Homework

This final week’s topics are:

· Strategic accounting issues in MNCs

· International auditing and corporate governance

· International corporate social reporting

What follows are my lecture notes and links for you to further your knowledge of these key topics in International Accounting.

I STRATEGIC ACCOUNTING ISSUES IN MNC’s

Strategy by definition is

a carefully devised plan of action to achieve a goal, or the art of developing or carrying out such a plan; a business plan.

(Encarata Dictionary)

Strategic Planning involves the following:

· Short- and long-term goals

· Objectives for the organization

· Action(s) to be taken

· Resources that will be needed

Accounting plays a huge role in strategic planning by providing quantitative information on…

· SWOT

· Strengths

· Weaknesses

· Opportunities

· Threats

· Costs and benefits needed for decisions on

· Capital budgeting, and

· Long-term investments

Capital Budgeting decisions as to whether or not to make a capital investment. Techniques used include:

· Payback Period

· Return on Investment (ROI)

· Discounted Cash Flow

· Net Present Value (NPV)

· Internal Rate of Return (IRR)

CAPITAL INVESTMENT TECHNIQUES:

Technique Definition Computation

Payback period	Number of years to recover the initial investment	Number of years for the cumulative cash flow to equal the investment
Book rate of ROI (return on investment)	Rate of average annual net income to the initial investment or average investment (book value)	Average net income investment book value
NPV (net present value)	Difference between the initial investment and the present value of subsequent net cash inflows discounted at a given interest rate	Present value of net cash inflows──initial investment
IRR (internal rate of return)	Discount rate that makes the initial investment equal the present value of the subsequent net cash inflows	Solving the following equation for discount rate i: (present value factor of i) Net cash inflows - initial investment

Use of a balanced score card approach is also valuable in strategic planning…for a better understanding of this technique…

http://balancedscorecard.org/Resources/About-the-Balanced-Scorecard

Source: Balance Scorecard Institute

And last but not least, the key to success in strategic planning is an awareness and sensitivity to the national cultures.

II INTERNATIONAL AUDITING & CORPORATE GOVERNANCE

Auditing is an integral part of multinational corporate governance.

Auditing is expected to improve the precision, quality and reliability of information made available to the market, and to enhance investor confidence in such information.

With the current trend toward globalization of markets, and rapid growth in international transactions, securing investor confidence is crucial for MNCs.

The Organization for Economic Cooperation and Development’s (OECD) revised code of corporate governance emphasizes among other things, that auditors should be accountable to shareholders, and that boards of directors should effectively oversee the financial reporting function.

For detailed information on this topic…

https://www.oecd.org/daf/ca/Corporate-Governance-Factbook.pdf

For a simpler definition from Investopedia.com

The system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

Corporate governance became a pressing issue following the 2002 introduction of the Sarbanes-Oxley Act in the U.S., which was ushered in to restore public confidence in companies and markets after accounting fraud bankrupted high-profile companies such as Enron and WorldCom. Most companies strive to have a high level of corporate governance. These days, it is not enough for a company to merely be profitable; it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behavior and sound corporate governance practices.

Some of the specific measures introduced by the Sarbanes-Oxley Act to improve corporate governance relate directly to auditing, for example, establishment of a new oversight board for the accountancy profession, tightly defining ‘independence’ of audit committee members, requiring external auditors to report directly to audit committee, and prohibition of certain non-audit services by external auditors.

On the following page is a brief summary of the Sarbanes-Oxley Act of 2002. Please take the time to read it.

Sarbanes-Oxley Act of 2002

Fondly known as SOX, the bill was enacted into law on July 30, 2002. It is also known as the Public Company Accounting Reform and Investor Protection Act of 2002. It is one of the most controversial laws passed in response to a number of major corporate and accounting scandals; i.e., WorldCom, Enron, Tyco, etc. As a result of the scandals, public trust in accounting and reporting practices was badly shaken.

This law was named after its sponsors and actually came into existence as a result of two bills presented to Congress.

In April 25, 2002, the House passed Republican Michael Garver Oxley’s bill. It was referred to as the Corporate and Auditing Accountability, Responsibility and Transparency Act. It had the support of President George W. Bush and the Security & Exchange Commission (SEC).

At the same time in the Senate, Democrat Paul Sarbanes was working on his proposal, Senate Bill 2673. This bill passed the Senate Banking Committee on June 18, 2002; seven days prior to the WorldCom scandal revealing that their earnings had been overstated by more than $72 billion during the last year and a quarter as a result of improper accounting. The full Senate approved Bill 2673 on July 15, 2002 by a vote of 97-0.

