Sarbanes-Oxley section 404 compliance - a pragmatic approach for corporate tax departments.

• Author: Fast, John

If your company is like ours, you are in the throes of complying with the now infamous section 404 of the Sarbanes-Oxley Act of 2002. Under section 404 of the Act, the CEO and CFO of public companies are required to assert to their auditor that the internal controls of the company are sufficient to assure that accurate financial statements are produced. The auditor is then required to issue a separate opinion indicating the firm's agreement or disagreement with management's assertion. For calendar year companies like Coors, the assertion and opinion are required to be made on the 2004 Form 10K filing.

In gauging how to respond to these requirements, you cannot help but feel like your being thrust into "The Matrix" where the line between fantasy and reality is blurred. On one end of the fantasy-reality spectrum lie the "best practices" the company could implement if it had the budget to do so. On the other end lie the ever-increasing tax compliance burdens to handle with fewer and fewer resources. So how do we respond? Our approach has been to be practical.

One of the concerns we have with implementing an elaborate and complicated internal control program is that if we build an over-complicated "mousetrap," we will forever be stuck trying to maintain it. Failure to follow details within the program could result in auditor comments in the management letter. Changes to the control program will require auditor review to assure the new control is effective to meet the identified risk. These reviews can be both time-consuming and expensive and may not guard against a material risk.

In designing our internal control framework to assure accurate reporting of tax information in the financial statements, we seek to answer the three basic questions:

1. What could go materially wrong?

2. What steps have we taken to prevent "it" from going materially wrong?

3. What documentation have we created to prove we have taken these steps?

   Materiality in this regard refers to the effect an error would have on the financial statements. For example, we would hot be nearly as concerned by weaker controls over payment of a $1,000 tax liability as we would a $1,000,000 liability.

   For purposes of identifying internal controls we break our activities down into five areas, as follows:

1. Collect information

2. Calculate liability

3. Make entries in financial system

4. File returns and make payments

5. Reconcile and adjust accounts

   Each area of activity is applicable to each type...