Handling the Tax Transition to IFRS and Sarbanes-Oxley Compliance

Source:  IT Business Edge

Date Published: 28/9/2006

With Duncan Lyon, Managing Director of Lyon Solution Services (LSS).  LSS specializes in working with large corporations to streamline and control the compliance and reporting processes of corporate tax functions, with expertise on the transition to tax reporting under the International Financial Reporting Standards (IFRS) and compliance with Sarbanes-Oxley.

Question: What are the International Financial Reporting Standards and how do they relate to Sarbanes-Oxley?

Lyon: The IFRS are accounting standards issued by the International Accounting Standards Board (IASB) that determine how corporations calculate and report their financial results. Historically, each country has adopted its own set, and the accounting “rules” for any two countries often contained major differences. For example, an American company reporting under both the U.S. and UK accounting standards could produce two completely different profit figures for the same year because of differences in the two countries’ accounting requirements.

IFRS is being adopted by most of the world’s major  economies, and the U.S. is working to harmonize its accounting standards (U.S. GAAP) with IFRS. Once IFRS is adopted globally, it will bring much needed consistency to reported financial data and allow better flow of investment capital across national borders.

The Sarbanes-Oxley Act imposes stringent financial reporting requirements on companies doing business in the U.S., including the establishment and certification of internal controls for the calculation and reporting of financial results.

In summary, IFRS is concerned with the accounting rules used to compute and report financial results. SOX is concerned with the process and controls around the maintenance of accounting records and preparation of accurate financial reports.

Question: What are the key obstacles for companies attempting to comply with these standards?

Lyon: The excessive burden and costs imposed on corporations to comply with SOX are well known but, despite recent pleas from big business, there appears to be little political motivation to relax the onerous requirements in the medium-term. On top of this, many large corporations are now having to overhaul their financial reporting processes and systems to report under IFRS, often in parallel with existing reporting requirements under U.S. GAAP. This is putting further pressure on over-stretched financial and IT resources.

The corporate tax functions of large corporations are under particular pressure. The tax systems of large corporations were highlighted as having the largest number of internal control weaknesses in the first year of audit reports under Sarbanes-Oxley. Under-funded tax cost centres have typically placed heavy reliance on unreliable spreadsheet technology and manual processes to prepare complex tax calculations and reports. In addition, the new tax reporting rules under IFRS require a fundamental change in reporting systems, processes and understanding for many organizations. The spotlight on corporate tax functions to comply with SOX and IFRS provides an ideal opportunity for a business case to invest in new systems and processes. However, tax managers with a technical background often lack the resources,  experience and skills to plan and manage the necessary changes.

Question: How does LSS determine what to recommend to a new client in terms of overcoming those obstacles?

Lyon: We start by working with senior management and stakeholders to assess their goals and objectives, identify current weaknesses and bottlenecks and draw up a strategic plan for change. We then work with the organisation to action the change program with a range of services, including project management, selection and implementation of new tax technology solutions and establishment of effective internal controls and procedures.

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