SOX-like provisions in the Finance Bill 2009 set alarm bells ringing for FDs

3rd May 2009

SOX style legislation hurriedly announced in the Finance Bill 2009 has set alarm bells ringing in the corporate world.  Legislation will be introduced in the Finance Bill 2009 to ensure that accounting systems in operation within large UK tax paying groups are adequate for the purposes of accurate tax reporting.  The legislation also provides that “Senior Accounting Officers” will be personally liable to fines of up to £5,000 for not meeting these obligations.  Fears are growing that apart from being ineffective, the new law will impose costly Sarbanes Oxley type controls and compliance at a time when companies can least afford it.  Gary Simon, FSN’s managing editor reports.

Legislation is to be introduced in Finance Bill 2009 to ensure that accounting systems in operation within large UK tax paying groups are adequate for the purposes of accurate tax reporting.  In a confusing statement the budget report places the obligation on “Senior accounting officers” (SFO) an undefined role but thought to equate to finance directors even though Tax Directors in large multinationals are generally responsible for organising tax computations and returns.

Under the new legislation, the SFO will be required to take reasonable steps to establish and monitor accounting systems within their companies to ensure that they are “adequate” for the purposes of accurate tax reporting and certify annually that this remains the case.   Although there is no explicit audit requirement, the SFO will have to specify the nature of any inadequacies and confirm that those inadequacies have been notified to the company auditors.

More worryingly for those involved there are personal penalties chargeable directly on the SFO for a failure to meet the obligations in addition to penalties imposed on the company, although details are vague.

In a Sarbanes Oxley (SOX) type way, companies will be expected to certify that management have established and are maintaining an adequate internal control structure and procedures for tax reporting. According to Deloitte, the accounting firm, “The critical test will therefore not be whether the tax return contains any inaccuracies, but whether sufficient controls were in place to enable accurate tax reporting.”

Since large multinational companies (small and mid-sized companies are excluded) use their group reporting and consolidation systems to collect raw tax data, the work done by US companies in preparing for SOX will be directly relevant to preparations in the UK.

This means that performance management vendors and more specifically providers of consolidation systems will be in poll position to help. Shak Akthar, UK Managing Director, of Tagetik a global provider of consolidation systems told FSN, “This new regulation fits in with the increasingly evolving compliance regulations that have and will continue to impose increasing demands on companies.  Tagetik’s goal is to simplify and improve the efficiency of financial processes and controls through a unified software solution for financial governance responding to different countries’ regulations.    For example, we released recently a new Tagetik process that delivers controls and risk management for internal auditing and internal stakeholders. We tested this application within the Italian market to comply with Law 262 (the Italian SOX).”

John O’Rourke, VP of Product Marketing at Oracle predicts that providers of consolidation systems will have a key role to play in assisting companies to become compliant and contain costs. “The proposed introduction of compliance regulation in the UK Finance Bill 2009 similar to Sarbanes-Oxley regulations in the USA is a very interesting development. Our experience with hundreds of companies in the USA has shown that having a world class financial consolidation and reporting system makes it a lot easier for companies to ensure compliance,” he told FSN.

David Taylor, VP Strategy & Global Business Development, at Trintech, agrees. “In anticipation of this tax legislation, we have witnessed demand from large Corporations for a cost-effective solution. Large Corporations face recurring problems, such as the provision of relevant tax data and supporting documentation from Shared Service Centers to the relevant Jurisdiction Tax Manager. We have noticed a common thread between these requests; the need for transparency, visibility and control to ensure governance, accountability and the appropriate distribution of responsibility, throughout the process. Trintech solutions are focused on delivering these controls; ensuring they are performed by the right person, at the right time and in the right order of execution thereby minimizing the risk of failure to the Senior Tax Manager and the Company in conforming to the requirements of the Financial Bill 2009.”

But not all vendors are convinced that the new requirements will be as onerous as SOX, or at least the infamous s404 of the 2002 Act.  Norman Marks, VP, Governance, Risk, and Compliance, at SAP BusinessObjects told FSN, “SOX is a massive Act, much of which is covered by existing ‘comply or explain’ provisions governing the evaluation of internal controls under the Combined Code in the UK.  So it could be argued that measures are already in place to provide the assurance required over tax returns.”

“It seems that some people have leapt to the conclusion that the Finance Bill requirement is similar to s404 of SOX, but without more detailed guidance from the UK government it is difficult to say. SOX  s404 requires audit firms to attest to, and report on, the assessment made by management but this is not the case with the new tax related law. In fact the law as worded so far looks much more like SOX s302 which is far less onerous,” added Marks.

Whether the new regulation will improve the government’s tax take is a mute point. Deloitte says, “HMRC are expecting that this measure will raise an additional £140 million of exchequer receipts over 4 years from around 60,000 companies. We believe that the impact is likely to be closer to neutral given that many companies do not currently have sufficiently high data quality to support tax deductions. These new requirements may lead to further deductions becoming available from the improvement in data quality.”

In fact data quality management is one of the key improvements that a comprehensive consolidation system can help bring about. According to Oracle’s O’Rourke, “The validation rules, process control, workflow and other features in Oracle Hyperion Financial Management and Financial Data Quality Management applications have made it easy for customers to define and enforce internal controls required to improve confidence in their financial statements, and reduce their costs of compliance.”

Nevertheless the whole exercise is likely to be costly.  Deloitte adds, “HMRC do not view these measures as imposing any significant additional burden on companies where 'adequate accounting systems' are already in place. However, we would expect the reality (in line with the US experience) to be that considerable additional work will need to be undertaken in relation to documentation of processes, assessment and benchmarking of risks and the adequacy of controls and the implementation of remediation plans as well as potential changes to the set up of accounting systems including general ledger code set up.”

“We are surprised to see the introduction of this proposal as it has not been the subject of any consultation and it appears inconsistent with recent communications from HMRC regarding their approach to assessing the quality of taxpayers' systems as part of the risk-based approach.

Our fundamental concern is that it appears to impose a significant new compliance burden on businesses, as well as presenting a potential personal exposure for the Senior Accounting Officer, while at the same time remaining silent on the hurdle of what is 'adequate' in this context.   Overall we believe this will have wide reaching implications for companies and individuals which will need considerable focus over the coming months,” added the audit firm.