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2012-05-09 19:04:28

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  1. Measure inflation
    by determining the current price for a "basket" of goods and services and then compare the current price with the price for the same basket of goods and services at an earlier time

    general inflation rate also reflects the decrease in the purchasing power of the currency
  2. During a period of inflation
    • assets reported on the balance sheet at historical cost are understated in terms of their current value
    • this results in understated expenses - depreciation and cogs
    • which results in overstated net income and overstated retained earnings
  3. Ignoring changes in prices of assets could lead to a number of problems, such as
    • negative impact on companies ability to borrow
    • can invite a hostile take over - current market price of stock does not reflect the current value of assets
    • overstated income - more taxes being paid - lead to stockholders demanding higher level of dividend
    • may experience liquidity problems
    • can distort comparisons across companies
  4. Purchasing power gains and losses
    • holding cash and receivables during inflation results in a purchasing power loss
    • holding payabales during inflation results in a purchasing power gain
  5. General Purchasing Power (GPP)
    • account for changes in the general price level - makes adjustments to the historical costs of assets to update for changes in the purchasing power of currency
    • nonmonetary assets and liabilities, stockholders equity and all income statement items are restated from the GPI at the transaction date to the GPI at the end of the current period
    • purchasing power gains and losses are included in net income
  6. Current Cost Accounting (CC)
    • account for specific price changes - updating the values of assets from historical cost to the current cost to replace those assets
    • historical costs of nonmonetary assets are replaced with current replacement costs and expenses are based on those current costs
    • holding gains and losses are included in equity
  7. Characteristics indicative of hyperinflation
    • general population keeps its wealth in nonmonetary assets or in a stable foreign currency; receipts of local currency are immediately invested to maintain purchasing power
    • general population thinks about prices in terms of a stable foreign currency, and prices may actually be quoted in that currency
    • prices for credit sales are purchases include an amount to compensate for the expected loss in purchasing power during the credit period
    • interest wages and prices are linked to a price index
    • the cummulative inflation rate over a three-year period is 100 percent or higher
  8. Latin America
    • long history of significant inflation
    • Brazil, Chile and mexico have developed sophisticated inflation accounting standards - brazil has abandoned inflation accounting
  9. Mexico
    Bulletin - 10
    • requires restatement of nonmonetary assets and liabilities using the central banks general price level index
    • exception: use of replacement cost for inventory and related cost of goods sold
    • exception: imported machinery and equipment - allows a combination of country of origin price indes and the exchange rate between mexico and the country of origin
    • was abandoned in late 2007 - copanies are no longer required to use inflation accounting
  10. Netherlands
    replacement cost accounting
    • Prior to IFRS in 2005 - dutch companies could use replacement cost accounting
    • in 2003 and 2004 - only heineken used this approach
    • heineken presented inventories and fixed assets at replacement costs, cost of sales and depreciation were also based on replacement costs, the entry accompanying the asset revaluation was reported in stockholders' equity
  11. IAS 29
    Financial reporting in Hyperinflationary economies
    • required for some companies located in environments experiencing very high levels of inflation
    • nonmonetary assets and liabilities and stockholders equity are restated using a general price index
    • income statement items are restated using a general price index from the time of transaction
    • purchasing power gains and losses are included in net income
  12. group accounting
    accounting for the parent and one or more subsidiaries
  13. Determination of control
    group accounting
    • legal control through majority ownership or legal contract is often used to determine control
    • effective control can be acheived without majority ownership - IAS 27 uses this definition
  14. Full consolidation
    group accounting
    • when sub is not 100% owned, the non-owned portion is in a seperate item called minority interest
    • IFRS allows use of the purchase method only, pooling of interests is no onger allowed under IFRS or in US, canada, Brazil, or Mexico
  15. Full consolidation
    Purchase method
    • When one company purchases a majority of the voting shares of another company, the purchased assets and liabilities are stated at fair value
    • the excess of the purchase price over the fair value of the net assets is goodwill
    • measures the minority interest as the minority percentage multiplies by the fairl value of the purchased net assets
