control best practice for new foreign subs

When I've done this, what seemed really helpful was:
(all of this with the caveat that we assume good faith actions at the sub...so question is how best to support them)
1) Training: make sure they know what they can do (and everything else is a can't). Worst event is to discover they've signed something they shouldn't have. This assumes you have documented everything like crazy. The audit guidelines for documentation are a very good start (I cringe when I say that...).
2) Travel. Skype is not a personal relationship. The more comfortable they are sharing a beverage on a quiet morning, the more likely they'll pick up the phone and call. Have a dinner at their homes, and they'll feel less hesitant to call you at yours.
3) Access (yours). Only use systems (and banks) that you have remote visibility into. Cloud-based GLs and related systems are cheap and they work. Make sure you have access. Your Brazil "advisor" may have their own system that they won't let you penetrate, but that doesn't mean your Brazil team can't use *your* systems (time management, doc management, process tools, CRM, SFA, etc).
4) Access (theirs). Make sure that during business hours they can reach you and feel comfortable doing so. Make sure that when you are on the ground with them you see them access your tools, and that they are comfortable working with them. Some "cloud" systems don't hold up well in truly remote situations, so don't assume...test, see and get feedback.

Everything else is specific to the process....

I completely agree with Keith, and would add a couple of other things for the folks in the subs.

In the U.S., we are used to doing many things a bit, oh, casually. Outside of the U.S., I have found that you are MUCH better off writing things down. And not just in an email. For absolute clarity (and this is very helpful when you are dealing with folks for whom english is not their primary language), write down all major processes and guidelines and make sure they have a "reference book" of these things. If you guidelines around spending by title and region, make sure that's in the book (I know, i hate "books" of any sort, but you really want this). T&E guidelines - in there. Corporate handbook - get it signed by all subsidiary employees as they are hired.

You will see that you will get a lot of questions about the guidelines up front as they assimilate them. You may find they have some great suggestions for "localizing" them as well, and I would be open to that. Being too rigid can really kill relationships up front (bend, but don't break where you really care). And you will find that having this all in writing will lead to much better outcomes when it comes to big issues that you see on an ongoing basis.

Lastly, I would like to echo Keith's point about travel. You should go there and they should come over here - at least the leaders, but try to work that in for rank and file employees as well.

I'm a little more on the side of caution when I see your title as the Head of Global Audit. This comes from my having spent seven months in South America conducting financial, controls and operational reviews. In Europe, I had many hats on (including manager of audit) as a foreign service employee, working for two years for a Fortune 10 company.

Perhaps the single biggest control issue that exists in the foreign areas you speak of center around the fact that checks, written on local banks, are not returned to the company but rather kept in the banks. That precludes an independent second and final review of financial transactions (specifically second endorsements) which, in my experience, was essential (at least in three instances). My advice: periodically "saddle up" your audit team and do cancelled check reviews at the foreign banks as an audit step to ensure 1) Foreign and Corrupt Practices Act provisions are not violated and 2) that second endorsement cashing/deposits are appropriate.

I don't disagree with the comments above -- it is essential to get to know the people who work in the subsidiaries by visiting the locations. I would venture to say, however that a half a day in the local bank reviewing check endorsements will tell you more about the operations of that business than weeks or months looking through stacks of documents (in a foreign language).

Good luck with it.

One of the best ways to manage subsidiaries is to have tight control on the money. If the subsidiary is making local sales to customers, do not give banking authority of the local bank account wher the customer funds are received. With electronic access, you can control the accounts from the US. With no money coming into the sub from external sources, you control their spending by tranferring money that is only needed to fund their operations based on a pre approved budget. In addition, if you can set up local payroll thru ADP for examply you can fund the payroll from the US which reduces the amount of money you would need to transfer to the local sub.

Hi Lee,

To say that this is a very broad subject is an understatement! There are numerous books written on the subject of internal controls for a multinational company. In my experience, controls start from the top down in a legalistic fashion.

