An unforgiving environment for tax questions.

• Author: Cunningham, Colleen
• Position: Financial Accounting Standards Board's Exposure Draft - Column

Tax issues have been in the headlines of late. The President's Advisory Panel on Tax Reform issued its long-awaited report. The Financial Accounting Standards Board (FASB) has issued an Exposure Draft on Uncertain Tax Positions. The Justice Department continues to investigate questionable tax schemes.

Additionally, one of the themes that came out of the recent Sarbanes-Oxley 404 reports was the concern over the number of material weaknesses related to tax personnel. I take offense when I hear the term "lack of competent resources." Imagine managing a tax team that is well-educated and hard-working in a company that has stated it has a material weakness because it lacks "competent resources" in its tax department. What a great motivator that must be!

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Given the myriad of accounting pronouncements that relate to tax accounting and reporting--not to mention the complexity and length of the tax code itself--I am surprised that any company feels it has adequate personnel to have 100 percent confidence in the accuracy of the judgments it used in applying all of the complex laws, codes, rules and standards in potentially hundreds of jurisdictions.

Not to mention the fact that companies are generally managed differently than they are set up legally. I am not sure it is humanly possible to have adequate personnel to cover all of that, particularly in the unforgiving environment that we are in, where some of the highly publicized scandals have put tax issues in the spotlight.

We have a new mode of second-guessing. We have individual audit partners that are a bit skittish to make a judgment call, and understandably so. In order to ensure that lawsuits did not bring down another giant accounting firm, the Justice Department and KPMG entered into a deferred prosecution agreement related to KPMG's marketing of aggressive tax structures. Under this agreement, KPMG itself agreed to certain terms, for a period of time--but no such protection was afforded the individual partners.

I believe that this causes a natural behavior change in audit partners. They may be held individually responsible for their judgment calls, and their firm may not support them. As a result, we are seeing a shift to the most conservative answer with no real concept of materiality. It's called "self-preservation." Add to that the second-guessing by the Securities and Exchange Commission (SEC), the third-guessing by the Public Company Accounting Oversight Board...