  16. Full consolidation
    • US and IFRS require goodwill to be capitalized as an asset
    • some countries require amortization over a period of up to 40 years
    • US and canada and IFRS require an additional impairement est
    • japan allows the option of immediate expensing of goodwill
  17. Segment Reporting
    • sements are defined by both line of business and geographic area
    • point of resisence is concerns about competitive disadvantage
    • an operating segement is an enterprise compnent if
    • it earns revenues and incurs expenses
    • its operating results are regularly reveiwed for performance and resource allocation
    • discrete financial information is available for it
  18. Revenue test
    segemnt revenue represents 10% or more of combined internal and external revenue
  19. Profit or Loss test
    segemnt profit or loss is 10% or more of the combined reported profit of profitable segments or the combined loss of all segments reporting a loss
  20. asset test
    segment assets are 10% or more of the combined assets of all operating segments
  21. Three differences
    • GAAP does not require disclosure of segment liabilities
    • IFRS explicity incudes intangibles in the definition of long lived assets for geographic area disclosures
    • when a company has a matrix form of organization IFRS allows operating segments to be based on either products or services or geographic areas GAAP only allows the products or services basis
  22. Financial Statement Analysis
    • Accounting analysis - reflection f economic reality
    • Financial analysis - cash flow, profitability and risk anaylsis
    • Prospective analysis - using accounting analysis and financial analysis, along with business environment analysis and company strategy, to forecast future cash flow and income
  23. Reasons to analyze foreign financial statements
    • foreign portfolio investment - investors want to diversify away some risk by investing internationally
    • International mergers and acquisitions - frequency and size of international corporate mergers has increased in recent years, purchaser needs to analyze the target companies statements
    • extending credit for foreign customers
    • evaluating foreign vendors
    • comparisons to international competitors
  24. Data Accessibility
    • Financial information is difficult to obtain in many countries compared to the US
    • Databases of foreign financial statements do exist, however these can contain errors and are often in a variety of formats. They also do not contain complete disclosure notes
    • can obtain a copy of the companies annual report through
  25. Language
    • most foreign companies do not produce financial statements in english
    • could hire a translator or develop a foreign language capability
    • english is the language of business, many foreign companies produce "convienence translations" of ther financial statements in english
  26. Currency
    • Many internationsal companies produce their financial statements in a currency other than the US dollar
    • can be converted to US dollar by translating all balances at the exchange rate at the end of the current year, to avoid distortions the current exchange rate should be used for all pervious years
    • analysis using ratios is not distorted by different currencies
  27. Terminology
    • countries that use the same language often have differences in terminology
    • sometimes the terminology is unfamiliar in convienece translations
    • knowledge of the business and accounting environment as well as reading of the notes to the financial statements can alleviate some of these problems
    • differences in UK and US were removed in 2005 when the UK adopted IFRS
  28. Format
    • Some format difference are not problematic because the informations is given just in a different place
    • other format difference are a problem because the information is not provided
    • common in europe is not to provide cogs
    • this prevents an analyst from determining gross margin percentage in inventory turnover
  29. Extent of disclosure
    • full disclosure in US is fundemental. Internationally disclosure tends to be limited
    • most serious disclosure limitations include information on segments, asset valuation, foreign operations, interim statements, and reserves
    • lack of disclosure contributes to the significance of format problems
    • globalization if capital markets tends to enhance disclosure as companies attempt to attract investors
  30. Timeliness
    • affects the relevance of information
    • varies significantly internationally since the filing deadlines differ from country to country
    • frequency of information varies from quarterly to annual reporting
    • very little investors can do to overcome these problems
  31. Differences in accounting principles
    • often results in significantly differenct income and other financial statement amounts
    • the biggest problems are consolidations, fixed asset valuation and depreciation and goodwill
    • difference cause some investors to limit the scope of their investments
    • some investors attempt to reframe foreign financial statements to a more familiar GAAP
    • Another approach is to use a stripped down measure of earnings that excludes items most affected by diversity
