Tax risk and internal audit

Effective teaming between tax and internal audit could be the
way forward in helping to manage tax risks across the enterprise!

Given the increasing pressures on time and resources, many tax functions are seeking to manage their tax profile by meshing together the tax technical skills of the tax function with the process and controls experience of the audit department, and embedding tax considerations into the organisation’s audit plan.

This is according to Sean Kruger Director and Head of Tax for Ernst & Young, who believes that such an approach will not only help to manage and reduce the overall tax risk profile of the organisation, but also potentially increase the competitive advantage of the business.

“When it comes to managing tax risk, many organisations fall at the first hurdle. Historically, few tax function leaders have had responsibility for undertaking risk assessment processes and reviews. As a consequence, limited consideration has previously been given to how tax risk can arise in, and impact on, the broader enterprise – other than in the traditional tax compliance, technical or administrative areas. From a tax perspective, there is a growing recognition that, in a post Enron and Sarbanes-Oxley s404 world, tax can no longer operate in detachment from other functions,” says Kruger.

He says that organisations need to have a strategy in place to deal not only with business process risk but also any tax related consequences that may arise from that business process. He acknowledges however that tax processes and risks are not always clearly appreciated and understood across the wider organisation.

“This often results from either a lack of resources within the tax or internal audit functions, or a traditional lack of risk management focus on tax issues. Without an adequate consideration of the tax consequences of business process risks, any company’s risk framework is likely to be incomplete,” he adds.

Having effective processes and controls, he says, around tax across the enterprise is also critical in terms of managing FIN 48 reporting requirements for US filers. “As part of the first year of adoption of FIN 48, most US companies extended significant effort to identify and document their historical ‘uncertain tax positions’. However, to ensure that all potential FIN 48 reporting issues are covered going forward, they also need to establish ongoing processes and controls to monitor changes that affect existing uncertain tax positions, identify new uncertain tax positions, document conclusions, and prepare financial entries and disclosures.”

Jonathan Blackmore, Risk & Advisory Services director at Ernst & Young concurs and states, “leading organisations have come to recognise that in order to manage this combined skills gap, they need to bring the internal audit department and tax function together to address tax risk management jointly across the enterprise.”

Blackmore says that in most organisations, the internal audit function is the board’s most powerful mechanism for understanding and providing semi-independent validation and monitoring around the spectrum of risk facing the organisation. “Involving internal audit makes it easier for all areas of tax risk across the enterprise to be identified, rather than just those situated in the tax and finance function.”

“Tax risk management competencies, gained through teaming with specialists or tax training, allows internal audit to shift the focus from a traditional approach of testing controls on individual transactions to evaluating the effectiveness of management efforts and internal controls over tax risks associated with strategic and business objectives, as well as financial, operational and compliance processes,” he adds.

Blackmore concludes: “The increased involvement of internal audit in tax risk management can also spur the development of a ‘leading practise’ corporate environment. Its benefits are likely to increase over, creating real competitive advantage for an organisation if leveraged correctly.”