The impact of the Sarbanes-Oxley Act and continuing sluggishness of the economy continue to put pressure on tax directors to demonstrate effective department management and efficient, cost-effective operations. In many cases, corporate tax departments are subject to a heightened internal focus on headcount, roles and responsibilities, and cost.

Because the tax function has typically been low on the priority list for capital expenditures and tools to make needed operational improvements, a sudden shift of attention to this area poses difficulties for many companies. Before the emergence of Sarbanes-Oxley, external reviews of the decisions and data underlying tax returns and provision calculations were generally conducted on a high-level, summarized basis. Going forward, the responsibility to create and verify the existence of sufficient internal controls within the tax area will lead to more detailed reviews of the underlying process and control framework.

Industry consensus, supported by findings by leading research firms such as the Gartner Group, acknowledges that Sarbanes-Oxley compliance will be an ongoing process and not a one-time endeavor solved with "magic bullets" such as software applications or one-time studies. Because the world of financial automation and ERP systems designed to automate and centralize critical financial information largely overlooked the specific needs of the tax function, tax departments have historically been left on their own to define automation needs. The resulting disconnect between tax automation approaches and the IT and finance areas has led to tax departments performing the vast majority of ongoing processes using disparate, specialized applications to address specific needs (such as a stand-alone application to calculate depreciation or spreadsheets to produce a provision calculation). In addition, a heavy emphasis on strategic tax planning and areas other than basic tax compliance during the 1990s forced many companies to bypass the creation of detailed processes, choosing instead to emphasize scope and deploy the bulk of resources to areas that made the greatest impact on the company's bottom line. Today's corporate environment and management priorities have dramatically changed these priorities and strategies.

With tax departments now facing a renewed focus on process and controls, many of the following issues are emerging as near-term priorities and challenges for tax management.

Consistency of data sources

The calculation of tax provision under FAS109 is generally the most direct tie between tax and the audited financial statements, and often has a significant impact on the overall outcome of a company's financial operations. In many cases, tax departments handling provision calculations in a single, stand-alone application or spreadsheet file, relying largely on manual inputs and/or ad hoc reports, cannot reliably ensure consistency between the underlying data and the information utilized to generate tax returns or other filings. This issue is further compounded as the number of subsidiaries, data sources and complexity of Schedule M calculations grows for an organization. As a result, companies seeking to ensure the existence of sufficient internal controls over the reporting of financial results are already studying how best to ensure greater centralization and uniformity between sources of data used to report the tax impact on the financials and the detailed information used to calculate tax liability throughout the year.

Audit support and substantiation of tax results

Providing reasonable assurance of the reliability of internal controls in the tax area extends beyond the here and now. It requires the tax department to provide acceptable assurance that adequate information will exist to support calculations under audit and prevent future adjustments that could have a material impact on the company's financial performance. This requirement itself is nothing new for most companies; many already have established audit response roles within the department. However, assuring long-term access to useful and reliable information requires the tax department to establish consistent processes and data sources to be relied upon over time, and to maintain continuing communication with IT and financial systems personnel to monitor and plan for changes in the underlying sources of the data. Because many organizations rely on IT and/or accounting functions to generate, safeguard and store historical tax information, any future changes to underlying systems, storage protocols or responsible personnel can create several degrees of separation between the tax department and the historical information required to substantiate prior period work. In many cases, the cost and effort required to access tax data from updated or replaced sources can be substantial and often can prevent information from being accessed at all. Such risks are significant, and are one of the primary focuses being applied to the tax area in ongoing efforts to substantiate and document tax controls in conjunction with Section 404 of the Sarbanes-Oxley Act.

Protection of knowledge capital and assets

Building a sound practice management structure around defined and reliable processes is the most dependable and effective way for tax departments to guard against the erosion or loss of critical knowledge capital and information due to personnel turnover, unforeseen events that disrupt operations or significant changes in department makeup or roles. For many organizations, tax processes built around specialization of resources and segregation of functional areas (such as compliance vs. audit defense, etc.) often limit the critical, in-depth knowledge behind key calculations to a single person or small group of individuals. The obvious impact is an elevated risk of information loss as key personnel leave the organization, particularly if processes managed by those resources are not well defined and documented. Additionally, the lack of effective tax processes will often results in a high number of critical calculations and analyses performed and maintained on hard drives and/or laptops with little, if any, supporting information captured in a central, standardized location. These challenges can grow more complex when outside service providers assume responsibility for some or all of the tax functions for a company. Any review of the adequacy of controls applied to the tax function will seek to ensure that key calculations, processes and decisions are made in accordance with defined review and process protocols, and that any personnel turnover and/or conversions of systems and applications will not result in a loss of critical data and context behind key tax calculations.

Standardized reporting compliance procedures

As a result of recent misuse of tax shelters and questionable tax treatment of material items, corporations are becoming increasingly aware of the importance of ensuring consistent, complete measures for adherence to relevant reporting standards, such as the IRS Reportable Transactions regulations. As the complexity and significance of required filings increases, the capability to ensure compliance is beginning to extend beyond the control of a single director or largely manual review processes. To ensure compliance with reporting laws and regulations, tax departments must now place an emphasis on deploying processes and supporting tools tied to relevant sources of data and updated information on the requirements themselves.

As tax departments begin to study and address these and other critical issues, many of the elements behind a successful controls structure are also being relied upon to help streamline ongoing processes required of the tax function, such as effective training of personnel, adequate review processes, and effective tax planning capabilities. By ensuring that the priorities of the tax function are addressed through application of reliable, defined processes, corporate tax departments have begun the difficult process of demonstrating the adequacy of internal controls applied to the tax area.

Jason Glad is the North American Practice Director for Tax at Jefferson Wells. He is based in the Washington DC office, and can be reached at (703) 226-2338 or by e-mail at Jason_Glad@jeffersonwells.com.