During a recent Bloomberg Tax webinar, Managing Tax Risk in Uncertain Times, we asked tax and accounting professionals in attendance what area of tax posed the most risk. Fixed and intangible assets was by far the top choice selected by over 50% of the respondents. With fixed assets representing the largest item on the balance sheet, we weren’t surprised. The monetary value at stake, plus the sheer complexity of related tax laws, makes accurately managing, depreciating, and tracking fixed assets extremely difficult. And, if you are a capital-intensive company with millions of assets to manage, this complexity can get exponentially unwieldy and risky.
For these reasons, having good SOX controls around fixed assets should be a top priority. Without proper controls it is impossible to meet the strict Sarbanes-Oxley (SOX) regulations needed to ensure accurate financial statements. It was unsettling to learn that 25% of respondents never even perform a review of tax internal controls, putting their company at tremendous risk for material weakness. As any financial executive can attest, a material weakness could have significant financial implications — from shareholder value, to tax penalties and fees.
To illustrate the magnitude of the risk, consider the Fortune 500 Company that had to restate their financial statements for three years in order to correct over $45 million in capitalization asset errors and errors in the timing of depreciation deductions. Poor accounting controls and spreadsheet errors were to blame. The company’s stock value plunged 70% over a 12-month period, and the CFO and several key tax professionals were let go.
Given these severe potential consequences, conducting a review of internal controls should not be optional. Best practices indicate that frequent reviews of internal controls and processes virtually eliminate material weaknesses. The use of specialized fixed assets technology with its ability to automate fixed asset calculations, document audit trails, and provide full visibility and comprehensive reporting can mitigate risk and positively transform a company’s fixed assets management and tax internal control process.