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SOX: Tax Related Material Weakness

26 Jul 2011

Taxand US has looked at some of the tax-related material weaknesses disclosed after the 2010 year-end and first-quarter 2011 filing seasons, and believes that the harsh reality remains that despite the existence of SOX rules for many years, tax-related material weaknesses are alive and kicking in 2011. Taxand US looks at the prominent culprits that can result in material weaknesses, as well as some best practices for successfully navigating these risks.

Below is a representative sample disclosure of a tax-related material weakness:

1) inadequate staffing and technical expertise within the company related to taxes
2) ineffective review and approval practices relating to taxes
3) inadequate processes to effectively reconcile income tax accounts
4) inadequate controls over the preparation of the quarterly tax provision.

Personnel, staffing and oversight issues continue to be among the most prevalent culprits when a material weakness label is placed on a company's tax-related internal controls. In some cases, these weaknesses resulted from inadequate resources in the corporate tax department. Additionally, inadequate oversight or a lack of understanding by management of complex tax calculations prepared by the tax department caused material weaknesses in many cases. This type of weakness was also reported in cases where the tax function was outsourced, with inadequate oversight of the third-party tax consultant or a lack of understanding of the calculations prepared by the third-party tax consultant. Furthermore, for corporations with complex structures or with overseas operations, lack of proper oversight in tax reporting by domestic and foreign subsidiaries often resulted in a material weakness.

Read the full article from Taxand US here, and learn the best practices for navigating these risks.

Taxand's Take

Historically, the tax function of a company has not always received the attention it is due when compared with other areas of a business. But with the steady flow of material weaknesses in tax being reported by SEC registrants as well as increased scrutiny by taxing authorities and the investor community, a company's tax affairs have quickly become a staple on the board's monthly meeting agenda. Unfortunately, the road to recovery from material weakness can be a long one. Although you might be confident that your company's internal controls over income tax accounting are adequate, we encourage you to use the examples cited above in committing to the continued assessment and enhancement of your internal control processes and procedures, especially in situations where complex tax planning has been undertaken at your company.

Your Taxand contacts for further details are:
Paul Helderman
T. +1 212 763 9760

Stephanie DeYoung
T. +1 212 759 4433

Taxand's Take Author