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Internal Watchdogs Want More on Tax

Internal Watchdogs Want More on Tax

Ernst & Young survey shows the tax function is increasing in its influence on executive level business decisions in New Zealand

Corporate tax functions throughout the world are making progress in responding to intense levels of scrutiny and pressure caused by regulatory and other change. According to Ernst & Young’s Global Tax Risk Survey 2006, Tax Risk: External Change, Internal Challenge, ensuring tax accounts and disclosures in financial statements are correct and tax risk management in general are the two leading measurements of tax function performance.

The biennial independent survey of 474 tax directors and senior financial executives across the globe – including 25 New Zealand respondents, representing major corporates – shows that time spent on tax financial reporting has increased by 14%, while time spent on planning and routine tax compliance has decreased 8% and 13% respectively over the last two years. This is a clear response by tax functions worldwide to the changed business environment.

Stephen Titter, leading Tax Accounting and Risk Advisory Services at Ernst & Young New Zealand, says the global survey provides important insights for all finance and tax executives, audit committee members, and tax and capital markets authorities.

“The results show that most world-class companies are adopting best practices for management of tax risks by updating their approaches to tax planning, tax accounting and controls, and tax compliance,” says Mr Titter.

However he points out that not all the New Zealand results are in line with the rest of the world, reflecting the smaller average size of our companies and their tax functions, greater influence of the tax function and our lesser regulatory requirements.

“The influence of the tax function on executive level business decisions has increased in the past two years, according to two-thirds of New Zealand respondents. It would seem New Zealand audit committees are now demanding a greater understanding and transparency around the potential impact of tax risk on the business and its reporting,” says Mr Titter.

“New Zealand respondents still spend more time on routine tax compliance than their global peers –38.3% of their time, compared to the global average of 31.3%. The most important measure for the tax function cited for New Zealand was timeliness of compliance, whereas globally the leading measure for the tax function is to ensure tax accounts and disclosures in financial statements are correct.”

Other key survey findings include:
•    The two most common reasons for tax risk challenges were increased complexity and lack of qualified staff, especially those trained in tax financial reporting.
•    54% of the respondents indicated that they have become more risk-averse during the last two years.
•    Two thirds of the respondents say that their risk coverage is comprehensive. SEC registrant companies lead non-SEC registrant companies in this area (76% as compared to 59%) with North American companies leading the pack at 80%, compared to 59% of European companies and 47% of Asian companies.
•    However, only 44% of the respondents reported that the tax department has a documented process for managing tax risk.
•    Only 10% of tax departments have instituted a regular program of review and testing by internal audit that goes beyond specific statutory requirements such as SOX 404. When they have been involved, they have identified material weaknesses ahead of the external audit in 25% of the cases.
•    35% of the companies surveyed intended to increase internal audit’s involvement in the next twelve months.
•    Tax respondents overwhelmingly (90%) report a well established communication channel between the tax department and senior management.
•    52% believe that the tax functions influence within their organizations has increased over the past two years.

Although the survey does show some important regional and other differences, what is much more obvious is the high degree of global consistency on the important questions.


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