Deficiencies in Tax-Related Internal Controls Detected Under Sarbanes-Oxley Section 404

38 Pages Posted: 5 Aug 2011

See all articles by Lynford E. Graham

Lynford E. Graham

Bentley University

Jean C. Bedard

Bentley University - Department of Accountancy

Date Written: August 5, 2011

Abstract

We examine detection, remediation and severity classification of deficiencies in tax-related internal controls identified under Sarbanes-Oxley Section 404. Our data comprise internal control deficiencies (ICDs) identified by company personnel and auditors, provided by several large auditing firms. We find that relative to ICDs in other accounts, tax ICDs are less likely to be remediated prior to yearend, are more likely to be severe, and are more likely to have failed to prevent a misstatement. Results show that companies under financial stress are more likely to have tax ICDs, and less likely to remediate those problems, implying that financial stress inhibits attention to internal controls over taxes. We find more severe tax ICDs among smaller, riskier companies lacking a high quality internal audit function. Investigating specific types of tax IDs, we find that severity classifications are higher for flaws in controls relating to the tax provision, deferred taxes, and compliance.

Keywords: Internal controls, Taxes, Sarbanes-Oxley Section 404, Risk assessment, Materiality

Suggested Citation

Graham, Lynford E. and Bedard, Jean C., Deficiencies in Tax-Related Internal Controls Detected Under Sarbanes-Oxley Section 404 (August 5, 2011). 2011 American Accounting Association Annual Meeting - Tax Concurrent Sessions. Available at SSRN: https://ssrn.com/abstract=1905069 or http://dx.doi.org/10.2139/ssrn.1905069

Lynford E. Graham

Bentley University ( email )

175 Forest Street
Waltham, MA 02145
United States

Jean C. Bedard (Contact Author)

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2410 (Phone)
781-891-2896 (Fax)

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