Corporate Governance,

1
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
  companys 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