International trade: A world of difference

Source: Exec Digital USA

Date :8/26/2008 1:53:30 AM

With many organizations conducting business outside traditional capitalist borders, the face of commerce is changing.

Written by Austin K. Welch

The way business is conducted these days means borders represent no barriers to moving into foreign markets and setting up a presence across the world.

Technological advances coupled with a thirst for products and services from a large part of the globe previously not deemed to be consumer-driven, mean organizations are now conducting business in places that, in many instances, have not experienced the concept of capitalism.

The International Accounting Standards Committee (IASC) reports that global trade has doubled in the past decade and quadrupled in the past two, with more than 40 percent of companies worldwide trading with eight or more countries or regions, many dealing with hundreds of individual suppliers.

However, the IASC warns that with the increase in buyers and suppliers participating in international trade, there is a corresponding need for risk mitigation on a global scale, as well as ensuring the right financial partnerships are in place.

One result of the explosive growth in global trade is a dramatic shift in transaction formats, which affects both ends of the supply chain. For businesses conducting trade across borders it is vitally important to ensure that mechanisms for payment are in place and recently, according to the World Bank, there has been a noticeable and ongoing switch from traditional forms of payment, such as letters of credit, to open account trading.

Such changes in business practise open up the possibility of increased bad debts for companies, but, according to the IASC, most companies that conduct business in this way believe such risks outweigh the significant business opportunities available.

As well as changing and adapting financial processes and systems to accommodate the needs of international trade, organizations also need to take account of banking arrangements, which can be extremely complex and expensive in some countries. If organizations have not conducted business in a particular territory previously and therefore have no financial history, problems can be encountered in arranging suitable banking facilities.

As well as the day to day financial issues affecting organizations going global, there are also financial reporting requirements to take account of; these can vary greatly by country and continent.

In order to ease the requirements of international businesses having to file numerous financial returns under the auspices of each individual country’s requirements, a number of governments have signed up to the International Financial Reporting Standards (IFRS), the single body of internationally accepted financial reporting standards. It is estimated by the IASC that over the next few years, thousands of companies will move to IFRS as a primary basis of financial reporting, making it easier and more practical to encourage cross border trade.

Although internationally recognized accounting standards are one way in which commerce is being helped to generate business abroad, there is a raft of other legislation to contend with. For example, any entity that is part of a US-based organization needs to file regular returns detailing all risks associated with financial transactions, whether that be of a payment processing or payroll nature. The Sarbanes-Oxley Act, which came into force six years ago, was initially designed to ensure all financial activities within a company were transparent, after a number of high-profile company collapses including Enron.

Tax legislation is another area fraught with problems for organizations conducting business on an international scale and one that can create problems in the long term, according to Lindsay Neilson, a tax consultant with Deloittes. “Anyone considering business dealings in a foreign jurisdiction must take local advise on how the tax system works, as falling foul of the authorities can prove devastating for organizations, which may even have their operating licence suspended as a result,” she says.

The Journal of Accountancy reports that fraud issues have increased over recent years as a result of the dramatic increase in foreign trade. One European initiative put in place recently and which it is thought will cut financial fraud substantially is the single euro payments area (SEPA). Its focus is on setting minimum compliance standards in relation to the payment of monies to and from EU countries.

Neilson is of the opinion that a growing number of companies will consider using SEPA on a strategic basis as an opportunity to review their entire payments strategy and financial infrastructure.

To satisfy shareholder expectations and growth plans, organizations must continually look outside of traditional markets for opportunities to sell more. Before doing so though, a detailed due diligence study will identify any financial issues that may act as a barrier to successfully entering a new and unknown foreign marketplace.