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Making the most of NAFTA: accountants expand client services to develop their cross-border business activity.

A year has passed since the North American Free Trade Agreement (NAFTA) was ratified in the United States, and a surge in international trade with Canada and Mexico is providing numerous business consulting opportunities for CPAs.

Companies that wish to take advantage of NAFTA will need WHAT'S the expertise of accountants to assist them with the documentation necessary to gain access to NAFTA markets, solve complex international tax issues and assist in expanding information systems to accommodate the nuances of international trade. Accounting firms also can advise companies on important regional differences and provide the appropriate contacts including Mexican and Canadian attorneys and bankers.

Both large and small CPA firms are reaping the rewards of new business activity generated by NAFTA. "International operations used to be the exclusive territory of Fortune 500 companies," says Richard Jungck, tax partner of Baird Kurtz & Dobson in Kansas City, Missouri, "but now we are seeing our entrepreneurial clients find revenue sources all over North America." In short, the increased volume of cross-border trade has a direct effect on any accounting firm interested in pursuing these service opportunities.

Following are profiles of a broad range of services accounting firms are providing companies that are taking advantage of NAFTA, plus a look at firms that have prepared their staffs to respond to NAFTA's multicultural environment.


Assisting Canadian and Mexican companies gain access to U.S. capital markets is a valuable client service opportunity for CPA firms. For example, Price Waterhouse's capital markets group in Houston helps foreign companies reconcile their financial statements to U.S. standards and follow U.S. generally accepted accounting principles and the Securities and Exchange Commission S-X requirements. The group also helps in due-diligence processes on either side of the border for companies acquiring foreign concerns that need to know the financial conditions of the other entities. Says A. Conrad Johnson, PW senior manager, "Researching the conditions of foreign entities is very similar to an audit.

The firm does on-site analyses of a company's financial conditions measured by both U.S. and foreign standards. Because many companies are closely held, ther may be a lack of public documents, a reluctance to disclose financial data and problems with translation. The firm has prepared its staff to meet the challenge of bilingual and bicultural work."


Managing foreign currency transactions also may provide accounting service opportunities. Such transactions expose a company to possible gains and losses as exchange rates fluctuates. For example, a U.S. company purchasing goods from a Mexican or Canadian company must acquire the foreign currency at the time of the payment. When the exchange rate fluctuates, the foreign currency may cost the U.S. company more at the time of payment than originally planned at the time of the pruchase. Companies can minimize their risk by hedging exposed foreign currency positions. Hedging is accomplished by buying or selling forward exchange contracts for the amounts of the exposed positions. This locks in the cost of the foreign currency while removing the risk. In effect, the risk is transferred to theother party in the forward exchange contract. Accounting firms can educate managements on how hedging works, make suggestions on establishing adequate hedging operations and perform internal control analyses to ensure transactions are hedged according to managements' intent.


Multinational businesses need advice on international tax issues. The international tax environment is complex, making tax planning a critical aspect of any expansion plan. For example, a U.S. company selling in Canada or Mexico receives credit for foreign taxes paid when its income is considered to have a foreign source. It is possible, however, that income from a sale in Canada or Mexico could be considered to have a domestic source and, thus, not be creditable against a U.S. tax liability. This creates a double-taxation scenario. William Zink, a partner and director of international tax at Grant Thornton, Chicago, is in charge of planning the appropriate structure of international commercial ventures and minimizing taxes. Says Zink, "The tax systems are not harmonized. Companies need assistance reviewing the treaty in order to be conversant when applying NAFTA's articles as they relate to and override Mexican or Canadian tax laws."

Another concern is the tax effect of transfer pricing. Advance pricing agreements can be made with both the Internal Revenue Service and the Hacienda, its Mexican counterpart. Accounting firms provide companies with international tax specialists who work in conjunction with economists to review transfer pricing exposures, document pricing methodology, evaluate tax implications and advise on documentation requirements. Peter Paulsen, international tax partner of Ernst & Young's North American business center in Dallas, says the firm evaluates whether a company is a good candidate for an advance pricing agreement. "When a company is interested in an advance pricing agreement, it can attend a prefiling conference with the IRS. We help the company sketch the terms of its particular agreement, assisting with analysis and support of the pricing or costing method applied in its agreement. Throughout the entire process, we work with foreign jurisdictions to ensure that they find the methodology acceptable."


