Challenges of Transparency in Corporate Tax Departments, The

CPA Journal, The, Oct 2007 by Cowan, Mark J, English, Tom

The role of the corporate tax department has shifted significantly in recent years, and the stress of such changes has been evident. Over the past decade, corporate tax departments have evolved from cost centers, focused on efficiently complying with the tax law, to profit centers, focused on reducing the company's effective tax rate. More recently, tax departments have had to adapt to the changing regulatory environment. On top of their normal tax compliance and planning functions, tax departments are now confronted with many new requirements, including compliance with the internal control requirements of SOX section 404, the newly expanded disclosure of book/tax differences on Schedule M-3 of the corporate tax return, IRSmandated electronic filing of tax returns, and now FIN 48.

Compliance with SOX section 404 was particularly difficult for tax departments because of documentation concerns. In fact, in the first year of section 404 compliance, tax accounting was the second most reported reason for internal control material weakness disclosures. This is not surprising because, historically, tax professionals have not been overly concerned with standardized documentation practices. For example, many tax departments would use ad hoc "homegrown" spreadsheets to compute tax provisions and deferred tax amounts for year-end financial statement reporting. These and similar documentation issues became painfully clear as tax departments went through the first-year SOX internal control review. (For a detailed discussion of these issues, including best practices to address them, see Mark J. Cowan and Tom English, "Sarbanes-Oxley section 404 and Mandatory E-Filing," The CPA Journal, July 2006.)

To overcome the historic problems they have encountered in tax accounting, tax departments will need to train their personnel not just in the technical requirements of FIN 48, but in proper documentation techniques as well. This is an area where the internal audit department can help. For years, some public accounting firms have required tax professionals to participate in one or more financial statement audits. While some of this crossfertilization may have been driven by staffing needs or state CPA licensing requirements, this effort also helped tax professionals gain an understanding of good documentation practice. This same practice is in place in many internal audit departments for management trainees. Many management development programs involve rotating management trainees through various departments, including internal auditing. This experience provides the trainee with an overview of the company and knowledge of good internal control practices. In-house tax professionals could benefit from such a practice. New hires would benefit from an internal audit stint that would ultimately provide a pool of tax professionals with the tools necessary to meet SOX internal control and documentation requirements and the FIN 48 documentation that the external auditors will require. This, of course, assumes that the tax department can spare new hires for such an assignment. Furthermore, internal audit departments can conduct sessions for tax professionals on documentation, or otherwise consult with the tax department on good documentation practice.