Internal Controls: Keep these things in mind for year-end…
I don’t think I can recall a time in my career when tax professionals have been faced with so many challenges in a relatively short amount of time. Over the past two years tax reform and other accounting legislation created issues that required immediate attention, like sweeping international changes that require companies to implement brand new processes. Now that tax departments have gotten their arms around most of the changes, it’s time to close the books on 2019. Whew!
Below are a few things to keep in mind as you begin the year end process:
According to a recent study by Audit Analytics, tax accounting issues were in the top four reasons leading to ineffective Internal Controls Over Financial Reporting (“ICFR”) in accelerated filers last year.
The top five reasons internal control issues contributed to an ineffective ICFR include:
- Material/numerous auditor/year-end adjustments
- Accounting personnel resources, competency/training
- Information technology, software, security and access
- Segregation of duties/design of controls
- Inadequate disclosure controls (timely accuracy, complete)
Aside from the technical challenges facing tax departments, many of the top reasons for ineffective ICFR remain personnel and process driven. If these are considered and addressed before year end, many of these items can be mitigated.
Before you begin your year-end close processes, you may want to consider:
- Evaluating the roles of the personnel within your department to ensure segregation of duties are maintained
- Documenting the requirements of management review and confirm that it applies an appropriate level of precision and completeness
- Identifying and filling knowledge gaps in personnel, providing training, filling open positions or engaging external resources to provide technical expertise where needed
After a few years of decline in Big Four audit deficiencies, it appears that PCAOB inspection deficiencies are on the rise again. Over the past two years deficiencies have risen from 29% to 32%. The PCAOB highlighted key areas of focus for 2019 which include audit procedures around new standards and past inspection findings, both of which have impacted tax departments. Unfortunately, the tax department is rarely seen as anything other than a high risk area in a company’s risk assessment and will continue to be an area of focus for auditors.
Additionally, under AS 3101, audits of large accelerated files with fiscal years on or after June 30, 2019, are expected to include critical audit matters (CAMs) in the auditor’s report. You’re probably thinking, what is a critical audit matter?
A CAM is defined as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that:
- Relates to accounts or disclosures that are material to the financial statements; and
- Involved especially challenging, subjective, or complex auditor judgment
The general nature of the definition of a CAM allows auditors to place a large amount of subjectivity around the areas they believe are the highest risk and material to the financial statements. Guidelines note that audits are expected to have at least one CAM. Given the complexity around tax accounting issues, it is likely that at least one CAM identified will point to tax department processes.
Even though the PCAOB aims to evaluate the work of audit firms, the unfortunate impact to audit clients is increased scrutiny and documentation, creating longer audits and increased investment of time. In addition, you may not be able to rely on past audit history, resulting in additional questions or supporting documentation not previously required.
The news isn’t all bad! There are things you can do to mitigate risk and prepare for increased audit scrutiny. Better design and execution of controls translates to lower audit hours and fees. Being prepared with an understanding of what is required of your tax department before the audit can help make the audit process run more smoothly.
We are your advocate and can help you deal with these challenges not only at year-end, but all year long. Contact Jen Crawford for more information on designing and implementing tax internal control processes, filling personnel gaps in your tax department and how technology may be able to alleviate some of the time constraints you’re experiencing.