FINANCIAL ISSUES FOR MULTINATIONALS

ACCOUNTINGIntroduction

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.

Body: 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

Intro: 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.

Body: 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

Intro : 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.

Body: 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 RECEIVABLESIntro: 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.

Body: 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

Intro : 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.

Body: 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 TRANSFERSIntro: 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 FINANCIALSIntro : 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 CONSOLIDATINGIntro: 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.

Body: 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

Intro: 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 ACCOUNTSIntro: 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.

Body: 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.