Sarbanes-Oxley 404's tax implications: the law may actually provide companies with the opportunity to better align tax and business processes and help them reach key objectives.

Tax processes aren't what might spring to mind for Sarbanes-Oxley Section 404 compliance. But the Act's requirements may provide companies with an unexpected opportunity to improve the effectiveness of business operations by improving tax processes, elevating tax risk awareness within the company and aligning the tax department functions with the company's objectives.

Face it: Taxes pervade nearly every aspect of a company's business, impact almost every transaction, are embedded in nearly every line item on a company's financial statements and can be a significant line item on that statement. So it follows that all levels of the enterprise--from the tax department to the boardroom--should support complete, accurate, efficient and timely financial reporting of tax matters, particularly in light of the increased scrutiny and call for transparency that Sarbanes-Oxley brings.

Sarbanes-Oxley compliance means that the complex processes and documentation needed to demonstrate proper internal controls over financial reporting are in place--typically across multiple business units and technology platforms. So it's not surprising that the task has proven more daunting than many anticipated.

Aware of these challenges, many companies are wisely taking a step back and revisiting the processes they have in place and are taking measures to help ensure that they're all on target. Refining these procedures will not only facilitate full Sarbanes-Oxley compliance in this first year, but will simplify the process in future years.

One place where this activity could yield major long-term improvements is tax. As companies prepare to reassess their Sarbanes-Oxley readiness, they should keep these three important--but not always recognized--considerations in mind.

1. The tax function is part of the integral DNA of all financial statements, and therefore deserves closer attention from boards. With today's increased scrutiny and call for financial statement transparency, boards have a vested interest in having a more in-depth view into those statements. Financial executives, in turn, can serve as change agents by facilitating closer collaboration for the overall good of the enterprise.

Their charge is to help make tax's more visible role in financial statements (in light of improved provisioning preparation)--and its potentially greater impact on a corporation's financial integrity--a matter of interest in the boardroom. Toward that end, the enterprise will benefit from the tax department's having a regular spot on the board's agenda.

This allows the department to report on steps taken to minimize tax risk exposure, other tax issues and their impact on the bottom line and on the company's overall reputation--ranging from the company's tax planning strategies to the tax impact of various executive compensation packages.

2. Tax needs to communicate throughout the organization. In February 2004, KPMG conducted a survey among 204 tax directors, which indicated that tax department strategy has a limited audience outside of the tax function. A full 84 percent of survey respondents said that internal tax customers view the tax department as a support function rather than a stand-alone entity of corporate-wide scope. Only one-third of respondents said they communicate with a broad audience within their organizations. Nearly half (43 percent) rated their tax department as low or neutral on how closely it works with various business operations to help evaluate the tax consequences of their decisions.

Without accurate and timely information flow between the tax department and other operational units, certain tax calculations may be arduous at best and inaccurate at worst. Potential tax risk areas can include:

* Deferred tax assets and liabilities

* Purchase accounting entries

* Formation/sale or spin-off of subsidiaries or legal partnerships

* Redemptions

* Tax provision/accrual

* Contingency reserve analysis

* Property taxes

* Valuation allowances

* Foreign operations, including valued-added tax (VAT), general service tax (GST) extraterritorial taxes, and transfer pricing 

* Compensation, benefits and payroll tax issues

* Restructuring for state income tax

* Capital markets transactions with hidden tax issues (debt modification, interest expense disallowance/deferral rules)

* Mergers

* Sale of assets or investments

* Stock basis computations

* Determination of tax-free status

* Balance sheet entries and classification, reconciliation

* Cash flow disclosure

3. Platform integration is key to automating and sustaining the process. Traditionally, tax and corporate finance's general ledgers have often functioned as separate entities, often with disparate platforms. So, some companies must now integrate the two more closely--logistically, operationally, culturally and from a budget standpoint--as part of the overall transformational effort driven by Sarbanes-Oxley preparations.

For some organizations, those steps might be major initiatives such as introducing or expanding the use of automation within tax departments to smooth the reporting process for internal controls. For others, it could be something as simple as addressing the tax elements of a new business venture, new location or new product from the very beginning of the process.

And for still others, it may require significant overhauls of IT platforms and/or software for compatibility to ensure that the tax function can be easily integrated with corporate accounting platforms. This includes the ability to retrieve tax-sensitized information--for example, legal entity, jurisdiction and location information--from the enterprise's enterprise resource planning (ERP) system. The bottom line is that the technology solution must be automated for speed and accuracy--and sustainable.

Many companies may have to invest in technologies, structure, communications platforms and culture change. That investment should reap rewards in later years in better-informed staff, up-to-date tools and on-point training. With these stakes in the ground, the financial executive is ready to begin plotting out exactly how he or she can become a change agent to help facilitate company-wide implementation of these three all-important initiatives.

The Change-Agent Game Plan

The following are some important strategies geared towards fostering increased collaboration between corporate finance, the tax function, audit committees, the board and a company's operational units in order to meet corporate governance compliance goals. While the outlined strategies are not intended as a "one-size-fits-all" blueprint, they offer some practical and customizable approaches that may help financial executives get from "A" to "B" in their change-agent quest:

* Improve flow of information and communications with the board.

* Obtain approval from the board for the scope of expanded board reporting, including periodic tax risk updates.

* Describe corporate objectives that can be supported or enhanced by tax initiatives and associated deliverables.

* Present the business case for change, including the expected costs and benefits, quantifiable and nonquantifiable.

* Improve flow of information and communications with the audit committee.

* Describe how tax risks are evaluated, managed and reported.

* Describe how tax transactions are authorized.

* Improve flow of information and communication with business units and operations.

* Identify proposed business transactions with tax implications.

* Proactively manage non-U.S. entity tax information and associated financial reporting.

* Address tax data needs to support complete, accurate and timely reporting.

* Engage IT resources to assess feasibility of platform integration, to estimate costs and to address sustainability, maintenance and service issues.

* "Tax-sensitize" ERP information.

* Support the corporate Sarbanes-Oxley compliance initiative.

* Understand the corporate initiatives.

* Collaborate on planning, scoping, documentation, testing.

* Monitor the tax-control environment and remediate where appropriate.

* Develop the business case for more tax function funding, if needed--describe costs and benefits.

* Assess training needs to support tax department competencies.

* Set scope of audit, including the audit firm tax resources to meet what's included in the scope.

In sum, while meeting the challenges of increased regulation--such as those presented by Sarbanes-Oxley 404--can be difficult, many companies are finding the accompanying benefits well worthwhile. Those who do their due diligence in terms of making the tax function an integral part of financial reporting, extending tax's influence and impact throughout all the enterprise's financial reporting structures and addressing the need for technology platform integration, will find the compliance road much easier to travel.

Better still, by establishing best practices and automation in this first compliance year and making those processes sustainable, financial executives will smooth the way for painless compliance in subsequent years ahead.

Steven Rainey is a Partner in Sarbanes-Oxley 404 Tax Services for KPMG LLP. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. He can be reached at 703.286.8290 or [e-mail].