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UK Firms Struggling To Meet New Accounting Requirements

by Robert Lee,, London

11 May 2007

Less than half (41%) of the UK’s largest companies believe that their accounting systems collect adequate information to produce the tax calculations and disclosure required to meet new accounting regulations, according to a new report by Deloitte.

According to the 'Mind the GAAP' report, only 20% of company tax professionals believe that their systems adequately meet new GAAP requirements, at a time when tax disclosures are more closely scrutinised than ever by regulators, analysts, investors and tax authorities. 43% of companies fear that small errors in brought forward balances could lead to material weaknesses in their tax reporting.

Commenting on the findings of the study, Alan MacPherson, tax partner at Deloitte, said:

“UK plc is getting to grips with an unprecedented raft of regulatory changes, such as the adoption of IFRS. While many of the changes are intended to increase transparency, companies currently lack the necessary knowledge and systems to achieve clearer, more accurate disclosure."

“Traditionally the focus of tax departments has been on planning in order to minimise costs and underpin shareholder value. With regulators and financial markets now demanding greater tax transparency and certainty, we believe that tax departments should dedicate at least one third of their time to reporting and compliance."

“Many tax directors do not believe that tax is currently a major driver of accountancy systems, and there is a strong consensus that it should play a much more influential role in future. It’s important that their tax concerns are firmly on the boardroom agenda."

“On the bright side, seven out of 10 in-house tax professionals believe that technology will positively improve tax accounting in the future. However, their expectation of further regulatory change means that many are adopting a 'wait and see' approach. Only one third (31%) have plans to implement new systems or upgrade existing ones."

“With nearly half (47%) of companies believing that the rate of regulatory change will stay the same or increase, taking time to take stock is an understandable, but high risk, response. We’ve seen from Sarbanes Oxley in the US, that the financial markets tend to severely punish companies with tax weaknesses."

“Companies are no longer able to rely on support from their auditors and are dependent on accounting systems, which were not designed with tax as a priority. Almost three quarters of the company tax professionals we interviewed admitted to feeling exposed as a result of the changes - they are acutely aware that they may be held personally responsible for any inaccuracies or misrepresentations."

“It is encouraging to note that companies understand that technology has a positive role to play in the compilation and submission of year end tax figures. The companies that cope best will be those with formal schedules for reviewing and regularly upgrading or updating their systems."

“While companies may find the current pace of change challenging, the silver lining is that better systems will in time ensure more accurate and reliable numbers, and so give greater confidence in the integrity of the accounts.”

The impact of regulatory change is taking its toll on tax departments. Tax directors at 49% of companies reported a fall in the motivation and morale of their teams. Three quarters (76%) claimed that workloads have increased as a consequence of IAS 12, with the extra burden being met through longer hours for existing staff (for 57% of companies) and the diversion of internal resources from other key areas such as tax planning and compliance (for 64% of companies).

MacPherson concluded: “Tax directors have to deal with demotivated teams, a lack of confidence both in their personal knowledge and the reliability of their systems, and uncertainty about interpreting regulation. These issues aren’t going to disappear overnight, so down-playing them isn’t the answer.”

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