FINANCIAL REPORTING CHALLENGES FOR MULTINATIONAL ENTERPRISES
1. INTRODUCTION TO FINANCIAL REPORTING FOR MULTINATIONAL ENTERPRISES
1.1 Overview of Multinational Enterprises (MNEs)
International business encompasses many companies, which have their branches or subsidiaries
in more than one country for the purpose of carrying out business operations and for making
profits. These entitles play a crucial role in the global economy principally in operation of
imports, exports and international business investment and globalization (Choi & Meek, 2011). A
firm chooses to implement IFRS with the aim of harmonizing its accounting standards across the
global markets to help potential investors have comparable financial reports (Chand & White,
2016). As pointed out earlier, this adoption does have its pros and cons. These objectives can be
achieved as IFRS increases credibility and comparability of financial reports, essentially helping
investors engage in cross border investments while possible drawbacks including
implementation expenses and high level of modifications within accounting practices (Chand &
White, 2016). Additionally, MNEs encounter various issues with respect to regulation and
reporting and financial reporting, especially with regards to carrying out debt covenants which
limits that predetermined financial levels of a firm agreed upon between the firm and its
creditors. Compliance with the covenants is important for MNE to minimize cases of default on
borrowings and albeit borrowings on more favourable terms. The Financial Accounting Standards
Board (FASB) also has a key role to play in an industry by setting standards like the Revenue from
Contracts with Customers (Topic 606), which is requirements for reporting revenue from
contracts with customers and this ensures greater comparability and reliability of financial
statements across industries (FASB, 2014). Altogether, the concern of the financial institutions
within MNEs which has been described in this section is the continued adaptations and strategic
integrations needed due to IFRS as revealed in the Ernst & Young Global IFRS Banking Survey
(Ernst & Young, 2017).
1.2 Importance of Financial Reporting in MNEs
Reporting on its financial information is important to MNEs since it enables the disclosure of
such information required to be standardized across different legal jurisdictions. It is imperative
to have high quality of financial reports to enable those with stakes in the companies such as
investors, creditors and even the regulatory bodies to make sound decisions (Gray & Manson,
2011). The implementation of IFRS has ensured MNEs impactful improvement within the quality
of financial reporting mechanisms. To the extent that IFRS enhances the quality of information
presented and provides a framework for increasing the consistency of financial statements
worldwide in a single language, it is particularly advantageous for MNEs that may be required to
file financial statements in multiple countries (Guceri & Majeed, 2018). The volatility and
dependable financial reporting under IFRS assists in reducing info asymmetry b/w the firm & its
investors that may thereby lead to reduction in the cost of capital & hence the growth
opportunity (Hail & Leuz, 2009). Also, the IASB argues that the existence of a strong conceptual
framework for financial reporting assists towards enhancing the issuing of standards for the
financial reporting framework that should bring efficacy and soundness to the management and
monitoring of financial information systems (IASB, 2018). It is also helps to report the financial
position of an MNE in meeting the regional and other requirements of the country in compliance
with the legal systems that may lead to penalties and bad reputation in a global environment.
From the above analysis, it could be deduced that while CEO duality is supposed to enhance
efficiency by concentrating power in the CEO who also serves as the chair of the board, it has
potential to compromise the quality of financial reporting in organizations due to lack of checks
and balances, thus implying the need for implementing good corporate governance practices to
improve reporting quality (Kim & Shi, 2017). Further, the use of key accounting trends and
techniques gives MNEs a chance to follow contemporary financial environments and thus stay
ahead of rivals (Gray & Manson, 2011). Consequently, complete financial reporting becomes a
necessity in the overall organizational performance, compliance with the set legal requirements,
and optimal strategic financial management that will ultimately define the corporate and
financial performance and sustainability of MNEs.
