Book Reviews

Abstract

A Google Scholar search of the title “Taxation of Multinational Corporations” gives approximately 44,500 hits. In conjunction with “Accounting,” “Finance,” and “Public Economics,” the search results are similar. These numbers show that international taxation is a vital research area that deals not only with fiscal borders, but also crosses the borders of academic disciplines.The monograph Taxation of Multinational Corporations by Jennifer Blouin (Wharton School, University of Pennsylvania) is the most recent issue in the series entitled “Foundations and Trends® in Accounting.” The objective of this series is to guide academics through the most important literature in a certain field of accounting research by means of high-quality surveys. The objective of this number in the series is to familiarize accounting researchers with current research questions and major publications in international taxation, regardless of whether the papers were published in accounting, finance, or public economics journals. This monograph should prove useful for non-tax accounting researchers, as well as for doctoral students in tax accounting interested in the issues arising in international taxation.By focusing on the impact of taxation on decisions by U.S. multinationals related to their cross-border activities, the monograph complements the excellent review of the tax literature by Hanlon and Heitzman (2010). Citation of this review article in the monograph would have constituted valuable information for the interested reader.The monograph is structured in seven chapters. Chapter 1 introduces the reader to various tax-driven problems and decisions faced by multinational corporations (MNCs); among them, location decisions as the most influential decisions from a welfare and tax revenue perspective, as well as repatriation decisions and profit-shifting incentives. The author correctly points to tax avoidance by MNCs that may result from overlapping tax claims by at least two jurisdictions. Although tax avoidance incentives are indeed a major threat to national tax revenues, the efficiency-threatening effect of double taxation could be initially mentioned.There exist two basic systems of avoiding international double taxation as described in the monograph: a territorial system exempting foreign income in the domestic country, and a worldwide system crediting foreign taxes against the domestic tax liability. Although the majority of OECD countries have implemented territorial systems, most of the empirical research in top-level academic accounting journals is based on data of U.S. MNCs facing a worldwide system. The author openly admits the resulting U.S.-centric view of the monograph (abstract and p. 3). It could be noted that U.S. data are less dominant in related fields of tax research, e.g., in public economics, in analytical tax research, or in second-tier journals. However, given the aims and scope of the monograph series focusing on research published in top-level journals, this limitation seems justified.Chapter 2 provides an overview of the taxation of U.S. MNCs, focusing on the principle of worldwide taxation, tax deferral, and the foreign tax credit (FTC). Under worldwide taxation, total income from the worldwide operations of a U.S. firm and its branches and subsidiaries is subject to U.S. taxation. Whereas the U.S. income and foreign income of the U.S. parent company and its branches are immediately taxable, the income of foreign affiliates organized as separate subsidiaries is taxable only upon repatriation, but not upon realization (deferral). Double taxation is avoided by crediting foreign taxes on foreign-source income against the U.S. tax liability. In contrast to most jurisdictions with territorial systems, the U.S. foreign tax credit (FTC) is not limited to the direct credit of foreign taxes paid by the parent company, but also includes the indirect credit of foreign taxes paid by subsidiaries. The FTC limitation on aggregate foreign-source income (the so-called overall limitation) is another element that distinguishes the U.S. from other countries, which typically practice a per-country limitation. Further U.S.-specific characteristics of the FTC are the income-basket limitation and an FTC carryforward and carryback that are denied by many jurisdictions.All of these principles of U.S. international tax law are clearly presented. Non-tax accounting researchers and non-U.S. tax researchers alike will gain useful insights from this description. Only one paragraph on Subpart F rules (p. 8) requires knowledge of the technical details of U.S. corporate law. Brief historical notes on past legislation, e.g., on controlled foreign corporations (Subpart F) legislation and the foreign tax credit, enhance the understanding of current U.S. tax law. Additional suggestions for further reading on U.S. tax law, although not being top-level research, would have been helpful for non-U.S. researchers.Chapter 3 is the most detailed part of the monograph. This chapter discusses the impact of taxation on investment and especially on repatriation decisions. Section 3.1 is designed to provide a theory of the impact of taxes on the investment