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Ernst And Young Survey Finds Increased Focus On Tax Risk

by Robert Lee,, London

06 December 2006

"Corporate tax functions throughout the world are making progress in responding to intense levels of scrutiny and pressure caused by regulatory and other change," is the conclusion of a new study by accounting firm Ernst & Young.

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 department performance.

The biennial independent survey of 474 tax directors and senior financial executives across the globe 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. The study concludes that this trend has come about in response to the changed business environment.

"The global tax landscape continues to evolve dynamically," noted Sam Fouad, Global Head of Tax at Ernst & Young.

He continued:

"Even more quickly than the quickening convergence of national regulations, 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."

"This new era represents an unprecedented opportunity for tax authorities, taxpayers, and tax advisors to work together more closely than ever before to redefine the tax policy and tax compliance landscape of the future."

Dave Boule, Global Director of Ernst & Young’s Tax Accounting and Risk Advisory Services observed:

“Our survey shows that the continuing rapid global change in the business and tax environment is forcing companies to think differently about financial accounting for income taxes and tax risk."

“Only those who take a strategic view and make people, process, and technology investments will be able to get in front of the wave of increasing complexity, time pressures and resource shortages."

The survey's key findings included:

  • 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, with SEC-registered companies and firms based in the US leading the way in this respect.
  • 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.
  • 35% of the companies surveyed intended to increase internal audits in the next 12 months.
  • Tax respondents overwhelmingly (90%) report a well established communication channel between the tax department and senior management.
  • 52% believe that the tax function's influence within their organizations has increased over the past two years.

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