1.3 Regulatory Frameworks and Standards Governing MNE Financial Reporting
MNEs' financial reporting is governed by rules, regulations, laws, and standards that enhance
business transparency, comparability and validity of financial data across national Lines. At the
heart of these frameworks is the IFRS commonly relied upon by MNEs’ in preparing their
financial statements considering guidelines set out therein. IFRS 9, IFRS 15, 16 for financial
instruments, revenue recognition and leases, respectively, contain elaborated guidelines on how
and when to recognize financial operations (PwC, 2016). IFRS has been known to increase
comparisons of the global financial data, thereby increasing the efficiency of decision-making on
investment opportunities, which in turn increases the efficiency of markets in the global market
(Lang & Lundholm, 1993). In the same way, accounting conservatism, which is assumed within
the above-mentioned frameworks, has the beneficial effect of providing the realistic evaluation
of assets and revenues and enhances the efficiency of debt contracts insofar as reported
amounts of values do not exceed their real values and the earnings (Linsmeier & Thornton,
2002). It is crucial when dealing with investors/creditors to remain safe from financial pressure
as this approach will help protect them. Another major component of these standards as
disclosed by Atannon et al. (2005) is the fair value disclosures which aid in improving the
measurement of investment holding, especially in debt securities by/reference> The financial
instruments that are undergoing a phase of re-measurement after application of the standards
are as follows Forms of financial instruments: It is also crucial to add that the company’s
effective governance is also vital for the quality and credibility of reportage. Effective governance
structures compliment on the types of compliance and sustainably reporting enhance the
company’s goals to meet societal and environmental norms (Mohd Ghazali et al. , 2015). Global
accounting standards like the ones set by the IASB as well as domestic regulators also revise
these standards from time to time to be in with the changing world economy. MNEs should
deliver accurate financial reports hence improving credibility. It is important to classify the
regulation in context with the management and financial health of MNEs that embrace best
practices and commitment to standards.
1.4 Emerging Trends and Globalization Impact on Financial Reporting
This is true is demonstrated through the merging of IFRS and GAAP where the melding of the
two creates a program that has a more integrated structure for the international business
environment (Choi & Meek, 2011). It is argued that these qualifications have become essential in
the pursuit of increased standardization and standardization of financial statements around the
world in view of globalization where many cross- border companies face different jurisdictions.
With more than 120 countries currently using IFRS, it is clear to see that accounting convergence
is on the rise as it helps troops financial integration and international investment (Ernst & Young,
2017). Technological factors have affected financial reporting by integrating methods such as the
automation of processes, real-time reporting, and interpretation of data, which enhances the
efficiency of compiling reports. Concerning the various changes that have occurred with the
growth of the different financial instruments or the manner in which the financial transactions
have taken place, there has also been changes in the different accounting standards in existence.
For example, FASB’s Topic 606 the revenue from Contracts with Customers outlines the
differentiation of revenue recognition in the global market, and it has achieved the provision of a
reliable set of rules that provide comparability (FASB, 2014). In addition, the debt covenant
hypothesis explains the way reporting requirements influence management decisions and
processes as firms attempt to conform to the covenants because default is costly (Dichev &
Skinner, 2002). While methods of financial reporting have been changing over the years to meet
the need for timely and accurate information, concerns over standardized tools and technologies
are set to remain relevant as the world looks to the future with respect to governing the
reporting practices.
2. CURRENCY TRANSLATION AND EXCHANGE RATE RISKS
2.1 Foreign Currency Transactions and Translation
Foreign currency transactions and translation are important issues in the financial reporting
framework of MNEs, which encompasses the conversion of financial statements in foreign
currency to the functional currency. This process is crucial in ensuring that all the consolidated
financial statementare prepared in the right manner so as to show the true financial health as
well as the performance of the MNE. Exchange rate fluctuations are continuous and
unpredictable, which create a risk that has a material effect on the reported earnings and assets:
a key challenge in accounting. The flip side of this is that the IFRS has set some rules and
regulation that tackle these challenges where by an entity is allowed to use the exchange rate at
the date of the transaction for initial recognition and closing rate at each balance sheet date for
re-measuring monetary items as stated by Chircop & Kaida (2014). These goals are consistent
with IFRS’s primary objectives of achieving cross-country “convergence” of accounting standards
and presenting similarly formatted annual reports (Callaghan & Willett, 2014). There are certain
guidelines that have to be followed while choosing the functional currency in relation to which
the statement is prepared and these include the need for the functional currency to be that of
the primary economic environment in which the MNE operates. This selection is imperative to
financial reporting and aids in averting the lack of comparability of financial statements across
different countries (Chircop & Kaida, 2014). Furthermore, when converting the financial
statements of the foreign subsidiaries to the reporting currency of the parent company, the
process of foreign currency translation results in adjusting the amount included in other
comprehensive income which affects the equity section in the balance sheet (Buchheit & Burak,
2017). Notably, it remains crucial to maintain excellent corporate governance to address these
complexities as robust polices and controls are relevant to mitigate the effects of translating
financial statements in foreign currency and perform accurate reporting (Cai et al. , 2018). Such
mechanism is vital in the process of improving the quality of firms’ financial reporting and
financial decision making with a view of sustaining investor confidence. MNEs should maintain
clear and accurate financial reports to improve credibility and operations.
