How do you know your tax number is right?

 

…It is the simplest question an auditor can ask. It is also the one that can undo even the most respected companies. The world built an answer two decades ago. Africa is only now waking up to it.

 

The auditor is young and entirely unmoved by reputation. She has spent a week inside one of Lagos’s most respected companies. This is a business with four decades behind it and a tax manager, Emeka, who has run its affairs for the better part of twenty years without ever being caught out. On the final afternoon she closes her laptop, looks across the table, and asks him one question. Walk me through how you know the tax figure in these accounts is correct. Not that it looks about right. How you know.

He starts to answer easily enough. Then something occurs that has never happened to him in two decades. He runs out of things to say. The number is correct, of that he has no doubt. Yet the whole of that certainty lives in his own head and in a spreadsheet only he can read. There is nothing on the table he can hand across that would prove it to anyone else.

Emeka is not incompetent. He is in truth very good. That is exactly what makes the silence so instructive. His difficulty is not that he lacks the answer. It is that his knowledge sits nowhere but in his own mind. It is governed by nothing and evidenced by nothing. So it is worth very little the moment he is asked to prove it. This is a failure of governance rather than expertise. It is one the corporate world has met before at ruinous cost.

The lesson of the collapse

That reckoning arrived most memorably in Houston. When Enron collapsed in 2001 and dragged a venerable auditor down with it, the wreckage laid bare how easily even celebrated companies could misstate their finances. No disciplined system stood behind the numbers. The American answer was the Sarbanes-Oxley Act. Its most consequential provision obliged management to document, test and vouch for the internal controls behind financial reporting. A figure could no longer simply be asserted. It had to emerge from a process that was written down, operated as described and checked by someone independent. Tax, among the most judgement-laden numbers in any set of accounts, sat squarely inside the new regime.

For tax functions long accustomed to running as a black box of expertise this amounted to a revolution. Every material tax number, from the provision through to the handling of an uncertain position, now had to rest on a control that could be evidenced rather than a specialist who could merely be trusted. The discipline was uncomfortable at the outset and costly throughout. Yet it altered the culture of the function for good. Tax risk shifted from something discovered in the middle of a crisis to something managed by design. A generation of tax leaders learned to build the paper trail before it was demanded rather than after.

From discipline to doctrine

If Sarbanes-Oxley supplied the discipline the OECD supplied the doctrine. In 2016 it published a study that took the control idea and aimed it precisely at tax. It set out what it called a tax control framework and described the features a credible one ought to display. A strategy that leadership has genuinely endorsed, clear responsibility assigned to named people, governance written down rather than assumed, testing that proves the controls actually work, and independent assurance that someone has checked. These were its building blocks. What had begun as an American reaction to fraud matured into an international standard for how a serious taxpayer should govern its own affairs.

The framework was never intended as an end in itself. Its real purpose was to underwrite a different relationship between large taxpayers and the authorities that assess them. A company able to show that its tax affairs are properly governed earns something valuable in return. The OECD termed it co-operative compliance. The revenue body offers greater certainty and a lighter touch in exchange for real transparency and a demonstrably sound control environment. Trust is extended to those who can prove they have earned it. The tax control framework is the proof.

What Africa can borrow

So what can Africa take from all this? The instinct might be to wave it away as a preoccupation of listed multinationals with compliance budgets to match. That instinct is exactly wrong. The timing makes it more so. Right across the continent tax administration is being rebuilt at speed. Nigeria has stood up a new revenue service, moved decisively toward self-assessment and stiffer penalties, and switched on real-time electronic invoicing for its largest taxpayers. South Africa is legislating the global minimum tax and preparing its own digital reporting. The thread running through all of it is that the burden of proof is sliding onto the taxpayer. The authority increasingly watches the transaction as it happens.

In that environment a tax control framework ceases to be a luxury. It becomes a form of insurance. When the authority can see your transactions in real time and expects you to have assessed your own liability correctly the ability to show how you reached a number is no longer a nicety. It is the difference between a position you can defend and one you can only regret. The discipline scales down further than most assume. A mid-sized Nigerian group needs no New York listing to record who owns each tax judgement and to have an independent eye check the result once a year. What it needs is the will to treat tax as a governed process rather than a private art.

A prize for both sides

A larger prize still is on offer. It belongs to the revenue authorities every bit as much as to the taxpayers. Co-operative compliance, still uncommon across the continent, hands African administrations a way out of the exhausting cycle of suspicion and dispute that devours so much of their capacity. An authority that learns to reward well-governed taxpayers with certainty instead of treating every large company as a suspect collects more at lower cost. It builds precisely the trust a thin tax base so badly needs. The lesson travels in both directions.

Which returns us to that Lagos boardroom and to Emeka. His company will probably survive this audit on the strength of a reputation built over forty years. But reputation is a thin shield in the world now taking shape. The authority sees the transaction as it happens and expects the taxpayer to have got it right the first time. Somewhere across town sits a rival with a less celebrated tax manager and a far better answer. That company can open a folder and show line by line how every figure was reached and who signed it off. When the assessment lands and one day it will only one of them will sleep.

A scandal in Houston two decades ago produced the answer to that young auditor’s question. It has been refined since in the committee rooms of Paris. It is now within reach of any African company prepared to build it. How do you know your tax number is right? Because you built a system that can prove it long before anyone thought to ask.

.Olatunji, principal at Cedarview Consulting, specialises in tax governance, risk and controls across Sub-Saharan Africa. This article reflects the author’s own views and is offered as general commentary, not tax or policy advice.