Treasury task force, which overhauled the regulations, attempted and succeeded in narrowing the gap between consolidated income tax reporting and consolidated reporting for financial statement purposes. The purpose of this article is to discuss some of the major changes and point out how these new regulations narrow the taxable and accounting income gap for consolidations. The "one entity" concept was not accepted "in toto" by the drafters of the new rules. Accordingly, the new regulations do not accept the historical Congressional interpretation that separate, legal corporations, should not obscure the fact that an affiliated group is a single corporation owned by the same individuals and operated as one unit. A series of computations and sub-computations are necessary whenever one undertakes the preparation of the consolidated return and the computation of the consolidated tax liability. A logical starting point is to determine, in accordance with the consolidated return rules, the separate taxable incomes of each member of the affiliated group. The first step is to compute separately for each member of the group all items of income or deductions in substantially the same manner as if separate returns were filed.

In 1964 Myron Gordon hypothesized that business managers can be expected to select those measurement and reporting rules which smooth periodic net income. Normal income and smoothed earnings were defined with considerable rigor. The smoothing hypothesis was tested by considering whether an accounting measurement rule was selected which tended to: adjust the firm's percentage change in earnings per share to the average percentage change in the industry or smooth the firm's earnings per share toward a normal value or smooth the firm's rate of return on common stockholders' equity. The dividend-income basis is particularly open to manipulation. Parent company management may wait until the very end of an accounting period, approximate the size of the parent's earnings, and then arrange to have the subsidiary declare or pass dividends in such magnitudes as to move reported net income in some sired direction. Management's ability to manipulate reported parent profits in this situation is eliminated under two alternative accounting methods for recording subsidiary operations. These methods are consolidated reporting and unconsolidated reporting under the equity method.

The article comments on the compatibility of auditing and management services. Compatibility advocates admit that the performance of management services may create pressures which threaten independence, but quickly point out that pressure exists whether or not the CPA functions as a consultant. Economic pressure is felt by the CPA to retain a client in auditing as well as in consulting. Advocates of compatibility fear that if the CPA were forbidden to perform management and auditing services for the same client this would add substantially to the cost of providing business with all the professional accounting service it needs. In other words, the cost associated with a restriction on services to ensure independence outweighs the cost resulting from a possible decrease in the utility of audited financial statements caused by an impairment of independence. Advocates of compatibility counter that no matter how influential advice is, neither the offering of it nor the acceptance of it gives the adviser the authority or the responsibility of management. No matter how much strength is accorded to either argument, the distinction between advising and decision-making is obviously a debatable one.