1. Gray, Salter & Radebaugh Chapter 4 GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASIS   Sidney J. Gray, University of New South Wales   Stephen B. Salter, University of Cincinnati   Lee H. Radebaugh, Brigham Young University Slides Prepared by: Jennifer Anne Salter

2. Gray, Salter & Radebaugh Chapter 4 CHAPTER FOUR COMPARATIVE INTERNATIONAL MANAGEMENT ACCOUNTING

3. Gray, Salter & Radebaugh Chapter 4 INTRODUCTION In this lecture we will cover:   Management control as it applies across borders.   Objectives, form and role of management control in different countries.   Cross-national differences in setting overall corporate objectives and budgeting.

4. Gray, Salter & Radebaugh Chapter 4 What is Global Management Accounting - Management Control Management Control focuses on:   The strategic objective of the firm.   The types of resources the firm needs, where it can get them in the short and long terms.   A system that tells the firm if it is going off track and needs to make corrections.   How to evaluate and reward manager performance.

5. Gray, Salter & Radebaugh Chapter 4 What is Global Management Accounting? Continued The Cross Border setting asks the following questions:   How do external & internal environments affect information needs and questions?   Are there different views in different countries?

6. Gray, Salter & Radebaugh Chapter 4 What is Global Management Accounting? Continued

7. Gray, Salter & Radebaugh Chapter 4 CULTURE, MARKETS & CONTROL Culture: An Introduction   A firm’s social/business environment affects strategy and control dimensions.   These environment dimensions are: culture and markets. .  Hofstede’s model of culture identified dimensions of human values that affect decision making by society and individuals.

8. Gray, Salter & Radebaugh Chapter 4 CULTURE, MARKETS & CONTROL: An Introduction to Culture Continued Hofstede’s Dimensions:   Individualism versus Collectivism.   Large versus small power distance.   Strong versus weak uncertainty avoidance.   Masculinity versus femininity (Achievement Orientation).   Long term versus short-term orientation.

9. Gray, Salter & Radebaugh Chapter 4 Table 4.1 A Selection of Hofstede’s Scores Countries Indivi- dualismLTO Mascu- linity Power Distance Uncertainty Avoidance USA9129624046 Australia9031613651 UK89256635 Canada8023523948 New Zealand7930582249 Germany6731663565 South Africa65n/a6349 Japan4680955492 Mexico30n/a698182 Hong Kong2596576829 Singapore2048 748 Taiwan1787455869

10. Gray, Salter & Radebaugh Chapter 4 CULTURE, MARKETS & CONTROL Culture and Control   The impact of a cultural variable on management control is not always clear.   Studies suggest that management control is affected by: individualism, power distance, long-term orientation.

11. Gray, Salter & Radebaugh Chapter 4 CULTURE, MARKETS & CONTROL Studies of Culture and Control I These studies find:   Asian nations tend to look to longer term market dominance profile.   Collectivists, e.g., Japan, tend to plan and reward at the group level.   Individualist cultures link reward and performance for each individual.

12. Gray, Salter & Radebaugh Chapter 4 CULTURE, MARKETS & CONTROL Studies of Culture and Control II   The Western concept of checks and balances makes the individual responsible & culpable.   The individualist culture is the basis for the system.   In Collectivist cultures group rewards dominate. These take longer to emerge, so planning would be longer term.   High Power Distance societies have few consultative/participative budgeting processes.

13. Gray, Salter & Radebaugh Chapter 4 EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS US Multinationals:   In a study of MNEs, Robbins & Stobaugh (1973) found: Intangible items rarely taken into account when evaluating performance. Foreign subsidiaries are judged on same basis as domestic subsidiaries.

14. Gray, Salter & Radebaugh Chapter 4 EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS Cont US Multinationals Continued: Return on Investment is most utilized measure of performance. A Supplementary device is often used to gauge a foreign subsidiary’s performance. – –Comparison to budget is most widely used.

15. Gray, Salter & Radebaugh Chapter 4 Table 4.2 Evaluating Foreign Subsidiaries and Foreign Subsidiary Managers

16. Gray, Salter & Radebaugh Chapter 4 EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS Cont Non-US Multinationals:   British Firms: Appleyard, Strong & Walton (1990) found that British companies: – –Preferred to use budget/actual comparison followed by some form of ROI. – –Tended to use the same ROI measure for foreign subsidiaries as for domestic subsidiaries.

17. Gray, Salter & Radebaugh Chapter 4 EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS Cont   Japanese Firms: Shields et al (1991) compared US and Japanese MNEs and found that: – –Japanese firms tend to use sales as the major performance criteria. – –US firms prefer ROI.