2.2 Impact of Exchange Rate Fluctuations on Financial Statements
Foreign exchange further influences the financial statements of MNEs hence realizing different
complexities and prospects in financial reporting. These fluctuations produce the significant
variation which can be seen in reported earnings, the value that is placed on the profits, and
liabilities, thereby altering the economic health as depicted in the statements. For instance,
when exchange rates change, then the view foreign assets and liabilities affect the present rates,
this results to significant income or expenses (Erkens, Hung, & Matos, 2012). This volatility is
even more apparent where the subject’s business operates in many places and uses different
currencies, — even small fluctuations in exchange rates can result in enormous effects on cash
flows. A major implication of foreign exchange risk is on translation of foreign subsidiary account
to report in the parent company’s reporting currency. This translation process can result into
translation adjustments, which are reflected in other comprehensive income and therefore
effect shareholders’ equity (Esqueda, 2017). In addition, these factors can create fluctuation on
the cost of capital for MNEs as well. When converts are used in financial statements and
valuations, high volatility may be observed due to fluctuations in exchange rates, which can
ultimately rise perceived risk among investors and thus, capital costs (Garay & Gonzalo, 2013).
This is most apparent in the emerging markets which characterized with frequent exchange rate
volatility that influences the quality of financial reporting and perceptions from the investors. On
the ECB side, institutional investors who are active players in the global capital markets, they, for
instance, focus on analyzing the effects of exchange rate changes on the financial statements to
evaluate risk and make sound investment decisions (Ferreira & Matos, 2008). Hence, integrated
and sound corporate governance practices are required for minimizing and addressing such risks
for elicitation of reasonably reflective accounting information. Sound risk management
frameworks that contain measures to ensure that MNEs apply correct hedging tools and
accounting standards can enhance effective risk management and insurance against volatility
and other effects of fluctuating exchange rates which hurt investor confidence and financial
performance. Therefore, the ability to guard and preferably, control the changes in exchange
rate is an essential factor of effective MNEs’ operation, if these companies are to be able to
present financial statements free of distortion factors and offer insight into the actual financial
status and achievements of the businesses in the era of globalized economy.
2.3 Strategies for Managing Exchange Rate Risks in Financial Reporting
Another factor worthwhile acknowledging is that exchange rate risks must be managed in order
to be able to provide MNEs with substantially correct financial reports, and to maintain financial
stability. Another of these methods is the hedge accounting where forward contracts, options,
and swaps are used for fixing future exchange rates for transactions so as to remove uncertainty
and volatility regarding MNEs financial statements. Thus, using hedging measures, such activity
can be kept stabilized which would help to protect profit margins from fluctuations in the
specific currency. Another approach that can be taken here is the natural hedging, where MNEs
match their revenues and costs in the same currency, which reduces the net exposure. For
instance, an MNE that operates in an economic environment where he transacts in euros but has
cost mostly in US dollars, can manage this risk by sourcing input or labor from countries that use
euros (Han & Chan, 2015). This also eliminated the currency risk and effectiveness the financial
activities in terms of the economic activities of the business. Exchange rate risks have to be
managed or mitigated through effective corporate governance practices. Comprehensive risk
management strategies put in place, leads to the right implementation and also supervision
hence a reduction in the cost of capital and an improvement in the quality of reporting as
supported by Ferreira & Matos (2008) and Garay & Gonzalo (2013). Firms with good corporate
governance practices are inclined to provide voluntary information regarding to the risk
management exercise as a way of enhancing on transparency and convenience to the investors.
IFRS also has a crucial role to play in this regard and discussions have been running high on the
issue of compliance with IFRS. The legalization of IFRS and the enforcement of IFRS solutions also
have a positive effect because the quality of financial statements, which means many values
such as the cost of equity capital, increases when producers offer financial information is raw
and accurate as the economic condition of the enterprise (Henry, Linder, & Yang, 2017). The
following are the key lessons that can be learnt from this paper in relation to managing exchange
rate risks among MNEs: Hedging is key to managing exchange rate; natural hedging is also
essential in managing exchange rate risks; strong corporate governance is fundamental in
managing exchange rate risk among MNEs; and the compliance to international standards is also
essential in managing exchange rate risks among MNEs.
