Business readies for Sarbanes-Oxley compliance, but most companies have allocated meager resources to costly endeavor.

A survey of nearly 400 tax executives regarding compliance with section 404 of the Sarbanes-Oxley Act revealed that 89 percent have begun planning or implementing processes and controls for their company's compliance with this federal law. Conducted by Tax Executives Institute as part of its 58th Annual Conference, the October 20 audience survey also showed that a full 85 percent of the respondents had not allocated any additional budget resources to that initiative. (Two percent answered "not sure.")

The Sarbanes-Oxley Act was enacted in 2002 to enhance the accuracy of corporate financial reporting. It requires that management's annual report contains both its assessment of the effectiveness of internal controls over financial reporting and the independent auditor's own attestation.

The TEI survey findings represent a paradox of sorts, according to TEI Executive Director Timothy McCormally. "While it's reassuring that most companies are already working toward compliance, there is a bit of a disconnect in having only 13 percent reporting any resources allocated to it, considering the industry generally agrees that compliance is likely to run a substantial tab." McCormally added that the interest level in section 404 is high, noting that more than 1,000 tax executives participated in a September telephone conference call on the provision. (Nearly 600 attended the Annual Conference, where the survey was conducted.)

Estimates of the cost to comply could reach well into the billions of dollars in additional staff, auditing fees, and other resources engaged toward compliance. In fact, a Business Week article released on the same day as the survey reported, "Industry experts say that as a result of these rules, auditing costs are likely to double, while the total tab for compliance [for a multinational company] could top $7 billion in the first year alone."

The TEI survey reveals that nearly all respondents (98 percent) consider one or more factors in their risk assessment, including:

* Legislative and judicial changes and effect on tax exposure accounts;

* Changes to business operations (e.g., new products, M&A, etc.), and effect on tax expense accounts; and

* Changes to information systems, data entry processes or system controls, and effect on tax expense accuracy.

The TEI survey also addressed "provisioning," a term used to describe the practice of setting aside a reserve of funds to cover any unforeseen tax liability. In addressing provisioning, respondents identified one or more of the following controls as a means to maintain reserves for exposure items, with 72 percent citing use of "most of [the following]":

* Detailed support of tax reserve is maintained, including account in which the reserve is recorded.

* Exposure calculations and records are updated and quantified quarterly and reviewed and documented with management.

* Approvals of changes in exposure items are documented.

* Calculations of tax and interest are reviewed after controversy is settled and timely communication made of outcomes and any resulting procedure changes.

Lynn Jordan, chair of TEI's Corporate Tax Management Committee, explained that provisioning is a topic of interest because government entities are calling for mandatory disclosure of reserve amounts. Much of the business sector has significant reservations about the move, however, citing the need for confidentiality during dispute negotiations and resolutions with the IRS.

According to Steve Rainey of KPMG LLP, who spoke at TEI's Annual Conference and assisted in conducting the survey: "Regardless of how they may view these developments, it's clear that our clients are taking Sarbanes-Oxley seriously and are marshalling whatever resources necessary to step up to the compliance plate."

Lynn Jordan concluded, "There's no question that the compliance landscape has become increasingly complex, and companies whose core competencies do not include accounting are likely to find it necessary to build that internal expertise or seek additional outside counsel."

The survey results may be accessed on TEI's website (www.tei.org).