18. Gray, Salter & Radebaugh Chapter 4 Table 4.3 - Criteria Used for Evaluating Divisional Managers

19. Gray, Salter & Radebaugh Chapter 4 EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS Con’t Bailes & Assada (1991) also compared US and Japanese MNEs. – –Japanese firms prefer to use sales volume as overall objective. Net Profit is second. – –American companies tend to use ROI most often, then controllable profit. Demirag (1994) - Japanese MNEs in the UK tend to use sales/market share targets.

20. Gray, Salter & Radebaugh Chapter 4 Table 4.4 Top Budget Goals for Division Managers

21. Gray, Salter & Radebaugh Chapter 4 EMPIRICAL STUDIES OF DIFFERENCES IN OBJECTIVES ACROSS NATIONS Con’t   APEC Firms: Merchant, Chow & Wu (1995) found little evidence of a link between national culture and firm’s goals in Taiwan. Kong, Harrison et al (1994) found that Anglo-Saxon managers prefer shorter term but more quantitative objectives.   Company objectives vary from culture to culture

22. Gray, Salter & Radebaugh Chapter 4 EMPIRICAL STUDIES OF DIFFERENCES IN THE BUDGET PROCESS ACROSS NATIONS Issues needed to be resolved are:   Is there a formal budget setting process?   Who participates and how?   What style of communication should be used?   How are objectives set?   Time period to be covered?   Should there be a monetary objective or non- quantitative objective?

23. Gray, Salter & Radebaugh Chapter 4 EMPIRICAL STUDIES OF DIFFERENCES IN THE BUDGET PROCESS ACROSS NATIONS US Firms:   Anglo-American practice assumes that performance is improved through participation of persons in carrying out the budget.

24. Gray, Salter & Radebaugh Chapter 4 EMPIRICAL STUDIES OF DIFFERENCES IN THE BUDGET PROCESS ACROSS NATIONS Japanese Firms:   Bailes & Assada compared US/Japanese companies: 90% of companies in both countries prepared master budgets. This process varied by country. US Managers tend to be more involved. Japanese managers tend to see this process as a way to improve performance.

25. Gray, Salter & Radebaugh Chapter 4 EMPIRICAL STUDIES OF DIFFERENCES IN THE BUDGET PROCESS ACROSS NATIONS Japanese Firms Continued:   Ueno and Sekaran (1992) found: US Managers use a more formal structure. – –Budgeting thus becomes a drawing together of diverse, often conflicting interests. US budget makers tended to create more “slack.” Japanese managers tend to measure performance over a longer time horizon than US managers.

26. Gray, Salter & Radebaugh Chapter 4 EMPIRICAL STUDIES OF DIFFERENCES IN THE BUDGET PROCESS ACROSS NATIONS Mexican Firms   Frucot & Shearon (1991) found: Performance of Mexican managers is the same as typical US managers. Higher level managers participate more. Lower level managers participate less. This is attributable to the high power distance culture. Managers of foreign owned subsidiaries show no desire to participate in the budget process. See themselves as powerless and process as alien.

27. Gray, Salter & Radebaugh Chapter 4 EMPIRICAL STUDIES OF DIFFERENCES IN THE BUDGET PROCESS ACROSS NATIONS APEC Firms:   Comparing managers in Australia and Singapore, Harrison (1992) found no significant relationship between national origin and participation, interaction and satisfaction.   Both groups seem to prefer a participative style of budgeting.

28. Gray, Salter & Radebaugh Chapter 4 EMPIRICAL STUDIES OF DIFFERENCES IN THE BUDGET PROCESS ACROSS NATIONS Harrison et al (1994) compared Australia, US, Singapore and Hong Kong and found:   Anglo-American firms place emphasis on decentralization, responsibility centers, organizational design, as well as quantitative and analytical techniques in planning and control   Singapore/Hong Kong Firms place emphasis on long term planning & group centered decision making

29. Gray, Salter & Radebaugh Chapter 4 CHAPTER FIVE PLANNING AND PERFORMANCE EVALUATION IN MULTINATIONAL ENTERPRISES

30. Gray, Salter & Radebaugh Chapter 4 INTRODUCTION This chapter deals with:   special problems faced by MNE management;   control in the global environment;   the planning process and operational plan with respect to strategic direction.