    • some firms alleviate some financial statement problems in their convienence translations
    • as the use of IFRS becomes more widespread many of these problems with abate
  32. Business environment differences
    • japanese and korean companies borrow much more on a short term basis than US companies, lending to lower current ratios
    • debt ratios also tend to be higher in JApan and Korea because of the sources of financing
    • lower profit margins in japan can be partially explained by japanese companies focusing on market share as opposed to profits
    • investors must have a good understanding of the business environment and how to identofy the best companies in that environment
  33. Form 20-F
    • foreign companies that file non-US GAAP statements with the SEC are required to complete a form 20-f, with the exception of those that use IFRS
    • reconciles net income and stockolders equity to US GAAP
    • There is no requirement to reconcile assets and liabilities
    • some ratios such as return on equity can be computed as if under US GAAP, most other ratios cannot
    • the analyst can overcome this by performing the restatement of financial statement items
  34. restatement overview
    • transform financial statements into US formats by transforming terminology differences, presentation differences, and item definitions and classifications
    • restating the foreign GAAP amounts to US GAAP amounts this is easier when company files form 20-F, the notes to the financial statements are very useful in completeing this step
  35. Corporate income taxes
    • are direct taxes on business income
    • imposed by most governments
    • the tax rates vary from zero percent in tax havens to over 40 percent
  36. Witholding taxes
    • are taxes on dividends and some other amounts paid to foreign citizens
    • typically applied to three types of payments dividends, interest and royalties
    • these vary accross countries and by type of payment and recipient
    • higher tate on dividends would encourage more debt fininacing and less equity financing
  37. Corporate income tax rates
    • significant variation in tax rates provides a distinct tax planning opportunity
    • some countries tax at different rates based on the type of activity or nationality of the company owners
    • also a variation in how taxable income is computed
    • expenses that are deductible in one country and are not deductible in others
    • Since the 1980's there has been a trend towards reducing tax rates
    • organization for economic cooperation and development (OECD) has established guidelines to mitigate the negative impact of tax havens
  38. Thin capitalization
    heavy debt financing
  39. Value Added tax
    • substitue for sales tax
    • these taxes are added into the price of the product or service at each stage
    • US does not have this, but it is common in EU and also used in australia, canada, china, hungary, mexico, nigeria, turkey, and south africa
  40. double taxation
    when two different countries tax the same income
  41. Taxation approaches
    • worldwide approach - all income of a resident or company of a country is taxed by that country regardless of where it is earned
    • Terrirotial approach - only income earned in that country is taxed
  42. basis for taxation
    • source - almost all countrues tax income earned within their borders
    • citizens - taxes the income of the country's citizens regarless of source or where they reside
    • residents - taxes income of the companies residents regardless of source or citizenship
  43. the US approach
    • the US taxes on the basis of source, citizenship and residence
    • residence is defined by being a permanent resident or by residing in the US for at leasr 183 days in a year
    • in combination with the worldwide approach, this means that the US permanent resident that does not live in the US is taxed on their foreign cource income
  44. causes of double taxation
    • usually arises when a company is taxed on income earned in a foreign country and taxed in that same income by its country of residence
    • to alleviate double taxation, the country of residence generally defers to the country where the income was earned
    • source takes precedence over residence
  45. solutions to double taxation
    • one solution - for a country to adopt the territorial approach, exempting foreign source income from taxation
    • for a country to allow domestice companies to deduct taxes paid to foreign governnents
    • for a country to provide a tax credit to domestic companies for taxes paid to foreign governments
    • moust countries including the US use the deduction and credit approaches
  46. FTC
    US approach
    two options
    • one is to deduct all foreign taxes paid
    • the other is to receive a tax credit for all foreign income taxes paid
    • given that the majority of such taxes are income taxes, companies tend to take the tax credit
    • US will not allow the credit to exceed the FTC limitation - cannot exceed either actualy taxes paid to a foreign government or the taxes that would have been paid if the income was earned in the US
  47. Indirect FTC
    • the US allows an indirect FTC on foreign taxes paid by a foreign subsidiary of a US parent
    • this FTC is not allowed until the income of thesubsidiary is taxed in the US
