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How Sarbanes Oxley is changing tax services

Sed Crest discovers how tax directors in North America are dealing with the Sarbanes Oxley Act and why they are less than satisfied with the tax advice they receive

Top 10 challenges facing tax executives

The survey asked respondents to describe the biggest challenge facing someone in their role. They are:

1. complying with Sarbanes Oxley legislation (18%);

2. increasing workload but limited internal resources and tax-advice budget (16%);

3. greater regulatory scrutiny and disclosure requirements (15%);

4. managing risk and reducing the effective tax rate (14%);

5. keeping abreast of developments (8%);

6. transfer pricing (8%);

7. finding expert advice that is cost-efficient (7%);

8. attracting and retaining quality staff (5%);

9. coordinating tax laws in other countries and supply-chain management (5%); and

10. growing complexity, foreign exchange fluctuation and other challenges (4%).

Coping with the Sarbanes-Oxley Act is the biggest obstacle facing tax directors in North America today. According to International Tax Review's annual survey of tax services, the legislation has changed the international tax services market in profound and far-reaching ways. The worst news is that the changes it has caused, and is causing, are far from over.

Sarbanes Oxley or its effect accounted for the top three or 49% of the issues tax directors find most challenging, according to the survey. One of the things the legislation does is to impose onerous approval procedures on tax directors if they receive tax advice from their auditor. After a decade of mergers and consolidation of tax and accounting firms and with the demise of Andersen in 2002, many tax directors are finding their options in receiving quality tax advice to be narrow.

Outside the big four professional services firms (Ernst & Young, PricewaterhouseCoopers, Deloitte and KPMG), only a small number of firms have the international scope and breadth of resources to provide the services that multinational corporate taxpayers demand. Mark Saks, General Electric's tax manager in Wisconsin, said that the problem was that there are now "too few firms that can provide quality services locally". This means that tax executives need to shop around and draw tax services from a combination of different firms, including international law firms and tax boutiques. This is evidenced in the flowering of transfer pricing and niche tax boutiques across the continent.

The procedures that Sarbanes Oxley imposes also mean that the compliance workload facing tax directors has increased substantially. This comes at a time when the tax function is under increasing scrutiny from the board as well as an increasingly aggressive Internal Revenue Service, newly empowered with strict disclosure requirements.

The strain is beginning to show. Stephen Keating, senior vice president of tax in New York for Computer Associates, a software company, said that the biggest challenge for him was "handling Sarbanes Oxley together with my normal responsibilities".

The extra work load is one thing but most respondents to the survey found their resources were not increasing to compensate for the greater demands placed upon them. Walter Stone, director of tax at manufacturer Solvay America in Houston, said that his biggest challenge was "increasing responsibilities with static resources".

Michael Cuellar, senior tax counsel at Danaher, a manufacturer, in Ohio, thought that his biggest challenge was that his tax staff had not increased at the same pace as either the regulatory demands or the growing size and complexity of his company.

One of the surprising results from this year's survey was that transfer pricing dropped from the fourth biggest challenge last year according to the sixth biggest challenge this year. This is not really about transfer pricing becoming less of an issue; it is about other issues superseding transfer pricing concerns. There is no doubt that multinationals face a heavy transfer pricing compliance burden. Both Charles Hahn, director of taxes at the Dow Chemical Company in Michigan and Jonathan Biller, senior tax counsel at Alcon Laboratories, a healthcare company, in Texas, agreed that transfer pricing is their biggest challenge.

The cost of external tax services was another problem for many tax directors. Concerns about the cost of external tax services rose from 4% of respondents in last year's survey to 7% this year. But respondents still put price as the second-lowest concern when selecting their tax advisers.

Some other problems that were more of an issue in this year's survey, which did not feature in last year's survey, were attracting and retaining quality staff and foreign exchange fluctuation. The continuing depreciation of the US dollar and the strengthening Canadian dollar has caused tax directors in North America new problems.

Diagram 1: Survey respondents by sector

What Sarbanes Oxley has done

Of the top 10 ways that Sarbanes Oxley has affected tax services, a change in the provider of tax advice featured in three of the 10 ways. More than one third of respondents said they had changed their tax advisers or were using the big-four professional services firms less for tax services because of the law.

According to responses to the survey, 57% of respondents still receive tax advice from their auditor. This is lower than last year's survey when 59% said they received tax services from their auditor. Within the group of respondents that still continue to receive tax services from the auditors, 63% said that they do not plan to change this within the next year, which is lower than the 76% in last year's survey.