2.4 Hedging Techniques and Their Application in MNEs
Forward contracts, options, and swaps are some of the hedging tools through which MNEs seek to reduce
volatility in exchange rates for their overall financial position. Forward contracts help companies to get a
guarantee of exchange rates useful for future transactions, which will help to minimize the possibility to
face an adverse exchange rate (Buchheit & Burak, 2017). Currency options enable organizational NXT to
engage in the exchange of currencies at a specific rate of exchange at specified time while giving no
guarantee that they have to do so, making it one of the most effective ways by which firms can manage
this risk. The use of swaps aims at the exchange of payouts in different currencies and can be used to
work around risks of being exposed to a certain currency in the long run (Doupnik & Perera, 2015). The
second category of currency risk management is called natural hedging and here MNEs synchronize their
costs and income in the same currency thus taking net risk in foreign exchange turnover. For instance, a
Company earning its revenue in euros would want to source its supplies from the eurozone to mitigate
the currency risks that are inherent (Han & Chan, 2015). It effectively manages the liability aspect that can
lead to substantial non-operational risks, while at the same time being more synergistic with the nature
of business operations. However, the usage of these hedging strategies is highly dependent on corporate
governance structures in implementing and monitoring these actions. Good governance mechanisms put
in place lead to proper frameworks undertaken in risk management hence proper investor confidence
being upheld (Cai, Kim & Park 2018 p 23). Some researchers proved through the test that during financial
capitalists’ crises like financial crisis 2007-2008 these corporate governance architecture wealthy
organizations were in a position to face a financial havoc underlining an importance of governance in
managing risk (Erkens, Hung & Matos, 2012). Large investors with a substantial impact in international
financial markets, may closely analyze the applicability of hedging procedures, in an effort to determine
the overall soundness of MNEs (Black & Coffee Jr, 1994). Managing with IFRS makes financial statements
more transparent and comparable, which is topical for assessing the effectiveness of hedge instruments
(Chircop & Kaida, 2014). This compliance also helps obtain investor confidence, and assists in arriving at
better investor decisions by affording high quality financial data that shows the health of the company on
the basis of economic realities (Callaghan & Willett, 2014). Analyzing all of the above concepts, it can be
stated that the effective use of hedging, the provision of good governance, and the adherence to
internationally recognized standards would help the MNEs to address the issues of exchange rate risks
effectively and enhance their performance in the context of globalization (Garay & Gonzalo, 2013, p. 70).
3. TRANSFER PRICING AND TAX IMPLICATIONS
3.1 Understanding Transfer Pricing in MNEs
Due to the increased complexity of current business environments and needs for clear and
effective business operations, it is immensely important to comprehend the key principles of
transfer pricing in MNEs and its consequences to maintain accounting international standards
and improve tax optimization. Transfer pricing is the process of determining the price at which
products and/or services, and other value added activities such as use of intangible assets are
sold between related businesses within the MNE group. In light of this, according to the
International Accounting Standards Board (IASB) (2018 ), transfer pricing needs to follow the
conceptual framework for financial reporting to enhance accountability and credibility of
financial statements. The Financial Accounting Standards Board (FASB) (2014 p. 6) underlines
that there is need to identify the revenue from contracts with customers that is often influenced
by transfer pricing. Guceri and Majeed (2018) review the literature on IFRS adoption and its
effect on financial reporting quality, MNEs’ transfer pricing policies and the required degree of
conformity with IFRS to achieve greater comparability and reliability of financial information.
Moreover, the authors claim that the issue of transfer pricing consultation is vital in the area of
accounting trends and technique hence they should ensure they get an update on transfer
pricing rules or methodologies. The one by Hail and Leuz (2009) is very devoted to
understanding the cost of capital implications of cross list and specifically notes that accurate
transfer pricing is a must to cover financial risks that may occur in the meantime and do not
undermine the trust of investors. Kim and Shi (2017) explore the influence of CEO duality and
firm performance relative to transfer pricing by linking its effect on the organizational
governance and financial performance. Lang and Lundholm (1993) and Linsmeier and Thornton
(2002) examined the factors related to analyst ratings and accounting conservatism, respectively
showing that TP can affect the perception of MNE’s operational performance by stakeholders as
well as the company’s ability to manage risks. In general, it can be assessed that the
considerations of transfer pricing in MNE present significant concerns with reference to
alignment with set regulations and laws, selection of the accountable accounting standards, and
evaluation of the impact generated on the overall financial reporting quality and perception of
stakeholders.
