It is a feature of front office tax functions that they operate largely outside the control of the mainstream tax Under Sarbanes-Oxley, internal controls, even management. Under the Sarbanes-Oxley Act 2002, many tax directors will be faced with the need to sign-of though a significant on tax internal controls so that their senior management can in turn give the required public assurances; proportion of the overall however,a significant part of the overall tax function will not be under their control. The survey suggests that tax function may not be the front office function is on average only slightly smaller than the ' mainstream'department(10 people in under their control the front office against 15 in the mainstream department ). Add to that another eight people who, on average. deal with tax issues such as personal taxes, sales taxes, and operational taxes from within the finance or Hr functions, and it is clear that the tax director only has direct control over a minority of the average financial Patchy adoption of risk procedures What procedures do financial institutions use to control their tax risks? The survey proposed a series of steps which might be taken to control risks and asked respondents to agree or disagree(fig 9). Typically a review of internal controls will take place in stages: firstly identifying all tax processes, then the risks arising within those processes, and finally the controls applied to manage those risks. The percentages of respondents who had taken the fundamental step of identify ing all their tax processes was relatively high at 67 percent, two in three of all respondents All tax processes have been identified Figure 9: To what extent do or sks arising as a result of those processe tax risks? have been identified 74% Appropriate controls to guard against those risks have been established A post-implementation review is carried out after each major planning exercise 42 Repeat transactions are only carried out after renewed tax opinions are obtained 46% Adequate procedures are in place to document all tax planning which is undertaken 58% The current portfolio of transactions undertaken is regularly reviewed for change of law The current portfolio of transactions undertaken is regularly reviewed for consistency of technical argument 54% he current portfolio of transactions undertaken is regularly eviewed for concentration of risk 56% 0%10%20%30%40%50%60% Base: All respondents (96) Percentage of respondents agreeing with statement An even greater number, 74 percent, claimed to have identified all the risks arising. This suggests that at least A thorough review requires some respondents do not take the view that risks arise from processes and a thorough review requires the the identification of rocesses before identification of processes before any examination of risk. examination of risk Rather fewer, 61 percent, believe that appropriate controls have been established to guard against the relevant risks, indicating that there is still work to be done. This is of course of particular relevance to those organizations which are subject to the provisions of the Sarbanes-Oxley Act, who will need to sign-off on the suitability of their intemal controls, some of them later this year 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients Each member firm is a separate and independent legal entity and each descnbes itself as such All rights reserved.8 © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved. It is a feature of front office tax functions that they operate largely outside the control of the mainstream tax department. Only 12 percent fall under the control of the tax director. This is not a surprising finding, because it is largely consistent with observation of the industry, but it does raise interesting questions in terms of risk management. Under the Sarbanes-Oxley Act 2002, many tax directors will be faced with the need to sign-off on tax internal controls so that their senior management can in turn give the required public assurances; however, a significant part of the overall tax function will not be under their control. The survey suggests that the front office function is on average only slightly smaller than the ‘mainstream’ department (10 people in the front office against 15 in the mainstream department). Add to that another eight people who, on average, deal with tax issues such as personal taxes, sales taxes, and operational taxes from within the finance or HR functions, and it is clear that the tax director only has direct control over a minority of the average financial organization’s tax personnel. Patchy adoption of risk procedures What procedures do financial institutions use to control their tax risks? The survey proposed a series of steps which might be taken to control risks and asked respondents to agree or disagree (fig 9). Typically a review of internal controls will take place in stages: firstly identifying all tax processes, then the risks arising within those processes, and finally the controls applied to manage those risks. The percentages of respondents who had taken the fundamental step of identifying all their tax processes was relatively high at 67 percent, two in three of all respondents. An even greater number, 74 percent, claimed to have identified all the risks arising. This suggests that at least some respondents do not take the view that risks arise from processes and a thorough review requires the identification of processes before any examination of risk. Rather fewer, 61 percent, believe that appropriate controls have been established to guard against the relevant risks, indicating that there is still work to be done. This is of course of particular relevance to those organizations which are subject to the provisions of the Sarbanes-Oxley Act, who will need to sign-off on the suitability of their internal controls, some of them later this year. A thorough review requires the identification of processes before any examination of risk Figure 9: To what extent do organizations control tax risks? Under Sarbanes-Oxley, many tax directors will have to sign-off on tax internal controls, even though a significant proportion of the overall tax function may not be under their control