Chapter 18

Corporate Governance,
Accounting, and Taxation

Learning Objectives
To explore the purpose and structure of corporative
governance as it is practiced globally
To examine the failures in corporate governance
in recent years and how authorities are responding
to these changes
To understand how accounting practices differ across
countries and how these differences may alter the
competitiveness of firms in international markets
To isolate which accounting practices are likely to constitute
much of the competitiveness debate in the coming decade
To examine the primary differences in international taxation
across-countries and in turn how governments deal with
both domestic and foreign firms operating in their markets
To understand problems faced by many U.S.-based
multinational firms in paying taxes both in foreign countries
and in the United States.

Introduction
The structure and conduct of
corporate governance and the
methods used in the
measurement of company
operations, accounting,
principles, and practice vary
dramatically across countries
Taxation and accounting are
fundamentally related
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Corporate Governance
The relationship among stakeholders
used to determine and control
strategic direction and performance
of an organization is termed
corporate governance
The way in which order and process is
established to ensure that decisions are
made and interests are represented
properly for all stakeholders
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The Goal of Corporate

Governance
The single
overriding
objective of
corporate
governance is
the optimization
over time of the
return to
shareholders

The most widely accepted

statement of good corporate
governance practices are
those established by OBECD
The rights of shareholders
The equity treatment of
shareholders
The role of stakeholders in
corporate governance
Disclosure and transparency
The responsibilities of the
board

The Structure of
Corporate Governance
The internal forces, the officers of the
corporation and the Board of directors, are those
directly responsible for determining the strategic
direction and the execution of the companys
future
The external forces include:
The
The
The
The
The

equity markets
analysts
creditors and credit agencies who lend them money
auditors
multitude of regulators

Auditors and
Regulators
Auditors are
responsible for
providing an external
professional opinion
as to the fairness and
accuracy of corporate
financial statements
These individuals
follow the generally
accepted accounting
principles

Regulatory
oversight of
publicly traded
firms in the U.S. is
provided by
governmental and
nongovernmental
agencies
Securities and
Exchange
Commission (SEC)
Applicable stock
exchange

Comparative Corporate
Governance
Corporate governance
practices differ across
countries, economies, and
cultures and may be
classified by regime
Market-based
Family-based
Bank-based
Government-based
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Comparative Corporate
Governance (cont.)
Corporate governance
regimes are a function of
three major factors in the
evolution of global
corporate governance
principles and practices
Financial market development
Degree of separation between
management and ownership
Concept of disclosure and
transparency

The Case of Enron

Many of the issues related to
corporate governance and its
failures are best described by the
Enron case
Enron Corporation declared
bankruptcy in November 2001 as a
result of a complex combination of
business and governance failures
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Corporate Governance
Reform
The debate regarding what needs to
be done about corporate governance
reform depends on which systems
and regimes are deemed superior
To date, reform in the United States
has been largely regulatory
Sarbanes-Oxley Act
Board structure and compensation
Transparency, accounting, and auditing
Minority shareholder rights

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Accounting Diversity
The fact that accounting
principles differ across
countries is not, by
itself, a problem
The primary problem is
that real economic
decisions by lenders,
investors, or
government
policymakers may be
distorted by the
differences
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Principal Accounting
Differences Across Countries
International accounting diversity
can lead to problems in
international business conducted
with the use of financial
statements
Poor or improper decision making
Hindering the ability to raise capital in
differing markets
Hindering from monitoring competitive
factors

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Principal Differences: The

Issues
The resulting impact of accounting
differences is to separate or segment
international markets for investors and
firms alike
Communicating the financial results of a
foreign company operating in a foreign
country and foreign currency is often a task
that must be undertaken separately from
the accounting duties of the firm
Nine major areas of significant differences
in accounting practices across countries
serve to provide understanding of this
issue and highlight some of the major
philosophical differences

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Principal Differences: The

Issues
Accounting for research and development
expenses
Accounting for fixed assets
Inventory accounting treatment
Capitalizing or expensing leases
Pension plan accounting
Accounting for income taxes
Foreign currency translation
Accounting for mergers and acquisitions
Consolidation of equity securities holdings

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The Process of Accounting

Standardization
There is still some
conflict over the
terminology of
harmonization,
standardization, or
promulgation of
uniform standards
1966 study of
accounting differences
across countries
conducted by
Accountants
International Study
Group

First strong movement

toward accounting
standardization was the
establishment of the
International Accounting
Standards Committee
(IASC) in 1973
Two other recent
developments concerning
international
standardization merit
consideration
General Electric Company
Financial Accounting
Standards Board (FASB)

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International Taxation
Governments alone have the
power to tax
Governments want to tax all
companies within their
jurisdiction without placing
burdens on domestic or
foreign companies that would
restrain trade
Each country will state its
jurisdictional approach in the
tax treaties it signs with
other countries
Treaties establish the bounds
of jurisdiction to prevent
double taxation

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Tax Jurisdictions and

Tax Types
Nations usually
follow one of
two basic
approaches to
international
taxation
Residential
approach
Territorial or
source approach

Taxes are
generally
classified one of
two ways
Direct Taxes
Indirect Taxes

The value-added
tax (VAT) is the
primary revenue
source for the
European Union

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Income Categories and

Taxation
There are three
primary methods used
for the transfer of
funds across tax
jurisdictions
Royalties
Interest
Dividends
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U.S. Taxation of
Foreign Operations
The U.S. exercises its rights to tax U.S.
residents income regardless of where the
income is earned
The income of a foreign branch of a U.S.
corporation is treated the same as if the
income was derived from sources within the
U.S.
Corporations operating in more than one
country are subject to double taxation
The calculation of foreign income taxes
deemed paid and the additional U.S. taxes
due involves the interaction of four
components

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Calculations of U.S. Taxes on

Foreign-Source Earnings: Four
Cases
Foreign affiliate of a U.S. corporation
in a high-tax environment
Foreign affiliate of a U.S. corporation
in a low-tax environment
Foreign affiliate of a U.S. corporation
in a low-tax environment, 50
percent payout
Foreign subsidiary of a U.S.
corporation is a CFC in a low-tax
environment

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Concluding Remarks Regarding

U.S. Taxation of Foreign Income
Recent accounting and tax rule
changes may actually result in
worsening the effective tax rate
and excess foreign tax credit
problem for U.S. corporations
Fuel is being added to the fires of
world governments and their
shares of the world tax pie
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