A Conference Committee was formed to reconcile the differences between the Senate (Sarbane’s S2673) and the House (Oxley’s H3763) bills. A conference committee is a Congressional committee appointed by the House and Senate in order to resolve disagreements on a particular bill. In this case, the goal was to combine two bills that had similar prescriptions.

SOX was obviously named after its two sponsors, Paul Sarbanes (D-MD) and Michael G Oxley (R-OH). The Act was approved by an overwhelming majority in both the House and the Senate and on July 30,2002 was signed by President George W. Bush into law. President Bush stated that the law included “the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt.” (Elisabeth Bumiller: "Bush Signs Bill Aimed at Fraud in Corporations", The New York Times , July 31, 2002, page A1).

 (A little-known fact is that the bill that was signed into law contained very little, if any, of Mike Oxley's Bill.  They kept his name on the bill more for political leverage within the House. )

The legislation covers a broad range and creates new and higher standards for all United States public company boards, management and public accounting firms. The Act contains 11 sections and requires the SEC to implement rulings on requirements to comply with this new law.

This law was far reaching and had international impact. Reference http://papers.ssrn.com/sol3/papers.cfm?abstract_id=474142

for additional readings simply Google SOX and you will find a myriad of articles.

There are major variations in many aspects of external auditing across countries, including the purpose of external auditing, the audit environment, regulation of auditing, and audit reports.

The International Auditing and Assurance Standards Board (IAASB) is part of the International Federation of Accountants (IFAC). IFAC is responsible for international auditing standards. There are 36 international standards on auditing (ISAs)

International Auditing Standard 1 (IAS 1), which governs the presentation of financial statements.

IAS 1 Presentation of Financial Statements sets out the overall requirements for financial statements, including how they should be structured, the minimum requirements for their content and overriding concepts such as going concern, the accrual basis of accounting and the current/non-current distinction. The standard requires a complete set of financial statements to comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows.

IAS 1 was reissued in September 2007 and applies to annual periods beginning on or after 1 January 2009.

Source: Deloitte website

The International Federation of Accountants’ website is www.ifac.org

III INTERNATIONAL CORPORATE SOCIAL REPORTING

In the past the focus was strictly on the economic aspects in external reporting. Today we are combining the economic aspects and integrating them with social and governance.

CRS – Corporate Social Reporting as defined in Investopedia.com

Corporate initiative to assess and take responsibility for the company's effects on the environment and impact on social welfare. The term generally applies to company efforts that go beyond what may be required by regulators or environmental protection groups.  Corporate social responsibility may also be referred to as "corporate citizenship" and can involve incurring short-term costs that do not provide an immediate financial benefit to the company, but instead promote positive social and environmental change. 

Also included in this week’s discussion is a PowerPoint presentation from John Wiley & Sons on the topic of CRS.

After you’ve had a chance to view the PowerPoint, go to the following KPMG website. It provides the current global trends in corporate responsibility reporting with a very interesting interactive tool that allows you to compare countries.

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/corporate-responsibility/Pages/default.aspx

Also please see the following notes for additional information on CSR.

OUR CHANGING WORLD AND THE EVOLUTION

OF

CORPORATE SOCIAL RESPONSIBILITY (CSR)

The Importance of CSR

· It is slowly becoming mainstream

· It discusses the role of business in society

· It is the pathway for businesses to become responsible and ethical…essentials for our future world

· And in return, CSR contributes to positive outcomes for companies and their stakeholders.

CSR Defined and Debated

According to the Financial Times the definition of corporate social responsibility is

a business approach that contributes to sustainable development by delivering economic, social and environmental benefits for all stakeholders.

CSR is a concept with many definitions and practices. The way it is understood and implemented differs greatly for each company and country. Moreover, CSR is a very broad concept that addresses many and various topics such as human rights, corporate governance, health and safety, environmental effects, working conditions and contribution to economic development. Whatever the definition is, the purpose of CSR is to drive change towards sustainability.

Unilever is a multinational corporation, in the food and beverage section with a comprehensive CSR strategy.

Here are three definitions of CSR and one for strategic CSR:

1. 1979 Archie Carroll claimed, “CSR encompasses the economic, legal, ethical and philanthropic expectations that society has of organizations at a given point in time” (Carroll, 1979: 500). 

2. 1984 Edward Freeman brought the term ‘stakeholders’ into this discourse and the approach according to which a corporate has a role in society and that it is larger than just pursuing profit. According to the stakeholder theory, CSR can be defined as “a view of the corporation and its role in society that assumes a responsibility among firms to pursue goals in addition to profit maximization and a responsibility of the stakeholders to hold the firm responsible for its actions” (Werther and Chandler, 2011: 5).

