Monday, March 28, 2005
SOX Impact on Tax Accounting
Tough Audit Standards Boost Tax Coffers
NEW YORK (Reuters) - Corporate America is suddenly discovering it owes Uncle Sam a lot of money -- and investors are suffering as a result.
In the past few weeks a series of major companies, including photographic firm Eastman Kodak (NYSE:EK - news), ConAgra Foods Inc. (NYSE:CAG - news) and telecommunications company MCI Inc. (Nasdaq:MCIP - news), have disclosed that they need to adjust their financial results because they owe or may owe more taxes than initially reported in recent years.
On Thursday, for example, ConAgra said it had missed aggregate tax payments of between $150 million and $200 million for periods dating back to 2003.
This windfall for the Internal Revenue Service (news - web sites) is at least partly the result of the crackdown on company bookkeeping triggered by the accounting scandals of recent years.
In particular, section 404 of the Sarbanes-Oxley Act has forced companies to introduce tough new internal controls, while another part of the law prompted companies to use different accounting firms as tax advisors than they use as auditors.
In many cases this has effectively led not only to re-examination of accounts previously announced, but has also led to a fine-tuning of tax reporting systems.
"As companies tighten their internal control structures they are not only going to improve financial reporting but will also improve their tax reporting as well," said Roger Siefert, managing director at the accounting and litigation practice of investigative firm Kroll Inc.
TAX ACCOUNTS VS GAAP
The recent spate of tax errors also reveal the hazards associated with the dual accounting system in the United States, under which companies keep two sets of books. There is one main book, that follows GAAP (generally accepted accounting principles) accounting and is widely followed by investors, creditors and regulators.
The second book is for income tax authorities and takes into account various allowances and adjustments. The adjustments usually include items like depreciation and depletion of various assets and other tax benefits put in place by policymakers.
Experts say stricter auditing standards are now helping companies detect when they previously made the wrong adjustments to GAAP books to arrive at the numbers submitted to the IRS.
"Essentially it boils down to 'did you include everything you should include in your tax returns?'," says Joshua Livnet, accounting professor at New York University's Stern School of Business.
The Internal Revenue Service also agrees Sarbanes-Oxley will make it easier for it to catch aggressive tax filers. "We think it will be healthy because the GAAP financials will be cleaner," said Bruce Ungar, the deputy commissioner for large and mid-sized businesses at the IRS.
Sarbanes-Oxley notwithstanding, Ungar says the IRS itself is becoming stricter with companies as well. From this year, it is asking companies to file a new document, Form M3, to detail how tax accounts were reconciled from GAAP accounts.
"It will shed more light on those returns and we will have a better mechanism to reconcile why the tax returns are different from the book numbers," Ungar said.
A key change in auditing practice this year has been the separation of tax compliance from auditing, allowing deeper probes into the way tax reconciliations have been made.
In the past, said Russell Wieman, a Detroit-based tax partner for accountants Grant Thornton, auditors would pay close attention to GAAP accounting but take only a cursory look at tax accounts.
"The auditor didn't typically spend a whole lot of time on things like depreciation," he said.
The taxman is, though, not always the winner.
AMCOL International Corp. (NYSE:ACO - news), an Arlington Heights, Illinois-based minerals company discovered this month that the IRS owes it at least $4 million after it reviewed results dating back to 1996.
posted by Brian Moran @ 9:03 AM