Another client service opportunity involves providing assistance with respect to the rules-of-origin section of NAFTA. Products shipped between Canada, Mexico and the United States must possess a NAFTA certificate of origin to qualify for the treaty's tariff reductions. Complying with these regulations requires competent professional advice. Michael L. Thomas, a manager in the PW NAFTA business center, says the firm's focus is on helping U.S. and foreign companies navigate the many international trade requirements.

NAFTA legislation has extensively revised U.S. Customs laws. As a result, various responsibilities of the U.S. Customs administration have undergone fundamental change. Traditionally, U.S. Customs classified and appraised each shipment as it entered the United States. Now, imports and exports must include detailed information on a certificate of origin for a one-year period. These records are subject to compliance audits, with severe penalties for noncompliance or deficiency. "The trade community now must meet requirements more responsibly and be prepared for U.S. Customs audits," says Thomas. "CPAs can help clients understand and apply the various trade regulations under U.S. Customs rules and requirements. Also, clients will need assistance establishing the needed accounting information systems and records to meet these new requirements. These systems must track the various countries of origin and the related costs of raw materials or finished goods to prove they qualify as NAFTA-originating goods."


Expanding internationally requires complicated accounting information systems. At a minimum, company systems should handle foreign currency transactions. More comprehensive systems must determine regional value for rules of origin and transfer information between branch locations and company headquarters. Rafael Garza, codirector of the E&Y North American business center, says, "Specialists with international experience are needed to assist in establishing such systems. They need to be multilingual, understand the technologies on both sides of the border and know how to integrate a system both within the country and across borders." (See box on page 56.)

Internal accounting controls must be upgraded to accommodate changes in the accounting information systems. Because any changes in the information system involve assessing the impact such changes will have on the internal control system, both external and internal auditors should be involved in designing the new internal control system.


Many firms are offering services beyond the typical tax and accounting services that help bridge cultural gaps. Jay Jessup, director of KPMG Peat Marwick's NAFTA center in Houston, says the center's clients are given "an overview of Mexico and its various regions, advice on how to open new facilities, introductions to appropriate contacts including Mexican attorneys and bankers and follow-up advice on logistics and distribution issues." Additionally, clients are given guidance on line-item analysis, such as how to budget for collections and credit when business practices differ substantially from those the client follows in the United States.

Accounting firms also can help companies select the best foreign market and determine appropriate market entry and distribution decisions. Francine Lamoriello, director of Peat's international trade and investment services in Washington, D.C., says, "In the target markets we do this by performing a detailed analysis of the specific industry including distribution channels, competition and customer buying criteria." The division, says Lamoriello, uses international trade consultants and works closely with a professional staff in Mexico and other countries in the hemisphere to "combine the knowledge of the clients' business and expertise in international trade, investment transactions and local-market conditions to achieve the best strategy for our clients."

Patrick Tabor, international contact partner for Latin America of McGladrey & Pullen, San Diego, says cultural issues play a large role in the success of a business venturing into Mexican markets. Trust based on an established business relationship is key when companies plan to expand into Mexico, Tabor believes. McGladrey helps companies complete an international business planning process, which identifies five critical factors for the success of a foreign business venture: legal, transportation and customs, marketing, financial and accounting (which includes audit, tax and miscellaneous systems work). The firm has established a strategic alliance with affiliates both in Mexico and the United States to provide services in these important areas.

Strategic alliances are the key to providing a one-stop shop for services for companies interested in expanding internationally. G. Edward Powell, head of Price Waterhouse's NAFTA business center, says, "The fastest, most cost-effective method of entering the Mexican marketplace is to join forces with an established Mexican company. Our experience suggests that companies trying to enter the Mexican market without such a relationship often waste substantial time and money simply because they do not understand the different business climate in Mexico."


Companies that manage or consult on investment in cross-border trade under NAFTA are finding a new source of revenue in the sale of informative literature. MHM Resources, a division of Mayer Hoffman McCann in Kansas City, Missouri, is experiencing a boost in demand for seminars and newsletters focusing on NAFTA issues relating to technical business and tax topics. According to J. Timothy Hannan, a firm partner, "These materials are both a source of revenue and an excellent method of marketing the firm's expertise." The firm mails the newsletter Trade Report, directed to manufacturers and wholesalers, to companies in the Kansas City area and sells it to other CPA firms to use in their marketing efforts.