    • the amount of income of a foreign subsidiary that is taxable in the US, is the before tax grossed up dividend
    • to qualify - US parent must own at least 10% of voting stock of the foreign subsidiary
  48. Controlled foreign corporation (CFC)
    • a foreign corp where US shareholders own more than 50% of the combined voting poer or fair value of the stock
    • a US shareholder is a US taxpayer that owns 10% of stock
  49. Tax treaties
    • bilateral agreements regarding how individuals from one country are taxed on income earned in the other country
    • purpose is to alleviate double taxation problems
    • also involve informed sharing between governments that help in domestic enforcement
  50. Model Treaties
    • OECD model treaty is the basis for most bilateral treaties of developed countries
    • host countries only tax business profits of foreign companies associated with permanent established
  51. US tax treaties
    • has zero percent withholding tax for interest and royalties and 15% for dividend payments
    • US has treaties with over 50 countries
    • treaty shopping is a tax reduction tatic related to treaties, that some countries are trying to stop
  52. Translation of foreign branch income
    • Net income is translated into US dollars at the average exchange rate for the year. net income is after foreign taxes paid
    • taxes paid to the foreign government, translated at the exchange rate on payment date then added
    • when earningss are repatriated to the US asnd converted to US dollars the difference between this amount and the translated net income is a taxable foreign exchange gain or loss
  53. Translation of foreign subsidiary income
    • dividends paid to the US parent are translated at the spot rate on the date of payment
    • taxes deemed paid on dividends translated at the spot rate on date of payment are then added
    • the translated amount of taxes deemed paid is used to determine foreign tax credit
  54. Tax Holiday
    • an incentive used by a government that partially or completely exempts a taxpayer for a period of time
    • primary reason for offering tax holidays is to encourage foreign direct investment
  55. Strategies
    large scale plans that reflect the direction of the company
  56. strategy formulation
    • involved determining organizational goals and strategies to acheive those goals
    • information is key ingredient, abouyt both internal and external factors
    • involves analysis of customer, market, and competitor information as well as risk assessment
    • includes financial expressions of firm strategy and preparation of budgets
    • capital budgeting is an important part
  57. strategy implementation
    involves mandagerial efforts to influence employees to attain organizational goals
  58. Budgeting
    • primary use of accoutning information in strategy formulation
    • provides managers with information about short term and long term planning responsibilities
    • provides expectations against which future results can be judged
  59. capital budgeting
    • large long term investmetns
    • three steps:
    • project identification and definition provides a clear basis for understanding and the project predicting the associated cash flows
    • evaluation and selection involves identifying cash flows and then using one or more of the captial budgeting methoda to evaluate the project
    • monitoring and review involves updating the analysis and project plan during the implementation phase
  60. Payback period
    • length of time it takes to recoup the initial investment
    • equal to the initial investment amount divided by the annual after tax fash flows
    • project will be accepted if the payback period does not exceed a predetermined length
    • weaknes: it ignores the time value of money and total profitability of the project
  61. Return on investment
    • average return on the initial investment
    • equal to the average annual net income divided by the initial investment
    • project will be accepted if the ROI exceeds a predetermined rate
    • weakness: ignores the time value of money and it ignores possible cash outlays subsequent to initial investment
  62. net present value
    • equal to teh present value of net future cash flows less the initial investment
    • required the estimate of minimum rate of return to be used as the discount rate
    • accepted if NPV >= 0
    • weaknesses: cannot be used for comparing projects of different sizes and that it tends to be biased towards large investments
  63. Internal Rate of return
    • represents the discount rate that results in a net present value of zero
    • equal to the discount rate that causes the net present value of future cash flows equal to the initial investment
    • accepted if IRR greater than hurdle rate
    • weaknesses: sometimes requires unrealistic assumptions about investment of funds, manual calculation is difficult
  64. Political Risk
    • likelihood that political events will impact cash flows
    • nationalization and expropriationg of assets is the most extreme form of political risk
    • also associated with changes in foreign exchange controls, repatriation restrictions, tax rules and labor laws
    • can vary from one country to another
  65. Economic Risk
