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    Internal control deficiencies in tax reporting: A detailed...
    research summary posted January 20, 2016 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.02 Assessing Material Weaknesses, 07.03 Reporting Material Weaknesses 
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    Title:
    Internal control deficiencies in tax reporting: A detailed view.
    Practical Implications:

    The authors use a unique data set to shed light on characteristics which lead to material weaknesses, specifically in tax-related accounts relative to other accounts. The data (obtained from several international accounting firms) allows the authors to determine which characteristics of tax-related internal control deficiencies are different from other deficiencies, prevent them from being remediated, and cause them to rise to the level of a material weakness. Results suggest that tax deficiencies, relative to other account-specific deficiencies, are less likely to be remediated, more severe, and more likely to cause a financial misstatement. Tax-related deficiencies are less likely to get remediated by year-end if discovered by the auditor, if the control was deficient in design, or if the control pertained to monitoring. This paper underscores the importance of auditor involvement in internal control reporting in taxes.

    Citation:

    Graham, L. and J.C. Bedard. 2015. Internal Control Deficiencies in Tax Reporting: A Detailed View. Accounting Horizons 29 (4): 917-942.

    Keywords:
    Sarbanes-Oxley Section 404, internal controls, control activities, taxes, internal audit
    Purpose of the Study:

    The authors take advantage of a unique data source to attempt to glean information on tax-related internal control deficiencies. They analyze the characteristics of these deficiencies relative to other account-specific deficiencies to develop an understanding of the nature of tax control deficiencies. The authors then investigate the characteristics of tax-related deficiencies which lead to material weaknesses.

    Design/Method/ Approach:

    The authors collected data on approximately 2,500 account-specific internal control deficiencies from 74 public company engagements during 2004 and 2005. The data came from several international public accounting firms. The authors use archival regression analysis to analyze factors which cause significant differences between tax-related and other account-specific deficiencies, tax-related remediated and unremediated deficiencies, and tax-related material weaknesses and control deficiencies.

    Findings:

    The authors find:  

    • Relative to other accounts, tax internal control deficiencies are less likely to be remediated before year-end, more likely to be severe, and more likely to cause a financial statement misstatement.  
    • Remediation for tax internal control deficiencies is less likely when detected by the auditor.
    • Remediation failure is more prevalent for poorly designed controls, controls over the tax provision, and monitoring controls.  
    • Tax provisions and deferred tax controls have a higher potential for producing misstatements.
    Category:
    Internal Control
    Sub-category:
    Assessing Material Weaknesses, Reporting Material Weaknesses