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Tax accounting has been the Achilles heel of large and small companies alike. It is the second-leading cause of financial statement reissuing, not to mention the amount of time it takes to implement appropriate controls. The constantly evolving tax environment also makes compliance a challenge. For example, the Sarbanes-Oxley Act (SOX) introduced multiple regulations that changed the financial accounting landscape. Companies were now required to enhance the transparency of financial statements through internal controls, regular external audits, registration with the Public Company Accounting Oversight Board, and certification of records by management.
The new SOX regulations were viewed as an increased workload by most accountants. But these laws also provide an opportunity to boost efficiency in tax accounting. By investing capital to ensure compliance, many tax workflows can also be improved. Accurate record-keeping will reduce errors in financial reporting and seal loopholes for committing fraud. By understanding how SOX overlaps with tax accounting, you can capitalize on resources and reduce the overall cost of compliance.
Understanding SOX 404
SOX 404 refers to section 404 of the Sarbanes-Oxley Act. This entire law contains accounting and financial regulations that impact multiple areas of your business. More specifically, Section 404 covers how management evaluates internal controls. By involving management during the financial accounting process, accountability can be established within the organization. This means that any financial statements released by a company are backed by their leadership and accounting teams. In this way, investors who rely on such statements to make decisions will enjoy more security and recourse for issues experienced. SOX 404 is relevant to more than just accountants who prepare these financial statements. It is also crucial to investment analysts, personal/capital market investors, and the public.
SOX 404 can be challenging to implement because it also covers tax accounting. Companies have to monitor their internal controls, tax environment, and vendors who support critical operations. Furthermore, the business has to prepare for an external audit to ensure continuous compliance. Such audits should be carried out by independent auditors who don’t have a conflict of interest with the client company.
Steps Towards Maintaining SOX404 Compliance
While understanding SOX 404 isn’t quite complicated, the bigger challenge lies in relating your internal controls to tax compliance. How can you align SOX regulations with tax accounting practices to ensure optimal workflows?
1. Start By Evaluating The Status Of Internal Controls
The starting point of SOX404 compliance is your internal environment. You need to strengthen relevant internal controls to detect issues faster, channel resources, and hire appropriate personnel. Simplifying the entire reporting process will also minimize auditing risks.
There are reliable warning signs that indicate problems with your internal environment. For example, overstretched resources and frequent budget deficits could result in the use of outdated software. Using complex spreadsheets with no centralization also exposes your financial records to errors.
2. Identify The Stakeholders Who Will Be Involved In Compliance Efforts
SOX compliance will involve multiple stakeholders inside and outside the business. All relevant personnel have a role in polishing internal controls and ensuring a framework for tax compliance. For example, the management team oversees a company’s internal controls and evaluates its effectiveness. Tax accountants are responsible for ensuring compliance with evolving tax laws. And finally, internal and external audit teams assess the overall integrity of the system to monitor compliance.
3. Understand Your Tax Environment
Businesses have varying tax regulations depending on the industry. There is also increased pressure by external auditors to identify issues with a company’s internal controls. Therefore, don’t expect to catch any breaks during tax compliance audits. Most companies face challenges when auditing financial reports, correcting mistakes in financial statements, and adapting to new accounting standards. These common issues provide insight into your internal tax environment and ideas of allocating resources to avoid the same problems.
Opportunities For Improving Tax Accounting During SOX404 Compliance
When it comes to SOX404 reporting, you need to think beyond compliance. Indeed, capitalizing on compliance efforts will provide additional opportunities for streamlining your tax accounting workflows. The good news is that compliance offers a useful foundation for taking the extra step. For example, you can use detailed record-keeping to review the current state of tax preparation tools. Are you taking too long to compile records and communicate with different departments? If so, consider upgrading to ERP software while centralizing critical accounting operations.
Another useful strategy is to show management that tax accounting workflows have a meaningful ROI. Because most personnel view tax compliance as an extra expense, show them how much the company is saving by streamlining tax accounting workflows. And by channelling resources during the planning stage, your business will avoid costly compliance issues down the road.
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