Financial Services Report
Financial Services Report
In order to succeed in the global market, it is imperative to know the various global financial institutions and the sources of funds for international operations. This paper will identify the role of financial institutions in the global economy and explore changes this industry will be experiencing during the next decade. In addition, this paper will demonstrate the impact these changes will have on Campbell Soup Company.
Financial institutions have the ability to serve as agents for its clients providing financial services. These services include, but are not limited to the facilitation of money, such as credit; investments-related services; stock exchange; and any other accounting or finance services. The global financial system (GFS) refers to those financial institutions and regulations that act on the international level, as opposed to those that act on a national or regional level (Global financial system, 2005, p1).
The International Monetary Fund (IMF), the World Trade Organization (WTO) and the World Bank are considered to be the most important international institutions. The Internal Monetary Fund acts as a lender of last resort to governments in financial distress, e.g. balance of payments crisis, currency crisis and debt default. Decisions are based on quotas, or the amount of money a country provides to the fund (IMF at a glance, 2005, p1).
The World Bank aims to provide funding, take up credit risk or offer favorable terms to development projects mostly in developing countries that could not be obtained by the private sector (What is the World Bank, 2005, p1). The only global international organization that deals with the regulations of trade between nations and settles trade disputes and negotiates international trade agreements is the World Trade Organization (What is the WTO, 2005, p1).
An important area of international finance is the financing international trade and investments. This area must be understood in order to raise funds at the lowest cost possible. There are some organizations that deal with international trade and have access to both the domestic and foreign capital markets. For example, the Eximbank (Export-Import Bank) finances exports from the United States to foreign countries. It facilitates the financing of U.S. exports through landing money to foreign purchasers of U.S. goods and purchasing eligible medium-term obligations of foreign buyers of U.S. goods at a discount from face value (Eximbank Mission, 2005, p1).
When a multinational company has difficulty raising equity capital, due to the lack of adequate private risk capital in a foreign country, the company may explore the possibility of selling partial ownership to the International Finance Corporation (IFC). The IFC is a subsidiary of the World Bank that also provides debt capital and equity capital to qualified companies (Basic facts about IFC, 2005, p1).
These alternative sources of financing may significantly differ with respect to cost, terms, and conditions. Therefore, management must carefully locate and use the proper means to finance international business operations.
Due to the fact that more firms are becoming multinational, it is expected that the GFS will gain importance over the next decade. Expanding operations to foreign countries has become the goal for many U.S. companies. In addition, the above-mentioned financial institutions will play a big role in the decision making if operations can expand abroad or not. Considering that the services the GFS provides encompass a wide array of services, it is likely that the magnitude of this industry will increase proportionately with the speed of globalization. Globalization will be the driving force for the GFS. As our world becomes more interrelated, global financial institutions will become helping guides to companies who want to become multinational.
The fast-paced development and the implications of globalization are noticeable worldwide. Events such as 9/11 and the tsunami disaster in Asia bring people together morally worldwide. In addition, as people grow together morally, their acceptance of international business will increase leading to a growing number of multinational businesses. This trend will have a great impact on the magnitude of the GFS over the next decade.
The Sarbanes-Oxley Act of 2002 will also have an effect on financial services over the next decade. Section 404 requires CEOs and CFOs, as well as external auditors, to appraise controls over all financial transactions within public companies (Financial Services Fact Sheet, p1). It is very costly for companies to meet compliance, and the cost has cut deeply into some of the company profits.
Another circumstance that might affect the financial services over the next decade is that there are only four companies that handle 97% of all external auditing in the United States, PricewaterhouseCoopers, Earnst & Young, Deloitte & Touche, and KPMG (Financial Services Trends and Market Analysis, p1). These four companies also audit over 80% of the public companies in Japan, 66% of those in Canada and over 70% of those in Europe. If one of these companies were caught in a financial scandal near the end of a year could present a risk to the financial markets.
There has been much concern over what should be done in the future to ensure that the competition between the auditing firms continues to be healthy. The regulations in the financial industry are rapidly changing in an attempt to improve disclosure and financial auditing. As these changes develop over time, they will greatly influence the operations as well as the returns of the financial industry.
One multinational company, Campbell Soup Company, is also affected by the changing financial industry. Due to the Sarbanes-Oxley Act, the process of all company functions is currently being audited, costing a tremendous cost to the company. The current independent auditor of the Campbell Soup Company is PricewaterhouseCooper. Should there be additional future regulations beside Sarbanes-Oxley, the auditing process may be changed in the future. Should inflation remain low as predicted, product costs, such as ingredients and transportation, should also remain low. This will also affect the rate of price increases implemented in the future, which may affect future earnings.
The wide array of services the GFS provides has led it to become an important factor for companies who want to operate internationally. As Campbell Soup Company, many US firms are aware of the implications of changes in this industry sector. The most recent events have increased the importance of global financial institutions, and as globalization proceeds, the magnitude of this industry is expected to grow.