decisions of MNCs. Actually, this section contrasts the concept of capital export neutrality with capital import neutrality and the corresponding systems of worldwide versus territorial taxation. Capital ownership neutrality, as an extension of these concepts, is not mentioned (see Desai and Hines 2003).The analytical part of Section 3.1 (pp. 16–18) shows how the difference between U.S. and foreign taxes affects the initial capital contribution of foreign subsidiaries, and proves that repatriating and recontributing capital back to the subsidiary (“roundtripping”) cannot be optimal. The understanding of this paragraph (p. 17) is complicated by a typo in the equations (Equations (3.4) and (3.6) are identical, but their difference in (3.7) is non-zero). The survey part of Section 3.1 mainly refers to research from the 1980s to the 2000s.Section 3.2 deals with the repatriation decisions of U.S. MNCs. The author first presents a simple analytical model of repatriation that clearly shows the tax incentives as functions of after-tax rates of return. Thus, it becomes obvious that tax rate differentials determine repatriation policy. It would have been a helpful extension to add that real-world investment and repatriation decisions are essentially multi-period problems under uncertainty with multiple intertwined decision variables. If an MNC has n subsidiaries and a planning horizon of T periods, there are n T non-negative repatriation variables, which are all interdependent due to the overall limitation and the carryover rules of the FTC. In addition, n T real-valued investment variables have to be taken into account. The reader receives a slight impression of the complexity of real-world tax planning later in Section 3.2.4, where some more details of the FTC, e.g., the differentiation between direct and indirect tax credit, are mentioned.An overview of the empirical studies on the impact of taxation on repatriation in Section 3.2.2 refutes earlier theoretical results, predicting the irrelevance of repatriation taxes, and shows that repatriations are a decreasing function of the U.S.-foreign tax rate differential. Potential explanations for this effect are varying definitions of taxable income and a non-stationary FTC position. By referring to the separation of permanent and transitory components of repatriation taxes, the author points to a hitherto unresolved research question.Consequently, much attention is devoted to repatriation decisions following the 2004 American Jobs Creation Act (AJCA), which temporarily reduced the tax cost of repatriations and, thus, represents an example of varying repatriation tax rates. The author derives conditions for optimal repatriation under the AJCA and provides empirical evidence that repatriating firms had substantially higher share repurchases than non-repatriating firms, although repatriating firms were required to invest in approved activities.Given the usual tax penalty on repatriations to the U.S., the question arises whether mechanisms other than dividends can be used as repatriation devices. This issue is addressed in Section 3.2.5. Tax rate differentials induce an obvious incentive to finance subsidiaries in high-tax countries with debt and to finance subsidiaries in low-tax countries with equity. On page 32, the author states that “the withholding tax rates on the tax-deductible remittances may be substantially higher than the withholding rates on dividends.” While withholding tax rates are sometimes higher for royalties than for dividends, it should be noted that many double taxation treaties have lower withholding tax rates on interest income than on dividends, aggravating the above-mentioned financing incentive. The cited literature provides confirming evidence.The remarks on tax havens in Section 3.3 lead the reader to the income shifting and transfer pricing decisions discussed in Chapter 4, constituting the second main part of the monograph. The introduction and the theoretical part of this chapter clearly describe the tax-induced incentives for income shifting within MNCs by means of adjusting transfer prices for intra-group sales. In the theoretical literature, it has been intensively discussed whether a single transfer price or separate transfer prices should be used for taxation and managerial reporting purposes. (For an integrated view, see Hiemann and Reichelstein [2012].) This important issue is briefly addressed with a single analytical reference. Some empirical evidence would have been helpful.The overview of the empirical literature on income shifting is very detailed. Even for tax researchers, it may be novel that tariffs rather than taxes are a pivotal determinant of transfer pricing. Although intra-group debt financing is a major device for international profit shifting, this issue is only incidentally mentioned. This is also true for thin capitalization rules, which have been implemented as a fiscal countermeasure against excessive debt financing of subsidiaries in high-tax jurisdictions (p. 39, fn. 4). Against the background of formula apportionment as the current intra-U.S. and proposed intra-EU tax allocation mechanism, it would have been a useful extension to address the problem