Arthur Andersen also has developed seminars and publications on NAFTA's effects on businesses in the signing countries. The firm conducts seminars on NAFTA in offices across the world and has published a source book providing detailed information on thousands of government and trade contacts. Coopers & Lybrand and the American Institute of CPAs recently agreed to publish jointly three "country guides" containing extensive information on the economic and investment environment of each of the signing countries.


It is too early to understand the long-term impact of NAFTA on accounting services, but it is clear that NAFTA regulations, along with other new international trade agreements, require companies to provide more information and documentation about their goods and services. As a result, CPAs are becoming more involved in interpreting and accounting for the impact international trade requirements have on their clients' activities. "A general trend in NAFTA and other new trade agreements," says PW's Michael Thomas, "is the greater reliance and significance of documentation and recordkeeping. Before NAFTA, no one really contemplated references to acceptable inventory methodologies in the context of trade agreements." Interpreting compliance requirements is just one of the many market opportunities caused by the increase in business NAFTA is providing CPA firms.


* CPA FIRMS HAVE RESPONDED quickly to the numerous business consulting opportunities resulting from the ratification of the North American Free Trade Agreement (NAFTA).

* CONSULTING OPPORTUNITIES FOR CPAs under NAFTA include assisting foreign companies gain access to U.S. capital markets, managing foreign curerncy transactions, solving international tax problems and upgrading information systems.

* FIRMS MUST MODIFY STAFFING requirements to accommodate client demands for cross-cultural expertise by seeking personnel who are multilingual and multicultural. These staff members are responsible for understanding international laws, rules and general business protocol while developing relationships with members in forein offices.

* NONACCOUNTING SERVICES ARE necessary to provide expert information on regional differences, advice on managing new facilities, introductions to appropriate contacts and establishing strategic alliances with affiliates in Mexico, Canada and the United States. Firms also can derive revenues from the sales of NAFTA-specific literature.


The increase in international business means new opportunities and challenges in the area of staffing. For example, Robert D. Crooks, a partner of Coopers & Lybrand, Houston, and the firm's liaison to Mexico, says the firm began investing heavily in resources and consulting with clients on Mexico in 1990 when that country modified its foreign investment law by presidential decree. The firm actively seeks qualified people who are not only bilingual but bicultural as well; thus, the firm prefers experienced people who have lived and worked in Mexico for a period of time.. In addition, the firm has an active two-way exchange program between the U.S. and Mexican offices where tax, audit and consulting personnel spend 18 to 36 months in offices across the border.

Arthur Andersen & Co. and Ernst & Young also hire bilingual individuals and rotate their U.S. and Mexican personnel. According to Roy Hershberger, a partner in Arthur Andersen's international tax practice in Mexico City, the purpose of the rotation is twofold: (1) to have the U.S. and Canadian managers learn the laws, rules and general business environment of Mexico and (2) to develop personal relationships and contacts with the people in the Mexico City office. The rotation program has helped the firm develop a firmwide North American network, giving personnel in the United States and Canada easy access to regional expertise in Mexico.


Here is a helpful list of reading material for those interested in learning more about NAFTA and its service opportunities.

* The Arthur Andersen North American Business Sourcebook by John G. Mott, Triumph Books, 1994.

* Doing Business in Canada, Doing Business in Mexico and Doing Business in the United States, Price Waterhouse, 1993.

* Doing Business in Mexico by Jay Jessup and Maggie Jessup, Prima Publishing, 1993.

* International Business by Mark F. Murray, American Institute of CPAs, 1993.

* NAFTA. An Assessment by Gary Clyde Hufbauer, Institute for International Economics, 1993.

* North American Free Trade Agreement: Assessment of Major Issues, U.S. General Accounting Office, 1993.

DAVID W. CORNELL, CPA, PhD, CMA, is an assistant professor of accounting at the Henry W. Bloch School of Business and Public Administration at the University of Missouri-Kansas City. He is a member of the American Institute of CPAs, the Kentucky Society of CPAs, the Missouri Society of CPAs, the American Accounting Association and the Institute of Management Accountants. NANCY D. WEATHEPHOLT, CPA, PhD, is an assistant professor of accounting at the Henry W. Bloch School of Business and Public Administration at the University of Missouri-Kansas City. She is a member of the AICPA, the AAA, the IMA and the Institute of Internal Auditors.
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Title Annotation:North American Free Trade Agreement
Author:Weatherholt, Nancy D.
Publication:Journal of Accountancy
Date:Jan 1, 1995
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