"Lifting the Lid: Scandals Show Risks at Far-Flung Operations

"Lifting the Lid: Scandals Show Risks at Far-Flung Operations:

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By Arindam Nag and Siobhan Kennedy

NEW YORK/LONDON (Reuters) - The current crop of accounting scandals highlights how multinational corporations can get hit hard by inadequate controls at foreign units, especially if those businesses are under pressure to meet tough financial targets.

Accounting problems announced recently by Swiss recruitment firm Adecco SA, like those revealed last year by Dutch retailer Ahold NV, center on activities that took place in the United States, thousands of miles from their head offices. Even the multi-billion-euro scandal at Italian dairy group Parmalat may have been partly triggered by its aggressive expansion in North and South America.

Industry experts blame internal supervisory systems that often fail to adequately cover faraway units. This may not only encourage local employees to cut corners and cover up difficulties for fear of upsetting headquarters but also allow executives to hide troubles from investors and regulators at home.

'If a corporation consists of a far-flung empire that can impede the information from flowing, that sometimes creates opportunities for renegade executives to take unfortunate liberties,' said Michael Young, a lawyer with Willkie Farr & Gallagher.

Adecco has not provided many details of its recent problems, saying only they involved internal controls at its North American operations. Ahold is still trying to recover from the fraud at its U.S. food distribution business while the shenanigans at the now insolvent Parmalat include a web of vehicles in offshore tax havens such as the Cayman Islands.

Lack of supervision over three areas usually triggers red flags: poor inventory management, improper control over collecting receivables and using lenient methods to recognize revenue.

The problems can be accentuated when a company, instead of building a business in a foreign land decides to buy one and in some cases bases its international expansion strategy on a series of acquisitions.

While they may gain local brand names, staff, customers and connections, the acquirer can also inherit weak accounting and internal governance systems that could create havoc in the future.

'The seeds (of today's scandals) were planted years ago,' said Young.

Some experts say that while modern businesses have decentralized, putting a lot more power in the hands of local managers, they have also imposed stiffer profit targets on them.

Rather than risk their jobs by admitting they have failed, some managers may find creative, and sometimes eventually fraudulent, ways to cover up gaps in a unit's performance. "