of high compliance costs associated with transfer pricing documentation requirements.In Chapter 5, the author highlights the interplay of tax- and non-tax considerations for the location and repatriation decisions of U.S. MNCs. This chapter suggests that the international accounting literature has only recently picked up the interdependence of tax incentives and financial reporting incentives, although at least three academic disciplines have intensively investigated international taxation for decades. However, as far as I know, in jurisdictions with book-tax conformity like Germany, the economic effects of interrelated tax and financial accounting have been explored since the 1980s. Against the background that some German tax privileges were discreetly implemented via modifications of local GAAP, it is an interesting anecdote in accounting standard setting that the convergence of IFRS and U.S. GAAP has been affected by lobbying activities related to repatriation tax obligations (pp. 49–50).The author provides a lucid explanation for the combined tax and financial reporting effects on repatriation decisions by an example on the Indefinite Reversal Exception (p. 48). Obviously, the (non-) declaration of current earnings as permanently reinvested affects the MNC's repatriation tax expense and, hence, the effective tax rate.Chapter 6 of the monograph presents recent developments in the taxation of U.S. MNCs. Apart from mentioning Congressional activities to confine tax sheltering, this chapter focuses on the current discussion of moving from a worldwide to a territorial system of corporate taxation.With only 14 printed lines, Chapter 7 is a very brief conclusion of the monograph. This chapter would have been ideal for suggestions for further research in international taxation.Evidently, the taxation of multinational corporations is an extremely large and diversified research area, so that a single survey is unable to cover all of the complex aspects arising in this context. Consequently, some research questions are neglected in this monograph; among them, group taxation, the taxation of relocation activities, AMT issues in international taxation, the use of holding companies, compliance costs, and alternative tax allocation mechanisms like formula apportionment. However, this monograph provides a very valuable extension of the survey by Hanlon and Heitzman (2010) with respect to repatriation decisions, transfer pricing, and non-tax considerations of U.S. multinationals.KENNETH A. MERCHANT and KATHARINA PICK, Blind Spots, Biases, and Other Pathologies in the Boardroom (New York, NY: Business Expert Press, 2010, ISBN-13: 978-1-60649-070-9, pp. x, 151).Shareholders vote for individual corporate directors, and corporate proxy statements provide descriptions of the experience, qualifications, and skills of the individuals being nominated for election to boards of directors. Yet an individual director only has the power to act on the corporation's behalf as one of a body of directors acting as a board.1 The central theme of this book is that boards of directors are not mere aggregations of individuals, but complex social systems that exhibit tendencies that occur in groups, including common blind spots, biases, and other similar pathologies. This book is intended for board members, executives, and advanced students who want to learn more about board behavior, particularly the negative effects of group tendencies. One goal of the book is to provide insights for board members and regulators who are interested in improving corporate governance. A second goal is to provide insights for shaping expectations about the degree and quality of advice and oversight that boards can provide, given their inherent limitations.The book unfolds as follows. Chapter 1 describes group tendencies and biases that can cause highly intelligent, energetic, and well-intentioned individuals to collectively misperceive risks and fail to recognize problems because of how they frame decisions, focus on unimportant details, and suppress dissent. Chapter 2 describes how groups can change individual behavior (social loafing and group conformity), Chapter 3 discusses cognitive limitations of groups because of shared information (shared information bias) and shared concerns (pluralistic ignorance), and Chapter 4 describes the tendency of groups to make riskier decisions (group polarization). Chapters 5 and 6 describe how group conformity (groupthink) can be dysfunctional and can entrench behavior that may be inappropriate for certain situations (group habitual routines), Chapter 7 explains why conflict is inherent in groups, Chapter 8 explores the role and misuse of power, and Chapter 9 discusses how groups can cause productivity losses. Finally, Chapter 10 discusses ways to counteract or overcome these tendencies, as well as dynamics to enhance the effectiveness of boards.Most chapters begin with a boardroom vignette to motivate the descriptions of the group tendencies and biases, their possible effects, and their functioning in real or plausible board situations. The authors acknowledge that the descriptions have not been developed from studies of boards of directors. Instead, the