(KJ) Your decision in the summer of 1999 to focus on tax accounting and form a FAS 109 group within the International Tax department of E&Y certainly seems to have been a good one. What was the thinking at that point? Did you anticipate companies might face accounting problems in the area of income taxes?

(PS) I can not claim to be a visionary on that point! I saw an opportunity in the international tax arena as the international tax groups within the Big 4 seemed to be increasingly dominated in the partner ranks by individuals with JDs and LLMs. While many of my colleagues would run screaming at the mere mention of debits and credits, I was one of the few international tax consultants who seemed to actually enjoy tax accounting. Rather than run from my roots as an accountant, I viewed “full immersion” in the technical tax accounting area as a niche where I might successfully differentiate myself. I went through E&Y’s “playbook” of international tax planning strategies and drafted paragraphs on the likely U.S. GAAP accounting results of each. Ultimately, I believe the firm concluded that highlighting the potential book benefits of the many service offerings might drive increases in tax revenue. Whatever the reason, I was authorized to form a tax accounting group in Washington, D.C. and was eventually promoted to the position of Director of Tax Accrual Services. Perhaps the best career advice I ever received was from a very good friend who suggested drafting a BNA portfolio on FAS 109 as an effective way to give the new group credibility both within the firm and within the marketplace. Drafting the BNA took at least triple the time and effort I had estimated, but gave me great insight into how much important tax accounting I had yet to learn!

(KJ) Do you think companies generally have a good handle now on tax accounting or are more difficult times still ahead?

(PS) I believe things are much better now because of the focus and resources that have been put on the area. I think the famous quote from the SEC staff that “sunlight is the best disinfectant; the area of tax accounting needs more sunlight” has been proven true to some extent. Gone are the days when tax reserves could be established based on a chief tax officer’s “gut feel” about where items will ultimately be settled with the tax authorities. Companies now are much more likely to list out specific reserves, rate them as “remote,” “reasonably possible,” or “probable,” determine a range of possible exposures and a best estimate, if any, and then disclose or accrue pursuant to FAS. This discipline makes it more difficult for departments to release necessary reserves to mask unexpected increases in the rate or to achieve some targeted effective tax rate. I think the accuracy of financial statements has been improved as a result of the recent attention in this area.

That being said, based on my experience as a consultant at E&Y, I think it is at least more likely than not (no pun intended) that many companies have yet to experience their low-water marks in terms of tax accounting. In addition to some well-publicized trouble areas such as reconciling foreign deferred tax assets and liabilities and the tax exposure area referenced above, I believe many companies continue to take short- cuts with regard to their foreign investments in general and their APB 23 representations in particular. I also view Other Comprehensive Income (OCI) as an area where many companies may have unexpected problems. Regarding APB 23, many companies accrue on their retained earnings or the E&P of their affiliates without considering the book and tax basis differences in the shares of the foreign subsidiaries. Many make representations year after year regarding plans to remit or re-invest foreign earnings in the foreseeable future, when existing evidence such as prior history or debt covenants might lead one to a different conclusion. With OCI, I have found that many corporate controllers do not understand the tax well enough, and many tax professionals do not understand the accounting well enough, to ensure this area is treated correctly. Being able to prove the accuracy of the cumulative after-tax balance of OCI is an extraordinary challenge for many companies.

(KJ) What tools might you recommend to assist companies in getting a better handle on their tax accounting?

(PS) I have had many vendors demonstrate their tax accounting software packages. The truth is that the more widely used packages are really very limited in their ability to automate the harder parts of the provision calculation. The CorpTax provision software is a great tool, probably the best among the well-known systems.

However, the most exciting package on the market now is by Levyti Consulting LLC. Their product, Global Tax Office, has a TaxCalc module that seems to have been designed by tax accountants who understand that the tax department in corporate HQ does not “own” the data of the international subsidiaries. In the TaxCalc system, foreign units enter their own information and tax calculations into the software, but HQ has full visibility and access to sufficient data to perform a review worthy of “key- control” status for SOX documentation purposes. The system has a verifiable Account Reconciliation process, calculates necessary journal entries and can keep data in local currency. It has features one might expect, such as allowing for the centralized storage of foreign tax filings to support foreign tax credits but also has surprisingly helpful features such as built-in training modules and a robust interim period calculation. Levi Strauss & Co. has spent considerable time with the software package and, based on the company’s marketing materials, I understand Ford is also a major client.

(KJ) Discuss your time at Levi Strauss & Co.? Many of our readers may be interested in hearing about the transition from a career in public accounting?

(PS) Working for one of the most valuable and widely recognized American brands has been a great pleasure. LS&CO. has such a rich history of community involvement and corporate philanthropy; working for the company and its shareholders is a tremendous privilege.

When I joined in May, 2004, our independent auditors had issued a material weakness letter regarding the company’s tax accounting for the previous year. By the end of our fiscal year in November of 2004, the material weakness letter was gone and no significant deficiencies regarding tax accounting were noted. This was a major achievement. It could not have been accomplished so quickly without a commitment from the highest levels of management to add resources and to support changes in reporting lines and responsibilities where necessary to strengthen controls and without the extremely talented and devoted individuals within the LS&CO. tax department, particularly at the staff and manager levels. Together with my initial hires – a Director of Tax Accounting and a Director of Tax Planning – we introduced new financial statement reporting procedures, created information gathering templates and detailed guidebooks for our foreign affiliates and engaged external tax accounting consultants to assist local management in key foreign locations. Tax accounting isn’t rocket science! I believe most companies can transition from their current state to a “best-in-class” tax provision process very quickly if they hire the right talent and have a commitment from management to support some relatively minor organizational changes.

(KJ) What other things might companies do that are facing material weakness letters or restatements involving their tax accounting?

(PS) If not already present, ensuring the Tax Department has a high-quality tax accounting expert is a crucial first step. To be most effective, this individual should be recognized as a credible expert by the Independent Auditors. To highlight this individual and their capabilities, some companies have created a “Tax Controller” or similar position that separates the tax accounting function from the tax compliance function. As the tax accounting role has grown in importance and the accounting rules have become more complex, the profile of an ideal candidate for that job has become increasingly different from the ideal tax compliance profile. Candidates who hold a Masters in Accounting degree with a concentration in Tax might be best suited for the former position while more traditional candidates might be better positioned for the top tax compliance post.

A Chief Tax Officer currently trying to remediate significant problems in this area might also have a discussion with the CFO regarding a possible recommendation that a tax accounting specialist join the Audit Committee of the company. Other companies are considering combining their tax and treasury functions in an attempt to further strengthen controls over this area. This can be particularly useful if the tax accounting control weaknesses involve repatriations from foreign subsidiaries or cash tax projections. One thing is certain, strong leadership and decisive action are required in order to avoid material weaknesses and significant deficiencies involving tax accounting.