First, a subsidiary's Board of Directors typically would pass two corporate resolutions. One empowers the senior managment of the subsidiary with individual or joint power (two executive signatures to act) to transact specified activities up to specified limits (expressed in local currency or dollar equivalents) without Board approval. Beyond these limits, the Board (or subsidiary shareholders) would have to authorize action.

The second is a banking resolution that authorizes the sub's bank accounts and banking signatories, again specifying checkwriting limits and above what limits two signatures are required.

Beyond these two corporate resolutions, policies and procedures would be developed governing detailed aspects of a subsidiary's spending and accounting policies.

Among the most important themes is the principle of segregation of duties. For example, the person spending should be separate from the person that does the accounting and monitoring.

If you need assistance with specific forms and examples, please see my profile and email me.

Jake

1. When it comes to documenting anything (notes, policies, decisions about controls or action items): If you are writing in English, be careful to avoid TLA's (three letter acronyms). CTA may mean currency translation adjustment to you, but why should a foreign national be dialed in to US vernacular? Pick simple words and be concise in your text.
2. Invite requests for clarification, or even follow up with a courtesy call to ask if anything needs clarification.
3. Often, newly opened offices may have small staffs, so ideal division of duties may be impractical until the office grows. Be pragmatic with your control setups.

@ Keith Perry, "we assume good faith actions at the sub."

I met with members of the Investment staff at the California State Teachers Retirement System (CalSTRS) a few years ago regarding good faith actions at their investment partners and consultants, and was told that their staff is on the phone daily with their counterparts to ensure good faith dealings. CalSTRS staff members also meet with investment managers and consultants on an annual basis.

Unfortunately, that doesn't always preclude a handful of investment managers and consultants to forgo compliance and "good faith" dealings in pursuit of profits.

The point here is to independently verify, on an ongoing basis, "good faith actions at the sub." You can accomplish this through greater transparency and visibility into sub operations.

Case in point, Apple's current dilemma with supply chain trading partner Foxconn. The California Transparency in Supply Chains Act of 2010, which became effective January 1, 2012, uses the tool of public disclosure to compel corporate social responsibility. Specifically, the Act has the goal of exposing retailers and manufacturers whose products are made through human trafficking and slavery. In doing so, the California legislature follows Justice Brandeis' approach to influencing behavior: "Publicity is justly commended as a remedy for social and industrial diseases."

While it seems like our group could publish its own textbook with all the content offered to date, I would also make sure you have internal training and documentation on the Foreign Corrupt Practices Act (FCPA) for all the non-US personnel and the US personnel that will assisting with / managing the foreign operations. Don't forget local country and US tax compliance, including FATCA, and planning opportunities. Are you structured appropriately? Do you have tax treaty benefits? Are you relying too heavily on one external advisor as opposed to getting different viewpoints related to key issues? Are your local advisors truly internationally-focused, or are they "blinded" by domestic law only and missing the big picture?

I have found as a CFO that the best way to control your sub is to limit/restrict their access to cash. I am not sure what type of operation you will have and if the local sub will be the seller of record or if the US will be the seller of record. If it is the US then then the US would make fund the payroll for the local staff and then any other expenses incurred would be reimbursed through expense accounts with receipts. Another approach is to determine a budget for the local sub and fund to that budget.

If the local sub is collecting money from customers you can have two bank accounts; an account where customers make payments that is controlled by someone in the US and then a local account which you would fund (from the collection account) based on budgeted figures. You would only fund what is needed each month

Everyone has made great comments and contributions to this discussion and I would largely agree with everyone, particularly the need to have tight control over your cash and who has authority to cut checks on behalf of your organization.

In addition, I would always urge a company expanding in to a new country to make sure that they have a calendar of compliance deadlines so that they can be sure not to fall at the first hurdle by failing to file a VAT return or a Corporate Tax return.

For example, in France you will be required to file your annual payroll returns by 31 January each year. This is in addition to the periodic filings and payments for social security that you will have made throughout the year. You will also need to file your VAT returns each month, typically by the 15th of the following month. Corporate Tax returns are due by 30 March each year.

Be sure to check with your service providers in both France and Brazil for an exhaustive list of deadlines.