Question

Why might an accounting-based control system provide headquarters management with biased information about the performance of a foreign subsidiary? How can these biases best be corrected?

Answer 1

The reasons why accounting based control system provide headquarters management with biased information about the performance of a foreign subsidiary are:-

i. Change in Exchange rates

ii. Transfer prices and

iii. Economic conditions

Change in exchange rates over a period of time, translates the financial data which can be misleading and hence due to home currency appreciation the increase in sales rises that decreases after translation. Using exchange rate for initial rate or forecast rate for this problem. The prices of the multinational firms have to be set based on the significant intra-firm transaction. Due to difficulty in setting the correct prices and incentives to set prices to minimize tax. Since it is not possible and not efficient to use correct transfer prices, the effects of transfer prices considered when finding the performance of a subsidiary. The growing subsidiary indicates profit in an economy at the time of recession that is growing quickly and profitably.

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