Introduction to International Business
Final essay, December 6th 2005
Multiple International Reports in Triplicate - Why Bother?
International businesses face so many pitfalls that it seems almost as if the whole world is against them. After using the good advice in the previous essay by this same hapless author, anticipating and minimizing risk factors, a company can get well under way only to fall flat on its face at the end of the first international fiscal period. While a national company can get away with a single set of financial accounts, international companies find themselves at the nexus of confusing and incompatible reporting regulations. To what point and purpose does this mess exist?
On its simplest level, accounting is needed to provide information for making decisions. The managers need to know what is going on with the company's finances to forecast and optimize operations. As a company outgrows the parents' garage and goes public, the desire for accurate accounts shifts toward stakeholders. Specifically, capital providers will be bugging you for a constant stream of financial statements in return for the resources they have provided. More generally, anyone who has an interest in the welfare of the company would like to consume some reports to know where they stand. In many places these statements also have to go to governmental bodies for reasons like taxation.
Providing information is not the only reason a company must dispense reports. As the company's turnover grows, so do the opportunity and temptation for fraud. To protect us from ourselves, rules demand keeping careful track of where money comes from and where it is used. In some cases, these rules and reporting standards are legally enforced. At other times, using them is nonetheless very strongly recommended.
Things get interesting when you realize that legal entities representing the company are required to really do business abroad. Every entity must report to its host country, and every country has its own idea of what you should report. While regional economic integration has unified systems to some degree, major trade blocs of the world still differ in their regulations. For example, the United States want everyone to use Generally Accepted Accounting Principles, while the progressive co-operative of the European Union, Russia, China and other unlikely allies ask for International Financial Reporting Standards. So a company doing international business needs to do one set of financial accounts and activity reports for its home country, and a possible additional set for every country it trades stuff in.
Two examples serve to illuminate the nuances of differing standards. A business with North American operations needs to make clear where their assets originate and how liquid the assets are. The information requirements largely mirror the wishes of investors whose main interest in seeing whether the business is profitable and not about to go bankrupt. A business in Europe needs to make a report on how they dispose of the total value they add to whatever they do. Evidently the banks get a kick out of this. A report set on one continent will not satisfy investors on the other.1 The second example is about terminology variance and how it is dealt with. A lease in the US is treated like a rent agreement in the EU and Japan, giving tenure but no ownership. A European lease is more like an American lease-purchase. Under one system things are liabilities, under another they are assets. As the rules may be complex and deviation sanctions severe, it is certainly not excessive to hire a new accountant for each of the company's scattered legal entities.
Dealing with all this bureaucracy does not help cost-efficiency. For big companies who want to play it safe, a handy alternative exists. There are currently four huge companies who can do your accounts for you: PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young, and KPMG. These are the best-known and most trusted. However, even the biggest are not always trustworthy, as there used to be a fifth major auditing company who got scandalously wrecked. The very wise, and very rich, could use more than one auditor, maybe even collect the whole set. Alternatively, a horde of smaller but more affordable audit firms are available in any developed country, and they can do the same job, if you dare to trust them.
It is clear that a company doing international business will have great fun adapting their accounting procedures to account for the numerous requirements. Doing all this will make sure investors and prospective business partners will be that much happier, provided, of course, that you are reporting positive results. Furthermore, in many places following the rules is mandatory to be able to set up a representative office or other legal entity. And, because you never know what those sneaky accountants are up to in the far-reaching corners of your business empire, it is also a good idea to make them follow the rules so you will not get ripped off.
Assets used in creating this essay:
- International Business, by Charles W. L. Hill, pages 529-547.
- Lecture notes from the Introduction to International Business course, and some random bits from Accounting I