Examining major problems caused by worldwide accounting diversity
Multinational corporations have been contributors to worldwide accounting problems as they have made or contributed to changes in which different countries have been using their accounting principles not only have they change the way accounting standards carried out but have contributed to the different problems that have been noted out in this answer. It basically looks into these issues and also coming up with ways in which this could be solved without affecting the way business is carried out in different countries through the use of accounting standards that will are recognized in each and every country. Each country has its own unique set of accounting and financial reporting rules and ways that each and every organization should adhere to. It is also necessary to know why there is accounting diversity which exists in multinational companies and worldwide. The diagram below shows some of the reasons for problems connected to accounting diversity.
Reasons for and problems connected to accounting diversity according to Muller Hans (2007)
The major problem in accounting diversity is the differing accounting rules and principals in every country worldwide. A tremendous problem in creating the financial statements of a multinational company is looking at coca-cola for example which is based in Kuala lumpur it needs to prepare individual financial statements in every single one of its over 100 international subsidiaries and observing the corresponding national accounting rules and principles. This then brings the company to make consolidated financial statement according to Generally Accepted Accounting Principles (GAAP) which includes data from all the financial statements of its subsidiaries. This is a trivial task for Coca-Cola and it potentially costs enormous amounts of money for the company.
Another problem is the lack of comparability between companies preparing their financial statements in two different countries, especially for investors who for example would like to compare the profitability of companies located in different countries; it is very hard to do so because of different accounting rules and principles.
In order to clearly understand the problems that are caused by diversification of accounting worldwide by multinational companies one needs to understand and know the ten environmental factors that are likely to shape accounting developments in a country from which these factors that is where the problems will basically arise when it comes to diversification of accounting by multinational companies. These ten factors are:
The nature of capital markets.
The type of reporting regimes
The size and complexity of business entities.
The type of legal system
The level of enforcement
The rate of inflation
Political and economic ties with other countries
Stature of the accounting profession
Existence of a conceptual framework
Quality of accounting education
Looking into the above list this is a detailed list of how diversification of accounting by multinational companies can cause problems within a country or different country that the company will be moving or aim to start operations in. Considering the factors noted above these may differ when looking into different countries as a contributor to diversity in accounting.
The nature of capital markets
When looking into the nature of capital markets several aspects affect the system of financial reporting that will be prevailing in a country that a multinational company moves to if it has different methods in which it uses. The markets of the particular country may be predominated by equity-oriented or debt-oriented. The multinational companies may be so influential that if it enters the market it straights goes to the stock market as a way to increase their source of capital which are called equity-oriented markets. This type of capital financing for multinational companies is mainly carried out in the United States of America and Canada. The multinational company may also look for financing when entering a country or if already in a country may be able to source out finance for their business from the bank as a way to add up their capital. This type of operation is called debt-oriented and is mainly practiced in Japan, Switzerland and Germany.
The multinational companies also face the problems of accounting diversity when it comes to attracting investors in any country that they would have moved to. In trying to curb this problem companies invest considerable resources in their annual reports and other financial communications to investors. This is done because anybody with investing power is a potential provider of capital; companies therefore treat the annual report as a marketing device to attract investors from the general population. With this in mind the multinational company’s strive to make their annual report a public relations document that will present a positive image of the company. Where by considerable amounts or resources are devoted to the preparation of annual reports in equity-oriented capital markets. In debt-oriented countries corporate annual reports tend to be more Spartan and a matter of fact since the companies will be focused on bank debt as a source of financing for companies in those countries. The banker providing the loan does not typically do so on the basis of glossy annual report and hence there is little reason to spend large amounts on the production of annual reports.
Type of reporting regime
Multinational companies can cause problems of accounting diversification through introduction of a dual or single set of rules for financial reporting and tax report. This could be either by introducing detailed set rules of tax reporting and external financial reporting that would have been adopted from the parent company. In countries were multinational companies have introduced dual reporting standards this make it possible for the company to form financial reporting that look highly profitable in their financial report when investors look into the report which will also make the company to be less successful in their tax filings to the tax collectors. This enables the multinational company to take an optimistic view to reporting earnings in their financial reports since the latter do not typically determine tax liability.
Looking into countries that use single accounting standards multinational companies reporting system is affected by inflation earnings in financial reports which is caused by real price in the form of higher tax liability. This has lead to companies in such countries to understate earnings over the expenditure.
Size and complexity of the business entities
The accounting diversification problems in multinational companies many also be influenced by size and complexity of business entities that will be in the country that the company is operating. Economically advanced countries are characterized by large and complex conglomerates that often sell hundreds of products, employ thousands of people, and do business with many dozens of countries. This will in turn lead to companies generating high value added instances that will exceed the economic output for example the Gross Domestic Product (GDP) of some countries.
Type of legal system
The legal system of a country is sometimes called a code law or legislation this can also be a common law or non-legislation. The code law refers to civilian law characterized as a mandating acceptable behavior while common law system focuses on deterring undesirable behavior. These types of laws affect the diversification of accounting by multinational companies in that in France and Germany code law is regulated through an accounting code that tends to be highly detailed, prescriptive and procedural which is in turn set by the legislature in trying to protect the creditor of the company. The common law in contrast looking into USA and Australia accounting regulations are set on a piecemeal basis by private sector standard setting body were any emphasis is made to present a true and fair picture to the company shareholders.
Existence of a conceptual framework
This is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards which prescribes the nature, function, and limits of financial accounting and financial statements that may cause problems for the multinational company if the accounting standards are not followed. The conceptual frame work help solve the problem of accounting diversification by multinational companies through providing the following information.
A statement of aims or objectives of financial accounting
Targeted user of financial statement
Financial accounting statements that ought to be issued
Quality and characteristics of good financial accounting.
Definition of reporting entity.
Definition and basis of recognizing financial statements elements
Measure of financial statements elements and conceprts of capital maintenance.
Level of Enforcement of regulations
Looking into problems of accounting diversification by multinational companies it is important to differentiate between accounting regulation and the actual accounting practices that basically prevail in a country. When looking into countries where there is a high level of enforcement accounting practices are largely in compliance with the requirements and in countries with low levels of accounting enforcement practices of business entities are likely to exhibit very little compliance with regulations. The problem that most companies face is to adapt to sophisticated accounting standards that that would be used in different countries which take a lot of resource for the company to implement and enforce such standards. The company would need trained employees to apply the standards, while regulatory agencies will need adequate budgets to monitor compliance.
Rate of inflation
The problem with diversification of accounting by multinational companies is that this will lead to many companies not being able to find ways of appropriating the inflation rate as most will be using different methods than the one recognized for example some use Historical cost model for financial reporting purposes which bases that inflation does not seriously impact the business operation. But some countries that have suffer from high levels of inflation use Inflation adjusted models for financial reporting to provide more decision and relevant information in the context of their economy.
Political and economic ties
Political and economic ties also affect the diversification of accounting especially when it comes to looking at the legal and educational system which may be transported across the border one will find out that countries within the same region intended to use the same accounting principles so that trade or business operations between the countries is not affect. This will make it difficult for a company to operate within that region if it does not know the ways in which accounting process are carried out.
Stature of the accounting profession
Another factor that causes problems in accounting diversification by multinational companies is the treatment of accounting profession where he should be made to feel or have a high esteem within the company so that the books will be accurate and well maintained. The professional also has the responsibilities of making sure that the required accounting standards are followed and adhered to.
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