    • likelihood that changes in teh host country economy will impact cash flows
    • inflation is most significant economic risk
    • inflation affects the ability of the local population to purchase goods and also impacts the overall cost structure of a business
    • also costs associated with manager times and effort to respond to inflation
  66. Management control
    management control system is the primary mechanism for implementing and evaluating the effectiveness of strategy
  67. Factors affecting strategy implementation
    • organizational structure:
    • ethnocentric - use an approach that assumes that the cultural background is universal
    • polycentric - consider the culture of the host country to be the most important and adopt it
    • geocentric - consist of units that play distant roles, they include global innovator, integrated player, implementer, local innovator
  68. management control systems
    • bureaucrative control - employs a significant amount of structure
    • cultural control - more informal and less structured
  69. responsibility centers
    • identify the activites that individual units perform and for which they should be held accountable
    • cost centers: responsible for producing output using a certain amount of resources
    • profit centers: responsible for costs and revenues
    • investment centers: responsibilities of a profit center plus responsibility for investment decisions - ROI is more common performance measure for this
  70. Choice of Currency in measuring profit
    • profit can be measured in local or parent currency
    • local currency is appropriate if the sub is not expected to pay parent company dividends
    • when parent currency is used, company must also choose a translation method
    • a decision must be made about whether to include the translation adjustment in the profit measure
  71. Translation to Parent company
    • translation for internal purposes, financial accounting standards need not be followed
    • inclusion of the translation adjustment in the profit measure is based on needs rather than accounting standards, depends on
    • whether the adjustment reflects the impact of exchange rates on parent currency cashflows
    • whether local manager has the authority to hedge against exchange rates
  72. Choice of currency in operational budgeting
    • often include budget-to-actual comparisons
    • exchange rates may change during the period between makin the budget and recording profits
  73. budget and actual rate combinations
    • 1 - 3 use same exchange rate for both budget and actual translations
    • 4 - translates the budget at teh actual rate at the time of budget and translates actual results using the actual rate at the end of the period
    • 5 - translated the budget using a projected end of period rate and translates actual results using the actual rate at the end of the period
  74. Decentralized and agency problems
    • decentralized companies are organized by division and division managers have significant authority - this structure decomposes problems into smaller peices
    • permits local decision making which provides more responsibility for division managers
    • an agency problem can occur since division managers make decisions in thier best interest
    • managers self interest can vary with the best interests of the company
  75. goal congruence
    an effective accounting system can alleviate this agency problem bu providing incentives to managers to act in the best interests of the organization
  76. Performance evaluation systems
    • trnsfer prices directly affect the profits of the divisions involved in an intercompany transaction
    • the effectiveness of these systems is influenced by ther fairness of transfer prices and affects the satisfaction of managers
  77. cost minimization
    • manipulating transfer prices between countries is one way for multinational enterprises to acheive cost minimization - refered to a discretionary transfer pricing
    • the most common approach is to minimize costs by shfting profits to lover tax rate jurisdictions
  78. Conflicting objectives
    • performance evaluation objective is better served by the negotiated transfer price
    • cost minimization objective is better served by the discretionary price
    • one solution: dual pricing - the official transfer price used for tax purposes is the discretionary transfer price
    • a seperate set of records used for performance evaluation use the negotiated transfer price
  79. Other cost minimization objectives
    • withholding taxes on dividends can be effectively avoided via setting favorable transfer prices
    • the same can be done to avoid profit repatriation restrictions
    • this essentially changes cash flows from dividends to intercompany revenues and expenses
    • reduction of import duties
    • increase cash flows out of a devaluing currency
    • enhance the competitive position of a foreign corporation
    • transfer pricing method depends on specific environmental variables
  80. arm's length price
    the price that would be agreed upon by unrelated parties
  81. US transfer Pricing Rules
    • allows IRS to audit international transfer prices
    • penalties of up to 40% of the underpayment of taxes can be imposed on violators
    • applies to both upstream and downstream transactions and transactions between two subsidiaries
