Advantages and Disadvantages of the Sarbanes-Oxley Act on Tax Planning, Essay Example

The Tax Advantages and Disadvantages of Sarbanes Oxley Act

Sarbanes-Oxley Act of United States passed in 2002 brought the most important reform in the current public financial reporting of United States. The Act was developed to reinstate the confidence of public in the public companies management after the scandals of WorldCom, Enron and others. Sarbanes-Oxley has directly influenced the liabilities and responsibilities of Board of Directors, Corporate Executives, Auditors, Audit Committees, and Analysts. This paper intends to provide the advantages and disadvantages of Sarbanes Oxley Act particularly in relation to the tax planning.

In respect to the tax planning, Sarbanes-Oxley identify the potential risks of the similar firm conducting both tax services and auditing for a business by changing the association between the Audit Committee of company and external auditors. Where as not limiting auditors from the tax services undertaking, Sarbanes-Oxley provides a new obligation for this type of services to be pre-approved or approved by the audit committee of a company, enforcing new accountabilities on both the audit committee and the corporate tax department.

The retention and appointment of auditors is considered a question for the audit committee of a company. In which situation auditors also render tax services to the company, the Final Rules of Security Exchange Commission specify that the committee must analyze:

  1. Transactions primarily suggested by the accountant of firm,
  2. Transactions for that the only purpose of  business is tax evasion, and
  3. The treatment of tax for that may not be assisted by the Internal Revenue Code of United States and associated regulations

 

These three tests are applicable equally to state, local, foreign, federal taxes.

Another advantage of this act is that the corporate departments of tax can carry out a very helpful function in supporting the committee of audit to meet its responsibilities of Sarbanes-Oxley in relation to tax services. It is particularly advisable that the Vice President of Tax or Director of Tax must attain a copy of the auditing policy of an entity and become familiar with its provisions, in addition to this the procedure for attaining the permission if services are not approved prior to this process.

The basic disadvantage of Sarbanes Oxley Act is that its adherence demands from the businesses to implement number of different internal controls to protect the company’s financial information. Internal controls are particular to each operation of accounting, for instance cash reconciliations, accounts payable, and fixed assets. Numbers of different internal controls needs extra time for the processing of accounting functions, which become the reason of delaying in the timely preparation of financial information. Furthermore, employees should confirm that all the documented work is correct and approved by the seniors. Increasing the functions and amount of internal controls increases the closing time for preparation of tax files and hence delays the preparation of financial statements.

Sarbanes Oxley Act policies demand public corporations to have yearly audit performed an independent accounting firm. These numbers of audits obviously increase the cost of business and hence higher accounting and audit fees demand from companies to fix their budgets in order to compensate for these services.

Finally, the severe fines for accounting and tax are increased in Sarbanes Oxley Act. Few penalties are unfortunately placed even on minor type of violations. Rigorous fines on minor mistakes or violations may restrict the executive type of talent group if the employees of future management are not intended to be liable for minor mistakes.

 

References

Piotroski, Joseph D. and Srinivasan, Suraj. (2008). Regulation and Bonding: The Sarbanes–Oxley Act and the Flow of International Listings. New York: Wiley.

“The Effect of Corporate Governance Regulation on Transparency: Evidence from the Sarbanes-Oxley Act of 2002”. Papers.ssrn.com. Retrieved 2012-02-04.

Farrell, Greg. (2005). America Robbed Blind. Washington: Wizard Academy Press.

Lucas, Nance (2004). “Sarbanes Interview”. Findarticles.com. Retrieved 2012-02-04.

Sarbanes–Oxley: Progressive Punishment for Regressive Victimization, 44 Hous. L. Rev. 95 (2007)”. Papers.ssrn.com. Retrieved 2012-02-04.

Stephen M. Kohn, Michael D. Kohn, and David K. Colapinto. (2004). Whistleblower Law: A Guide to Legal Protections for Corporate Employees. New York: Praeger Publishers.

Farrell, Greg (2007). “USA Today — SOX Law Has Been a Pretty Clean Sweep”. Usatoday.com. Retrieved 2012-02-04.