descriptions rely heavily on findings in experimental social psychology, which the authors believe provide “a nice blend of theory and practice, rigor and relevance” (p. x). Yet this reliance on experimental findings is a potential limitation. Experimental psychologists and economists have long acknowledged the artificial nature of the groups, tasks, events, and settings of experimental research. In particular, the tasks used in many experiments about groups may have experimental but not mundane realism.2 In particular, the experiments are not likely to reflect or capture the critical evaluative judgments and events of relational boards selecting from among alternative courses of action in fulfilling their advisory and oversight roles and responsibilities.The authors overcome this limitation by relying on experiments that were used to test theories and by using both the theories and findings to develop the descriptions of the group tendencies and their possible effects. They focus on findings that have been replicated many times, using a wide variety of different tasks and settings. In addition, they focus on theories and findings that they believe are highly relevant for boards, based on their experiences in participating in and observing board meetings in companies and in interviewing board members.The book describes about a dozen tendencies and biases inherent in all groups. Consider two examples. First, “social loafing” is the tendency for individuals to reduce the effort they put into a task when they are working as part of a group as opposed to working alone. A famous experiment by Max Ringelmann measured how hard subjects pulled a rope (Kravitz and Martin 1986). Subjects pulled a rope harder when they did it individually than when they were pulling as part of a team. This result was partially attributable to the difficulty of coordinating group effort as the size of the group increases, but subsequent studies found that this result also was attributable to individuals believing that their individual efforts will not be visible and identifiable to others, will not necessarily impact group performance, and the task has little meaning or significance for them.Social loafing is used to explain how highly accomplished and respected individuals can appear to be inattentive, disengaged, or disinterested in the performance of their director duties. To minimize social loafing, the authors suggest that boards structure board discussions, encourage work in standing or ad hoc committees, and evaluate directors individually.Second, “groupthink” is a way of thinking where pressure for unanimity overwhelms an individual's motivation to realistically appraise alternative courses of action. Groupthink is caused by social pressure and a tendency to want to avoid confrontation. Studies by Janis (1982) and others demonstrated that individuals often conform to majority viewpoints, not only because they do not trust their own perceptions, but also because they do not want to stand out from the crowd for fear of being ridiculed. Groupthink is more likely when groups are very cohesive, insulated from outside sources of information, have a strong and directive leader, and are under stress.Groupthink may cause directors to reach a consensus too quickly because of the way social similarities shape their perceptions and decision making, salient norms reinforce consensus-based decision making, they have unqualified support for the CEO, and open dissent is rare. To minimize groupthink, the authors suggest that boards include members who have different backgrounds and viewpoints, seek expert information from advisors and consultants, ensure that a range of alternatives is considered, create a culture in which members are empowered and expected to debate and challenge each other, and include members with relevant expertise.The authors focus on specific group tendencies and biases and provide advice about how to mitigate potential negative effects. This approach is another potential limitation, because the underlying group processes and dynamics overlap and interact, resulting in conflicting advice. The final chapter focuses on unavoidable board tensions and some practical advice about avoiding or minimizing the effects of the most serious tendencies and biases, including creating constructive dissent, fashioning the right board composition, and using board evaluations to improve board and corporate performance.This book is relevant and timely for accountants and auditors interested in improving corporate governance and financial reporting. A recent survey found that a third of audit committee members surveyed indicated that they believed that groupthink tendencies influenced their meetings (Audit Committee Institute 2011). A thought paper from the Committee of Sponsoring Organizations of the Treadway Commission (COSO) highlighted the potential effects of groupthink, as well as bias-inducing tendencies of overconfidence, confirmation, anchoring, and availability on board behavior, and how their effects can be mitigated by seeking opposing and disconfirming evidence, questioning expert opinions, and encouraging opposing points of view (KPMG LLP et al. 2012). Schrand and