Right now is the height of "earnings season" as the trickle of a few super-efficient companies issuing earnings turns into a torrent of reports. This is perhaps the most interesting year in many decades for corporate earnings as the Sarbanes-Oxley Act (SOX) makes auditors double their efforts in scrutinizing their public clients. One of the most significant parts of SOX is a requirement that public companies review and fully document their systems of internal controls. Auditing companies are required to review this documentation and opine as to the sufficiency of the control environment. For many companies this meant huge expenses in terms of time and even money to create documentation for systems that were supposed to exist all along as well as larger audit fees to test these systems. Along with this review and audit comes the specter of disclosing certain aggressive practices that might have avoided the auditors' scrutiny in years past.

One recent earnings release by Nextel held an example of the type of cost this may entail. Nextel reported sharply lower earnings due to a higher federal tax liability caused by the company having to withhold at a higher corporate tax rate because of recent increased profits. Huh? For one thing, withholdng does not generally impact corporate earnings. For another, US Federal tax rates do not vary very much after a certain pretty low point. IRS publications indicate a blanket federal rate of 35% after $15 million in net income - far below what Nextel is reporting. This is purely speculation but for many companies, a disclosure like this could lead one to believe that the company was accruing expenses for the risk associated with some sort of aggressive tax strategy it is employing.

Nextel is hardly unique in disclosing higher tax liabilities this year. As auditors scrutinize practices of whole industries, many more dollars in tax exposures will likely be disclosed. For example, one of the areas that auditors must scrutinize is how a company handles sales and use tax collection. Many very large periodical publishing companies have traditionally ignored sales tax collection on subscriptions to their publications because not all that many states taxed subscriptions. This has changed in recent years as states have tried desperately to balance their budgets. Now approximately half of all states tax periodical subscriptions. But publishers have largely not kept pace preferring to play "audit lottery" and pay the piper only when he comes calling. These tax exposures can be huge since there are generally no statutes of limitations for sales tax non-filers. And since the tax is calculated at an average of around 6% of the full subscription price, having many years open may cause these companies to recognize huge expenses.

There are many other types of companies which allow these types of situations to grow for sales taxes, state income taxes and even "abandoned property." I have singled out periodical magazine publishing because it is the industry I know the best. But as these companies analyze their past practices and as auditors examine them, one wonders what the impact will be on the coffers of taxing authorities around the country! SOX may unexpectedly end up balancing many states budgets!