International Risks For U.S.- Based Global Companies: A Guide For The Chief Accounting Officer

Given the continued sluggishness in the U.S. economy, many U.S.-based companies are pinpointing the international marketplace (particularly emerging markets) as the best place for growth, either organically or through business acquisitions. Although the business strategy may be sound, there are numerous risks that U.S.-based companies should understand in dealing with international subsidiaries, global transactions, foreign personnel and unique business environments. This article is focused on the business and accounting risks faced by a chief accounting officer or controller of a U.S.-based global company and the leading practices that should be utilized to mitigate some of these risks.

INTERNATIONAL BUSINESS AGREEMENTS

One of the more challenging aspects of capturing international transactions is identifying any unusual aspects contained within international business agreements. Whether partnership agreements, purchase and sale agreements, leases or management contracts, among others, business agreements negotiated and documented outside the United States are structured to conform to business models different from what we typically see at home. These differences frequently are driven by country-specific laws or regulations, expectations of the local business community, foreign investor rules or a wide range of tax implications. Also, international agreements sometimes can merge several business concepts within one business document (such as a lease and management agreement), which is not typical in the United States. As such, it is vitally important for a chief accounting officer to review all new and existing business agreements, particularly older agreements with lengthy terms, pertaining to revenue recognition and off-balance sheet risks in particular. International growth through acquisition can be a challenge in this regard, and a thorough review should be performed during the purchase accounting phase of any acquisition.

U.S. GAAP KNOWLEDGE AT INTERNATIONAL SUBSIDIARIES

Another often overlooked risk involving global U.S. companies is accounting risk resulting from lack of expertise in U.S. generally accepted accounting principles (GAAP). Although seemingly obvious, international accounting personnel and department heads tend to view their roles with more of an operational focus toward financial close timing and upstream reporting. Many times, balance sheet analysis, particularly off-balance sheet risk, is not a priority for accounting departments outside the United States. In addition, differences between U.S. GAAP and any local GAAP reporting (such as International Financial Reporting Standards or country-specific GAAP) easily can be overlooked due to lack of management attention on compliance with U.S. rules. In other words, it is a mistake to assume globally based accountants have expertise in U.S. GAAP or knowledge surrounding our rules-based accounting literature, which uses terminology, language and concepts with...