In this year's survey, 17% of respondents said they would change the tax services they receive from their auditor within the next 12 months and a further 20% said that were not sure.

The requirement under Sarbanes Oxley for an audit committee to approve tax services provided by the company's auditor means more approvals and delays for tax directors. Michael Cuellar said that Sarbanes Oxley had absolutely changed the way he receives tax advice. "Seeking audit committee approval every time we request advice from our statutory auditors has in essence caused us to cease using their services," he said.

How Sarbanes has changed tax advice

Tax executives said that Sarbanes Oxley had affected the way they receive tax advice in North America in the following ways:

1.  less use of auditors for tax services (29%);

2.  greater scrutiny and documentation requirements resulting in a heavier workload (25%);

3.  little or no effect (16%);

4.  increased costs and higher fees for tax services (9%);

5.  decrease in tax-advantaged products and less aggressive planning (6%);

6.  change of tax advisers (6%);

7.  not subject to Sarbanes Oxley (4%);

8.  more use of law firms (2%);

9.  internal changes inside the big four professional services firms (2%); and

10. other ways (1%).

This has led to many tax directors going to one of the other big-four firms for tax advice as well as an increase in tax advice from international law firms. Lonnie Groe, director of international tax at StorageTek, a data storage company, in Colorado said that she had "definitely gravitated to the law firms".

There are also international implications of restrictions on receiving tax advice from your auditor. Multinationals with operations in many countries prefer to have integrated, comprehensive tax advice from a coordinated source. Sarbanes Oxley has made that more difficult to obtain. Gary Dienst, principal and tax director at O'Connor Capital Partners in New York said that Sarbanes Oxley has "required us to change tax advisers in some of the jurisdictions in which we do business".

Roberta Lentz, international tax manager at Steelcase, a manufacturer, in Minnesota, reiterated the point. She said that Sarbanes Oxley had affected them overseas because "our auditor is the same as some overseas tax service providers". He added that this made it "a real hassle to keep track of fees and predict what you'll be working on so the audit committee can approve it before you do it!"

Another result of Sarbanes is more uncertainty about what services tax directors can receive from their auditor. Carmela Leone, vice president of worldwide tax at Sotheby's Holdings, a fine art auctioneer, in New York, said that the legislation has "made it very difficult to work smoothly through a transaction without questioning the levels of services that can be provided by the service provider".

Saks, of General Electric, went further. "We try to abstain from using our auditor for tax services," he said. Mike Buescher, tax director of Kellwood, an apparel wholesaler, in Montana, said:"We used to use our auditing firm whenever possible. Now we only use them if we cannot find another competent source."

The extra approvals and concerns mean that tax directors have less time to get on with the real task at hand. Stephen Keating, of Computer Associates in New York, said that Sarbanes had affected him tremendously. "It's limiting the time I have for tax planning," he said.

Almost 10% of respondents said that Sarbanes Oxley had increased the overall cost of their tax and compliance needs. The possibility of needing to go to more than one of the big four firms for audit and tax advice means that overall they are paying more. Thomas Kelly, director of tax and treasury at Pall Corporation, a liquid treatment technology company in New York, said that Sarbanes has "been a windfall for the accounting firms but for shareholders and corporations it's an expense and diversion we don't need".

Another effect of Sarbanes has been a marked decrease in tax-advantaged products and more conservative tax planning generally. Charles Goulding, managing director at Cooper Industries, a manufacturer in Houston, said: "We only focus on business-related tax planning. We see a sharp reduction in tax-advantaged financial product offerings."

Kelly, of Pall Corporation, agreed with this point. He said the biggest challenge was "determining that fine line between what's good for the company and shareholders and what is overly-aggressive tax planning".

There is a smaller group of respondents however, that insist that Sarbanes has not affected how they receive tax advice. Sarbanes does not apply to companies unless they are publicly listed in the US. Just over 16% of respondents said that the legislation had had little or no effect on how they receive tax services and a further 4% pointed out that they were not subject to it.

Just over half of companies in the North America continue to receive tax advice from their auditor. This group does not want to go through the fuss of changing advisers and are taking the extra documentation and approvals on the chin. Dow Chemical's Hahn, said: "There has been no effect on the tax services we receive. There has been a profound effect on the amount of internal time and resources we devote to financial reporting for taxes."

Diagram 2: How much respondents spend on tax advice each year

Diagram 3: Proportional average of outsourced tax services by tax spend

Diagram 4: Average proportion of tax services outsourced by sector

Other providers of tax services

The 'other' segment above is further divided as follows:

  • second-tier accounting firms (BDO, PKF and Grant Thornton) - 40%;

  • sole practitioner(s) - 27%;

  • tax boutiques - 20%; and

  • economists (transfer pricing) - 13%.