Zechman (2012) suggest that overconfident executives may be more likely to exhibit an optimistic bias and, thus, may be more likely to start down a slippery slope of growing intentional misstatements.This book is a valuable resource for understanding and improving board judgments. Most discussions of corporate boards focus on best practices for board size, composition, structure, leadership, focus, and evaluations, but fail to recognize that a board is a group and that group judgments, although often better than individual judgments, can be affected by tendencies and biases inherent in all groups, even boards that have embraced best practices. Awareness of these group tendencies and biases, as well as their symptoms, causes, and possible ways to minimize their effects, is an important initial step in improving board judgments and corporate governance.CHRISTOPHER NAPIER and ROSZAINI HANIFFA (editors), Islamic Accounting (Cheltenham, Glos, U.K.: Edward Elgar Publishing Limited, 2011, ISBN 978-1-84844-220-7, pp. xx, 740).What is to be understood by the term “Islamic accounting”? The question has arisen in the context of the development of the Islamic financial services industry (IFSI) in recent decades. The raison d'être of IFSI is Islamic religious law, the Shari'a, and its interpretations in Islamic commercial jurisprudence, the Fiqh al Muamalat, according to which certain forms of transactions and financial instruments that are widely employed in conventional finance, as well as the conducting or financing of activities connected with alcohol, pork, gambling, and armaments, are prohibited. These include (the Arabic terms are in brackets): any form of interest receipts or payments [riba], short selling and speculation in general [maysir], and vagueness or ambiguity of contractual outcomes [gharrar]. Islamic finance, therefore, uses forms of contract based on Fiqh al Muamalat (known as the “nominate contracts”) and financial instruments which avoid these prohibited elements. The resulting transactions call for specific accounting treatments that may not be indicated within “generally accepted accounting principles” such as U.S. GAAP or the International Accounting Standards Board's (IASB) IASs and IFRSs. For this reason, a specialized accounting standards body, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), was set up in 1991, and has since issued around 25 financial accounting standards.In a narrow sense, “Islamic accounting” might, therefore, be understood as accounting as required by AAOIFI's standards, although such a usage is debatable for reasons I will give below. However, for the editors of this weighty collection of 33 papers (most of which have been previously published in journals, and are reproduced from the originals) plus an introductory chapter, the term has a much wider sense or set of senses. In the introductory chapter, written by the editors and entitled “An Islamic Perspective of Accounting,” the narrow sense is presented first. The second sense that they mention is associated with notions of social responsibility within a framework of religious ethics: accounting is seen through the lens of a corporate governance (CG) framework that, in contrast to the neo-liberal and secular perspective that characterizes the U.S. and U.K. approach to CG, with its emphasis on the rights of investors and creditors, stresses accountability to God for socially responsible behavior (including transparency and fair dealing, as well as environmental sustainability). While the first, narrow sense of “Islamic accounting” is concerned with technical issues such as recognition, classification, and measurement, as well as disclosure, this second sense is particularly concerned with the latter, as well as with corporate governance more generally. A third sense of the term is suggested by the need for accounting treatments to provide an appropriate basis for determining liability to zakat, a type of wealth tax or obligatory (for Muslims) religious levy intended to finance social causes such as the alleviation of poverty. The book also contains papers concerned with the auditing of Islamic financial institutions and with the history of accounting in the Islamic world, as well as a paper on management accounting systems in Islamic and conventional banks.As its title suggests, the general thrust of the book's contents is Islamic particularism in accounting; namely, the thesis that accounting (in the broad sense together with corporate governance), as envisioned and practiced from an Islamic perspective, is qualitatively and not just technically different from conventional accounting. The second sense of the term “Islamic accounting” is, thus, clearly central to this thesis. However, the book contains only a minority (less than 25 percent) of empirical papers, and it is to these that reference must primarily be made in assessing to what extent the thesis is effectively supported.After the introductory chapter by the editors, the book is divided into six parts: Conceptual Framework for Islamic Accounting (three papers); Accounting Ethics and Social Responsibility (seven papers); Corporate Reporting (nine papers); Accounting Practice and Zakat (seven