Understand basic internal controls and related mitigating procedures that can help to mitigate identified tax risk in your organization.
Controlling the tax risk
Once a company has its tax risks identified, mitigating procedures need to be implemented and documented. In order to do so, there has to be a core understanding of basic internal control objectives and the related mitigating procedures.
The control objectives are what you want to happen.
As an example, if you want your tax expense figures to be timely then the mitigating procedure would be to ensure that accounting has entered all its transactions into the general ledger and been reviewed before the tax department starts the provision.
Once you have a handle on the control objectives, mitigating procedures with individual key controls can be implemented.
An internal control is easiest explained as “the checks and balances” process. There are three types of controls:
- The preventative control – it catches issues before it makes a mess.
- The detective control – it finds the mess after the fact and measures the efficacy of preventive controls.
- The corrective control – it corrects the mess so it doesn’t happen again.
Obviously, the best (and typically most expensive to employ) are preventative controls. When designing a mitigating control thought has to be given to how effective the control will be and the cost of having the control in place. In addition, you need to consider the impact of the control and whether there are limits to what that control can do once put in place.
About the term “key control”. A mitigating procedure may have a number of checks and balances (individual controls) but there are usually only a few key controls. “Key controls” are the ones that matter – as an example, in preparing a tax return there are lots of checks and balances already built into the software but the key control is the detailed review.
(With excerpts from the book, Tax Risk in the 21st Century: How to Manage Tax Risk like a Big Company Without the Big Expense by Ana Sainz of Claret Partners)
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No matter what your business or the size, tax departments have a significant responsibility – to deliver efficient, credible tax provisions, reporting and compliance. Achieving this goal requires your data, technology, people and process be effectively integrated.
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