International Accounting
and Multinational Enterprises
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Accounting Development in the
Global Economy
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Chapter Two
Learning objectives:
• Identify the key environmental influences on business
and accounting
• Discuss the major factors influencing the development of
accounting and information disclosure in the global
economy
• Examine some of the important accounting issues that
distinguish MNEs from purely domestic corporations
• Discuss culture as an important determinant of
accounting systems worldwide.
• Identify the major international pressures for accounting
change
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CHAPTER OUTLINE
1. Environmental Influences on Business and Management
2. Environmental Influences on Accounting
3. Major Developmental Factors
(1) Corporations as Legal Entities
(2) Professional Management
(3) Securities Markets
(4) A Wider Audience
(5) An Evolutionary Process
4. Accountability and Multinational Enterprises
5. Culture and the Global Environment
6. International Pressures for Accounting Change
7. Summary
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Introduction
Accounting is a product of its environment, shaped by
characteristics unique to its national environment.
This chapter will investigate factors that influence the
development of national accounting systems and the
accounting and information disclosure practices of
corporations, especially MNEs.
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Environmental Influences on
Business and Management
Environmental Influences:
• Educational, socio-cultural, legal, political, and
economical.
Essential Points:
• First, environmental analysis can be a valuable
tool in explaining differences in business
operations between countries, and
• Second, “cultural relativism” means that the
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rationality of any behavior should be judged
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within its own cultural context.
Influences
on Accounting
International Factors
Enterprise Ownership
Culture
Enterprise Activities
Accounting
Regulation
Finance & Capital Markets
Legal System
Inflation
Economic Growth
Social Climate
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Taxation
Accounting Systems
Accounting Profession
Accounting Education
& Research
Political System
3
Major Developmental Factors
• Corporations as Legal Entities
• Professional Management
• Securities Markets
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Corporations as Legal Entities
•
•
•
•
Limited Liability
Separation of Ownership and Control
Creditors limited to corporate assets
“Transparency” (Disclosure) necessary
for investor
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Professional Management
Corporate officers:
• Hired for skills, not
ownership of capital,
• In some countries,
corporate ownership
held by family holdings.
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6
Securities Markets
Allow:
• Efficient raising of finance;
• Exchangeability of shares; and
• Privatization of state-owned enterprises in
“emerging” markets.
Require:
• Information availability; and
• Increased quality and quantity of financial
disclosures to the market.
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Financial Information & Control
• Available to the public, not just current investors and creditors;
• Quality and quality predominately influenced by regulatory
bodies;
• More detailed and up-to-date information available to “other”
finance providers, such as institutional investors and governments;
• Private shareholders in public corporations tend to exercise little
direct influence; and
• Heavy governmental influence also reduces the control of private
shareholders.
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A Wider Audience
• Employees, trade unions, consumers,
government agencies and general public;
• Allows those significantly affected by
corporate actions the opportunity to
influence those decisions; and
• Corporate “accountability” has become
an issue of major importance in recent
years.
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Corporate Accountability
Supply
• Differences are measurable
and controllable;
• “Rights” of non-finance
providers could endanger
the corporation;
• Disclosures may increase
power of non-finance
providers and criticism of
corporation.
Demand
• Information disclosed to
finance providers could
satisfy non-finance
providers;
• In Europe, some
countries require union
access to information.
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An Evolutionary Process
• Public disclosures are a spin-off from the
evolution of disclosures to financial providers;
• Disclosures also due to the growth of active and
well-developed securities markets;
• Lesser developed markets would require measures
significantly different than in developed countries.
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Accountability and Multinational Enterprise
• Domestic corporation’s primary operations are in one country,
cross-frontier relationships with non-related parties.
• MNE’s operate in numerous countries with different laws and
currencies, cross-frontier relationships with related units:
• Foreign Direct Investment requires MNE’s to make fuller
disclosures;
• MNE’s have greater freedom to act in their own best interests;
• MNE’s best interests often at odds with various nationalistic groups
in host country;
• Special impact of MNE’s has given rise for more accountability and
information disclosure.
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Cultures and the
Global Environment
• Business and managerial behavior strongly influenced by
culture;
• Societal values depend on a variety of internal ecological
and environmental factors (I.e. family, class structure,
politics, law, finance, education, etc);
• External factors, such as international trade and investment,
war, colonization, and scientific discovery, force changes
at the national level; and
• As a result, accounting systems and societal values
influence and reinforce societal values.
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International Pressures for
Accounting Change (Gray’s Model)
Institutional Consequences
External Influences
•Legal system
•Corporate ownership
•Capital markets
•Professional Associations
•Education
•Forces of Nature
•Trade
•Investment
•Conquest
Ecological Influences
•Geographic
•Economic
•Demographic
•Genetic/ Hygiene
•Historical
•Technological
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•Urbanization
Societal Values
•Religion
Accounting Values
Accounting Systems
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International Pressures for
Accounting Change
Differences:
• Socialism and Capitalism,
• Developed and Developing Countries,
• Political systems,
• Deregulation of markets, and
• Increased privatization.
Economic Groupings:
• European Union,
• United Nations and OECD, and
• NAFTA expansion.
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Relationships Between MNE’s
and Host Countries
Though less antagonistic and more practical than in prior years, there
are remaining areas of concern:
• Impact on culture and social development of host countries,
• Influence on employment and consumption patterns,
• Environmental impact,
• Adherence to UN and OECD guidelines,
• Harmonization of tax regimes, exchange controls, restrictions on
foreign investments, and
• Development and recognition of IASC and IFAC accounting and
disclosure standards.
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