Controlled Framework for Income Taxes

Since the enactment of the Sarbanes-Oxley Act of 2002 (SOX), Income Tax has had the unenviable distinction of being one of the main reasons companies have been required to disclose material weaknesses in the audited financial statement. The total number of reported material weakness disclosures has been steadily decreasing each year since the compliance with SOX [section][section] 302 and 404 began. This trend, however, does not prove true when income tax is isolated. For example, Ernst & Young's Global Tax Risk Survey found that, from 2006 to 2008, there has not been a decrease in tax material weakness. Indeed, the survey revealed that there is actually an overall increase of disclosures required for income tax-related control weaknesses. Despite considerable efforts to remediate and address the material weaknesses for income tax, the total continues to increase. Although there are additional steps that tax departments must take to improve their controls, there may just be an inherent weakness that is out of the control of the tax professional's hands. A condition that has added to the tax professional's control woes in many companies is a disconnection of the tax function from the rest of the functions in the controller's department. Although there is a common deliverable for all involved in financial reporting, when decisions about the data, structure, process, and communication are made, if the tax components are not considered, a control weakness will likely be attributed to the tax area. If the tax leaders are involved in decisions, the potential effect of business decisions can be assessed and should assist in reducing some of the external weaknesses that the tax department is unable to control. If the external weaknesses are addressed, the tax department can focus on securing and fostering a controlled environment and, possibly, change the trend to reduce the number of material weakness disclosures required for tax. Tax Department Internal Weakness Issues