31. Gray, Salter & Radebaugh Chapter 4 Acme Brush of Brazil Cooper Grant is president of Acme Brush of Brazil the wholly owned subsidiary of U.S.-based Acme Brush Inc. Cooper Grant’s compensation package consists of a combination of salary and bonus. His annual bonus is calculated as predetermined percentage of the pretax annual income earned by Acme Brush of Brazil. A condensed income statement for Acme Brush of Brazil for the most recent year is as follows: Sales …………………. BRL 10,000 Expenses …………….. 9,500 Pretax income ………. BRL 500 After translating the Brazilian Real income statement into U.S. dollars, the condensed income statement for Acme Brush of Brazil appears as follows: Sales …………………. USD 3,000 Expenses …………….. 3,300 Pretax income (loss)…. USD ( 300)

32. Gray, Salter & Radebaugh Chapter 4 Acme Brush of Brazil   The BRL pre-tax income becomes a USD pre-tax loss because sales and expenses are translated at different exchange rates.   Specifically, Sales are translated at an exchange rate of USD 0.30/BRL and Expenses are translated at an exchange rate of USD 0.347368/BRL.   The question is whether Acme Brush should use BRL income or USD income to evaluate Cooper Grant’s performance.   There is no unequivocally correct answer to this question.   Issues that might be discussed include: What is the Brazilian subsidiary’s objective? To generate profits that can be distributed to U.S. stockholders? Does Cooper Grant have the ability to “control” USD income? Do the translation procedures that result in a USD pre-tax loss make economic sense?

33. Gray, Salter & Radebaugh Chapter 4 THE STRATEGIC CONTROL PROCESS   Gupta & Govindarajan (1991) identify the following stages in a formal strategic control system: Periodic strategy reviews Annual operating plans Formal monitoring of strategic results Personal rewards and central intervention.

34. Gray, Salter & Radebaugh Chapter 4 THE STRATEGIC CONTROL PROCESS Continued   Benefits of a formal strategic process: Greater clarity and realism in planning; “Stretching” of performance standards; Motivation for business unit managers; Timely intervention by central management; Clearer responsibilities.

35. Gray, Salter & Radebaugh Chapter 4 THE STRATEGIC CONTROL PROCESS Continued   For this system to work, we need to: Select the right strategic objectives; Set suitable targets: – –for a full-fledged strategic business unit - ROI. – –standards benchmarked on the performance of key competitors. Design a system to put pressure on management to perform; Ensure the process does not become too “big”.

36. Gray, Salter & Radebaugh Chapter 4 THE STRATEGIC CONTROL PROCESS Continued   Control problems unique to a global company/environment include: different operating environments culture; legal systems; political differences

37. Gray, Salter & Radebaugh Chapter 4 CHALLENGES OF CONTROL IN THE GLOBAL FIRM   Planning and Budgeting Issues: Determining the currency in which the budget should be prepared: – –local currency or – –parent currency?

38. Gray, Salter & Radebaugh Chapter 4 CHALLENGES OF CONTROL IN THE GLOBAL FIRM Continued   Planning and Budgeting Issues: Currencies fluctuating in value is beyond the control of the MNE: – –managers should not be held accountable for the results of events over which they have no control. – –e.g., hedging against potential foreign exchange losses if they have no responsibility to hedge. – –If the manager is given the authority, then that manager should be evaluated in terms of translated profitability.

39. Gray, Salter & Radebaugh Chapter 4 CHALLENGES OF CONTROL IN THE GLOBAL FIRM Continued   Planning and Budgeting Issues: It is difficult for senior managers to understand budgets generated in different currencies. Thus: – –Translating budgets into home currencies allows consolidation of budgets into a firm wide view. – –Management might want shareholders to see parent country profitability.

40. Gray, Salter & Radebaugh Chapter 4 CHALLENGES OF CONTROL IN THE GLOBAL FIRM Continued   Budget and Currency Practices of MNEs: Robbins and Stobaugh (1973) found that: – –less than half of MNEs judged subsidiary performance in terms of translated dollar amounts. – –Only 12% used both local currency & dollar standards – –Many use local currency budget and actual figures. Morsicato (1978) found many used both dollar and local currency budgets.

41. Gray, Salter & Radebaugh Chapter 4 CHALLENGES OF CONTROL IN THE GLOBAL FIRM Continued   Capital Budgeting: This is the longer-term relation of operational budgeting. Must consider a variety of factors: – –Project subsidiary cash flows vs. parent cash flows – –Taxation – –Inflation rates – –Unanticipated exchange rate changes – –Political risk

42. Gray, Salter & Radebaugh Chapter 4 CHALLENGES OF CONTROL IN THE GLOBAL FIRM Continued   Capital Budgeting: May require more judgment than operational budgeting because when environmental factors are used in long term strategic decisions, the outcome may be at odds with a desire for strong ROIs.

