Role of Management Accounting in International Firm

INTERNATIONAL ACCOUNTING Sources: 1) Financial knowledge enables central control to determine what is happening in different subsidiaries. That enable the integration and control of subsidiaries by the central control. (Belkauoi, 1991) 2) Management accounting’ involvement in currency management is also important as the fluctuations in the exchange rates can distort the financial results of the subsidiaries. (Eiteman, Stonehill and Moffet, 1992). ) Management accounting is a means of co-ordinating established configurations and its form depends on the strategies a firm adopts for configuration and co-ordination (Tomkins, 1991) 4) Study by Biles and Assada (1991) investigated how the Japanese and American ownership firms evaluated the performance of their subsidiaries. The US firms frequently used financial ratios for performance measurement. ROI was by far most important, whereas Japanese firms pay more attention to individual line-items in the budget such as sales volume and production costs. ) Horovitz(1978) compared management controls between UK, French and German firms. He concluded that German and French firms tend to be more centralized than the UK firms. The control systems of German and French companies were more detailed than that of UK firms. 6) Holzer and Schonfelt (1986) illustrated that accounting systems of major European and US firms differ greatly and, although internationalisation affects their management accounting systems, it does not do so in a linear fashion. Factors: 1) Configuration. ) Strategy. 3) Ownership of the firm. ROLE OF MANAGEMENT ACCOUNTING IN INTERNATIONAL FIRM: The international firms have disperse configuration as their activities in the value chain are spread throughout the world. Therefore, the international firms use management accounting to co-ordinate and integrate their activities in different countries. The role and scope of management accounting differs in international firms depending upon the relationship be tween their subsidiaries and the strategy of their top management. Porter 1986) classified international firms into the global firms, the multidomestic firms and the exporting firms. Both global and multidomestic firms have dispersed configuration but the former is an integrated unit whereas the latter is a conglomerate that achieves control by making its subsidiaries as independent of each other as possible. In a global firm, management accounting supports a dispersed configuration of the value chain located across the world. The output of one subsidiary is an input of other subsidiary located in a different country. The dispersed location of subsidiaries call for extensive co-ordination and central management intervention in the affairs of the subsidiaries. By focusing on global product-line profitability, the central management can use management accounting to establish an integrated organization. Various operations like production, sales, R&D are positioned globally according to specific locational advantage and they are integrated through extensive planning and budgeting activities. Management accounting in an international firm is a finely tuned information mechanism. In contrast, there is little integration of subsidiaries in a multidomestic firma as they usually operate in different businesses. Therefore, they are relatively free to devise their own strategies and plans and to monitor their progress towards them. Central management monitors subsidiaries from a portfolio management perspective which evaluates subsidiaries largely on financial rates of profitability. Management accounting role in multidomestic firms is setting financial targets for sudsidaries and evaluating their performance using composite financial ratios like ROI( Return on investment), ROA (Return on assets) , RI (residual income) and ROE ( return on equity). There is little emphasis on information which integrates activities across subsidiaries. International firms are exposed to exchange rates fluctuation risks. These fluctuations creates uncertain cash flows in corporate currency and also can distort the performance of subsidiaries (Eiteman, Stonehill and Moffet, 1992). Therefore, the management accounting manage the currency risks in the international firms by monitoring the short-term transaction exposure to debtors and creditors, medium term budgeting of international cash flows and long term strategic currency and exposure concerns over the firm’s strategic planning period. Management accounting uses transfer pricing between subsidiaries in different countries in order to maximize international firm’s after-tax global profits. Through transfer pricing firms may divert profits to regions where taxes are low (Radebaugh and Gray, 1993). The threat of this puts pressure on host governments to make and adminstor tax laws that benefits the firm. However, the firms seek to be as independent of the individual location as is possible, to minimize the political risks such as change in government causing substantial changes in host country’s economic policies. The management accounting plays a key and wide role in international firms. The information technology is improving and becoming cheap with the passage of time. That will further deepen the role of management accounting in the international firms. According to Belkauoi (1991), the financial knowledge resulting from management accounting has enabled the integration and control of dispersedly configured firms by the central control. The global firm is characterized by its large geographical reach and the considerable interdependence between its subsidiaries. Global firm uses management accounting to integrate its activities across the globe. On other hand, the multidomestic firm’s subsidiaries are quite independent in their activities.