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Tax-Related Material Weakness: Still Relevant in 2011
With year-end tax provision (for calendar-year companies) soon needing attention, some insights into what continue to be the usual suspects that can result in tax-related material weaknesses, as well as how companies have been able to successfully remediate them, might help plan for changes or additional procedures to year-end provision work. Taxand US analyses how pertinent tax-related material weaknesses are to a business.
The focus of Sarbanes-Oxley Act Section 404 is on internal controls over financial reporting (ICFR). Financial reporting includes recording transactions, reporting those transactions in financial statements and safeguarding assets. One of the requirements of SOX 404 is that public companies must include a report on internal control from management in each of their annual reports. This report needs to include a statement of management's responsibility for establishing and maintaining adequate ICFR and an assessment by management of the effectiveness of ICFR, as well as the framework used by management to conduct the required evaluation of the effectiveness of the company's ICFR. (Most US companies have used the Committee of Sponsoring Organisations of the Treadway Commission, or COSO, framework.) Documentation must be maintained (in the form of narratives, risk control matrices, etc) for management's assessment of internal controls and testing of both the design and operating effectiveness of these controls
Taxand US provides an in depth analysis of this topic including a look at key controls and processes
Many issues relating to the reporting of income taxes arise from a lack of communication within the tax department and between the tax department and other corporate functional areas. Use the best practices above to break down the communication barriers and create a strong tax department that can minimise the risk of material financial statement errors. Use the budgeting process to increase the bench strength of your income tax accounting function. Most disclosures we have reviewed discussing tax material weaknesses also refer to a lack of adequately trained personnel or ineffective use of outside consultants.
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