outsourced tax error a significant deficiency? 2853

  • Basically we outsource our tax provision work and tax return preparation work because we don’t have all the resources needed internally. This is normal for a company of our size. We have a ‘tax expert’ work with the Controller and with our CPA firm (that prepares our tax returns) to gain assurance that our taxes will be calculated/reported materially correct. We rely on them for the big number crunching and tax application knowledge. On our part the Controller also reviews the information sent - to assure it is complete (they have all that they need and understand any significant business events) and accurate. The tax expert and the CPA tax people work with the controller to assure the business events and data is picked up/calculated correctly by the tax expert . We also have controls that all information is booked accurately in the books and reflected in the disclosures. And we have controls that verifies the provider(s) are qualified to perform the tax work.
    Under this control framework we are reasonably assured that our tax reporting - including the financial statements/disclosures - will be materially accurate.
    Here, finally, is the issue: our ‘tax expert’ missed some significant (not material) tax impact issue and did not calculate our provision accurately. This was noticed by the CPA firm tax auditors/preparers. This CPA firm is also our external auditors (large int’l, not big 4 firm). They say we have a significant deficiency for Internal control purposes. I say we do not because our control framework, which includes the review by the CPA firms tax auditors/preparers, caught the error in a timely manner.
    If we have an Internal Control design weakness/exception that is defined as ‘less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting’, then we have a significant deficiency.
    Given all of the controls mentioned above we did we catch a significant error in a timely manner within our control framework. Therefore, from management’s viewpoint we do not have a significant weakness in our control design and execution.

  • For starters, your auditor’s review (audit?) of your tax provision cannot be considered a control. They cannot audit themselves. That is a conflict of interest.
    I wouldn’t get too hung up over a significant deficiency as it does not get reported externally, only to your BOD. It appears that you do have a control deficiency of some sort. I don’t have enough information to comment on whether or not it is significant.
    Your company should consider whether or not your outside ‘expert’ is enough of an expert for you to rely on. Ultimately, management is responsible for the tax provision and management needs to ensure that it has the right people in position to prepare and review the provision. In addition to evaluating the expertise of the outside ‘expert’, I would also suggest that management evaluate the skills of the company employee(s) responsible for reviewing the work of the ‘expert’ to see if more expertise needs to be hired into the company.

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