Seamlessly Integrating Italian Subsidiaries: Overcoming Financial and Cultural Challenges for International Success.

When international groups, particularly UK-based companies, acquire businesses in Italy, they often encounter significant challenges during the integration process. While these challenges vary, they commonly revolve around local accounting practices, cultural differences, and reporting standards. This article explores these specifics and provides recommendations for overcoming them to ensure successful integration and accurate financial reporting.

Accounting and Reporting Landscape in Italy

Accounting and financial reporting practices in Italy are heavily influenced by local regulations and tax compliance requirements. Two main categories of financial professionals dominate the field:

Locally Certified Accountants (“Dottori Commercialisti”):

1. Typically operate independent practices.
2. Focus primarily on tax compliance and advisory services rather than managerial or corporate accounting.
3. Frequently serve as external consultants, which may lead to gaps in business alignment and a lack of actionable insights for management.

Finance Employees:

Generally have practical experience but lack formal qualifications in internationally recognized accounting frameworks such as ACCA or ACA. Tend to work under the guidance of Dottori Commercialisti, focusing on routine financial tasks.

This creates a closed circle where the majority of financial expertise is geared toward tax compliance, leaving little emphasis on broader financial reporting or strategic financial management aligned with international standards.

Key Challenges in Integration

1. Shortage of Internationally Qualified Professionals

UK groups often expect a high level of expertise and familiarity with international accounting standards (e.g., IFRS) and Group-specific reporting practices. However, the Italian market has a limited pool of professionals holding globally recognized certifications such as ACCA or ACA. These qualifications foster a holistic financial perspective, adaptability, and alignment with international best practices, making them crucial for facilitating integration. The lack of such professionals in Italy is often a significant obstacle.

2. Rigid Approach to Accounting Standards

Italian accounting practices are primarily tax-driven, with an annual focus due to legislative requirements. This clashes with the monthly or quarterly reporting cycles typically required by UK or international groups. Local professionals often attribute delays or deviations from Group requirements to legal constraints, though in many cases, these are standard practices rather than strict legal obligations.

3. Cultural and Communication Gaps

Italian businesses are often accustomed to operating independently, leading to resistance in adopting new processes or systems imposed by the parent company. Misalignment in communication styles and priorities between the UK head office and the Italian subsidiary can exacerbate misunderstandings and delays in integration.

4. Fragmented Financial Systems

Many Italian companies rely on legacy financial systems that are not compatible with the advanced ERP systems often used by international groups. This makes data consolidation, reporting, and analysis more cumbersome and prone to errors.

Risks of Misaligned Solutions

A common approach to addressing integration challenges is appointing an ACCA (or equivalent)-qualified professional to manage the local finance function. However, if this professional lacks local exposure and proficiency in the Italian language, it risks creating communication gaps, lack of transparency, and mistrust in the figures provided to the Group. Similarly, relying entirely on a locally certified professional with no exposure to international practices can lead to resistance in adopting Group standards and inefficient financial reporting. Even if the figures are technically accurate, they may lack the depth and context needed to provide meaningful insights for management decision-making.

Both scenarios can ultimately result in failure, undermining the integration process leading to lack of transparency and mutual trust between the Group and Local entity.

Recommendations for Successful Integration

1. Develop a well-structured and thought-out integration plan, focusing on the following key areas:

• Areas of Relevance:

Identify and outline the specific areas, departments, or processes where integration efforts are critical to ensure alignment with organizational goals.

• Risk and Prioritization Assessment

Conduct a detailed analysis using tools such as a Risk Matrix or an Internal Controls Matrix.

Categorize risks by their likelihood and impact, and prioritize them for mitigation based on organizational objectives.

• Responsibilities

Clearly define roles and responsibilities for stakeholders at all levels.

Assign accountability for implementing and monitoring each component of the plan.

• Timeline

Develop a realistic and phased timeline for implementation, including milestones, checkpoints, and contingency plans.

• Deep Dive into Controls

Break down each control into actionable, concrete processes and procedures to ensure its effectiveness.

