What is really important for tax executives in Sarbanes-Oxley?

• Author: Campbell, Glenn C.

By now, readers of The Tax Executive and other professional tax journals undoubtedly have read a great deal about one portion of the recently passed Sarbanes-Oxley legislation: (1) the provisions that limit the kinds of services that auditing firms can provide to their clients. (2) This article is about other portions of Sarbanes-Oxley having far reaching and potentially more serious implications for corporate tax executives. These provisions can impose severe penalties for (i) "altering" documents (3) and (ii) "misleading" or otherwise "improperly influencing" auditors. (4)

These new provisions are broader in scope than their counterparts under prior law, and even perceived violations of these provisions could prove personally disastrous to tax executives who might be involved. Moreover, the provisions may apply to situations that tax executives routinely face, including (i) the provision of advice to other personnel within the company concerning the drafting and revision of corporate documents, and (ii) communications with auditors concerning income tax reserves and other items to be incorporated into financial statements.

That these important parts of Sarbanes-Oxley have attracted relatively little attention in the tax community may reflect a tendency to view tax practice as a "thing apart" from broader areas of the law, such as securities regulation. Hence, over the years, tax practice has come to be perceived as a highly specialized area with its own language, its own set of penalty provisions, and its own body of ethical rules.

This sense of separation, however, can be misleading, and in the aftermath of Sarbanes-Oxley, it can pose particular dangers. Indeed, for publicly traded companies, tax practice is a form of federal securities practice, and elements of a company's tax reporting that are perceived as distorting financial statements can create liabilities both for the company and for individuals within the company.

This concern is far from theoretical. Even before Sarbanes-Oxley, tax executives found themselves at or near the centers of high-profile government investigations, and passage of the Act has increased the likelihood that the actions of tax executives will become subject to scrutiny in the future. Tax executives, therefore, stand in the thick of today's focus on corporate governance and responsibility.

Dealing with the new law, and the increased scrutiny it has spawned, will not be easy. Inevitably, tax executives will need to increase the level of formality with which they approach the tasks of drafting and revising potentially sensitive documents and of communicating with financial auditors, while eschewing excessive procedural constraints that could unduly impair the efficiency of the office (and unduly impose on the privacy of the company's tax personnel).

The difficulties faced in reaching the appropriate balance mean that tax executives must devote attention and energy to addressing the new provisions. This article describes the important new provisions and suggests practical steps that tax executives might take in the short term to protect their companies and themselves.

Rules Relating to the "Alteration" and "Falsification" of Documents

Section 802(a) of Sarbanes-Oxley introduces to the federal criminal law the following provision:

Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined ..., imprisoned not more than 20 years, or both. The new law supplements prior, and still-existing, provisions of the criminal law that are more limited in scope. (5)

There is little if any doubt that "matter[s] within the jurisdiction of any department or agency of the United States" includes federal tax matters. Therefore, almost all of the documents that tax executives create, review, and comment upon in the course of their work appear to be covered by the new provision.

The language in the new law prohibiting the destruction, mutilation, or concealment of documents seemingly requires little interpretation. The references to "altering," "concealing," "covering up," "falsifying," or "making false entries," however, are not as easy to construe. Given the immediate historical context of Sarbanes-Oxley, including the government's successful prosecution of Arthur Andersen following the collapse of Enron, these terms may be of surprisingly broad application.

Following the trial in which Andersen was convicted on one count of obstruction of justice, several jurors, in post-trial interviews, indicated that their votes in favor of conviction were influenced in particular by instructions that Andersen's inside counsel, Nancy Temple, had provided by e-mail to David Duncan, an Andersen partner. (6) In her e-mail, Ms. Temple advised Mr. Duncan to revise certain language that he had proposed including in a draft memorandum. Ms. Temple did not advise Mr. Duncan to destroy the initial draft, and in...