7-6b Computer Security of Accounting Information

sentence for fraud to 25 years. SOX established new crimes with potential 20-year sentences for destroying, altering, or fabricating records in federal investigations, or any scheme or attempt to defraud shareholders. SOX requires that the chief executive officer and chief financial officer of a publicly traded corporation must certify in each periodic report containing financial statements that the report fully complies with the Securities Exchange Act of 1934 and that the information fairly presents the company’s financial condition and results of operations.

As a result of the FCPA and later SOX, some people might have anticipated that strong corporate governance would be implemented and that companies would become models of corporate social responsibility. Unfortunately, news media continue to report bribery allegations in distant locations, increasing fines, and lots of money spent on control enhancements. To expand market share, many companies work to grow markets in developing countries, which indeed have some of the highest growth and potential, but also have additional challenges related to the FCPA.

Advances in technology have revolutionized business and other aspects of society. Electronic business, or e-business—the exchange of goods or services using an electronic infrastructure—began with the early computers of the 1950s. However, e-business did not become commonplace until the development of the world wide web in the 1990s. Technology facilitates business activities, but there are some downsides. Business managers must beware of potential problems associated with e-business. A business must take precautions to avoid becoming a victim of computer crime.

A computer crime involves the use of computers to perpetrate or facilitate illegal activity. The average computer crime has been estimated to cost almost $200,000, whereas the average armed robbery involves far less money: only $250. Statistics show that the higher the dollar amount of a crime, the lower its probability of prosecution.13

Increased use of computers to maintain financial records has led to more opportunities for computer crime. Estimates of computer fraud losses are several billion dollars per year. One of the most highly publicized computer crimes was the Equity Funding fraud, in which nonexistent insurance policy records were added to the customer master file of the firm over a nine-year period from 1964 to 1973. Allegedly this was done by a large number of employees claiming to be carrying out “unscheduled” file updating that was not part of the normal data processing operations.

Based on movies and television shows, you might think that the biggest threat to computer security is intentional sabotage or unauthorized access to data or equipment. For most organizations this is not true. The five basic threats to security are:

• natural disasters; • dishonest employees; • disgruntled employees; • persons external to the organization; and • accidental errors and omissions.14

Accidental errors and omissions cause the great majority of the problems concerning computer security. Errors and omissions are especially prevalent in systems of sloppy design, implementation, and operation. However, if the system’s development process is implemented properly, errors and omissions will be minimized. At the same time, better computer security will protect against intentional misrepresentation of data by employees and persons external to the company. An effective internal control structure that includes computer security is an integral part of any reliable information system.

Reality Che C k lO-6

Preventive controls can keep a worker from being tempted to do wrong. While an individual is ultimately personally responsible for his or her own behavior, isn’t it better for a company to set up controls that help people do what’s right? How could such controls be created and implemented?

Summary

Ethics provide guidance by which people interact with the world, including how they conduct business, how they treat other people, and how they care for the environment. Ethical perspectives can come from history and literature, religious principles, and personal experiences and observations. Integrity is defined as adherence to moral and ethical principles, soundness of moral character, and honesty. A person of integrity has two essential characteristics: knowledge of what is right and courage to do what is right.

Ethics and economic progress are tightly intertwined. Millions of business transactions take place daily that require mutual trust. Classical economists considered economics a branch of ethics. Business activity would grind to a halt without trust, fair dealings, and honest communication.

Corporate social responsibility (CSR) is the idea that companies have obligations to society that include the welfare of stakeholders, such as customers, employees, suppliers, and the communities and countries where the company does business. CSR also includes environmental responsibility.

Corporate financial scandals are nothing new. Some of the more recent scandals have led to an investor’s loss of confidence in the stock market and in the reliability of corporate financial reports. In some countries, the legislatures have enacted new laws concerning fraud and corporate financial reporting. Some of the most infamous recent corporate financial scandals include Enron, Worldcom, Vivendi, and Parmalat.

Ethics classes affect people’s actions in a positive manner. Teaching ethics does not mean that everyone taught will become ethical. Nonetheless, teaching ethics will have at least some impact on the ethical perspectives and behavior of those being taught.

The concept of internal control refers to rules and procedures designed to ensure the accuracy and reliability of financial and accounting information. Business managers rely upon the accounting information system to supply them with the financial information needed to make effective decisions.

Key TermS

ethics, p. 168 integrity, p. 168 Corruption Perceptions Index (CPI), p. 171 corporate social responsibility (CSR), p. 172 mark to market accounting, p. 177 Ponzi scheme, p. 179 internal controls, p. 183 Foreign Corrupt Practices Act (FCPA), p. 184

ChapTer QueSTionS

1. What do you consider the key characteristics of a person of integrity? 2. Why is ethical character of people so important to business and society?