Cascade these controls into relevant operational areas, ensuring alignment with established standards and policies.

• Implementation and Monitoring

Define methods for periodic monitoring and evaluation of the controls' effectiveness.

Include mechanisms for feedback, continuous improvement, and realignment if necessary.

• Documentation and Communication

Maintain comprehensive documentation throughout the integration process.

Establish clear communication channels to keep stakeholders informed and engaged.

2. Appoint a Financial Controller with International and Local Expertise

• Deploying a Financial Controller who is both internationally qualified and familiar with the local market is critical. This individual should serve as a bridge between the parent company and the local entity, ensuring alignment of practices and smooth communication.
• Emphasizing qualifications such as ACCA, ACA, or equivalent is essential to build trust and facilitate rapid adaptation to Group requirements.

3. Provide Training and Support

• Invest in training local finance teams on international accounting standards and the Group’s specific reporting requirements.
• Encourage and sponsor certifications like ACCA for local employees to enhance their expertise and broaden their perspective.

4. Streamline Systems and Processes

When integrating the subsidiary into the Group’s ERP system, it is critical to ensure a smooth transition that aligns with both Group standards and local compliance requirements. Below are the key considerations and best practices to incorporate into the integration plan:

• Ensure Local Compliance

Include a local accounting and reporting module in the ERP system to address specific requirements such as: Electronic invoice system (e.g., as mandated in Italy), VAT and WHT reporting requirements.

Failure to implement a local module can lead to:

Double ledger management for VAT purposes.

Increased reliance on manual tools like Excel, reducing efficiency.

Risk of non-compliance, potentially resulting in sanctions.

• Avoid Mid-Year Transitions

Do not move the local ledger into the ERP during the year. Instead:Plan the migration to coincide with the start of the financial year to maintain seamless data flow.

Mid-year transitions can disrupt processes, creating inefficiencies for: Tax reporting; Local statutory reporting.

Example: A UK Group transitioned local accounting into its ERP mid-year (October), closing the license for the previous local system. This resulted in extensive manual work to ensure VAT and WHT reporting compliance and prepare mandatory local books.

• Automate Processes

Automate as many processes as possible within the ERP system to:

Minimize manual intervention;

Reduce errors and increase efficiency.

• Prepare for a Smooth Transition

Develop a robust transition plan as part of the overall integration strategy.

This should include:

A phased approach to data migration.

Thorough testing of the local module.

Training for local personnel on the ERP system.

Contingency plans to address potential challenges.

• Avoid Rushing

Take the necessary time to prepare for the integration.

Rushed implementation can lead to:

Unnecessary costs.

Increased efforts for local staff.

Reduced accuracy in reporting and compliance.

5. Adapt Reporting Timelines Incrementally

Transition from annual to monthly reporting in stages, providing adequate support and resources to the local team during the process.

Highlight the benefits of regular reporting, such as improved decision-making and operational efficiency.

6. Promote Open Communication and Cultural Alignment

Foster an environment of collaboration and mutual respect by promoting cross-cultural understanding between Group and Italian teams.

Clearly communicate the Group’s goals and expectations while remaining receptive to feedback from the local team.

7. Partner with Experts in Both International and Local Practices

Firms like FinDep Consult foster both international and local certifications and practices.

Their professionals understand the pain points and gaps, offering tailored solutions to bring the acquired business under the Group’s control.

FinDep Consult ensures the reliability of financial reporting, which is crucial for business management and decision-making, making it imperative to place these responsibilities in the right hands.

Conclusion

Successful integration of Italian subsidiaries into a UK parent company’s framework requires a nuanced approach that respects local practices while aligning them with international standards. Addressing the shortage of internationally qualified professionals, overcoming cultural resistance, and modernizing financial systems are pivotal steps. By prioritizing trust, training, and effective communication, UK groups can ensure quick and accurate financial closes, ultimately driving better business outcomes and smoother integration.

Anastasia Aleksenko FCCA Dottore Commercialista, Managing Director of FinDep Consult

Visit our site: www.findepconsult.com