If corporate tax directors were to adopt a mantra, it might very well be: Tread lightly.
In fact, according to a new study by Ernst & Young LLP, 44 percent of tax directors say their companies have become more risk averse in the past two years. Most of the 354 tax directors surveyed reported spending more time on compliance, and 75 percent said risk management was a criterion upon which their performance was measured.
"In the '90s, tax directors were more focused on the value they could bring by lowering effective cash rates and increasing cash flow," says Mark Weinberger, vice chairman of E&Y's tax service. "As good as a tax director is at reducing the overall tax rate, if he does something that might be legal but that hurts the company's reputation, it could undo all the value created."
How companies measure tax-director performance.
|Success in dealing with tax authorities||81%|
|Tax risk management||75%|
|Timeliness of compliance||64%|
|Effective tax rate||48%|
|Source: Ernst & Young LLP|
As a result of this more-conservative bent, some tax initiatives have taken a back seat. "We're spending more time on compliance, documentation, and disclosure, and a lot less time on tax planning," says one tax director at a Fortune 500 company, who estimates she spent 10 times as long on 2004's annual close as she did in the past. Moreover, says Bruce Sedlock, director of taxes and asset accounting at $3 billion Allegheny Energy Inc., tax managers are being much more cautious. "Prior to Sarbanes-Oxley, tax directors might have been more likely to make estimates, but now we're more precise in accounting for reserves," he says.
Tax directors are also finding their internal influence increasing. To make sure they're pursuing the appropriate tax policies, many are presenting their positions to not only the CFO but also the CEO and the board. Nearly half of respondents said they receive "active direction" from the audit committee.
John Leahy, finance chief at the $900 million technology and business consulting firm Keane Inc., in Boston, confirms that he has seen changes in the tax-director role, although he says the shifts go hand in hand with "so much else we're dealing with in regard to good corporate governance, compliance, and transparency."
Still, there's no denying that reducing the effective tax rate remains a priority, says Sedlock: "A lot more companies are experiencing operating losses, and in times like that people become more aggressive about generating cash." But the process, says Leahy, "is complicated by "a whole lot more scrutiny."