SPECIFIC ISSUES FACED BY MULTI-NATIONAL COMPANIES HAVING HQs IN UK AND USA IN RELATION TO FINANCIAL REPORTING

 

ISSUES FACED BY THE MULTINATIONAL COMPANIES

Multinational company (MNC) is actually a multinational corporation that functions with a headquarters in the origin of that country, while having other facilities and assets that are based in location of other countries. Multinational Corporation that operates in different countries provides technology, marketing skill and finance capital for a more profitable market in return. Many host countries have impose regulation which gives them a portion of share in profit, market and also jobs which is generated by multinational corporation in that particular country.

GLOBALISATION:

Globalisation can be seen in much different way, one way of seeing it as increase in the share of economic activity that is taking place across national boundaries. Globalisation that takes place has given a great impact on a number of interrelated developments such as:

Growth in foreign direct investments and Multinational Corporation,

Enhance the development of communication and transport technology, privatization of public sectors services Internationalization of financial markets.

The impact of globalization can be both positive and negative, the positive side can be seen the potential of generating wealth and improving the living standards of a country. Countries that have the skill and resources are able to take advantage of the opportunities provided by global market. However, it seems to be flaws for countries that do not fall into this category.

 

ECONOMIC ENVIRONMENT

In the economic environment, Unilever generates wealth by adding value to raw materials, and manufacturing their product for the consumers. The parties that are involved in the economic environment is their employees, government, investors, and many more communities that benefits from the activities of the company.

This graph shows the parties that benefit from the activities that are ventured by Unilever in UK. Despite the economic instability that happens in decades, Unilever is still able to generate an operating profit of €5,020 and sales of € 39,823 million in 2009. This graph shows us that the employees gain the biggest share of the company which is €5.2billion, whereas the least share is earn by the local communities which is €89million. The provider of capital obtains the 2nd highest share which is €2.5billion and the governments gain €959million from the company in the form of corporation tax that is issued by the government.

Sociological Environment

Making a difference in society is one of Unilever’s biggest aim because they want to deliver the best and to give back to the society that has been supporting the success of Unilever. Unilever will be focusing on 4 elements which is giving more choice to consumers, focusing more on research and development on healthier products, to provide nutrition information to the understanding of consumers and also improving nutrition quality of their products.

In order to improve the nutritional quality of the product and maintaining the taste, It is estimated that reduction of salt intake by 1g can reduce the chances of strokes by 5% and heart attack by 3 % reducing salt by as little 1 g. The Nutrition Enhancement Programme has come up with a strategy known as salt reduction strategy; in this strategy it states that “in 2009 we set product benchmarks to achieve a dietary intake of 6 g of salt per day by the end of 2010, with the ambition to reduce further to5 g per day by the end of 2015’’.

This graph clearly shows that Unilever has taken the responsibility in giving consumer to make healthier choices. Unilever has come up with healthier products and also providing the health information on the products so that consumer will understand the content of nutrient in the product. For example, Knorr is one of Unilever’s famous food solution brands in UK, all crouton varieties are now containing less 70% less saturated fats and up to 40% less sodium.

Technology Environment

In the technology sector, Unilever has been spending in the area of e-business to improve brands communication and market through internet, and also making transaction simple along chain. Unilever Technology has work together with Unilever R& D group in order to meet consumers’ needs. In the year 2003, Unilever introduce the new “pallet live storage system” from Bitto Storage System Ltd. The purpose of this technology is to store frozen products.

Plans are being made to improve IT infrastructure in Unilever. For example, increment in the energy-efficiency of data centers and applying power management strategies. Tele presence video conferencing is also applied in order to reduce the impact of business traveling. Telepresence has been generated in 13 countries and plan to add another 39 countries in 2010. This technology has helped us to reduce our emission by 4,230 tones and save up to €12 million in travel cost for the year 2010.

FINANCIAL ISSUES FOR MULTINATIONALS

ACCOUNTING

Multinationals need a common accounting language, for all their overseas operations, to grasp the overall picture of their financial position globally before they can exercise control and manage their risks. Most countries accept the International Financial Accounting Standards Board (IFRS) as the universal language of accounting and US multinationals are making the transition to adopting it. Global consulting companies can align the two standards at lower costs. SAS 70Intro: Multinationals are complying with an expanded mandate for corporate governance which now includes the extended enterprise. They are expected to institute internal controls for all third parties who manage their business processes.

