Too Taxing

The flood of material weaknesses related to tax reflects a lack of expertise — and the evolution of an art into a science.

Moreover, the traditional pipeline for tax accountants — the Big Four — is drying up, says Jennings, because some firms are locking in their talent by issuing lucrative mortgage loans with tough retainer stipulations as part of their compensation packages. While enrollment in accounting at U.S. colleges rose 17 percent from 2000 to 2003, enrollment for tax accounting is flat.

“It’s not a path to the top,” says Paul Sassano, tax-solutions director for Jefferson Wells. “People don’t rise to CFO from the tax department.” In fact, says Sassano, in many companies, tax is considered a lower rung on the finance ladder. “They feel a bit overlooked sometimes,” he says.

A Fix for Tax

That may change. “Companies are going to view tax professionals as critical to the process from now on,” says Jennings. Caruso agrees. “You have to put a priority on it, and tell them that it’s good work,” he says. “We gave [the new tax team] the message that we have a CFO who cares about the details and wants them analyzed.”

Some companies are raising the profile of tax accounting by realigning the department and integrating tax professionals into business units. Some are installing a tax controller to serve as “interpreter” between tax and financial accounting functions. Others are focusing on the all-important communication between internal audit and tax. At Avery Dennison, for example, vice president Ahmed Rubaie now has both departments reporting to him, though the move was not prompted by 404 concerns.

How long tax accounting will remain in the auditors’ grip is uncertain. “We are dealing with a swinging pendulum and trying to calibrate where it will take us,” says TEI’s McCormally, who believes many of the adverse opinions were caused by the suddenness with which the new tax rules were implemented. But Tony Santiago, president of TaxSearch Inc., sees little relief in sight. “Everyone is scared to death that one of the next areas of focus may be international FAS 109,” he says.

Inevitably, there will be further repercussions. “Right now companies are balancing risk mitigation with tax planning,” says Santiago. With the former winning out and given a zero tolerance for tax shelters, he says, companies will find it increasingly difficult to lower their effective tax rate. And, he says, “won’t that put the CFO between a rock and a hard place?”

Kris Frieswick is a freelance writer based in Boston.

Material Fallout
Some 152 companies have received adverse opinions on tax-related material weakness. Here is a sampling:
Company Material Weakness Outcome
AIG Tax credits wrongly identified as insurance profits Fired Mike Murphy (designated tax expert) and CFO Howard Smith
Kodak “Errors, not misconduct” related to income-tax reporting led to informal SEC inquiry Hired new chief tax officer in July and tax accounting manager in August
Tommy Hilfiger* Alleged underpayment of Hong Kong taxes Will lead to filing four years of amended U.S. federal income tax
MCI “Significant complexity” in income-tax accounting Hired more staff and a VP of tax and outsourced some tax areas
Impco Technologies Calculation of the value of deferred tax assets CFO and treasurer Nickolai Gerde resigned several weeks later
*Company expects adverse opinion.
Source: Company documents and published reports

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