3.2 Transfer Pricing Methods and Challenges
It is as follows that transfer pricing methods are critical in determining how income and expenses
of international companies should be shared among the regional subsidiaries. Important
methods include the Comparable Uncontrolled Price (CUP) method, Resale Price Method, Cost
Plus method, Profit Split method, as well as the Transactional Net Margin Method (TNMM). CUP
identifies the price in that controlled transactions is more or less than what it could be in an
uncontrolled transaction. The Resale Price Method involves the offering of a product to an
unrelated party to determine the selling price and deducting a standard gross margin. In Cost
Plus method, a certain profit is added on to the total cost incurred. The Profit Split Method seeks
to determine the combined profits of the intercompany transactions and then split down
according to the value of the contribution of each participant. Finally, the TNMM evaluates the
net profit margin to an appropriate base which could be sales or assets against those achieved
by similar businesses (Doupnik & Perera, 2015). It essential to assess comparability of such
standard and often assessing the uniqueness of items or services being priced, proves a
herculean task (Callaghan & Willett, 2014). This is further compounded by the fact that laws
regarding the use of electricity from renewable sources differ from one region to another, thus
creating loopholes that may be exploited. Actual and reasonable value reporting are vital
concerns to provide legibility and credibility in the financial statements; however, applying the
fair value accounting to the transfer pricing has become a challenge and debatable issue
(Matsumura & Shin, 2005). From the findings above, it is now clear that the efficiency of transfer
pricing practices is determined by the corporate governance practices. Despite these drawbacks,
proper governance can make transfer pricing methods clearer and more non-contrived and
conform to international standards and laws (Mohd Ghazali, Weetman, & Anderson, 2015). But,
mandatory to admit, the recent global financial crisis, 2007-2008, have demonstrated that if the
governance is weak, the transfer pricing may turn into an ineffective, or worse, manipulative
practice that can jeopardise the financial stability (Erkens, Hung, & Matos, 2012). Thus, the
standards, such as IFRS 9, IFRS 15, and IFRS 16 that are issued with the intent to strengthen
financial reporting comparability and relevance between MNEs and to ensure that financial
reports present reliable and comparable information in assessing the transfer pricing risk and its
potential impact on financial statements (PwC, 2016). Another aspect related to transfer pricing
decisions is accounting conservatism, which is the practice of being particularly cautious when
preparing financial statements – this could entail not engaging in income shifting with great
aggressiveness, although this could have negative effects for the organization’s productivity
(Linsmeier & Thornton, 2002). Effective financial reporting and transfer pricing have become
more challenging and complex due to the dynamic nature of financial reporting and international
environment; it is crucial to ensure sustainable governance to address these issues and likely
impacts proactively.
3.3 Tax Compliance and Reporting Issues Related to Transfer Pricing
Multinationals face diverse tax compliance and reporting challenges especially on transfer
pricing as the global economy continues to evolve where finding appropriate solutions to fit the
challenge may at times call for great pay attention and caution. As a regulatory board, the SEC
entails specific and specific recognition of risks associated with uncertainties on the capacity of
the entity to continue operating as a going concern, with practices of transfer pricing and their
effects on solvency and taxation (SEC, 2014). MNEs should carry out effective corporate
governance in tackling these challenges: As a measure of internal control and compliance, MNEs
should establish stringent mechanisms of handling danger of transfer pricing risks in a manner
that is both transparent and ethical (Solomon & Solomon, 2014). However, due to the increasing
sophistication of transfer pricing methods and different regulations in various jurisdictions, it is a
challenging task for MNEs to abide the rules stipulated under the laws of TP (Buchheit & Burak,
2017). The significance of the concept of value relevance points to the importance of, and the
need for, preparing and presenting accurate and transparent financial reports, especially in
connection to the transfer pricing practices that may influence income and expenditures among
related parties (Barth, Beaver, & Landsman, 2001). The second factor is the institutional
investors, who analyze the MNEs’ transfer pricing policy by examining the tax compliance
measures to determine the company’s condition in terms of governance and structural structure
(Perry & Siragusa, 2016). Thus, MNEs have to approach tax compliancy and reporting concerning
TP as a delicate matter that has to be solved with the necessary references to the legislative
regulation while taking into account shareholders’ demands regarding the company’s
transparency and credibility of financial reporting.
3.4 Transfer Pricing Documentation and Regulatory Requirements
Organization and execution of transfer pricing documentation and the set of legal requirements
place a considerable number of expectations on multinational enterprise (MNEs) to create the
necessary documentation regarding the intercompany transactions to meet tax standards and
the guidelines of international law. Requirements are designed to provide both administrative
and substantive control over the distribution of the income and expense with related entities
engaged in different tax jurisdictions. Many countries have adopted the IFRS as a benchmark for
reporting, and as a result, those established standards give prime influence and guides MNEs on
how to produce transfer pricing documentation (Chand & White, 2016). Similarly, regulation
agencies such as FASB dictates the acceptable international standards for revenue recognition so
as influence the documentation and reporting of MNEs’ transfer pricing arrangements especially
in terms of revenue from customers’ contracts (FASB, 2014). These standards were developed to
enhance comparability and the quality of financial statements of MNE to other firms (Choi &
Meek, 2011). Furthermore, the use of IFRS makes it all the more significant in impacting the
quality of the MNEs’ financial reports where there is need to have proper documentation to
support the system of transfer pricing to ensure best practices in reporting (Guceri & Majeed,
2018). Various compliance requirements and tax regulations have appeared and evolved over
the recent years when companies worldwide become even more globalized and perform
numerous cross-border transactions, it then grows critically significant to carry out the adequate
and on-time documentation of MNEs transfers pricing. Thus, it only indicates that MNEs should
develop sound documentation systems and implement and adhere to effective procedures in
the management of laws on transfer pricing to allow for high transparency in its operation to
increase the level of trust to the financial reporting systems (Gray & Manson, 2011).