SAS 70 mandates that multinationals institute adequate internal controls for all their overseas partners, just as Section 404 does for domestic business, to detect any material weakness in the enterprise before it results in an unanticipated deterioration in financial performance. Compliance needs warrant that multinationals look for partners who are not only cheaper options for sourcing but also a good fit in terms of culture, technology solutions, management team and reputation. Nair and Co has the knowledge to find the partners who have the complimentary business processes to be best able to meet compliance needs.

GENERAL LEDGER

US Multinationals need a common language to view their exposure to foreign currency risk when they operate in numerous countries. They need a General Ledger that aggregates the transaction data of all their accounts in any country to gain a view of their overall exposure to currency risk.

US Multinationals cope with a variety of conventions in accounting of transactions in their operations overseas. Each overseas operation also has its own policy for hedging against currency risks. A global General Ledger provides an overall view of currency risk exposure and prepares the ground for finding the most optimum means to hedge against it. Multinationals can reduce the costs of hedging by taking advantage of natural hedges inherent in the reverse movements of their transactions. Nair and Co has the expertise to develop a General Ledger that translates individual country Ledgers into a global General Ledger.

ACCOUNTS PAYABLE

US Multinationals can centralize the management of payables to realize significant efficiencies and compliance benefits. Fewer cross-border transactions, with centralized payables management, will reduce transaction costs incurred on banking charges and currency conversion. Centralized management of payments can also lower cost of holding cash reserves.

Multinationals should centralize their payables management to cut costs in cross-border transactions. The frequency of cross-border transactions can be reduced by netting payments between subsidiaries. Multinationals can also reduce the costs of financial services as fewer banks manage payables from a single point. A global view of payables data helps to determine the optimal policies for payment terms for each supplier. Compliance can be improved by using the cash reserves of the entire enterprise, instead of anyone unit of the company, to meet possible shortfalls in any one unit. Nair and Co assists in building systems of centralized management of payables and identifying the attendant efficiencies. 

ACCOUNTS RECEIVABLES

Multinationals should manage their Accounts Receivables (AR) from a central point with IFRS compliant consolidated data. Any material weakness due to delays in payment and their impact for the entire enterprise is most likely to be detected from a central point.

Multinationals have their local subsidiaries manage accounts receivables; the payment terms reflect customer relationship practices in each region. Technological changes, such as electronic invoicing and integrated software systems, as well s regulatory improvements such as a common clearinghouse for all countries in Europe enable greater centralization in the management of receivables. Centralization of data for all accounts receivables enables companies to prepare reports and compare payment terms to their customers. Nair and company offer the knowledge to standardize information for centralized management of accounts receivables.

 EXPENSE PROCESSING

Multinationals can centralize and automate expense processing to reduce costs of manual processing and fraud. A global view of the data also helps to optimize expense management. Local variations in regulations and practices for access to data as well as IT systems complicate the task of automation of expense management.

Multinational card programs, when they are integrated with expense processing software, can help to eliminate manual expense processing, eliminate fraud and integrate the data flowing from merchants. Multinationals can use reporting based on the consolidated data to find opportunities for striking deals with airlines and hotel companies. They can also reduce their costs of currency conversion and banking charges. The practical challenges of implementing such systems are access to data from merchants who are bound by local laws and organizational practices. Nair and Co assists its clients finding ways to deal with the regulatory environment for transaction data access in each country and to integrate it with their ERP systems.

FUNDS TRANSFERS

Multinationals want to pool their account balances worldwide to minimize the costs of short-term borrowing and to maximize the returns from short-term investments. Automated transfers of funds help to aggregate them at a central point and to manage them optimally. Body: Local subsidiaries of multinationals typically maintain their account balances with local banks. When cash is short, they incur costs of an overdraft with their bank. Similarly, they don’t earn enough from their cash surpluses when they lie idle or are kept idle for precautionary reasons. When multinationals pool their worldwide account balances, the costs of each subsidiary are minimized and returns maximized as lower amounts are kept idle for precautionary reasons. Liberalization of capital movements enables rapid transfers of cash from one country to another. Nair and Co can assist in building systems for centralization of account balances with automated funds transfers.

MONTH-END FINANCIALS

Multinationals need more frequent reporting of their accounts to cope with their short-term risks. Volatility in short-term exchange rates, interest rates, asset prices has an impact on their operating cash flow and the ability to manage business operations. The accurate reporting of short-term financials with short lead time poses a significant challenge. Body: Multinationals need month-end financials to gain visibility to their short-term risks. They can manage their short-term risks with the use of hedging instruments. These instruments are bought for short periods of time. Treasury managers need to assess the cost of buying hedging instruments versus the benefit in terms of lower risk every month. Nair and Co brings the knowledge of the best practices for rapidly preparing financial accounts every month.

