Challenges Of Accounting In Global Organizations

Project Objective

Discuss about the Challenges of Accounting in Global Organizations.

In the 21^st century, the uncertainty in the accounting scenario especially in the global business organizations has grown to a large extent. This poses a number of challenges before the entities since it has a direct impact on their ability to maximize their profit earning capacity. These intense challenges arise due to the rapidly changing business environment and the key organizational factors that operate inside it. Here the key challenges have been illustrated that arise in the financial and accounting scenario so that the readers can understand the strategies adopted by concerns to tackle such demanding conditions on the global platform (Adams, 2013).

It is vital for the business firms that operate in the unpredictable global scenario to take into consideration the various factors that influence the accounting environment such as globalization, control issues, technological changes, internal modifications, etc so that the underlying intention of the new business strategies can be understood in a simpler manner (Abbott, Green & Keohane, 2016). The key area that has been covered here includes the key accounting challenges of some of the important global organizations.

The primary objective of the project is to identify the key challenges that arise in the path of the global organizations due to which they have to act in an agile manner and perform their business operations in a careful way. It would basically help to understand how some firms succeed to modify their operations and sustaining in the unpredictable business environment.

The scope of the project work is pretty wide since it focuses on the global organizations and the challenges faced by such concerns due to the changes that are taking place in the business environment. At the same time the topic has been narrowed down to three multinational organizations so that the exact challenges that arise in the path of the businesses can be understood in the easiest way possible (Antràs, 2013).

The literature review is an important section of the activity since it fundamentally makes an attempt to focus on the key accounting challenges that arise in the path of a number of global organizations so that the readers can understand the significance of analysing the business environment that influence the global firms to make changes in their functional aspects as per their requirements (Barnes, et al., 2014).

Business challenges arise in different form and one of the key challenges that arise in front of businesses is due to the accounting aspects. It is essential to understand that the technique adopted to follow the financial reporting process varies all around the globe. The International Financial Reporting Standards (IFRS) that is followed differs among nations and it can be divided into 2 categories – the extent to which IFRS is allowed to impact the reporting structure of firms and the extent to which the practices stated in the IFRS differ in along the national lines (Brown & Dillard, 2014).

Project Scope

A number of blue-chip companies such as Wipro, which is a leading global IT, consulting and business services concern have tried their level best to align their accounting standards adopted by their business to the IFRS so that they can a healthy transition from Indian GAAP to IFRS. Even though Indian GAAP is quite similar to IFRS but still it is not exactly same since the global financial reporting is quite different and asks the business to disclose a number of facts and estimates in the business environment (Busco, 2014). A number of challenges also arise in the legal and regulatory framework of the business concern due to which the business has to focus on amending the prevailing model so that it can adapt to IFRS.

Another vital reporting challenge faced by a number of MNCs would be the detail relating to the foreign currency exchange rate at which the business transaction needs to be translated so that the inclusion of the same can be done in the financial statements of the undertaking. This shows that many global organizations face a number of challenges in their reporting aspects of the business (Clegg, Kornberger & Pitsis, 2015).

In the prevailing global environment, the accounting standards that are followed by the business organizations has a major role to play since it has an impact on the financial performance of the business concern on the global platform. Over the past years, a number of research studies have been conducted that focus on the factors that bring about difference in accounting model of businesses – it is known as comparative accounting. In the paper “Accounting in the global environment” author M. Gaffikin has stated that a number of elements such as legal system, culture, language, religion, etc have got an impact on the accounting model that is followed by business undertakings in the global business environment (Gaffikin, 2008). One of the factors that pose challenges is culture since no one has exactly been able to define the term and it has different meaning for different individuals and business entities (Depledge, 2013). The comparative accounting cannot depend entirely on the cultural dimensions and it must involve a broader scope to have a significant meaning that can be understood. Due to the rapid changes that are taking place in the business scenario due to globalization, businesses face challenges to identify the exact accounting policies and procedures that will be beneficial for their business and its operations as a whole (Downey & Bedard, 2015).

Literature Review

Due to the presence of undefined elements in the accounting aspects of the business activities, a number of concerns fail to implement the most appropriate accounting regulations that can be beneficial for the business concern (Geppert, Matten & Williams, 2016).

Another key challenge that is faced by business concerns in the global environment relates to the formulation of key business ideas to introduce new model of business. The changes that have been taking place in the business environment on the global platform demotivate the entrepreneurs to conceptualize new business ideas since the complexity associated with it further gives rise to a number of financial accounting and management accounting challenges (Held, 2013). Due to the intense competition that exists in the international industrial scenario, a number of global businesses feel pressurized to introduce new business ideas because they fear that it might fail due to the strict accounting policies that need to be adopted to carry out the business activities (Kløverpris & Mueller, 2013).