3. 2003 Aaronson defines CSR as “business decision-making linked to ethical values, compliance with legal requirements, and respect for people, communities, and the environment around the world.”

4. 2011 Werther and Chandler defined strategic CSR as “the incorporation of a holistic CSR perspective within a firm’s strategic planning and core operations so that the firm is managed in the interest of a broad set of stakeholders to achieve maximum economic and social value over the medium to long term.” 

Source: Strategic Corporate Social Responsibility, Debbie Haski-Leventhal, 2018, Sage Publications

Alternative concepts and terms to CSR:

· Sustainability

· Corporate responsibility

· Corporate citizenship

· Social business or enterprise

· Conscious business

· Creating shared value

Brief History of CSR

1759 Time permitting, read Adam Smith’s, The Theory of Moral Sentiments or at least check out the Adam Smith Institute at www.adamsmith.org On this website you can get a summary of the main themes of the book.

1940 Smith’s approach was strengthened by Elton Mayo’s Hawthorn study. The focus was on the productivity of workers in an electric factory.

1953 Howard Bowen published Social Responsibilities of the Businessman. It was the first time

someone had written specifically on CSR and it is viewed as the modern-era CSR.

1970 Milton Friedman argued that the only social responsibility of a company was to make as much money for its stockholders as possible. CSR, unless used as a means to make more profit, is immoral. 

Please note there is a difference between stockholders or shareholders vs stakeholders

1971 the Committee for Economic Development (CED) published the Social Responsibilities of Business Corporations. CED observed that business functions by public consent, and its basic purpose is to serve constructively the needs of society to the satisfaction of society. As such, the social contract between business and society was changing substantially and business was expected to assume broader responsibilities to society. Furthermore, the CED noted that business assumes a role in contributing to the quality of life and that this role is more than just providing goods and services.

1979 Archie Carroll argued that, in addition to financial responsibility, companies also have a legal responsibility (to obey the law and regulations), an ethical responsibility (to do what is right, fair and just) and a philanthropic or discretionary responsibility (to be a good corporate citizen, give back to the community).

1984 another leap forward when Edward Freeman developed the stakeholder theory and argued that companies are not only accountable to their shareholders but to a broad set of stakeholders. As such, stakeholders include employees, consumers, governments, the community in which the company operates and even the environment. This was another attempt to broaden the responsibility of business from financial alone, to social and environmental as well.

2002 Porter and Kramer published an article in Harvard Business Review (HBR) arguing that companies that are not good for society would not be able to maintain their competitive advantage in the future. 

Business Responsibilities

Narrow view

· Businesses exists to produce products and services, sell them and maximize profit.

Broad view

· Businesses have additional responsibilities to making a profit. Business operates within society and only thrives because of people who are employees, consumers and even shareholders. As such, business has an enormous responsibility to ensure the well-being of people and to avoid harm. 

Drivers for Change

· Successful responsibility companies

· For an excellent read consider The World is Flat by Thomas Friedman (2005)

· Consumer growing awareness

· Globalization and free flow of information

· Financial crises and the results of unethical business

Business Motivation for CSR

The motivation is divided into three groups:

1. Moral

a. It is the right thing to do

b. Society makes business possible and companies have a reciprocal obligation

c. Social license to operate

2. Relational

a. Relationships with stakeholders

b. Minimize restrictions

3. Economical

a. Brand and reputation

b. Employee engagement

c. Profits

BOTTOM LINE: CSR yields great benefits to everyone.

Homework, which represents two questions on the final exam plus …

1. Strategic issues for MNCs…from the list below research your MNC and write one paragraph on each of the three topics explaining how the MNC handles these issues.

· Performance Evaluation Measures

· Financial and Non-Financial Evaluation – how does your MNC regard its foreign operation and how are the unit and the manager evaluated.

· Management Control Systems and National Cultures

· What steps, if any, is your MNC taking to be sensitive to the national culture?

· Corporate Social Responsibility (CSR)

· What is your MNC doing with regard to CSR?

2. Tell me why I should invest in your MNC; please provide at least one calculation for a capital investment evaluation; i.e. ROI, NPV, IRR or the payback period. (see notes above for details on these techniques)

Your answers to the above two questions are to be included on your final exam. There is no need to post them in this week’s discussion area.

HOMEWORK REMINDER:

You are responsible to individually read all of the Group Project presentations posted in Week 7 and also respond to at least two different country posts. Your responses to the teams should be posted in the same discussion area in Week 7 where the presentations are posted.