INTERNATIONAL CONSOLIDATING

Multinationals need a global view of their financial position. Internal transactions within the enterprise and financial reporting in a variety of currencies cloud the global view of the state of finances of multinationals.

Multinationals are expected to report their global financial position in order to comply with IFRS. A global financial statement also lends itself to analysis for the purpose of optimization. The high incidence of transactions within the multinational enterprise complicates the task of preparing a single financial statement for the entire multinational corporation. IFRS expects multinationals to prepare financial statements for each of the business segments of the company. Since multinational companies execute bulk transactions for a number of their business segments, accountants face a challenging task of assigning revenues and costs to each business segment. Regulatory bodies also expect that a well defined audit trail exists to justify the accounting policies. Nair and Co brings knowledge of the best practices to adapt to a new era of accounting that is global and amenable to analysis.

INTERNAL AUDIT

US Multinationals view Internal Audit as a means to manage risk worldwide. Non-financial risks originating overseas are more likely to impact them than financial and domestic risks. Global consulting companies can assist in building the information infrastructure to manage enterprise risks. Body: Multinationals increasingly want their Internal Auditors to ensure that internal control systems detect an adverse event and contain its effects before extensive damage is inflicted. Internal Auditors periodically inspect internal control systems to ensure that adequate defenses have been built. Increasingly, global supply chains are affected by events in distant places which cascade throughout the enterprise. A global view of the enterprise helps to detect vulnerabilities and the possible ripple effects of an event. Internal Auditors can use analytics software to find patterns in data that can help to anticipate adverse events and their impact. They also need knowledge of local business, regulations and laws to understand the data in a perspective. Nair and Co can assist in preparing a framework for data mining required to understand, anticipate and mitigate risks.

STATUTORY ACCOUNTS

Multinationals contend with a diversity of national laws for statutory accounts. These laws reflect differences in tax laws, contracts, accounting of retirement benefits and employment law. Global consulting companies help in reconciling national standards for statutory accounts and financial reporting at the global level.

Multinationals will deal with the costly business of complying with international accounting standards for global reporting and national laws that influence statutory accounts. Enforcement of tax laws and contracts remain national. The politics of each country affects the choices each country makes for retirement security as well as employment security. Accounting treatment of individual items will vary depending on the national laws of each country. Nair and Company has the unique skill to deal with the conflicting and shifting demands of national and international laws governing accounting. 

 

REFERENCES

Aharoni, Y. (1993). “From Adam Smith to Schumpeterian Global Firms.” Research in Global Strategic Management. JAI Press Inc. Ansoff, H. I. (1965). Corporate Strategy. New York: McGraw-Hill. Aosa, E. (1992). An empirical investigation of aspects of strategy formulation and implementation within large, private manufacturing companies in Kenya Unpublished PhD Thesis. Barnett, W. P., & Hansen, M. T. (1996). “The Red Queen in Organizational evolution.” Strategic Management Journal. Barman & Chaves, M. (2005). “St rateg y and restructure at the United Church of Christ.” pp. 466-492. Chaffee, E. (1985). “Three models of strategy.”

Miller, D. (1989). Configuration of Strategy and Structure: Towards a Synthesis.

New York: Free press. Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance. New York: Free Press

Porter, M. E. (1979). How competitive forces shape strategy. Havard business Review,

March/April 1979. Stern, C. W., & Stalk Jr, G. (1998). Perspectives on Strategy from The Boston Consulting Group. Boston Massachusetts: John Wiley & Sons. Su shil. (1990). “Corporate Financial Reporting in India Corporate Financial Reporting.” Penguin

books. Thompson, A. A Jr, & Strickland, A. J. III. (2003). “Strategic management:

http://www.the manager.org/models/diamond.htm

(2007, 08). Discuss the Management Problems Facing Multinational Companies and Companies with an International Dimension in Various Parts of the World.StudyMode.com. Retrieved 08, 2007, from http://www.studymode.com/essays/Discuss-The-Management-Problems-Facing-Multinational-120224.html

 http://www.businessdictionary.com/definition/multinational-corporation-MNC.html#ixzz393FDRiMT

http://www.unilever.com/sustainability/strategy/

Read more: http://www.ukessays.com/essays/business/issues-faced-by-the-multinational-companies-business-essay.php#ixzz393bNdhcs