1. Corporate Governance, Accounting, and Taxation
Chapter 18
Corporate Governance,
Accounting, and Taxation

2. 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.

3. 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

4. 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

5. 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

6. 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 company’s future
The external forces include:
The equity markets
The analysts
The creditors and credit agencies who lend them money
The auditors
The multitude of regulators

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. The Process of Accounting Standardization
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)
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

17. 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

18. 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

19. Income Categories and Taxation
There are three primary methods used for the transfer of funds across tax jurisdictions
Royalties
Interest
Dividends

20. 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

21. 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

22. 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