Business Readies For Sarbanes-Oxley Compliance

A survey of nearly 400 tax executives regarding compliance with section 404 of the Sarbanes-Oxley Act revealed that 89 percent have begun planning or implementing processes and controls for their company's compliance with this federal law. Conducted by Tax Executives Institute (TEI) as part of its 58th Annual Conference, the October 20 audience survey also showed that a full 85 percent of the respondents had not allocated any additional budget or resources toward that initiative. (Two percent answered "not sure.")

The Sarbanes-Oxley Act was enacted in 2002 to enhance the accuracy of corporate financial reporting. It requires that management's annual report contains both its assessment of the effectiveness of internal controls over financial reporting and the independent auditor's own attestation.

The TEI survey findings represent a paradox of sorts, according to TEI Executive Director Timothy McCormally. "While it's reassuring that most companies are already working toward compliance, there is a bit of a disconnect in having only 13 percent reporting any resources allocated to it, considering the industry generally agrees that compliance is likely to run a substantial tab." McCormally added that the interest level in section 404 is high, noting that more than 1,000 tax executives participated in a September telephone conference call on the provision. (Nearly 600 attended the Annual Conference, where the survey was conducted.)

Estimates of the cost to comply could reach well into the billions of dollars in additional staff, auditing fees, and other resources engaged toward compliance. In fact, a Business Week article released on the same day as the survey reported, "Industry experts say that as a result of these rules, auditing costs are likely to double, while the total tab for compliance [for a multinational company] could top $7 billion in the first year alone."

The TEI survey reveals that nearly all respondents (98 percent) consider one or more factors in their risk assessment, including:

  • Legislative and judicial changes and effect on tax exposure accounts;
  • Changes to business operations (e.g., new products, M&A, etc.), and effect on tax expense accounts; and
  • Changes to information systems, data entry processes or system controls, and effect on tax expense accuracy.

The TEI survey also addressed "provisioning," a term used to describe the practice of setting aside a reserve of funds to cover any unforeseen tax liability. In addressing provisioning, respondents identified one or more of
the following controls as a means to maintain reserves for exposure items, with 72 percent citing use of "most of [the following]":

  • Detailed support of tax reserve is maintained, including account in which the reserve is recorded.
  • Exposure calculations and records are updated and quantified quarterly and reviewed and documented with management.
  • Approvals of changes in exposure items are documented.
  • Calculations of tax and interest are reviewed after controversy is settled and timely communication made of outcomes and any resulting procedure changes.

Lynn Jordan, chair of TEI's Corporate Tax Management Committee, explained that provisioning is a topic of interest because government entities are calling for mandatory disclosure of reserve amounts. Much of the business sector has significant reservations about the move, however, citing the need for confidentiality during dispute negotiations and resolutions with the IRS.

According to Steve Rainey, a federal tax partner at U.S. audit, tax and advisory firm KPMG LLP, who spoke at TEI's Annual Conference and assisted in conducting the survey: "Regardless of how they may view these developments, it's clear that our clients are taking Sarbanes-Oxley seriously and are marshalling whatever resources necessary to step up to the plate."

Lynn Jordan concluded, "There's no question that the compliance landscape has become increasingly complex, and companies whose core competencies do not include accounting are likely to find it necessary to build that internal expertise or seek additional outside counsel."

The survey results are set forth below.

Tax Executives Institute is the preeminent organization of business tax professionals. Founded in June 1944, the Institute today has more than 5,400 members aligned in 53 separate chapters in the United States, Canada, and Europe. TEI members are accountants, lawyers, and other corporate and business employees who are responsible for the tax affairs of their employers in an executive, administrative, or managerial capacity.

Where in the 404 process is your enterprise?

A. Not yet started planning
11.3% (32)

B. In planning stages -- defining approach, setting timeline, determining significant items to be included 29.8% (84)

C. Documenting processes and controls
44.0% (124)

D. Evaluating internal controls to correct deficiencies or add needed controls
11.7% (33)

E. Monitoring control effectiveness
3.2% (9)
2. Where in the 404 process is your Tax Department?

A. Not yet started planning
17.8% (53)

B. In planning stages -- defining approach, setting timeline, determining significant items to be included
27.9% (83)

C. Documenting processes and controls
38.9% (116)

D. Evaluating internal controls to correct deficiencies or add needed controls
12.8% (38)

E. Monitoring control effectiveness
2.7% (8)

3. Has your Tax Department added budget or resources to implement 404?

A. No added budget or resources
85.0% (290)

B. Added budget (consultants, etc.)
10.0% (34)

C. Added personnel
1.2% (4)

D. Added both budget and personnel
1.8% (6)

E. Not sure
2.1% (7)

4. Is your enterprise using consultants in the 404 process?

A. No, in house resources only
29.3% (96)

B. Yes, using external auditors
25.9% (85)

C. Yes, using consultants other
36.3% (119) than external auditors

D. Not sure
8.5% (28)

PLANNING

5. How is 404 being viewed by your enterprise?

A. Do what is required to comply with section 404
36.4% (134)

B. Meet the requirements plus improve selected processes or controls
34.2% (126)

C. Take the opportunity to improve all processes and controls
19.8% (73)

D. Don't know
9.5% (35)

6. How is 404 being viewed by your Tax Department?

A. Do what is required to comply with section 404
33.5% (125)

B. Meet the requirements plus improve selected processes or controls
42.1% (157)

C. Take the opportunity to improve all processes and controls
20.1% (75)

D. Don't know
4.3% (16)

SCOPING

7. How would you categorize Sales/Use Taxes?

A. Low magnitude, low likelihood
31.2% (116)

B. High magnitude, low likelihood
18.3% (68)

C. Low magnitude, high likelihood
28.5% (106)

D. High magnitude, high likelihood
17.7% (66)

E. Not sure
4.3% (16)

COSO CONTROL ENVIRONMENT

8. Which of the following has your department documented?

A. Policies, procedures, and processes
12.6% (46)

B. Job descriptions, training requirements, and performance criteria
8.5% (31)

C. Tax Department objectives and strategy
4.9% (18)

D. More than one of the above
53.8% (196)

E. None of the above
20.1% (73)

COSO RISK ASSESSMENT

9. Which risks do you consider?

A. Legislative and judicial changes and impact on tax exposure accounts
2.8% (10)

B. Changes to business operations (e.g., nexus, new products) and effect on tax expense accounts
2.6% (9)

C. Changes to information systems, data entry processes, or system controls and effect on accuracy of tax expense
4.3% (15)

D. More than one
88.0% (309)

E. None
2.3% (8)

COSO CONTROL ACTIVITIES: TAX PROVISION

10. What is the control to maintain reserves for exposure items?

A. Detailed support of tax reserves is maintained, including account in which the reserve is recorded
15.2% (49)

B. Exposure calculations and records are updated and quantified quarterly and reviewed and documented with management
9.3% (30)

C. Approvals of changes in exposure items are documented
0.9% (3)

D. Calculations of tax and interest are reviewed after controversy settled and timely communication made of outcomes and any resulting needed changes in procedure
2.8% (9)

E. Most of the above
71.7% (231)

COSO: INFORMATION & COMMUNICATION

11. Do you...

A. Have regular communication with the Board regarding tax matters? 7.2% (25)

B. Have an accounting system that is effective in providing legal entity and apportionment data? 15.4% (53)

C. Have a Tax file library system or electronic document management system? 9.0% (31)

D. More than one of the above. 48.1% (166)

E. None of the above. 20.3% (70)

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