Reputation is king

This upheaval in the tax services market means that a number of companies are considering their options for receiving tax advice from a different firm. The survey asked respondents which factors influenced their decision in the selection of their tax advisers. Reputation came out on top.

Brands are a critical element of reputation management. The survey also asked respondents to reveal the firm that they thought had the best brand in tax services in North America, irrespective of the tax advisers that they use. The big-four firms performed well here. More respondents thought Ernst & Young had the best brand, followed closely by Pricewaterhouse-Coopers and Deloitte with little between them, followed by KPMG. Of the law firms, Baker & McKenzie has the best brand in tax in North America according to respondents, followed by McDermott, Will & Emery, Fenwick & West and McCarthy Tétrault.

Diagram 5: Use of third-party tax advice by tax spend

Less happy

One of the most startling results from this year's survey was a clear drop in the level of satisfaction with tax advice. The average level of satisfaction dropped from 1.83 (very satisfied = 2, satisfied = 1, unsatisfied = -1) in last year's survey to 1.64 this year.

The level of satisfaction dropped in all regions that the survey covers. Satisfaction in Canada suffered the biggest drop from 1.86 to 1.48. The San Francisco Bay area also saw a decline in satisfaction with tax services, the score dropping from 1.92 last year to 1.57 this year.

Diagram 6: Why taxpayers choose their advisers

Table 1: Satisfaction with contact level with tax advisers

How often do you meet with outside advisers?



Every second week




Every 1-3 months


Every 3-6 months


Every 6-12 months


How would you assess the level of contact with outside advisers?







Very good


How often do you review your use of firms?

Every six months


Once a year


Every two years


Every five years


Improving tax services


International Tax Review opened the survey of international tax services in North America in January 2005. We encouraged consumers of international tax services in North America to provide their views by completing the online questionnaire. The survey closed on March 1 2005.

We received 133 responses from heads of tax, chief financial officers and tax executives. More than 76% of respondents were personally responsible for the selection and retention of their tax advisers. Most of the responses were from within the region (93%). The remaining respondents were located in Europe (5%) and Asia or Africa (2%).

The questionnaire asked tax executives how much they spend on tax services, what tax services they outsource and how satisfied they were with the services they receive. It also asked them what their biggest challenge was and how tax services could be improved. Some of their responses are reproduced here.

Not all respondents provided information on their annual turnover but more than 68% of respondents did. More than 81% revealed how much they spend on external tax services each year. This group is then divided into three groups according to how much they spend on tax services each year:

  • above $1 million (37%);

  • between $250,000 and $1 million (33%); and

  • below $250,000 (30%).

With lower satisfaction levels and more tax directors looking to receive tax advice from new providers, this means that the need to improve tax advice is even more important.

The survey asked respondents on how they thought tax advice could improve. Top of the list, with 26%, was respondents saying that tax advisers need to understand their client's business and industry better. Saks, of General Electric, agreed that this was a key way for tax advice to improve. "I would like my advisers to focus on doing what is right for my company. I am interested in working with an adviser that wants to understand my business and build a relationship," he said.

The next most popular way that respondents thought tax advice could improve was by partnering with their client and providing more support and cooperation (14%). A number of respondents thought that tax advisers needed to improve the consistency of advice, mainly by reducing the level of work delegated to juniors. Tax directors are also frustrated with constantly having to deal with new people on an account.

Groe, of StorageTek, thought that tax advisers could improve by "giving timely responses and not spreading the research among several advisers as it appears inefficient". Michael O'Connor, chief tax officer of Alcan, a metals and packaging company, in Montreal, agreed that tax advisers needed to "simplify things, get to the point faster and don't try to push the work to inexperienced people".

Jeff Boyd, tax director of Promega, a biotechnology company, in Wisconsin, thought that tax advisers needed to work together better and provide more consistency. "Far too often I find I have to go to three or four different advisers in a firm and the quality of the advisers varies greatly. The issue has become so significant that at times I have had to work with multiple firms on issues that it seems completely unnecessary," he said.

Diagram 7: How satisfied taxpayers are

Fee frustration

The third-highest ranking way tax advice could improve was concerning fees (13%). A number of respondents did not like surprises when it came to fees and wanted more regular fee updates as to how much the work would cost. Daniel Wenzel, international tax counsel at SC Johnson & Son, a manufacturer, in Wisconsin, suggested that tax advisers should "provide services on a results-achieved basis where possible and keep the client better-informed as to progress and as fees on the project are being incurred".

