International Business

Anne-Marie Pockett, MBA

Week 11 The Accounting Environment

Anne-Marie Pockett, MBA

Objectives

Accounting

Environment

National differences

in Accounting

Practices

The Enron Scandal The Enron scandal, revealed in October 2001 Led to bankruptcy of the Enron Corporation American energy company based in Houston, Texas and the de facto dissolution of Arthur Andersen, which was one of

the five largest audit and accountancy partnerships in the world

Biggest audit failure.] Enron was formed in 1985 by Kenneth Lay after merging Houston

Natural Gas and InterNorth.

Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that, by the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions of dollars in debt from failed deals and projects.

Chief Financial Officer Andrew Fastow and other executives not only misled Enron's board of directors and audit committee on high-risk accounting practices, but also pressured Andersen to ignore the issues.

Robert Maxwell

Ian Robert Maxwell, MC (10 June 1923 5 November 1991)

A Czechoslovakian-born British media proprietor and Member of Parliament (MP).

He rose from poverty to build an extensive publishing empire.

His death revealed huge discrepancies in his companies' finances, including the Mirror Group pension fund, which

Maxwell had fraudulently misappropriated.

The Parmalat Scandal

Accounting and Finance

Two functions are close interrelated

CFO (Chief Financial Officer)- responsible for procuring and managing the companys

financial resources.

Relies on the Controller (chief accountant) to provide right information

Role of the Controller Board of Directors

Chairperson

President & CEO

VP R & D VP Operations CFO VP Marketing-Sales

Controller Treasurer

Cash flow mngt Evaluation operations

Hedging Tax planning

Internal Auditing Assist s in

corporate strategy

Statements Accounting standards

and procedures

Accounting International Differences

Balance format can vary

US

Assets= Liabilities + Shareholders equity

Europe

Fixed Assets + Current Assets Current liabilities- Noncurrent liabilities

= Capital Reserves

International Standards and Global

Governance

US GAAP (Generally Accepted Accounting Principles)

has historically been the standard

Each country has developed its own GAAP

IFRS (International Financial Reporting Standards)

issued by the IASB (International Accounting

Standard Board)

Convergence process- make them compatible-

international negotiation process ongoing

Accounting Objectives

According to the Financial Accounting Standards Board (FASB) (establishes standards in the US)

the external reporting of accounting information

should provide information for three purposes:

1. Investment and credit decisions

2. Assessment and cash-flow prospects

3. Evaluation to enterprises resources

Who will use this information?

According to the IASB (International Accounting Standard Board)

IASB users

Investors

Employees

Lenders

Suppliers and other

trade creditors

Customers

Governments and their agencies

The Public

Cultural Differences in Accounting

Disclosure /Assessment Matrix for National

Accounting Systems

Greater caution in assessment

Le

ss d

isclo

su

re t

o t

he p

ub

lic

Secrecy

Transparency

Optimism Conservatism

Asian

Colonial

Nordic

Anglo-American

Less developed

Latin Germanic

Near Eastern

Japan

African

More developed

Latin

Less developed

Asian

Differences in Financial Statements

In Language

Currency

Types of statements

GAAP Usage

Differences in Language

English first choice to raise money abroad

Provide information in different languages in companys internet site

e.g. www.ericsson.com.br

Differences in Financial Statements

In Language

Currency

Types of statements

GAAP Usage

Differences in Currency

Companies use different currencies for their statements

Ericsson- Swedish kronor

Intel- U.S. Dollars

Adidas- Euro provides exchange rates between euro and US dollar, British

pound, Japanese yen

Differences in Financial Statements

In Language

Currency

Types of statements

GAAP Usage

Differences in Types of Statements

Can be confusing

Major issue is use of footnotes

Footnote disclosures in US companies tend to be most comprehensive

They go into great detail

Differences in Financial Statements

In Language

Currency

Types of statements

GAAP Usage

Differences in GAAP Usage Major issue Although it is a decreasing problem as more stock

exchanges and companies use IFRS

E.g. Adidas 3 companies (Adidas, Reebok and Taylormade) Each company comply with local company accounting

standards

Adidas consolidates those statements using different set of standards- IFRS

In consolidated accounts cannot show individual company statements

Corporate Governance

Corporate governance refers to the combination of internal and external

mechanisms implemented to

safeguard the assets of a company

and protect the rights of the

stakeholders

Work of the controller is key here

Debate

Should U.S. Companies be

allowed to close the

GAAP?