(Financial Mail)Tax and corporate governance PULL UP YOUR SOX Getting to grips with demanding new financial reporting systems brings measurable benefits Following the Enron and WorldCom fiascos, in 2002 the US enacted the Sarbanes-Oxley legislation as a measure aimed at more effective control of corporate governance and financial reporting. This year Sarbanes-Oxley (better known as Sox) is mandatory for a number of US listed companies. As companies deal with the rigours of complying with Sox, what emerges is an indication of just how pervasive the legislation is, and its impact on tax thinking and practice.

Perhaps the best way of describing the impact is to relate what occurred at a recent meeting with the tax section of a sizeable corporation. The section comprises 10 seasoned professionals (mostly lawyers) who focus on US and international tax planning. What set the tone was the fact that at the time of the meeting, seven of the 10 professionals were involved not in tax planning, but in dealing with Sox compliance measures and it was expected that this would continue for some time to come.

Much of the discussion focused on the systems and IT requirements necessary to deal with Sox, and to relieve those involved from Excel hell (a term used to describe the chaos that results when attempting to use spreadsheet or other stand-alone systems for integrated financial applications, a use for which they were never intended).

The fact that business in the US is taking Sox seriously is hardly surprising, given the scope of the legislation and the fact that it requires both CEOs and CFOs to certify the accuracy of financial statements. In addition, management has to certify the effectiveness of internal controls, a requirement that typically entails the validation of each step in the control process.

What distinguishes tax from other corporate functions is the relatively large number of controls that need to be validated. So while a corporate tax department would normally busy itself with issues such as accelerated write-offs, foreign tax credit utilisation and other planning measures, the chances are that it is currently using most of its resources to comply with Sox.

And the fact that tax risk is typically spread throughout a business organisation means that controls must be validated in a variety of departments or functions. For example, sales taxes may normally be dealt with by a business's sales department, while payroll taxes may normally be dealt with by the human resources department.

Yet payroll taxes are potentially complex. Likewise, sales tax is affected by a variety of factors. Complying with Sox means validating each step in each of these processes.

A serious pressure imposed by Sox is that it does not allow much time for compliance. Quarterly reports must be filed within 45 days (soon to be 35 days) of the relevant quarter. Tax processes and systems therefore need to be able to cope with an increased compliance burden, within a relatively short period. On occasion one hears discussion of the Sarbanes Oxley tax a term used to describe the taxing (in the sense of onerous) effects of the legislation. The demands of this new regime have drawn criticism from those who believe it represents overkill or is unnecessary, and a few companies have even delisted to escape the net. But it is here to stay, and businesses that have taken a more positive attitude are finding benefits.

Aside from boosting investor confidence through improved governance and more trustworthy financial reporting, businesses are finding that measurable value lies hidden in the new, vastly improved financial reporting systems that are evolving. Enterprise resource planning (ERP) systems such as SAP and Oracle are an ideal platform for dealing with Sox, because they can integrate information from all aspects of the business, including tax. Such systems typically make use of a unified database (which may span multiple entities, operations, locations and countries). Their data is more accurate and more secure and is typically available in real-time, allowing the review of current data at any time. This all adds up to improved use of data, and therefore enhanced management control.

As a result, businesses are finding value in information previously locked up in business departments that typically did not communicate. Tax-relevant activities of all departments are now becoming visible to the corporate tax department, which aids more effective tax planning. Transactional data supporting tax credits is readily accessible. The overall effective tax rate is available to all departments at any point in time.

A further feature of ERP systems is that they can be readily adapted to deal with inevitable changes both in law and practice as Sox matures. These systems can also be adapted to assist with the increasing tax-filing burden. Sox is administered by the Securities Exchange Commission and also governs tax reporting. Here one has to deal with the Internal Revenue Service for federal income tax, and with state or local revenue authorities for other taxes. Compliance with US revenue filing requirements is in itself an increasing challenge. There has been an increase both in the number of returns required and in the level of detail to be submitted. It is therefore imperative that tax processes and systems are geared to serve both reporting and filing needs for all significant taxes.

Equally important for businesses is to select personnel or consultants who can adapt to the increased compliance burden. In addition to a sound knowledge of taxation, it is critical that those selected have verifiable experience with Sox and filing requirements, as well as the relevant software packages.

Where the business operates on a multinational basis, it is important that a firm is selected which has integration capability in these countries, and can deal with the different languages and functional currencies as well as local variations in tax law and accounting practice. Sox has created the need for combined tax capabilities as never before. No doubt the effect of Sox is being felt more in the US than elsewhere, but it is influencing global thinking on corporate governance. In the UK the Companies Act has recently been amended to tighten up aspects of corporate governance, especially financial reporting. Canada has recently tightened rules on internal control reporting. In the EU, Sox has added impetus to the corporate governance reform initiative.

Sarbanes-Oxley is pervasive, is here to stay, and is being taken seriously. Executives in SA will surely not escape its imperatives. Those who embrace it can unlock value way beyond complying with the law. In facing the options and opportunities that a regime of this nature presents, businesses should pick their systems and partners wisely.

Rubin is a US-based tax consultant

[ Back To TMCnet.com's Homepage ]

Discussions: