Sarbanes-Oxley Section 404 and the Tax Department

How companies can capitalize on their SOX investments.

July 31, 2007
by Michael Guelker

Implementing Section 404 of the Sarbanes-Oxley Act has proven to be one of the most involved processes companies have faced in a number of years.

Below is a brief synopsis of strategies for companies large and small to think long-term and capitalize on their 404 efforts, including:

  • How to capitalize on the momentum of your compliance efforts and reap the harvest of your hard work
  • How to address common concerns over the efforts required to take additional steps beyond 404 compliance
  • How a real-life taxpayer capitalized on his efforts to improve and automate his tax provision process

Capitalize on the Work Already Done

Along with the significant financial investments made by companies to comply with Sarbanes-Oxley requirements, it would be a shame to let all the hard work and the high level of change experienced in corporate tax departments as a result of Section 404 efforts go to waste, and only serve as a compliance effort to satisfy the auditors. What many tax departments fail to see is the opportunity presented by all your efforts to capitalize on the momentum and improve the overall processes and technology within your department.

Consider the following factors that allow you to take advantage of 404:

  • The 404 efforts allows for complete documentation of processes identifying any gaps in a desired “Best Practices” state.
  • Opportunity to rethink old processes — You may be using 10-year-old processes that don’t offer your department maximum effectiveness in today’s tax environment. Consider what can be done a better way? What have you been hoping to change, but haven’t yet found the opportunity or reason to act?
  • Availability of budget dollars allocated to the tax department — Companies have already spent, and will continue to spend, an inordinate amount of money to comply with Section 404. Show how you can use the compliance efforts expended, along with some incremental spending, to produce favorable ROI beyond pure regulatory compliance. Leverage the successful work you’ve already done to seek out the additional capital you may need to further streamline the department.

Following your SOX compliance efforts, change is fresh in everyone’s mind. The time, effort and capital used for compliance are still tangible events that your colleagues and superiors can relate to. Capitalize on the flexibility and attitudes present, and make additional changes where you think they’re needed most.

Concerns of the Effort Required

If corporate tax professionals across all industries share one thing, it is the incredible amount of responsibilities they have on their plates. And seeking out funding for additional work is not high on the list of tasks to pile on top of that. But despite the overwhelming feeling felt by many, there is hope. In this competitive environment, where discretionary budget dollars are hard to come by, you have to be creative to get the purse strings to open. The most effective way tax departments can obtain budget dollars is to effectively prove a positive ROI. Most companies indicate that in order for a project to get approved, it must pay for itself within one to two years. The most effective ROI is either a reduction in the effective tax rate, staff reductions, shifting of resources from compliance to planning or reduction of taxes that go right to the bottom line (e.g. consumer’s use tax, etc).

The ROI calculations are relatively simple and easy to explain to senior management. The most common calculations are:

Total Investment/(Total Savings/12) = Payback Period in Months
Internal Rate of Return; Use MS Excel’s IRR function to calculate

The trickiest part is calculating savings in such an esoteric field as tax, but it can and has been done in the past. You just have to be confident in your numbers and be able to show how by using process changes and automation, you can effectively shift resources from compliance to planning and that those resources are going to generate tax savings that are going to drop right to the bottom line.

Donít Let Your 404 Efforts Go to Waste

It is possible to use your 404 efforts for something other than an audit guide for your outside auditors at year-end. With the increased focus on tax due to Sarbanes-Oxley, it is conceivable to make the necessary process and automation changes in your department so that your department is more effective and efficient and that your changes contribute to the companyís overall bottom line. By being proactive and building an effective business case with favorable ROI, your 404 efforts will not go to waste and you can build that world-class tax department youíve always wanted.

For the full article including a real-life example, please visit: vertexinc.com/AICPA.

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Michael Guelker, Director of Tax Services, Vertex, Inc. Throughout his career and as a former Tax Partner with PricewaterhouseCoopers, Mike has led many Fortune 500, middle market, and emerging industry engagements. As both an income and sales and use tax expert, Mike regularly hosts tax thought leadership Webcasts offered by Vertex. He has been published in many journals and magazines, including those by the Tax Executives Institute and Association for Computers and Taxation.