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International Accountingand Multinational Enterprises

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Accounting Development in the Global Economy

Chapter Two

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Learning objectives:

• Identify the key environmental influences on business and accounting

• Discuss the major factors influencing the development of accounting and information disclosure in the global economy

• Examine some of the important accounting issues that distinguish MNEs from purely domestic corporations

• Discuss culture as an important determinant of accounting systems worldwide.

• Identify the major international pressures for accounting change

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CHAPTER OUTLINE

1. Environmental Influences on Business and Management2. Environmental Influences on Accounting3. Major Developmental Factors

(1) Corporations as Legal Entities(2) Professional Management(3) Securities Markets(4) A Wider Audience(5) An Evolutionary Process

4. Accountability and Multinational Enterprises5. Culture and the Global Environment6. International Pressures for Accounting Change7. Summary

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Introduction

Accounting is a product of its environment, shaped by characteristics unique to its national environment.

This chapter will investigate factors that influence the development of national accounting systems and the accounting and information disclosure practices of corporations, especially MNEs.

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Environmental Influences on Business and Management

Environmental Influences:

• Educational, socio-cultural, legal, political, and economical.

Essential Points:

• First, environmental analysis can be a valuable tool in explaining differences in business operations between countries, and

• Second, “cultural relativism” means that the rationality of any behavior should be judged within its own cultural context.

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Environmental Influences

on Accounting

3

Accounting Systems

International Factors

Culture

Accounting Regulation

Legal System

Inflation

Economic Growth

Social Climate

Enterprise Ownership

Enterprise Activities

Finance & Capital Markets

Taxation

Accounting Profession

Accounting Education & Research

Political System

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Major Developmental Factors

• Corporations as Legal Entities

• Professional Management

• Securities Markets

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Corporations as Legal Entities• Limited Liability

• Separation of Ownership and Control

• Creditors limited to corporate assets

• “Transparency” (Disclosure) necessary for investor

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Professional Management

Corporate officers:• Hired for skills, not

ownership of capital,• In some countries,

corporate ownership held by family holdings. 6

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Securities Markets

Allow:

• Efficient raising of finance;

• Exchangeability of shares; and

• Privatization of state-owned enterprises in “emerging” markets.

Require:

• Information availability; and

• Increased quality and quantity of financial disclosures to the market. 7

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Financial Information & Control• Available to the public, not just current investors and creditors;

• Quality and quality predominately influenced by regulatory bodies;

• More detailed and up-to-date information available to “other” finance providers, such as institutional investors and governments;

• Private shareholders in public corporations tend to exercise little direct influence; and

• Heavy governmental influence also reduces the control of private shareholders.

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A Wider Audience• Employees, trade unions, consumers,

government agencies and general public;• Allows those significantly affected by

corporate actions the opportunity to influence those decisions; and

• Corporate “accountability” has become an issue of major importance in recent years. 9

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Corporate Accountability

Supply• Differences are measurable

and controllable;

• “Rights” of non-finance providers could endanger the corporation;

• Disclosures may increase power of non-finance providers and criticism of corporation.

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Demand• Information disclosed to

finance providers could satisfy non-finance providers;

• In Europe, some countries require union access to information.

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An Evolutionary Process

• Public disclosures are a spin-off from the evolution of disclosures to financial providers;

• Disclosures also due to the growth of active and well-developed securities markets;

• Lesser developed markets would require measures significantly different than in developed countries.

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Accountability and Multinational Enterprise

• Domestic corporation’s primary operations are in one country, cross-frontier relationships with non-related parties.

• MNE’s operate in numerous countries with different laws and currencies, cross-frontier relationships with related units:

• Foreign Direct Investment requires MNE’s to make fuller disclosures;

• MNE’s have greater freedom to act in their own best interests;

• MNE’s best interests often at odds with various nationalistic groups in host country;

• Special impact of MNE’s has given rise for more accountability and information disclosure.

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Cultures and the Global Environment

• Business and managerial behavior strongly influenced by culture;

• Societal values depend on a variety of internal ecological and environmental factors (I.e. family, class structure, politics, law, finance, education, etc);

• External factors, such as international trade and investment, war, colonization, and scientific discovery, force changes at the national level; and

• As a result, accounting systems and societal values

influence and reinforce societal values.

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International Pressures forAccounting Change (Gray’s Model)

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External Influences•Forces of Nature•Trade•Investment•Conquest

Ecological Influences•Geographic•Economic•Demographic•Genetic/ Hygiene•Historical•Technological•Urbanization

Societal Values

Accounting Values

Accounting Systems

Institutional Consequences•Legal system•Corporate ownership•Capital markets•Professional Associations•Education•Religion

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Differences:• Socialism and Capitalism,• Developed and Developing Countries,• Political systems, • Deregulation of markets, and• Increased privatization.

Economic Groupings:• European Union,• United Nations and OECD, and• NAFTA expansion.

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International Pressures forAccounting Change

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Relationships Between MNE’s and Host Countries

Though less antagonistic and more practical than in prior years, there are remaining areas of concern:

• Impact on culture and social development of host countries,

• Influence on employment and consumption patterns,

• Environmental impact,

• Adherence to UN and OECD guidelines,

• Harmonization of tax regimes, exchange controls, restrictions on foreign investments, and

• Development and recognition of IASC and IFAC accounting and disclosure standards.

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