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 highrisk 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 Marketing-Sales

CFO

Controller

VP Operations
Treasurer

Accounting standards
and procedures

Statements

Evaluation operations

Cash flow mngt

Hedging

Internal Auditing

Tax planning

Assist s in
corporate strategy

VP R & D

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 compatibleinternational 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)

Investors

The
Public

Governments
and their
agencies

Employees

IASB
users

Customers

Lenders

Suppliers
and other
trade
creditors

Cultural Differences in Accounting

Disclosure /Assessment Matrix for National

Accounting Systems
Less developed
Secrecy
Germanic

Latin

Less disclosure to the public

Near Eastern

Less developed
Asian
African

Japan
More developed
Latin

Asian
Colonial
Nordic
Anglo-American

Transparency
Optimism

Greater caution in assessment

Conservatism

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?