3. How does corporate social responsibility (CSR) contribute to successful business operations? 4. Briefly describe the financial scandals at Enron, Worldcom, Vivendi, and Parmalat; what other scandals have happened in recent years or months? 5. How can ethics be taught? 6. Why are internal controls important to successful company operations?

Mini Case: ExxOnMObI l C ORPORATIOn: Why A RE C ORPORATE ET h ICS C OdES SO I MPORTA n T ?

What if someone is an excellent plumber, but often overbills his customers for the hours he works? This plumber will not be in business very long. ExxonMobil believes that the way the company conducts business is as important as the results obtained. For nearly 40 years, the companies now known as ExxonMobil have promoted business ethics and integrity through a 12-page booklet titled “Standards of Business Conduct.” Some of the topics included in this booklet are ethics, antitrust, conflicts of interest, environment, product safety, and alcohol and drug use.

In 1999, Exxon and Mobil merged to form the ExxonMobil Corporation, a multinational giant in almost every aspect of the energy and petrochemical business. With oil and gas explorations on six of seven continents, the company is the largest nongovernment gas marketer and reserves holder. Fuels are marketed under the Exxon, Mobil, and Esso brands. ExxonMobil regards a well-founded reputation for scrupulous dealing as a valuable company asset.

Questi O ns:

1) Why is ethics so important to doing business? 2) If all companies established a corporate ethics code, would that eliminate company financial scandals? Why or why not?

What Is the Right Way to decide Where to do business?

POINt COuNteRPOINt

When a company is looking for ways to improve profitability and thereby increase returns on investment to its stockholders, the company will often seek new places to do business, including countries where it is not currently doing business. Assume that the company has decided to start business operations in one additional country but has not decided which country. The company is deciding between Country A and Country F. Setting up operations will cost about the same in either country. Country A has a very low risk of corruption; its CPI is 8.5. On the other hand, Country F has a very high risk of corruption; its CPI is 1.4. Country A is a smaller market than Country F. Projected sales revenue in Country A is $1 billion. Projected sales revenue in Country F is $2 billion.

Point A business has an obligation to its owners to make a profit and thereby provide the owners with a return on their investment. Because Country F offers the potential of twice the revenues of Country A, the company should set up operations in Country F. COuNteRPOINt While Country F offers the possibility of twice as much revenue as Country A, the risk of corruption in Country F is several times higher. If the company establishes business in Country F and later becomes involved in corruption, the company could lose all its extra profits settling court cases and paying fines. The safer route would be to establish business in Country A, where the risks of corruption are much lower.

What do You Think?

Which argument for selecting a country in which to do business is the right one? After considering the risks of corruption, where would you do business, Country A or Country F? Why?

inTerpreTing global buSineSS newS

1) A news article described a fraud that occurred at a small company. A lower-level manager had been embezzling money for many years. The manager said that she was justified in embezzling the money because the company had not paid her what she was worth. In addition, she said that the company would not miss the money, as it had made huge profits, thanks to her efforts. What do you think? Do you think the company will miss the money? Assuming the manager was underpaid, was she justified in committing fraud? 2) A news story criticized corporate ethics codes, saying that they had no impact upon corporate behavior. Do you think ethics codes affect or do not affect the behavior of corporations and their employees? 3) In a news article about the Foreign Corrupt Practices Act (FCPA), the writer said that the FCPA hurt the ability of American firms to compete with non-U.S. firms. The writer said that the time had come for Congress to repeal the FCPA so that American firms would be better able to compete in the global marketplace. What do you think?

porTfolio projeCTS

Explore your own Case in point: the Cpi Find the Corruption Perceptions Index (CPI) score for two countries where your selected company does business, one country with a relatively high score and one country with a relatively low score. Search for news stories about corporate financial scandals in these two countries. Prepare a short summary of news stories about financial scandals in these countries. Briefly describe what you perceive are the risks of corruption, such as paying bribes, that your selected company might face in these countries.

Questions:

1. Do you think the CPI score accurately identifies the probability of a financial scandal occurring in the two countries you selected? 2. In addition to people identified in the news stories, who else might have been hurt by the scandals?

3. What are some steps that could be taken to reduce the likelihood of recurrence of the scandals in the news stories?

Develop an international strategy for your own small Business: Corporate Ethics Codes Research the corporate ethics codes of several major companies. Identify what you consider are key aspects of those ethics codes. Based on your findings, prepare an ethics code that you would use for your own small business.

