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Whether financial statements of public U.S. corporations provide sufficient information to the public to determine a corporation's tax payment to the U.S. Treasury and its involvement in "tax shelter" transactions has been much debated since the well publicized collapses of Enron Corporation and WorldCom, Inc. In this paper, we use specific examples to demonstrate how "income tax note" data can be analyzed to answer these two questions and, in so doing, point out the limitations of using financial accounting information to address tax-related issues. We conclude with suggestions to increase the transparency of a corporation's tax activities through enhanced disclosure.

We use event study techniques to gauge market participants' ex ante perceptions regarding the benefits and burdens of the Schedule M-3, and structural break analysis to investigate whether managers make ex ante or ex post changes in book-tax differences as a result of this mandatory change in federal tax return disclosures. We find evidence suggesting investors believe ex ante the substantial increase in book-tax difference disclosures will increase future tax burdens and/or tax-compliance costs. Investors also appear to believe the M-3 may be more costly for firms having the types of book-tax differences that attract additional IRS scrutiny (e.g., discretionary permanent differences) and when such firms are weakly monitored. Further, we find evidence of a substantial reduction in our proxy for discretionary permanent book-tax differences prior and subsequent to the implementation of the M-3 and other regulatory events, suggesting both ex ante and ex post real effects on firm behavior. JEL Classifications: G14; H25; H26; M48. Data Availability: Data used in this study are available from public sources identified in the paper.

We discuss the accounting rules that apply to reporting a U.S. company's international operations. We use examples to illustrate diversity in accounting and offer caveats for policy makers, standard setters, analysts, and researchers regarding their interpretation and use of fi nancial accounting information.