Thus in the global marketing scenario, the newly evolving changes in the accounting model deter business concerns to exploit the business situation since they feel the organic growth will be limited, which could have an adverse impact on the overall objective and performance of the business undertaking (Lisak & Erez, 2015). Some key issues are inflation accounting, differences in the multinational taxation system on the global platform, determination of the income tax as well as the indirect tax model like VAT, withholding tax, etc.

It is important for global business concerns to be well prepared before entering the international market since otherwise it can lead to disappointing outcome and detract its business efforts in the domestic marketing scenario as well. In order to protect the effort, time and financial resources, the businesses that wish to operate in the global market platform need to analyze the market scenario in the best way possible so that all the challenges can be identified in the most effective way and necessary strategic plans can be created and implemented so that the businesses can transform their business idea into a reality and make a strong global presence in the marketing scenario (McGann, 2015). Example – In the shipping and logistic sector, all the accounting aspects especially the taxation and legal models should be understood.

Most of the assessments s regarding challenges in accounting considers technological issues as one of the top issues for the multinational companies. This is bets comprehended as the struggle for keeping up with the new, evolving and innovative technological requirements and the expectations of the associated clients (Milne & Gray, 2013).  Mostly the common challenges in the any multinational company multiply rich and favorable opportunities. This is mostly relevant in the case of the financial and accounting sectors. For an instance,  the multinational companies  which leverage the power of creating marketing automation and associate it to the categorized insights of the experts   obtain the opportunity for differentiating themselves. It is very precise as the field as a unit is striving with technology that using it in a successful manner can be very effective.

Key accounting challenges in global organizations – Reporting model

Dealing with the expectations and demands of the clients represent a challenge that is of high priority for mostly 29 percent of the multinational companies. The clients expect stellar service and to be more specific, they do expect for having their issues resolved. The significance of these  expectations  is very important and it definitely tales a whole lot of attention firm the management for ensuring that the satisfaction level of the clients are met efficiently (Reinalda, 2013).

In the case of Wal-Mart, the company has a record of facing big issues and challenges regarding its accounting and financial obligations in the country of China. After many years of heralding the country as one among its best markets, the retail company stated that its performance in China was the worst in the history of the company.  This was completely due to the unresolved accounting issues (Rinaldi, Unerman & Tilt, 2014).  This resulted into the scale up of the management of the retail stores and the cutting down of jobs thereafter. Inspite of the appearance of the reversals to be  abrupt the  gaps in the foundation of the retail business of Wal-Mart in China  have been evolving for many years,  which is hidden by the  questionable unauthorized practices of sales and  accounting  which was stated by the employees of the company  themselves.  The accounting practices included certain sales that were allegedly booked in the case when no merchandise left the stores’ shelves.  This resulted in making the business to appear very strong even in the case where there was significant slow done in the transactions of the retail along with the pilling up of the  unsold inventory. This was verified by the authorized documents and people of the company itself (Seo, 2013). The retail company itself stated that it was not happy with the growth of the inventory on an international level.  The retail stores in China, at present continue to make huge sales which are sometimes very unprofitable and are made without any authorization of management which was stated by the employees of the retail company who left their service. Huge concerns regarding the accounting issues and bulk sales that cropped in were raised back in the company’s internal report of 2011 which was obtained through the email of an internal company and the interview of the former employees by the lawyers.  Both the interviews and reports  with the former and current employees  state the  Chinese stores of Wal-Mart  ordered  extensive investigation under extreme pressure  for meeting the targets of earnings, indulged in to markups  of inventory that were temporary in nature  as  a move regarding accounting of the company which could furnish  huge profits  without any sort of additional sales  of the merchandise. Right after the employees’   “recognized discrepancies of inventory pricing  in the year 2011, the senior  leadership of  Wal-Mart in China  and United States  had ordered  for an extensive  investigation which resulted in to  different  changes in the  accounting and financial department of the company along with the leadership and disciplinary  actions in the internal structure of the company (Sharp, 2014).  This however, strengthened the compliance measures, regular audits and training in the company which was reported by Wal-Mart in its statements (Waters & Rinsler, 2014).  None of the  accounting and financial challenges  that were reviewed for the retails  stores in China  were determined  to be of useful matter to the consolidated accounting and financial conditions  and outcomes of operations of Wal-Mart.  Wal-Mart also did not happen to address the specific queries regarding issues and challenges associated with accounting and the changes in the leadership. It only stated   regarding its bulk sales which are common in practice by the developing markets that are monitored and regulated on a regular basis and most part of it is comprised by the Chinese business. The bulk sales are recorded to provide a minimum of  $243 million dollars in sales  and the  accounting of the markups ranged  to a 4 percent  of gross profits  in the year of 2010  only, that too in the hypermarket stores which was investigated by Stanford Lin,  who performed  the internal review of the accounts of the company (Shyamsundar, 2013). The employees of Wal-Mart were unable to understand the reason behind the high prices which were significant even of for temporary basis., as they did not resonate with the regular strategy of low pricing that the successors of Sam Walton along with him used for turning the five –and-diem into the biggest retail chain in the world which has more than $500 billion as its annual sales.  The markups  had the pattern of  unauthorized,  unsustainable and unusual  steps  and deals in accounting  with the rivals and suppliers  which made the profits and sales  appear to be very string than the underlying  trends of retail in the  stores. Due to these aspects, the business of Wal-Mart in China was getting worse on a continuous pattern inspite of the pronouncements to the contrary (Sioshansi, 2013).