    • most MNC's have significant business activities in the US are headquartered in the US
    • requires the use of arm's length concept
    • primary factors to consider are the degree of comparability to uncontrolled transactions and the quality of the inderlying analysis
    • the IRS provides for correlative relief to help in situations where the IRS agrees with a company's transfer pricing but the foreign government does not
  82. Compareable uncontrolled price method
    • transfer price is determinied based on reference to the company;s sales of the same product to an unrelated buyer
    • reference to transactions between two unrelated parties for the same product are acceptable
    • if an uncontrolled transaction is not exactly compareable an adjustment is allowable
  83. resale price method
    • generally used when the affilliate is a sales subsidiary and simply distributes finished goods
    • transfer price is determined by deducting gross profit from the price changed by the sales subsidiary
    • gross profit is determined by reference to uncontrolled parties
    • the most important factor in choosing this method is the similarity in function of the affiliated sales subsidiary and the uncontrolled reference company
  84. Cost plus method
    • most appropriate when comparable uncontrolled transactions don't exist and sales subsidiary does more than simply distribute finished goods
    • transfer price is determined by adding gross profit to the cost of production
    • gross profit is determined by reference to uncontrolled parties
  85. Profit split method
    • treats the two related parties as one economic unit
    • profit from the eventual sale to an uncontrolled party is allocated between the related parties
    • allocation is based on relative contribution of each party
    • contribution is determined by functions performed risk assumed and resources employed
  86. Advance Pricing Agreements (APA)
    • an agreement between a company and a taxing authority regarding and acceptable transfer pricing method
    • unilateral agreement - between taxpayer and one government
    • bilateral agreement - between taxpayer and two governments
    • advantage is assurance that their approach will not be challenged
    • disadvantage - is the time and cost involved in arriving at the agreement
    • US began its APA in 1991
    • increasingly other countries have established programs
    • in the US, a total of 61 agreements executed in 2009, approximately 74% involve foreign parent companies
  87. International Trends in corporate governance
    • accounting scandals have led to increased focus on corporate governance
    • Sarbanes Oxley - direct response to these scandals includes new rules pertaining to corporate governance and auditing
    • these are consistent with a worldwide movement to corporate governance and auditing
  88. Corporate governance
    involves a set of relationships between a company's management, its board, its shareholders and other stakeholders
  89. Principles of corporate governance
    • provide guidence to help governane within their boarders, thses principles also make clear that the board of directors has ultimate responsibility for governance
    • in 2004 revisions to the corporate governance code point out that external auditors should answer to shareholders these revisions also highlight the board of directors responsibility for overseeing financial reporting
  90. Sarbanes Oxley Act of 2002
    • PCAOB was created to oversee the accounting profession
    • certification of statements by CEO's and CFO's
    • External auditors to report directly to audit committee
    • restriction on allowable non-audit work for auditors
    • increased penalties for financial statement fraud
  91. The Audit Quality Framework
    • Provides the following key drivers of audit quality
    • the culture within an audit firm
    • audit partners and staffs skills and personal qualities
    • effectiveness of the audit process
    • reliability and usefullness of audit reporting
    • non controlable factors affecting audit quality
  92. Purpose of Auditing
    • in the US and UK the purpose of the external audit is to provide assurance that the financial statements are fairly presented
    • in the US sarbanes Oxley also requires audits of internal controls - provides assurance about the process of financial statement perparation
    • ingermany auditors are also responsible for evaluating the report of management
    • the supervisory board in germany has essentially equivalent responsibilities to US board of directors
    • german law includes specific regulations about the composition of the supervisory board
    • german supervisory boards are more broadly representative than their US equivalent
  93. Environment of Auditing
    • Cultures that value saving face and societal harmony are less accepting of the questioning inherent in auditing
    • collectivist cultures often distrust outside auditors
    • recent chinese history of state owned enterprises is related to explicit limits regarding application of lower cost or market and allowance of bad debts
    • all of these factors can surprise auditors from a western perspective
    • countries with less developed financial infrastructure would need less sophisticated auditing
