurate information. Sometimes this meant that companies were missing information from one of the systems. But more often, the tax system had incomplete or abbreviated company names and the legal system was missing or had inaccurate tax identification numbers, among other anomalies.
Manually reconciling records takes large blocks of time away from the relevant departments and creates significant additional work for auditors.
Building a link to synchronise the two systems ensures that changes are accurately reflected in both systems. Periodic reports of discrepancies can assist in process remediation as users work to understand the source of any further inaccuracies.
Chief Operating Officer – Global Services, ICSA Software International
For more information, please contact Charles Overs at: firstname.lastname@example.org.