Tax & Accounting Blog

SOX Controls Over the Tax Function

Global Tax Compliance, ONESOURCE, Tax Provision, US Income Tax Compliance September 28, 2012

It has been 10 years since the Sarbanes-Oxley Act of 2002 was passed, and many companies are still feeling the effects of the Act–specifically as it relates to Section 404.  Section 404 requires management (and for many public companies, their external auditor) to report on the adequacy of the company’s internal control over financial reporting (ICFR).  Although these attestation rules have been relaxed for smaller public companies, the past decade has also brought new auditing standards from the PCAOB and new rules for management from the SEC.

Despite the best attempts at improving the effectiveness of internal controls and the quality of financial reporting, companies continue to suffer from restatements resulting from errors in income tax provisions.  Tax department resources—both technology and people—are often cited as areas requiring remediation when material weaknesses are identified in controls over the tax provision process.

To cope with concerns over adequate staffing of qualified tax personnel, companies are more commonly co-sourcing with a third-party to add an additional layer of review and technical expertise.  While this helps with the technical aspects of tax provisions, it may not address technology related control issues.

Many companies–including large, sophisticated public filers–continue to utilize “homegrown” spreadsheets to calculate their income tax provision.  While these spreadsheets may be well-designed and certainly offer a high degree of flexibility, such spreadsheets often lack adequate controls.  In a worst case scenario, undetected formulas errors may result in a material weakness finding or restatement.  In the best case, significant time and effort is expended rolling spreadsheets from quarter-to-quarter and year-to-year, double and triple checking formulas, and satisfying the external audit firm that the spreadsheet works as designed.

As a result, prepackaged tax provision software has become an increasingly popular tool to augment controls over the financial reporting of income taxes.  With proper implementation, tax provision software allows tax departments to focus more of their efforts on data input and meaningful review of the resulting provision, and less on spreadsheet design and maintenance.  Having more time to focus on the tax consequences of business combination—and less time on footing, cross-footing, and recalculating—could pay dividends in the form of proper financial reporting, more effective tax planning, and more efficient tax compliance.  And what tax professional wouldn’t enjoy more time delving into complex technical issues and less time ensuring their spreadsheet has not become a random number generator?

Likewise, external auditors can perform their duties more effectively in a stronger control environment, particularly in an audit engagement that includes the auditor’s attestation on the effectiveness of ICFR.  Similar to the tax professional who is able to spend less time checking formulas when a tax provision is prepared using a prepackaged tax provision solution, auditors may be able to spend less time re-performing spreadsheet calculations.

So the bad news is that a decade into life with Sarbanes-Oxley, financial reporting of income taxes remains a leading cause of material weaknesses and restatements.  The good news is that a tax department can implement a stronger internal control environment, while dedicating less time to being a part-time IT specialist and more time to being a…tax department!