    • when banks or families are the primary source of financing there is less demand for auditing
    • common law countriestend to have more influential auditing prefession relative to code law countries
    • audit quality and independence are likely to be influenced by level of rigor to join the profession and by the extent of legal liability assigned to auditors
  94. Audit regulation
    • auditing in anglo-saxon countries has historically been self regulated
    • recent scandals have led to increased government oversight
    • many other countries exercise much more control
    • auditor qualifications vary significantly from country to country
  95. Audit reports
    • the content of audit reports varies significantly between countries and sometimes between companies in the same country
    • audit reports sometimes refer to local audit standards non-local standards, multiple sets of audit standards, or are addressed to different audiences
    • the sarbanes oxley act in US includes a requirement to provide assurance on the internal controls
  96. Harmonization of Auditing Standards
    • International auditing has historically received less attention than international accounting
    • globalization has increased the importanceof cross national understanding of audit reports
    • harmonization will help increase consistency of auditing world wide
    • the increased leverl of assurance on financial statements should result in more efficient global capital markets
    • the IFAC develops international auditing standards
  97. IFAC
    • the IAASB is the entity that deveopls international auditing standards
    • the IFAC's forum of firms, as well as, its compliance committee deal with international regulation and compliance
    • the IFAC's efforts at harmonization are supported by the IOSCO
  98. IFAC pronouncements
    • a set of internal standards on auditing consist of 9 sections
    • section 200 - covers auditor responsibilities in conducting an audit
    • section 500 - deals with audit evidence
    • section 700 - covers audit reports
    • Sections 800 and 900 deal with engagements other than a standard audit
  99. Auditor Liability - Background
    • civil liability can result from breach of contract or civil duty
    • criminal liability can result from criminal conduct
    • professional sanctions can result from violation of the rules of a professional body
    • the potential for legl liability varies internationally and is highly significant in some countries
  100. Auditor Liability - possible reforms
    • several solutions to limiting auditor liability exist in order to limit potential damage to firms
    • change of ownership structure to limit or eliminate joint and several liability
    • proportionate liability that limits auditor liability to the proportion for which they are deemed responsible
    • statutory caps to limit damages
  101. Auditor Independence
    • Independence is a fundemental principle of auditing
    • Auditoes in the US are required to adhere to a detailed set of independence rules
    • the SEC has additional rules for auditors of public companies
    • and SEC report in 2000 cited numerous violations by big five auditors
  102. Proposals to strengthen auditor independence
    • involvement of stockholders in auditor appointment
    • restrictions or prohibitions of certain consulting activities
    • increased regulatory oversight
    • increased involvement by the board of directors and audit committee
    • mandatory rotation of audit firms or engagement partners
    • seperating consulting operations from the auditing practice
    • increasing the stringency of admission criteria to the profession
    • a principles based approach to auditor independence in contrast to a lengthy set of "bright-line" rules, which would maintain some specific rules
    • a conceptual approach similar to the above but that includes no list of specific prohibitions
  103. Audit Committees - US
    • a committee of the board of directors responsible for financial reporting oversight
    • beginning in 1990, increased attention have been paid to this topic
    • Sabanes - Oxley includes specific provisions related to audit committees
  104. Audit committees - internationally
    • increasingly being seen as an mportant component of corporate governance
    • there is wide accepted globally that the auditor works for the audit committee
    • australia, requires listed company's to have audit committees composed completely of outside directors
    • Audit committees are also now required for listed companies in malaysia and singapore
  105. Internal Auditing
    • and independent objective assurance and consulting activity designed to add value and improve an organizations operations
    • the SEC requires an internal audit function of public companies
    • Internal audit can enhance the effectiveness of internal controls over financial reporting
    • the clearest difference is the consulting function of internal auditing particulary in risk management
    • given their complexity, MNC's are increasingly demanding risk management consulting
    • internal auditors also commonly perform compliance audits and effectiveness and efficiency audits
  106. The foreign corrupt practices act
    • requires companies to maintain effective internal controls and not pay bribes
