The effect of SOX and the increased focus on accounting for income taxes: survey results.

• Author: Arlinghaus, Barry P.

The tax department today operates in a changed environment--one with a higher profile and a greater workload. This is a world of compliance with the Sarbanes-Oxley Act of 2002 (SOX) and FIN 48, Accounting for Uncertain Positions in Income Tax, as well as Schedule M-3 and corporate e-filing. To learn more about the effect of SOX compliance and the increased focus on accounting for income taxes, in December 2006 a survey of senior tax executives was undertaken. This article reports the findings of that study.

Methodology

Information for the study was obtained through a web-based survey of chief tax officers at 2,180 companies. Tax Executives Institute provided the e-mail addresses, and prompted participation in the study in messages to its membership as well as on its website.

To develop the questionnaire, in the fall of 2006 information and insights were sought from the chief tax officer and other tax and accounting professionals at 13 companies. The contacted professionals included controllers, internal auditors, and tax personnel involved in accounting for income taxes, compliance and planning for federal, state, and international income taxes, and compliance and planning for indirect taxes such as customs, excise, property, sales, use, and VAT taxes.

In late November, the questionnaire was emailed to respondents to print out, collect information if necessary, discuss it with colleagues, and think about it before completing a web-based survey. In early December, these respondents were sent a link to the web-based questionnaire, together with instructions.

The response rate to the survey was lower than expected. The questionnaire may have been too long or the year-end timing may have been less than optimal. Although the low response rate compromised the ability to conduct meaningful analysis by demographic variables, the responses to the SOX and FIN 48 questions provide significant insights into the issues being faced by those doing compliance and planning in today's environment.

In all, 231 senior executives completed the questionnaire. Of these, 30 people reported that they are not required to--and do not voluntarily--comply with SOX, but answered the questions in the section dealing with FIN 48. The remainder (201) answered the questions dealing with SOX compliance.

Profile of Respondents

Tax executives from a broad cross-section of companies responded to the survey. A profile of the respondents by size of company, as measured by revenue, assets, and number of tax professional staff is provided in Tables I and II. Table III shows the number of respondents by the industry group that accounts for the greatest percentage of a company's revenue. Table IV shows respondents by the number of their company's U.S. and non-U.S, subsidiaries. Twenty-two of the companies whose senior tax executive answered the SOX section of the survey indicated that their company was a subsidiary of another company. Thirty-three (including the 22 who answered the SOX questions) of those completing the FIN 48 section reported that their company was a subsidiary of another corporation.

Slightly more than half of the respondents, to either the SOX or the FIN 48 sections of the questionnaire, reported that executive-level compensation is based on pre-tax income. These responses are summarized in Table V. Approximately 54 percent of the respondents in either group reported that effective tax rate is not one of the primary measures of overall tax department performance. Table VI summarizes these responses.

Respondents were asked to specify on a scale of 1 (idea stage) to 7 (after transaction completed) at what point the tax department generally becomes involved in the corporate decision-making process. Table VII provides a summary of these responses. Approximately two-thirds of the respondents reported that the tax department at their companies becomes involved relatively early (stages 1 to 3) in the decision-making process.

Twenty-seven of the 201 respondents to the SOX section of the survey indicated that their company reported in its annual report a material weakness in internal control in the tax area (income or non-income) in management's assessment of internal control. Nineteen of these reported having one material weakness, five reported having two, and three reported having four material weaknesses.

Fifty-six reported that their companies had significant deficiencies (other than those reported as material weaknesses) in internal control in the tax area (income and non-income) that were disclosed to its board or its audit committee. Thirty-seven of these had only one significant deficiency, nine had two, six had three, and four had more.

Senior Management's Perception of the Tax Department

Senior management's perception of the tax department affects the ability of tax management to accomplish all that it is being asked to do in today's environment. Senior tax executives were asked five questions about how senior management perceives the tax department. Table VIII summarizes the responses.

Almost 85 percent agreed or strongly agreed that senior management expects business leadership and involvement from tax management. Approximately 81 percent believes senior management understands the value tax can bring to the company's business units. The responses were evenly divided between agree and strongly agree.

Seventy-three percent believe senior management expects tax management to take aggressive but supportable positions that are most favorable to the company. Only 41 of the 145 who believe this strongly agreed with the statement.

Only 85 respondents, or 43 percent, believe senior management is providing tax management with the resources needed to ensure compliance with SOX without sacrificing time spent on planning. Just 14 of the 85 strongly agreed with the statement. Given this perception, it might be expected that only 71 respondents, or 36 percent, think senior management understands the workload that has been placed on the tax department as a result of the changed environment (SOX, FIN 48, M-3, e-file, etc.). Only 16 of the 71 strongly agreed with the statement. Although not conclusive, the data suggest that the earlier tax management gets involved in corporate decision-making, the greater likelihood that senior management understands the workload placed on the tax department and is providing relatively greater resources for SOX compliance.

Effect of SOX Compliance on Planning and Positions

Tax executives were asked for their views on the effect of SOX compliance on planning and tax positions. Table IX summarizes these responses.

Almost 60 percent think that one of the consequences of SOX compliance is that the tax department spends significantly less time on tax planning than it did before the law was passed. One-third of those who believe this strongly agreed with the statement. This may be attributable in part to a lack of resources. Approximately 80 percent believe that one result of SOX is much more detailed documentation of tax positions and related discussions.

Surprisingly, only one percent of senior tax executives believe that IRS auditors will spend significantly less time auditing detail in the tax area as a result of SOX. And the two respondents who feel this way, did not strongly agree. Conceptually, however, if the controls mandated by SOX are in place, the IRS should be able to rely on these and not have to spend much time auditing detailed records. Time saved in this area should provide more time for the IRS to focus on issues and the bigger picture. Tax executives were evenly split whether SOX increases the nature and extent of monitoring of changes in the tax law (all taxes).

Respondents were asked about the effect of SOX on relations with their company's board or its audit committee. Approximately 42 percent believe their company's board or its audit committee is much more aware of tax positions because of SOX. Almost 29 percent disagreed. Forty-three percent think that, as a result of SOX, their board or its audit committee is better educated about tax and its effect on the company. Almost 18 percent do not. Table X summarizes how often tax department representatives met with the board or its audit committee post-SOX versus pre-SOX. Tax has a higher profile with more boards or board audit committees now than pre-SOX.

SOX Testing

Respondents were asked who served as the...