43. Gray, Salter & Radebaugh Chapter 4 INTRA-CORPORATE TRANSFER PRICING   This refers to pricing of goods and services transferred between members of a corporate family.   Different corporate units may transfer: raw materials; semi-finished and finished goods.

44. Gray, Salter & Radebaugh Chapter 4 INTRA-CORPORATE TRANSFER PRICING Continued   Home office units may allocate: fixed costs interest on loans fees royalties for use of trademarks, copyrights.   Such prices should be based on production costs but often they are not.

45. Gray, Salter & Radebaugh Chapter 4 INTRA-CORPORATE TRANSFER PRICING Continued   Why internal transfers may be priced with little consideration for market prices: taxation, competition/market share, circumventing national controls, boosting subsidiary profits.

46. Gray, Salter & Radebaugh Chapter 4 INTRA-CORPORATE TRANSFER PRICING Continued   Prices are arbitrarily established because of taxation: different tax rates complicate things, e.g., high tax countries cause incentive to charge many expenses against parent company income. some authorities provide specific guidelines on how to allocate expenses. this likely eliminates selecting an allocation method consistent with manufacturing strategy.

47. Gray, Salter & Radebaugh Chapter 4 Ameripill Case Objectives   The case illustrates the importance of considering global implications and organizational design issues when creating and implementing an accounting-based performance evaluation system.   The issues presented are typical of the pharmaceutical industry.   Specific teaching objectives are identified as follows: 1. 1.Provide students with an understanding of numerous complex issues involved in evaluating international subsidiaries. 2. 2.Demonstrate the impact that financial-based evaluation systems have on strategic decisions. 3. 3.Illustrate the institutional, regulatory, and tax incentive factors associated with international strategic decisions. 4. 4.Provide a basis for considering the strengths and weaknesses of centralized versus decentralized decision making in international settings.

48. Gray, Salter & Radebaugh Chapter 4 Ameripill Case Overview   The case is organized around the performance evaluation system's impact on decision making in three interrelated international subsidiaries.   The decisions include:   expanding operations in and shifting production to the U.K.,   acquiring new product lines in Germany, and   withdrawing a product in France.   Exhibit TN-1 provides a method to summarize the interactions between the performance evaluation system and decisions at the international subsidiaries.

49. Gray, Salter & Radebaugh Chapter 4

54. United Kingdom Impact of Expanding Current Manaufacturing Capacity by Acquiring Worsley Plant OriginalIncreaseRevised BudgetDue toBudget 1993Smoothkare1993 Sales $ 49,960 $ 12,000 $ 61,960 Cost of sales (21,982) (11,500) (33,482) Direct expenses (14,658) Other income (expenses) (1,499) Responsibility earnings $ 11,821$ 500 $ 12,321 Interest income (expenses) (358) Exchange gains (losses) (142) Division charges (1,629) EBT $ 9,692$ 500 $ 10,192 Managed assets $ 84,500$ 5,500 $ 90,000 EBT%19.4%16.4% ROA%11.5%11.3% Responsilbility earnings growth%5.0%9.4% Responsibility earnings - 1992 $ 11,258

55. Gray, Salter & Radebaugh Chapter 4 OriginalIncreaseRevised BudgetDue toBudget 1993Koblenz1993 Sales $ 156,840$ 7,400 $ 164,240 Cost of sales (65,872) (3,108) (68,980) Direct expenses (50,286) (2,373) (52,659) Other income (expenses) (300) Responsibility earnings $ 40,382$ 1,919 $ 42,301 Interest income (expenses) (1,312) Exchange gains (losses) (150) Division charges (4,700) EBT $ 34,220$ 1,919 $ 36,139 Managed assets $ 73,760 $ 15,500 $ 89,260 EBT%21.8%22.0% ROA%46.4%40.5% Responsilbility earnings growth%23.7%29.6% Responsibility earnings - 1992 $ 32,645 Germany Impact of Acquisition of Chemie Company

56. Gray, Salter & Radebaugh Chapter 4 OriginalIncreaseRevised BudgetDue toBudget 1993Withdrawal1993 Sales $ 108,720$ (10,872) $ 97,848 Cost of sales(53,414)5,341(48,073) Direct expenses(31,539)1,600(29,929) Other income (expenses)(946) Responsibility earnings $ 22,831$ (3,931) $ 18,900 Interest income (expenses)(1,033) Exchange gains (losses)(272) Division charges(3,262) EBT $ 18,264$ (3,931) $ 14,333 Managed assets $ 74,220 EBT%16.8%14.6% ROA%24.6%19.3% Responsilbility earnings growth%6.0%-12.3% Responsibility earnings – 1992 $ 21,539 France Withdraw Saincoeur from French Market