Many Companies Botch Tax Disclosure

More than a quarter of large public companies are not meeting the disclosure requirements for tax reserves required by the Financial Accounting Standards Board rule known as FIN 48, according to a recent study by tax consulting firm Seigel & Associates.

Analysis of annual reports filed with the SEC in the first quarter of 2008 by more than 600 companies whose revenues exceed $2 billion shows that more than 28 percent of them did not fully meet the disclosure requirements of FIN 48, according to a comprehensive report prepared by the tax reserve advisory firm founded by former IRS Chief Counsel Stuart E. Seigel.

“The level of noncompliance with FIN 48 disclosure mandates is relatively high and much remains to be done to bring compliance to more acceptable levels,” Seigel says.

"The Seigel Tax Reserve Report" covers initial filings through the period March 31, 2008. J. Brad McGee, president of Seigel & Associates, says the firm intends to track and publish results on a quarterly basis.

The greatest area of noncompliance was the “12-month look-forward rule,” where one of every eight companies provided no disclosure, McGee says. This disclosure requires that tax positions that have a reasonable possibility of significant variation over the next 12 months be reported.

“The generally poor performance in this area of disclosure creates the greatest concern,” McGee adds.

As a result of the adoption of FIN 48, 280 of the reporting companies increased their tax reserves - the amount set aside by companies pending post-filing tax adjustments - by a total of $8.1 billion, and 151 decreased their tax reserves by an aggregate of $6.8 billion.

The net increase in total tax reserves due to FIN 48 adoption was $1.4 billion, the report says. For the year 2007, 321 companies increased their tax reserves by a total of $14.8 billion, and 221 decreased their tax reserves by total of $12.9 billion. The overall net increase for the reporting companies in total tax reserves for the year 2007 was $1.9 billion.

The analysis covers only first quarter 2008 filings. Seigel & Associates estimates that about 70 percent of companies use the calendar year for financial reporting purposes and, therefore, filed their statements in the first quarter. Another 300 or so of these larger public companies will file during the remaining quarters of 2008.

In conducting its analysis, the firm created a qualitative measure of FIN 48 compliance, the “Seigel Index,” derived from a company-by-company assessment of whether the minimum disclosure requirements were met - and the degree of compliance with those mandates. To attain a score of 100 (denoting satisfactory compliance), a company had to report correctly basic information in six different areas.

Among the findings:

• The aggregate Seigel Index for the companies covered in the report is 91.3
• Smaller revenue companies - those in the $2 to $5 billion range - had the lowest score of about 90.
• Seven industries fail to earn an index of at least 90.
• Industries ranking worst in FIN 48 compliance are airlines, electronic instruments and controls, natural gas utilities, insurance, energy companies and regional banks. Industries with the highest overall compliance levels
• Seigel Index scores above 100 - include commodities, major drugs, consumer financial services, conglomerates, non-cyclical consumer products, investment services, capital goods, money center banks, computers and chemical manufacturing.

FIN 48 mandates a consistent standard for determining tax reserves and requires that these reserves and additional supporting information be disclosed in financial statements. The first disclosures were made earlier this year.