4. REGULATORY COMPLIANCE AND DISCLOSURE REQUIREMENTS
4.1 Compliance Challenges Across Multiple Jurisdictions
It is undeniable that compliance issues differ from country to country; for this reason, it presents
numerous issues and risks in the area of transfer pricing for MNEs. The IASB offers conceptual
framework for financial reporting with focus on how MNEs should operate amid different
systems of regulation so that financial statements would remain compatible (IASB, 2018).
However, the CEO duality meaning having the same person as the Chief Executive Officer and
the Chairman of the board of directors can affect the adequacy of governance structures in co-
coordinating with other players in ensuring that compliance with laws is done appropriately
across jurisdictions and this has been a challenge noted by Kim & Shi (2017). Another factor that
may cause variation in analyst’s rating of the releases is the level of compliance of MNEs to
regulatory framework in the various countries in which they operate, with regard to the effect
on investors’ confidence in the market (Lang & Lundholm, 1993). Accounting conservatism might
have an impact on MNE’s compliance strategy since pursuit of more conservative measures of
revenue and expenses disclosure can reduce the likelihood of running afoul of regulatory
requirements (Linsmeier & Thornton, 2002). Nonetheless, fair value disclosures give rise to
several difficulties, with specifically regard to investments in debt securities, because the
valuation of the assets might differ between separate jurisdictions (Matsumura & Shin, 2005). In
the same regard, the relationship between the corporate governance features and sustainability
report indicates the need for enhanced good corporate governance mechanisms, particularly to
address compliance issues and reconcile measures to make reporting tout across various legal
systems (Mohd Ghazali et al. , 2015). Where MNEs operating among different jurisdictions to
find an appropriate legal environment, a specific state is characterized by a change in the
requirements for compliance, the use of effective mechanisms of governance, as well as the
presence of strict internal controls to minimize the possibilities of non-compliance with the legal
requirements and ensure public confidence in financial performance (PwC, 2016).
4.2 Disclosure Requirements for MNEs
Multilateral agreements have established disclosure standards as a wide-ranging set of
regulatory and governance rules and recommendations designed to address issues relating to
MNEs’ financial reporting accuracy. Agreed, greater emphasis on incorporation of sound
corporate governance systems acts as linchpin towards guiding MNEs to adhere to the disclosure
standards, thus enhancing shareholders’ confidence and transparency (Solomon & Solomon,
2014). The fact that what is presented in the value relevance literature from the field of financial
accounting standards highlights the practical need to offer up relevant and reliable information
through disclosures for investors and other users of existing financial statements as well (Barth
et al. , 2001). Also, institutional investor behavior plays the role in shape up the disclosure
practices because investors depend on the adequate and reliable disclosures to make good
investment decisions and to estimate the MNEs’ financial position (Black & Coffee Jr, 1994). Yet,
there are many issues that MNE face when addressing disclosure obligations, primarily
connected with the multinational operations of the companies and the differences in the legal
frameworks regulating disclosure around the world (Buchheit & Burak, 2017). Bringing the
requirements of the multiple regulatory frameworks into a consistent set of disclosure while
trying to meet the needs of diverse stakeholders remains a feat that poses significant challenges
to MNEs hence requires constant effort to improve on quality of disclosure especially in financial
reporting.
4.3 Transparency Initiatives and Their Impact on Financial Reporting
Anti-Tmc mechanisms bear a huge role in moulding transparency and corporate accountability
within MNEs, research showing how standard mechanisms for corporate governance improve
efficiency in Asia-Pacific markets for investment (Cai, Kim & Park, 2018). As evidenced by the
story of the growing IASC, the history of the development of financial reporting standards
demonstrate the trend of increasing openness and standardization in financial reporting
(Callaghan & Willett, 2014). The implementation of IFRS is one of the significant achievements
towards the greater cause of a globally accepting standard in handling company financial
accounts across different jurisdictions (Chircop & Kaida, 2014). Nevertheless, such
implementation has its drawbacks for MNEs especially when adapted in regions such as Mexico,
where firms will have a hard time transitioning to be IFRS complaint (Esqueda, 2017). In addition,
the consequences of the recent and severe 2007–2008 financial crisis brought to ample evidence
the value of sound organizational governance as an efficient means for averting financial risks
and maintaining investors’ trust, which in turn dictated the need for stronger transparency and
accountability initiatives within financial firms globally (Erkens et al. , 2012). Transparency
measures remain key drivers in the global MNE reporting environment and a host of regulatory
changes that define practices in the context of globalization of reporting standards in MNEs.
