Several years ago, I wrote an article published in the Iowa Journal of Corporation Law titled Putting SEC Heat on Audit Firms and Corporate Tax Shelters: Responding to Tax Risk with Sunshine, Shame and Strict Liability, 29 Journal of Corporation Law 220 (Winter 2004), available on the SSRN network, here. I noted that the wave of accounting scandals like Enron's that led Congress to pass Sarbanes-Oxley and push for greater independence of auditors was similar to the corporate tax compliance problems that reduce revenues for the federal fisc as well as harming corporations and investors. Sometimes tax and accounting gimmicks go hand in hand, and clearly the expansion of accounting firms into multidisciplinary practice facilitated companies' participation in tax shelters and undermined directors' and investors' assessments of tax risks. I suggested that Congress had missed an opportunity when passing Sarbanes-Oxley to legislate even greater transparency about taxes. I proposed that the SEC ban auditor provision of aggressive tax planning, defined by refernece to the IRS's reportable transaction categories. Companies are already required to review their transactions to comply with IRS reporting, and could therefore use this same tax information to provide internal and external disclosure to their boards and investors. I also suggested at the least that companies should be required to provide "tax risk profile" information to their boards and their investors, so that both groups would be better prepared to evaluate a company's reports and the credibility of its external auditor on tax matters. The goal was to use the IRS's existing tax analysis to set appropriate limits on auditor provisions of tax services to establish greater independence.
Anna Bernasek, who regularly writes for Fortune, wrote a piece in the New York Times on February 5 raising a similar question about transparency of tax returns as well as financial statement information. The original column, Why Let the I.R.S. See What the S.E.C. Doesn't, is available here. A reprint of the column is available here.
Bernasek's point is that companies have already prepared tax returns using the federal income tax rules, which generally are less flexible in permitting companies discretion in deciding how much tax they owe and therefore may provide a more accurate picture of the company's overall financial situation. The numbers on the tax return are kept confidential, however, while financial statements of reporting companies are publicly available through the SEC filing process. Greater disclosure of selected tax information would provide both investors and analysts a better sense of a company's true economic condition. It wouldn't be necessary to reveal the entire return, but perhaps at the least the "Schedule M-3" that reconciles tax and financial accounting numbers would be of interest.
Bernasek notes that "there is good cause for trying to understand what is really going on with corporate taxes, company by company" because the numbers suggest a downward treend for corproate taxes relative to the overall gross domestic product. That could be caused by new ways of minimizing taxes or new methods for overstating earnings. Either way, it is of interest to investors and greater transparency may help to stop abuses.
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