ChapTer noTeS

1 D. Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions, New York: HarperCollins Publishers, 2010. 2 T. Louwers, R. Ramsay, D. Sinason, J. Strawser, and J. Thibodeau, Auditing and Assurance Services, 4th ed., New York: McGraw-Hill, 2011. 3 F. Fukuyama, Trust: The Social Virtues and the Creation of Prosperity, New York: Simon & Schuster, 1995. 4 A. Solzhenitsyn, “A World Split Apart,” Address given at Harvard Class Day afternoon exercises, June 8, 1978. 5 C. Dickens, Oliver Twist, 1838, Electronic Text Center, University of Virginia Library, http://etext.lib.virginia.edu/toc/modeng/public/DicOliv.html. 6 A. Craig Keller, K. T. Smith, and L. M. Smith, “Do Gender, Educational Level, Religiosity, and Work Experience Affect the Ethical Decision-Making of U.S. Accountants?” Critical Perspectives on Accounting, 18, no. 3, 2007, pp. 299–314. 7 AACSB International, “Religion Curtails Financial Fraud,” BizEd Magazine, accessed November 1, 2010, www.bizedmagazine.com/research/religion.asp. 8 R. W. Tillerson, “Standards of Business Conduct,” ExxonMobil, accessed January 2006, www.exxonmobil.com/corporate/about_operations_sbc.aspx. 9 P. Lambe, “Accounting for Knowledge Management,” Green Chameleon, accessed September 21, 2004, http://greenchameleon.com/thoughtpieces /account.pdf. 10 United States Attorney, Southern District of New York, “Bernard L. Madoff Pleads Guilty to Eleven-count Criminal Information and Is Remanded into Custody,” Press release, March 12, 2009, accessed September 18, 2010, www.justice.gov/usao/nys/pressreleases/March09/madoffbernardpleapr.pdf. 11 L. M. Smith and J. R. Miller, “An Internal Audit of a Church,” Internal Auditing, 5:1, 1989, pp. 34–42. 12 Paul the Apostle, 2 Corinthians 8:20–21, The Guideposts Parallel Bible, New International Version, Grand Rapids, Michigan: Zondervan, 1956. 13 D. Larry Crumbley, L. M. Smith, and L. DeLaune, Trap Doors and Trojan Horses, an Auditing Action Adventure, Durham, NC: Carolina Academic Press, 2009. 14 S. H. Kratchman, J. Lawrence Smith, and L. M. Smith, “Perpetration and Prevention of Cyber Crimes,” Internal Auditing 23, no. 2, March–April, 2008, pp. 3–12.

iii

Global Business Strategy and Organization

Aleksandar Todorovic/ Shutterstock.com

iStockphoto.com/Ricardo De Mattos ArtisticPhoto/Shutterstock.com Noel Hendrickson/Blend Images/Jupiter Images Jorg Hackemann/Shutterstock.com

CHAPTER 8

Entry Strategies in Global Business

CHAPTER 9

Control of Global Business

CHAPTER 10

The Organization of Global Business

CH 8

Entry Strategies in Global Business

STR/Getty Images © C Miller Design/Getty Images

After studying this chapter, you should be able to:

LO-1 Summarize the major entry strategies used by companies, especially those from emerging economies, in the globalization process.

LO-2 Explain the evolution of multinational enterprises (MNEs).

LO-3 Explain the major strategic reasons why MNEs invest abroad.

LO-4 Explain the pros and cons of foreign direct investment (FDI) from a host country perspective.

LO-5 Describe what countries can do to successfully attract FDI.

Cultural Perspective

India, Inc. Goes Global

On March 31, 2010, Bharti Airtel, India’s biggest cell-phone operator, announced that it was acquiring 100 percent of Kuwait-based Zain Group’s African assets in 15 countries, excluding those in Morocco and Sudan, for $10.7 billion. This was the largest acquisition between two multinational companies in the developing world, thereby propelling Bharti Airtel to become a worldclass multinational corporation. This acquisition created the world’s fifth largest cell phone operator, with some 287 million fixed and wireless subscribers across 20 countries in Africa and Asia by 2014. Such types of overseas acquisitions are becoming commonplace among other cash-rich Indian companies as well.

