Despite the ongoing debate over just how much Section 404 covers, even companies not subject to Sarbox are starting to rethink their B&P as a result of the act. Jay DuBose, CFO of AAA Life Insurance Co., says he expects the National Association of Insurance Commissioners to require 404-type controls within two years. Among the reasons he chose to move to an enterprise B&P software package this year, he says, is that "there were not adequate controls within Excel to ensure the integrity of the data."
— Tim Reason
- Is budgeting, planning, and forecasting an internal control? CFOs disagree.
- Auditors do look at B&P, but most reviews are cursory.
- Documenting the B&P process is a good idea, but keep it simple.
- Budget-to-actual reviews are usually considered a control.
Laws without Borders
A recent Supreme Court ruling could expand the application of the wire-fraud statute to cover foreign-tax evasion. The case, Pasquantino et al. v. United States, involved the smuggling of liquor from the United States into Canada, but it could also have consequences for business.
Because of a common-law doctrine known as the revenue rule, U.S. prosecutors were barred from indicting the smugglers on charges of foreign-tax evasion. Recovery of foreign-tax revenue, as well as prosecution of the underlying tax evasion, is understood to be the responsibility of the defrauded nation. Instead, the prosecutors charged the smugglers with domestic wire fraud, claiming that the defendants used a U.S. telephone system to defraud the Canadian government. The U.S. Supreme Court upheld that charge.
Since the U.S. government did not seek to recover the lost Canadian revenue, Justice Clarence Thomas asserted in his majority opinion, the revenue rule has only an "attenuated" link to the wire fraud.
In addition, since the Pasquantino convictions punish the defendants for using the U.S. telephone system, "their offense was complete the moment they executed the scheme inside the United States," wrote Thomas. The wire-fraud statute "punishes the scheme, not the success."
For U.S.-based corporate tax managers who avoid foreign laws, sometimes in the name of "aggressive tax planning," Pasquantino could lead to federal investigations — even convictions. And for managers who exploit legal loopholes but still adhere to the letter of the law regarding tax shelters, transfer pricing, or the characterization of foreign revenue, the ruling brings uncertainty to areas once considered settled.
Some tax experts wonder if the Supreme Court did enough to clear up ambiguities in the case law. In broad terms, the court failed to "adequately appreciate the complexity of [foreign] tax laws," says Philip R. West, former international tax counsel for the Department of the Treasury.
Thomas F. Carlucci, a partner in the San Francisco office of law firm Foley & Lardner LLP, warns that if companies are already under investigation by federal regulators, then their tax shelters and transfer-pricing procedures may invite extra scrutiny. "It's not likely a wire-fraud charge would be the sole violation being investigated," notes Carlucci, "but it introduces a new risk exposure."
— Marie Leone
Cash from Trash
Insurance reimbursements for damaged property, plant, and equipment (PP&E) may be boosting operating cash flow (OCF) at some firms by millions of dollars a year. But according to a recent report, the classification of the cash flies in the face of accounting rules.
A study by the Financial Analysis Lab at the Georgia Institute of Technology argues that insurance reimbursements for the loss of PP&E are supposed to be classified as cash flow from investing, not OCF, according to accounting rule SFAS 95, since the original purchase of such items is classified as a use of cash for investing.
According to Charles Mulford, the study's author and professor of accounting at Georgia Tech, insurance reimbursement for damaged PP&E is akin to receiving cash from the sale of the damaged assets, which would normally go back into the investing cash-flow line item. "I won't say it's widespread," says Mulford, "but there are enough examples to know that there is some confusion on reporting of these kinds of insurance proceeds."
One company cited in the report, Network Equipment Technologies Inc., boosted its OCF by more than 193 percent in its 2003 fiscal year, thanks to insurance reimbursements stemming from a flood at one of its leased facilities. Mulford says the proceeds were improperly applied as OCF. The company's CFO, John McGrath Jr., says the reimbursement was solely to cover the business-interruption claim the company filed, although proceeds were used to build out the new leased facility. "Even if this were a gray area," says McGrath, "the implication that [our accounting for the reimbursement] is misleading is not true, because of the fact that it's disclosed in half a dozen places in the financial statement."
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