    • the logic is that effective internal controls over financial reporting will mitigate the risk of bribe payments
    • this legislation was a reation to the discovery that many us companies did pay bribes enforcement of the FCPA has resulted in large fines against major US companies
  107. Sustainable development
    goal is to meet the needs of the present without compromising the ability of future generations to meet their own needs
  108. Stakeholder theory
    • environmental disclosures made in response to stakeholder demand for environmental and social information
    • major problem: fails to explain different disclosures by similar industries in same geographic areas
  109. Legitimacy Theory
    • Social reporting is means to deal with firms exposure to political economic and social pressures
    • behavior motivated by congruence with perceived goals of society to legitimize their performance
    • society's perceived goals represented by various interest groups such as environmental public interest groups
    • has also led to increased skepticism
  110. International trends of external reporting
    • largely voluntary in most countries
    • wide diversity based on different countries drivers
    • national culture affect CSR procedures
    • influenced by organizational culture
  111. Regulating CSR practices
    • significant short coming with voluntary CSR practices
    • Biased and Sel laudatory disclosures - minimal disclosure of negative information
    • disclosures insufficient and low in credibility lack of independent verification of performance
    • difference between accountability and forced accountability where spirit of the later may not exist
  112. Problems of regulation through legislation
    • lobbying in favor of economic over social environmental inerests may undermine regulatory enforcement
    • if corporate legitimizing activties successful - public pressure for governmental disclosure may be low leaving ti up to manager to conrol details of social reporting
    • needs to be stringent enforcement mechanism
    • regulatory agencies weak due to dependency on expertise and information of those they are trying to regulate
  113. Regulation of CSR in the US
    • Chicago climate exchange is the only cap and tade system for all six greenhouse gases in north america
    • emitting members voluntary but legally binding comitments to meet annual GHG reduction targets
    • below target - can sell or bank surplus allowances
    • above target - can purchase ccx carbon financial instrument contracts
    • some efforts have failed since carbon offsets are nearly impossible to verify as to legitimacy
    • california and nine eastern seaboard states have formed regional green house initiative to introduce greater regulatory scrutiny
    • "superfund" legislation is the 2000's required corporations to actively remediate past problems
    • "superfund" reporting also helped more positive environmental informational financial reporting
  114. International Arrangements to Regulate CSR
    • domestive increase of environmental laws in austrailia, new zealand, the UK and the EU
    • 2005 Kyoto protocol ratified by more than 165 countries but not the US
    • the EU ETS launched in 2005 created EU - wide market for emissions trading linked to kyoto protocol
  115. Climate Change
    • International Panel on Climate change has cound concentration of carbon dioxide in the atmosphere has increased by 35% in the past 250 years
    • 1995-2006 rank among warmest years for global surface temperature
    • 2007 - stern report - our actions resulting in climate change risk major disruption in economic activity
  116. Emissions Trading
    tradeable carbon credits must be purchased or pay a fine if certain emission limits are exceeded
  117. Carbon credits
    reductions in greenhouse gases with tradeable financial value
  118. Carbon funds and emissions brokerages
    funds set up to purchase carbon credits and brokerages mediate between buyers and sellers of the credits
  119. clean development mechanism
    promotes reductions in emissions of developing countries
  120. Carbon Neutral
    emissions offset by removal of an equal amount of gas from the atmosphere
  121. Carbon Tax
    tax on use of fuels causing carbon dioxide and greenhouse gas emissions - based on type and quality - promotes fuel efficiency
  122. Global Reporting Initiative - Guidelines
    • as of january 2009 more than 1500 organizations from 60 countries use guidelines to produce sustainabilty reports
    • Part I: defines report content, quality and boundary - ensures qualityof reported information
    • Part II: standards for disclosure - base context - three types of disclosure
  123. CSR practices by MNC's
    • UPS 2009 annual report states that it follows GRI guidlines
    • shows plans to cut airlie carbon emissions
    • shows how it responds to each of G3 indicators
  124. Extent of Environmental Disclosure Varies
    • Canada more extensive than the US
    • firms from countries that ratifies Kyoto protocol seem to have higher disclosure indices related to pollution and greenhouse gas emissions
    • japan stands out as a country with high rate of reporting on climate changes
    • few companies report on risk of legal action or business disruptions caused by climate issues