As part of the economic liberalization process that began in 1991, India’s regulators gradually increased the amount of foreign exchange available to Indian companies for expanding their operations abroad. Overseas investment, once considered a drain on India’s scarce foreign exchange reserves and a diversion of domestic investment, has given way to supporting India’s national champions as they try to compete in the global marketplace. In fact, borrowing abroad in international financial markets has allowed Indian firms to finance their foreign acquisitions. Indian companies did borrow—within strict regulatory limits—given the low global interest rates starting in 2000 (post-dotcom era). Tata Steel (part of India’s oldest and largest conglomerate, Tata Group) borrowed heavily to purchase Anglo-Dutch steel-maker Corus in 2007 for $12 billion. Tata Motors, another division of Tata Group, took a loan of $3 billion to acquire prestigious Jaguar Land Rover from Ford Motor Company in 2008. Hindalco, India’s biggest aluminum manufacturing company, borrowed $3 billion to buy Novelis, a manufacturer of aluminum products in Canada.1 Suzlon, an Indian manufacturer of clean energy wind turbines, sold convertible bonds to acquire Germany’s REpower.

Are all of these acquisitions fundamentally sound? No, some have not worked out as planned. While these acquisitions may seem daring, in many cases they were defensive strategies. With ongoing globalization and because India opened its economy to foreign competition, many in corporate India believe that the best way to protect their domestic turf, and grow as well, was to venture overseas with the primary motive of acquiring new technologies, specializing, and gaining scale economies. If acquisition of foreign firms hadn’t occurred, then Indian companies would face increased foreign competition at home or be acquired by another company. Because Indian corporations are often seeking foreign know-how and technology, they often retain the managers and key personnel of acquired firms.

LO-1

Summarize the major entry strategies used by companies, especially those from emerging economies, in the globalization process.

risk profile

the potential financial loss that entrepreneurs are willing to take in a business

Introduction

In this chapter we will explore the reasons why and how firms engage in international business, and we’ll also study international movements of factors of production (i.e., land, labor, capital, and technology). Traditionally, we would consider factors of production to be mobile only within a country, but as we have seen with the advent of international organizations, such as the IMF, World Bank, and WTO (all discussed in Chapter 1), factors of production have become relatively mobile. This is especially true within regional economic integration blocs (discussed in Chapter 3).

By observing what is going on in the world, one can see the importance of international business. Entrepreneurs from all over the world purchase goods, services, real estate, or even mines and technology in other countries. For example, in 2010, Chinalco, a Chinese, state-owned aluminum manufacturing company bought a bauxite mining interest in Australia. That same year, Donald Trump, an American real estate magnate, bought real estate in Scotland, hoping to build a billion-dollar golf course and resort there. Also, when global export of services are analyzed, it can be shown that there are millions of Asians working in the Middle East just as there are millions of Mexican and Central American workers in the United States. In addition, thousands of management consultants and engineers from the United States, Japan, and Europe export their services by working outside their respective countries—as their services are outsourced to foreigners. Next, the chapter will show how export of technology is relatively easy provided it is done legally. Finally, this chapter will closely examine foreign direct investment (FDI), which is a major focus of international business (and briefly discussed in Chapters 2 and 3). FDI describes the motives behind the movement of capital from one country to another to purchase foreign assets, and it also involves ownership, management, and control of those foreign assets (manufacturing facilities, branch offices, etc.). This is done through multinational enterprises (MNEs), sometimes referred to as multinational corporations (MNCs), transnational corporations (TNCs), or transnational enterprises (TNEs).

As mentioned in earlier chapters, globalization used to imply, largely, that businesses expanded from developed to developing economies. The opening vignette, however, reinforces that mergers and acquisitions (M&A) activity now flows in both directions and increases also from one developing country to another. Emerging-market MNCs are now competing furiously against those from rich countries. There has been a sharp increase in the number of emerging-market companies acquiring established businesses and brands in the West, starkly demonstrating the fact that globalization is a two-way street (see Exhibit 1.3). Furthermore, several U.S. financial institutions avoided bankruptcy in the Global Credit Crisis of 2008–2009 only by obtaining financial support from sovereign-wealth funds (state-owned investment funds) of various Persian Gulf states and the Chinese government.

8-1 Strategy Choice and Implementation:

Going International2

There are several ways that domestic businesses can participate in and profit from international operations; much depends on the amount of risk (ownership, operation, or transfer) that entrepreneurs are willing to take. A fundamental consideration that must be made in business is the risk–return trade-off. In general, the greater the risk (loss of capital invested) entrepreneurs are willing to take, the greater the rewards (profit) they are likely to reap. The converse is also true. Thus, when firms decide to go international, as indicated in Exhibit 8.1, a wide range of opportunities may be available, and entrepreneurs can choose the approach that suits their risk profile (i.e., the amount of potential financial loss they are willing to take).