Comparative accounting

In the case of Tesco, the accounting challenge and issue is mostly regarding the recording revenue   way too early. The deals  that  are done by Tesco with the suppliers  which result in the payments  back to the Tesco  for almost a period of multi-year  appear to have  led  in  too much of the  revenue  which is being loaded and confronted at front  instead of  spreading it over the entire span of the deal.   The auditors were responsible for the glitch which caused to the turmoil in the accounting and financial statements of the company (Timmer, et al., 2015).  In accordance to the last audit report of Tesco, materiality was 150 million pounds and the auditors could not be blamed with no specific mistake in any year of more than 118 million pounds.  In the concurrent accounting year, Tesco had overstated its profits in the first half of the year. It emerged that 145 million pounds of the error was from the prior years which completely denoted that the accounting of the company had issues in its previous years (Spence & Rinaldi, 2014).  This challenge that Tesco faced regarding obtaining of efficient accounting was the failure of the company in having a finance director for many weeks which resulted in weak internal control system over the accounting and financial statement (Sultan, 2014).

Conclusion

The attraction and development of the new clients is one of the most important aspect of business for any multinational business organizations in the world. As the needs , expectations and buying behavior of the  clients  evolve, the  accounting and financial conditions of the multinational companies need to be competitive and sustainable so  that clients  can  associated and collaborate with them for successful businesses.  The accounting and marketing efforts must be in adapting the requirements of the clients alongside them.   The multinational companies must make serious efforts to address all of these issues and challenges for having highly successful and strategic business.

References

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Abbott, K.W., Green, J.F. and Keohane, R.O., 2016. Organizational ecology and institutional change in global governance. International Organization, 70(2), pp.247-277.

Antràs, P., 2013. Grossman–Hart (1986) goes global: Incomplete contracts, property rights, and the international organization of production. The Journal of Law, Economics, & Organization, 30(suppl_1), pp.i118-i175.

Barnes, A.J., Unruh, L., Chukmaitov, A. and van Ginneken, E., 2014. Accountable care organizations in the USA: types, developments and challenges. Health Policy, 118(1), pp.1-7.

Developing of new business

Brown, J. and Dillard, J., 2014. Integrated reporting: On the need for broadening out and opening up. Accounting, Auditing & Accountability Journal, 27(7), pp.1120-1156.

Busco, C.A., 2014. Integrated reporting. Springer,.

Clegg, S.R., Kornberger, M. and Pitsis, T., 2015. Managing and organizations: An introduction to theory and practice. Sage.

Depledge, J., 2013. The organization of global negotiations: Constructing the climate change regime. Earthscan.

Downey, D.H. and Bedard, J.C., 2015. Coordination and communication challenges in global group audits.

Geppert, M., Matten, D. and Williams, K. eds., 2016. Challenges for European management in a global context: Experiences from Britain and Germany. Springer.

Gaffikin, M. J. (2008). Accounting theory: Research, regulation and accounting practice.

Held, D., 2013. Global covenant: The social democratic alternative to the Washington consensus. John Wiley & Sons.

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Lisak, A. and Erez, M., 2015. Leadership emergence in multicultural teams: The power of global characteristics. Journal of World Business, 50(1), pp.3-14.

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Seo, G., 2013. Challenges in implementing enterprise resource planning (ERP) system in large organizations: similarities and differences between corporate and university environment (Doctoral dissertation, Massachusetts Institute of Technology).

Sharp, P.A., 2014. Meeting global challenges: discovery and innovation through convergence. Science, 346(6216), pp.1468-1471.

Shyamsundar, P., 2013. Accounting for natural wealth—Practical challenges ahead. Environmental Development, 7, pp.181-183.

Sioshansi, F.P., 2013. Evolution of Global Electricity Markets: New paradigms, new challenges, new approaches. Academic Press.

Spence, L.J. and Rinaldi, L., 2014. Governmentality in accounting and accountability: A case study of embedding sustainability in a supply chain. Accounting, Organizations and Society, 39(6), pp.433-452.

Sultan, N., 2014. Making use of cloud computing for healthcare provision: Opportunities and challenges. International Journal of Information Management, 34(2), pp.177-184.

Timmer, M.P., Dietzenbacher, E., Los, B., Stehrer, R. and Vries, G.J., 2015. An illustrated user guide to the world input–output database: the case of global automotive production. Review of International Economics, 23(3), pp.575-605.

Waters, D. and Rinsler, S., 2014. Global logistics: New directions in supply chain management. Kogan Page Publishers.