1. International Accounting and Financial Reporting Summer 2007 William F. O’Brien, MBA, CPA

2. Session XI-A Control, Tax & Audit Issues

3. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-3 Control, Tax & Audit Issues n Strategic Planning n Financial Measurement n Financial Planning…don’t call it a “Budget” n Transfer Pricing n Performance Measurement

4. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-4 Integrated Planning SP$P MBOs Integration ParticipationCommitment

5. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-5 MNE Planning Stages n Strategic review n Annual operating plan n Financial n Non-financial n Integration & monitoring n Personal planning & rewards

6. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-6 Integrated Planning Benefits n Greater clarity & realism n Performance stretch n Increased motivation n More timely intervention n Clearer ownership

7. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-7 Financial Measurement n Varies by region n US versus Japan n Numerous targets n ROI n Sales n Quality n Market share n Income n Variance minimization

8. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-8 Key Financial Planning Questions n Formal process? n Who participates? n Style of communication? n Establishment of targets? n International logistics? n Time frame? n Industry and geography volatility impact? n Measurement of variances?

9. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-9 International Considerations n FX determination n FX impact on results n Resolution of FX fluctuation

10. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-10 Cross-National Examples n Mexico n High participation among local senior managers n High participation among local low level managers n Low participation among subsidiary managers n Asia-Pacific n High participation

11. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-11 Cross-National Example…US and Japan n US —12 days longer n US: focus on ROI; Japan: focus on sales n US is more participative n Both are bottoms up n Japan: greater focus on action against variances n US: uses plan for evaluation, compensation and incentives

12. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-12 Goals of Int’l Transfer Pricing n Strategic goal congruence n Preservation of local management discretion n Minimization of “built-in” conflicts n Taxes versus duties n Local balance of payment status n Inflation and politics

13. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-13 Transfer Pricing Issues n Government regulations and restrictions n Tax statutes n Tariff and duty rates n Currency restrictions n Inflation rates n Local motivation

14. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-14 T/P Approaches n Market-based (recommended approach) n Cost-based n Negotiated rate n Advanced pricing agreement n General rule n Variable cost plus opportunity cost

15. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-15 Why Market-Based? n Legal n Goal congruence n Equity n Simplicity

16. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-16 Taxation n Types n Credits versus deductions n Other issues n Tax planning

17. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-17 Types of Taxes n Direct n Income taxes n Double taxation impact due to dividends n Indirect n Value-added taxes (VAT or TVA) n See Exhibit 16.1 n Paid at transfer point of goods or services n Recovery of prior assessment

18. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-18 Tax Credits and Deductions n Two approaches to offset multinational taxation n Credits usually result in more equitable impact n See Exhibit 16.2 for an example

19. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-19 Other Tax Issues n Tax havens n Attitudes and avoidance n U.S. foreign source income n Sub-part F exception…taxed when earned n Transfer price issues n Recall our discussion in Session XVI n See pages 479-482 n Note IRS Code Section 482 n Incentives, rates and tax treaties

20. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-20 Tax Planning n Exports n Withholding issues n Branches n No income deferral; good for start-ups with losses n Subsidiaries n Normal sheltering of income until distributed n Locations n Influenced by incentives, rates and treaties

21. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-21 Internal/Operational Auditing Objectives n S-C-O-R-E n Safeguarding assets n Compliance with laws and regulations n Organization goal attainment n Reliability of information n Effectiveness and efficiency of operations

22. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-22 Current Governance Climate n Shift to Board focus from Senior Mgmt. focus n Global perspective n FCPA-Foreign Corrupt Practices Act (1977) n COSO-Treadway Commission: Committee of Sponsoring Organizations (1987) n IIA, FEI, IMA, AICPA, AAA

23. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-23 Foreign Corrupt Practices Act n Passed in 1977 n No bribery n No influence peddling n Facilitating payments are OK n Influences action that must be taken anyway

24. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-24 MNE Audit Challenges n FX n Language and culture n Legal considerations n Supply of audit professionals n Training

25. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-25 External Auditors n True and Fair View (TFV) n EU base: 4th directive n Subject to cultural interpretation n Presents Fairly n More standardized meaning n Independent audit environment--varies widely n Brazil, Germany, Japan, Netherlands & US

26. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-26 Other Audit Related Issues n Harmonization of GAAS n Same fundamental arguments as GAAP n Driven by globalization of capital markets n International Federation of Accountants-IFAC n Worldwide equivalent of AICPA n Practices, education, ethics n Financial and managerial actg. concerns n Also involves IT information n Compliance is “encouraged”

27. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-27 International Audit Variances n Note the drive for harmonization on pages 436 - 450

28. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-28 Institute of Internal Auditors--IIA n Established 1941 n Professional body for internal auditors n Certification n Literature n Lobbying n Training n Code of ethics

29. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-29 Risk Management (includes Economic and Political Risk) n Risk identification n Risk assessment n Risk assignment n Risk quantification n Risk consolidation n Risk settlement n Avoid n Diversify n Share n Transfer n Control n Accept--Exploit At SBU-local level At corporate level

30. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-30 Risk Mgmt. Issues n Threat identification and mitigation approaches n High risk makes planning more important n Some risk factors to consider: n Loss of resources directly involved n Loss of time n Loss of resources indirectly involved n Risk mitigation n Use of joint ventures or alliances n Geographic dispersion n Avoiding certain competitors

31. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-31 Keep This Paradigm Shift in Mind n Moving from “Results of Operations” n To “ Operating information for Results”

32. Session XI-B Course Wrap-Up Major Themes

33. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 15-33 Major Themes n Derivation of GAAP n Impact of social, cultural and accounting values n Global perceptions of ethics n International financial reporting and transactional accounting n International financial statement analysis n International financial management overview: n Organizational structure n Risk assessment and mitigation n Planning, control and measurement n Transfer pricing n Global auditing and taxation n All presented in the context of current newspaper and media events