4.4 Internal Controls and Audit Considerations for Ensuring Compliance
Internal controls and audit are the essential factors that are known to have significant
contributions towards the compliance with the regulatory aspects and soundness of the financial
reporting standards of MNEs. MNE has been under significant examination by institutional
investors around the globe because of their applicability in the protection of investors’ interest
and in dealing with different corporate malpractices as well as the reliability of the info provided
by these companies (Ferreira & Matos, 2008). From the previous information, it can be
illustrated that voluntary disclosure practices together with internal controls improves the
quality of financial reports and reduces the cost of capital especially for the MNEs operating in
the emerging economies where the information transparency is crucial (Garay & Gonzalo, 2013).
The elements of consideration in the study of accounting trends and techniques, together with
the strategies influencing the use of internal controls on audit in risk management, help in the
improvement of those internal controls in line with the set rules and regulations and the
regulatory standards (Gray & Manson, 2014). Internal controls and transparency are pertinent to
MNEs, for which the strong corporate governance structures like independent audit committees
and careful scrutiny of variables related to earnings management would help to address these
issues (Han & Chan, 2015). On the same note, the adoption of the International Financial
Reporting Standards (IFRS) made mandatory, developed more effectively internal controls, as it
brought realignment for reporting and improved the cost of equity capital for MNEs since it
offers more consistency of reporting across the globe (Henry, Linder, & Yang, 2017). The
empirical studies in the value-relevance literature highlight the significance of integrating
conceptually based internal controls and the theoretical goals of the financial accounting
standard setting process, within which financial information is accurate, relevant, and timely to
the needs of decision makers (Holthausen & Watts, 2001). Internal control structures and audits
are arguably critical elements for the MNEs to consider amid its global operations as it seeks to
privilege regulatory compliance and avoid hazardous risks with investors and stakeholders.
5. CORPORATE GOVERNANCE AND ETHICAL CONSIDERATIONS
5.1 Corporate Governance Structures in MNEs
Corporate governance system enhances accountability, transparency and control in every MNE
business concerning the global community. CEO duality where the director also serves as both
the CEO and the chair of the board is a widespread structural feature in MNEs and affects the
performance of the organization through the behavioral agency theory perspective (Kim & Shi,
2017). Existence refers to the occurrence or existence of events at a given point of time while
occurrence relates to the frequency or relative occurrence of the events in corporate disclosures
as perceived by the analyst The actual rating given by the analyst to corporate disclosures
depends on many factors, determinants or factors, as for example corporate governance
practices thus indicating an importance of good or good corporate governance features in
investors’ perception or confidence levels (Lang & Lundholm, 1993). Accounting conservatism,
which involves a strict standpoint to issues of financial reporting, improves on the efficiency of
debt contracts within the MNEs due to the subtlety of civil servants to issue quality information
and an improvement on the existing agency costs problems (Linsmeier & Thornton, 2002).
Accuracy of fair value disclosures enables investors to get relevant information when assessing
investments in tagged items, indicating the importance of the policies on transparency in
financial reporting systems (Matsumura & Shin, 2005). The relationship between corporate
governance and sustainability disclosure has centered on the idea of the effective governance
mechanisms on sustainable business practices, hope of increasing effective stakeholder trust and
engagement (Mohd Ghazali et al. , 2015). While MNEs are facing the challenges of the flows in
IFRS and the complexities brought by that change, the governance has to readapt to the changes
in the flow and regulation to meet the standards, legal obligations, and bring efficiency and
transparency into the practice (PwC, 2016). Therefore, corporate governance structures in
MNEs are complexity and they act as the pillar that influences the performance of the firm, the
reporting system, and stakeholders.
5.2 Ethical Issues in Financial Reporting for MNEs
As for the ethical problems of the financial reporting of MNEs, it is necessary to mention that
these problems are manifold and cannot be summarized by one or another challenge. As the
case with any other set of standards like the one set by FASB, international accounting standards
offer the right guidance for accurate and clear financial reports, but creating or interpreting the
standards may well develop ethical questions (FASB, 2014). As the International Financial
Reporting Standards (IFRS) adoption by MNEs as highlighted in the Global IFRS Banking Survey
2017 by Ernst & Young annexes show, complexities are Avanced in ensuring compliance and
ethical conduct (Ernst & Young, 2017). The accounting practices and standards change with time,
and thus one wonders as to what extent new methods and approaches to accounting,
specifically concerning the revenue recognition and the fair value, are ethical, especially given
that the Financial Reporting Council’s (FRC) 2012 cluttered discussion of integrity mainLYs on
the question of truth again (Gray & Manson, 2011). However, the experience in IFRS adoption on
financial reporting quality can depend on the jurisdiction See for example, the cross-sectional
investigation of the effect of IFRS Financial Reporting Quality in Bahrain (Guceri & Majeed, 2018).
