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Common Problems Analyzing Foreign Financial Statements
There are a number of significant challenges facing individuals responsible for evaluating the financial condition of foreign customers or foreign applicants for credit terms. Some of the most significant of these challenges are listed below:
- Many creditors have no idea about the standards of training or independence required of auditors in foreign countries.
- Many foreign countries do not have the anything approaching the number of accounting and auditing rules as are in effect in the United States. Consequently, credit professionals in many cases cannot accuracy of financial statements presented by a foreign customer even when the statements are audited.
- Even when statements have been audited, it is usually difficult to know the scope of the audit, or how rigorous the auditor is required to be.
- The statements will be denominated in a foreign currency, not in US dollars, necessitating currency conversions.
- In many countries, a company will have several sets of books - each for different purposes. Chances are that if a customer has multiple sets of books that they will share with a potential creditor the statements that make the company look the most creditworthy.
For all of these reasons, credit professionals must view foreign financial statements with a certain amount of professional skepticism. More importantly, they need to spend the time necessary to learn as much as possible about how to effectively assess the financial health of their foreign customers and applicants. Why? Because as the global economy continues to grow and barriers to import and export continue to be removed, export credit management will become more important for U.S. based companies and most of these companies will either assume that (a) their credit department is equally capable of managing foreign and domestic credit risk or (b) that any shortfalls in terms of training and education have been addressed and corrected to the point that the credit manager or credit analyst can identify issues and concerns about foreign statements with clarity and based on a solid understanding of the risks associated with evaluating foreign financial data.
© 2009 by Michael C. Dennis. All Rights Reserved. Excerpted from "Credit and Collection Forms and Procedures Manual" by Michael C. Dennis