Title: Financial reporting of Brazilian subsidiaries to Swedish multinational parent companies: a field study

Authors: Arne Fagerstrom, Lars G. Hassel, Gary M. Cunningham

Addresses: Department of Business Administration, Abo Akademi University, Henriksgatan 7, FI 20500 Turku, Finland. ' Department of Business Administration, Abo Akademi University, Henriksgatan 7, FI 20500 Turku, Finland. ' Jonkoping International Business School, Jonkoping University, P.O. Box 1026, SE 551 11 Jonkoping, Sweden

Abstract: With significant foreign direct investment in emerging economies and the European Union requirement that publicly held multinationals present consolidated financial reports, vertical adjustments to information provided by subsidiaries to conform to parent company accounting standards have become important. Yet, this issue has not been investigated significantly. In this study, we explore Brazilian subsidiaries| adjustments for Swedish multinationals to comply with Swedish accounting standards for consolidated financial reports as typical of the issue of vertical adjustments in general. Results show that subsidiaries that are material in consolidated groups seemingly make appropriate adjustments. Other subsidiaries that are not material are inconsistent. Also, some subsidiaries often distort financial results by inappropriately making adjustments before translating to the functional currency. Most subsidiaries use adjustments to smooth income. Lack of guidance and tacit approval from the parent company are possible factors subsidiaries| to make appropriate vertical adjustments. Laxity in the external audit process is apparent.

Keywords: consolidated financial reporting; group financial reporting; vertical adjustments; multinationals; multinational enterprises; MNEs; foreign subsidiaries; currency translation; income smoothing; accounting standards; Brazil; Sweden; external audit.

DOI: 10.1504/JIBED.2009.029011

Journal for International Business and Entrepreneurship Development, 2009 Vol.4 No.3, pp.179 - 190

Published online: 26 Oct 2009 *

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