papers); Auditing (three papers); and Islamic History of Accounting (four papers).In Part I, a particularly significant paper (Chapter 2) is that by Rifaat Ahmed Abdel Karim, who was at the time secretary-general of AAOIFI. The author explains the rationale for the setting up of AAOIFI (under its initial name, the Financial and Accounting Organization for Islamic Banks and Financial Institutions [FAOIBFI]). The context of the financial reporting issues and problems faced by Islamic banks are also well explained in the previous paper (Chapter 1), by Moustafa F. Adbel-Magid.Dr. Karim states that two options were considered by FAOIBFI in developing objectives of financial accounting (for Islamic financial institutions):The author tells us that after a lengthy process of discussions involving accounting academics and practitioners, Shari'a scholars, Islamic bankers, and officials in central banks, it was agreed that the second approach should be adopted. Both approaches were considered to be in compliance with Shari'a precepts, so that there was no reason to reject the second approach. Moreover, a similar approach was adopted in developing the concepts of financial accounting, which comprised the following:An example of the issue mentioned under (c), above, is the recognition of profit under a type of Islamic credit sale transaction known by the name of the “nominate contract” employed as Murabaha, which is a sale at cost (which must be disclosed) plus a mark-up or gross profit margin. Payment of the Murabaha price is typically made by installments, which raises the question of how the profit element should be recognized. According to IAS 18, the financial element of the profit (or interest) should be recognized pro rata temporis, using the “effective interest rate” method, while the nonfinancial element should be recognized when the sale takes place. However, the Murabaha mark-up is not interest, and Islamic banks could interpret IAS 18 in various ways, either to recognize all of the mark-up as profit at the time of the sale, or to recognize it as profit at the conclusion of the contract (when the final payment is made), or, indeed, by various methods of recognition pro rata temporis. One might suggest that the mark-up could be decomposed into the “pure interest” element and the “pure gross profit” element by reference to prevailing market interest rates, but that would in fact be an example (to quote from (b), above) of a concept “used in traditional financial accounting but … inconsistent with Islamic Shari'a.” AAOIFI, in its financial accounting standard on Murabaha, settled on a method of recognition of the entire mark-up as profit pro rata temporis.The author's explanations of the raison d'être of AAOIFI and its standards are amplified in another paper by him, which appears as Chapter 12 in Part III of the collection. A paper in Part IV of the collection, which appears as Chapter 24, by Ros Aniza Mohd. Shariff and Abdul Rahim Abdul Rahman, provides further support to the proposition that accounting practices for Islamic transactions (in this case, Islamic leases) are divergent in the absence of generally accepted and applicable financial reporting standards.The papers by Dr. Karim present a particularly well-informed view of what may be meant by “Islamic accounting” in the first, narrow sense mentioned above in a financial accounting standard-setting context, namely, accounting based on the second of the two options considered by FAOIBFI/AAOIFI. In contrast, most other papers in the collection seem to favor the first of the two options. For example, in the following paper (Chapter 3), Roszaini Haniffa (one of the editors) and Mohammad Abdullah Hudaib take the view that “[b]ased on the limitations of conventional Western accounting, the Shari'a Islami'iah is proposed as the foundation in building a theoretical framework for IPA [the Islamic perspective of accounting]” (p. 43). Other papers in the collection also seek to link the notion of “the Islamic perspective of accounting” with a more general critical perspective on accounting; for example, in Chapter 17 by Rania Kamla, Sonja Gallhofer and Jim Haslam, which links Islamic principles and accounting for the environment within a critical perspective.We have, therefore, in this collection a contrast between:Whether this more radical sense of “Islamic accounting” is significantly reflected in practice is an issue on which the empirically based papers in this collection should be able to shed light. It is, therefore, to these that I will now turn. While none of the papers in Part II, Accounting Ethics and Social Responsibility, are empirically based, three of the papers in Part III, Corporate Reporting, are. The same is true of one paper in Part IV, Accounting Practice and Zakat. These papers cast light on the extent to which the more radical sense of “Islamic accounting” is significantly reflected in practice. Three other empirically based papers are included in the collection, Chapters 25 and 26 in Part VI and Chapter 29 in Part V, but as they do not bear on the issue identified above, they will not be examined here.Chapter 16, a paper by Maliah Sulaiman, reports the results of a “laboratory