Some tax directors complained that their tax advisers did not try to provide alternative solutions that would cost less. Donald Slome, director of corporate taxes at USG, a building materials manufacturer, in Chicago, said tax advisers could improve if they "focus on meeting the needs at the least possible cost and be imaginative in identifying and recommending alternatives".

In a post-Sarbanes era of tax services another frustration evident in the survey was over the level of qualification and protection that comes with tax advice. Tax directors do not find it helpful to receive advice that comes with a disclaimer clause that reduces their accountability for their advice. Susan Han, general counsel at AIM Trimark Investments in Canada, thought that tax advisers should "stand behind the advice and shouldn't cover themselves with qualifications all the time".

Diagram 8: Respondents' annual turnover

Top 10 ways tax advice needs to improve

The survey asked how tax advisers could improve the services they deliver. They responded as follows: 1.  understand the client's business and industry better (26%);

2.  partner with the client to provide more support and cooperation and reduce inconsistency in advisers and delegating work to juniors (14%);

3.  deliver fee-sensitive options and provide progressive fee estimates at regular intervals (13%);

4.  faster response times and more proactive advice (12%);

5.  improve relationship management with more frequent contact and improve listening skills (11%);

6.  do not peddle pre-packaged, one-size-fits-all solutions (6%);

7.  focus on practical solutions that can be implemented rather than esoteric planning (6%);

8.  improve technical knowledge to provide more comprehensive advice (5%);

9.  bring innovative, value-added ideas relating to the client's business (4%); and

10. more frequent updates or other ways (3%).

One size does not fit all

Another objection from tax advice consumers related to off-the-shelf or one-size-fits-all tax advice that is not tailored to the needs of the client. Brenda Szymanowski, tax director at AstenJohnson, a manufacturer, in South Carolina, thought that tax advisers should "listen to us first and hear what we are asking, then provide the service that meets that request - not packaged or canned items, but answers and solutions and guidance that are specific to our needs". She added: "Specifically, if you can work with us rather than taking the project away and coming back with the answer in a fancy booklet, but instead helping us to gain more knowledge and know-how."

Charles Hahn, director of taxes at Dow Chemical in Michigan, agreed that untailored tax advice was not helpful. He said that tax advisers could improve by "partnering with the client to capitalize on the strengths of the client and the adviser, rather than selling turnkey, one-size-fits-all projects".

Diagram 9: Third-party tax advice by firm type and tax spend

Key people

The fourth most important consideration when selecting tax advice was on the basis of a key individual. The survey asked respondents to name an individual that influenced their choice of firm.

Respondents mentioned people such as:

  • Firoz Ahmed,

    Osler Hoskin & Harcourt, Toronto;

  • Doug Ewens,

    McCarthy Tétrault, Calgary;

  • George Gerachis,

    Vinson & Elkins, Houston;

  • John Hanlon,

    Deloitte, Chicago;

  • Allan Lanthier,

    Ernst & Young, Montreal;

  • John Peterson,

    Baker & McKenzie, Palo Alto;

  • Larry Pollack,

    KPMG, New York;

  • Peter Skewes-Cox,

    PricewaterhouseCoopers, San Francisco; and

  • Lowell Yoder,

    McDermott, Will & Emery, Chicago

Table 2: Company turnover by annual tax spend

Annual turnover

Average tax spend

Above $10 billion


$5 billion-$10 billion


$1 billion-$5 billion


$501 million-$1 billion


$201 million-$500 million       


$100 million-$200 million


Below $100 million


Change is good

Corporate tax services in North America continue to be buffeted by howling winds of change. A new legislative environment has significantly changed the delivery of tax services. And the changes are not over. Of the 57% of respondents that continue to receive tax advice from their auditors, 17% of them said they will change this over the next twelve months.

Service provider changes in the tax services market that some tax directors have or will undergo is like a game of musical chairs. What others lose, they will gain from other new clients and vice versa. But, as Lee Faust, vice president of tax at Saint-Gobain, a materials manufacturer, in Pennsylvania, said, changing advisers can be a plus.


Alston & Bird LLP

Analysis Group

Borden Ladner Gervais LLP

Cole & Partners

Ernst & Young

Fenwick & West LLP

Goodmans LLP

McCarthy Tétrault

McDermott Will & Emery

Osler, Hoskin & Harcourt LLP

Torys LLP

Vinson & Elkins LLP

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