Operating in more than one currency involves dealing with exchange rates, which usually change on a daily basis. The management accountant must be familiar with these fluctuations and how to manage them to avoid or mitigate transaction risk. Transaction risk assesses the possible implications of future cash transactions due to changing exchange rates.
Accountants dealing with international environments must be familiar with several terms related to foreign exchange.
The Spot Rate is the exchange rate of one currency for another for immediate delivery.
Currency Appreciation occurs when the currency of one country is stronger than the currency of another country. In that case, the stronger currency can buy more units of the weaker currency. For instance, an American dollar can buy 14 Mexican Pesos.
Currency Depreciation is the opposite of Currency Depreciation. In this case the currency of one country can buy fewer units.
Management accountants also need to be aware of the level of involvement that firms can undertake in international trade.
Some of the environmental factors that must be taken into consideration because they affect performance evaluation of firms doing business internationally are:
Economic factors such as organization of central banking system, economic stability, currency restrictions, etc. The Financial Investigation Bureau of the Internation Chamber of Commerce warns about fake bank guarantees. They stated that some of the guarantees, ranging from tens to hundreds of millions of dollars, were offered as collateral for various deals while others were for the benefit of named individuals. All the documents were found to contain numerous inconsistencies and ‘red flag’ terms that rendered them invalid.
Political and legal factors such as impact of foreign policy and degree of governmental control of business. According to the ICC (International Chamber of Commerce, Commercial Crime Services, a total of 406 incidents of piracy and armed robbery were reported in the 2009 annual piracy report issued by the ICC International Maritime Bureau’s Piracy Reporting Centre (IMB PRC).
Educational factors include the degree of technical training and the degree and extent of formal education.
Sociological factors include attitudes toward industry and business, minset and cultural attitudes with respect to authority and persons in subordinate positions, cultural and racial diversity, attitude toward foreign corrupt practices, etc.
Every business is looking for opportunities in the international business arena. The rewards are many but the challenges are many too. Management accountants should work closely with forensic accountants to identify risks of fraud and implement procedures and practices to deter its pervasive effect.
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