Furthermore, the list of costs and benefits related to cross listings in the US offers ample motives
for ethical values to be implemented for considerations in financial reporting as MNEs court
investors while creating trust and credibility in their reporting techniques (Hail &Leuz, 2009). The
evidence for the theory on the debt covenant hypothesis, moreover, reveal that by influencing
choices of financial reporting, the MNEs have the ethical obligation to disclose relevant and
sustainable information to its stakeholders (Chen et al. , 2002). To address these ethical issues,
MNEs must act ethically and err on the side of conservatism in their financial reporting to act in
the best interests of the shareholders and other stakeholders to restore and sustain general
public confidence in the international financial system (Choi & Meek, 2011).
5.3 Best Practices for Ensuring Integrity and Transparency in Financial Reporting
Solutions that will help to improve the integrity and transparency of financial reporting in multi-
nationals include a range of significant measures which concerns different sphere of the
corporate governance, disclosure regulation and use of the international standards. The latter
relates to the fair value disclosures which are important as they offer investors valuable
information for the assessment of investments especially the debt securities; thereby increasing
the level of transparency to the shareholders and subsequently aid in proper decision making.
With respect to the link between corporate governance and sustainability disclosure, it gives
emphasis on improved governance mechanisms that lead to the prevention of corporate
irresponsible actions and improve the stakeholders’ confidence and participation in the firms
(Mohd Ghazali et al. , 2015). Equally, information highlights regarding the shifting and emerging
accounting standards like IFRS 9, IFRS 15 and IFRS 16 as pointed out in business research
magazines like Pricewaterhouse Coopers helps MNEs to keep update on ever-changing
regulations and apply set regulations in their reporting systems (PwC, 2016). As mentioned,
previous studies including Ramanna and Watts (2012) show that there is a consistency in
different companies using fair-value measurements that have not been inherently verifiable
leading to concerns that using such measurements for reporting purposes could lead to
distortion in financial reports. Similarly, legal demands, as defined by the Securities and
Exchange Commission (SEC) regarding risks and uncertainties that any company may have
regarding its future as a going concern also help in encouraging accountability and transparency
when issuing their financial reports (SEC, 2014). According to Solomon & Solomon (2014),
corporate governance frameworks play a significant role in implementing accountability and
ethical practices in international business, solidifying the significance of strong corporate
governance systems in enhancing integrity, and accurately authored honor in financial reporting.
Finally, the significance of the value relevance literature is that it feeds into the never-ending
discourse on the justification of financial accounting standard setting, Accordingly, the
elaboration of sound standards to mirror economic characteristics and supply useful data to the
users is the goal (Barth, Beaver & Landsman 2001). When incorporated in the preparation of
financial statements and other trends in this process, it will help MNEs maintain integrity, reduce
risk and thus increase trust and transparency among the users of the MNEs’ financial
statements.
5.4 Role of Stakeholders and Corporate Social Responsibility in MNE Financial Reporting
Stakeholders and corporate social responsibility (CSR) play a central role in enhancing the
disclosure of information in multinational enterprises’ (MNEs) financial statements. Black and
Coffee Jr. (1994) and Ferreira and Matos (2008) pointed out that institutional investors exert
considerable pressure on MNEs to provide more disclosure and follow the principles of CSR to
safeguard their investment and to enhance sustainable value creation. Buchheit & Burak, 2017
argue that MNEs experience significant difficulties related to the regulation of financial
reporting, which seems to stress the significance of communication with stakeholders and CSR.
Cai, Kim, and Park (2018) show that corporate governance is integral in determining the financial
reporting structures of MNEs with strong governance frameworks fostering accountability,
integrity, and stakeholder confidence. In addition, as revealed by Callaghan and Willett (2014)
and Esqueda (2017), the compliance with IFRS demonstrates MNEs’ adherence to international
standards and ensures greater comparability and consistent with global reporting practices.
Voluntary disclosure practices, as highlighted by Garay and Gonzalo (2013), enhance financial
reporting quality and lower the cost of capital of MNEs which strengthens the role of stakeholder
communication and transparency. Furthermore, the dynamic shifts in the accounting trends and
techniques, as noted by Gray and Manson (2014), also points to the need for MNEs to read the
current developments and fashion how they incorporate CSR considerations into their
frameworks of reporting. Through stakeholder engagement, CSR integration and compliance
with global reporting, MNEs can improve their credibility and reputation besides sustaining
themselves in the global market.
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