experiment” using students as surrogates for investors in testing whether certain financial reporting methods developed by Baydoun and Willett (1994, 2000), namely, a current value balance sheet (CVBS) and a value added statement (VAS), which the authors argue are more consistent with Islamic principles than a historical cost balance sheet (HCBS) and a statement of profit and loss (PL), would in practice be found to be preferable to, or more important than, the latter. The results indicated that Muslim subjects did not accord significantly greater importance to the CVBS and VAS compared to the HCBS and PL. Nor were the Muslim subjects' responses significantly different from those of non-Muslims. The author concluded that “the suggestion that Muslims ought to be provided with financial information of a different character from what is normally disclosed in Western-based accounting systems, seems to have little support” (p. 380; emphasis in the original).Chapter 18, a paper by Bassam Maali, Peter Casson, and Christopher Napier (the latter being one of the editors), examines the extent to which social reporting by Islamic banks conforms to a “benchmark set of social disclosures … derived by applying Islamic principles in an a priori manner” (p. 417). The authors conclude: “Contrary to our expectations, the empirical findings suggest that social issues are not of major concern for most Islamic banks” (p. 425).In Chapter 19, a paper by Roszaini Haniffa and Mohammad Hudaib, the authors “attempt to assess the degree of variation of communicated ethical identity … against a benchmark of ideal ethical identity” for Islamic banks (p. 431). This variation is measured by what the authors call the Ethical Identity Index (EII). The EII is composed of 78 constructs grouped under eight dimensions. The dimensions are: vision and mission statement; board of directors and top management; products; Zakah, charity, and benevolent loans; employees; debtors; community; and Shari'a supervisory board (internal supervision of Shari'a compliance). Using content analysis, the corporate annual reports of seven Islamic banks for the period 2002–2004 were scored on the basis of the EII. The highest score was 65 percent, while the lowest was only 16 percent, and the three-year means for the other five banks ranged from 28 percent to 48 percent, which, as the authors note (with surprise), “suggest[ed] a large disparity between the communicated and the ideal ethical identities” (p. 444, italics in the original).The findings of these empirically based papers strongly suggest that the more radical sense of “Islamic accounting” is an ideal that is present in the minds of a number of academicians (and maybe others), but is not reflected in practice. In other words, the notion of “compliance with the Shari'a,” which is reflected in the practice of Islamic banks, does not encompass, to any significant degree, “Islamic accounting” in this sense (including financial reporting and corporate governance). Nevertheless, compliance with the Shari'a is the raison d'être of Islamic banks. Hence, such compliance must apparently be understood as not implying the need to practice “Islamic accounting” in the more radical sense.How, then, is such compliance to be understood? What seems to be important is the avoidance of prohibited types of transactions such as charging or paying interest or speculation by short selling, and of strictly prohibited business activities, such as those associated with arms manufacture, alcohol, pork, and gambling, and, in particular, the use of the Shari'a-compliant nominate contracts provided by the Fiqh al Muamalat (Islamic commercial jurisprudence) as a basis for financial transactions and instruments. Apart from avoidance of the prohibited business activities, the use of such contracts as a basis for an Islamic bank's operations constitutes compliance in a narrow, formal (juristic or legalistic) sense, rather than in the broader and more substantive sense of compliance in practice with Islamic ethical precepts, such as those of socially and environmentally responsible business conduct.Thus, what appears to be the thesis of the editors of this collection of papers, namely, that accounting, in a broad sense encompassing financial reporting and corporate governance, as envisioned and practiced from an Islamic perspective is qualitatively (and not just technically) different from conventional accounting, is not, in fact, borne out when the empirically based papers in the collection are considered. Even the technical differences, due to the need for specific rules for the financial reporting of the results of certain Shari'a-compliant transactions, barely constitute “Islamic accounting.”Notwithstanding this lack of coherence, the papers in the collection are well written and well presented (although some are quite old), and a number of them are very informative for readers such as academicians and graduate students interested in Islamic finance. These papers include the editors' introduction, the two papers by Rifaat Ahmed Abdel Karim, and the various empirically based papers cited above. I would not recommend the book to practitioners or to undergraduate students.