Across the Great Divides: Integration Comes to Tax

I was amused and encouraged to see that in a recent Deloitte white paper (“Finance Transformation: Think à la Carte, Not Overhaul”), corporate tax pros were described as “the rock stars of the bottom line.”

At last — a little recognition!

And why not? After all, the tax liability is among the largest items on many a corporate P&L and balance sheet, and the function’s effectiveness directly impacts it. As the white paper points out, “potential bottom-line tax-related benefits are found [in places] throughout the organization, including logistics, procurement, capital projects, and corporate development.”

I’m not sure how enthusiastically tax folks will take to the “rock star” designation, but it sure makes a change from the traditional image, which is more like “forgotten stepchild.” Yet there’s still some truth to that old image, too. In many businesses, tax is still perceived, often correctly, as a house divided within itself, operating according to its own arcane laws and connected to the business at large by little more than endless uncoordinated and repetitive requests for information.

On the technology side, despite a burst of investment after Sarbanes-Oxley, tax still lags the finance and accounting functions. In a 2009 Business Finance Tax Survey of 175 finance and tax executives, we found that many corporate tax departments are still caught up in collecting, manipulating, and validating data. About a third of respondents said that their tax function spends more than 30 percent of its time on such low-value-add tasks. Fifteen percent said that these processes consumed more than half of their time.

But tax may be on the point of shaking off its dowdy, tech-deprived image. Money for IT projects is still tight in this economic environment, for sure, but forward-looking companies are finding themselves tempted by potential efficiency gains from software upgrades. And some are building tax infrastructures worthy of the function’s rock-star status.

Bridging the Provision and the Return

When it comes to preparing and filing the returns, you’ve just got to do it; it’s not the most strategic activity in the world. But compliance work soaks up huge amounts of tax departments’ time and resources, seemingly out of all proportion to the end product. In most companies, compliance remains siloed off from the tax accounting process, almost guaranteeing a lot of backing and filling between them.

The gap has seemed almost unbridgeable. The two processes occur at different times and in vastly different time frames. With the provision, you’re under intense time pressure — a few days — to align with the book close. For the returns, you get a relatively leisurely 6 months or so. The levels of materiality are different; the summarized data used in the provision must be broken out into the detail required by the return. In many organizations, the two processes are performed by different people.

Despite the challenges, companies are aware of the potential efficiencies to be gained by leveraging provision work to ease the compliance process. But the infrastructure just hasn’t been there. The results of post-Sarbanes software implementations in the heavily spreadsheet-dependent tax accounting process were not always encouraging. “Many vendors had a software package that helped to prepare the provision, and many other vendors or the same vendors offered a software package that would help with the tax return, but they didn’t really speak to each other,” recalls Scott Wrag, managing director with CBIZ Tofias in Boston and leader of the accounting firm's tax services group. In 2006, a KPMG survey of corporate tax pros found that among respondents who used third-party provision software, those who found it beneficial barely outnumbered those who did not. Significantly, one of the most common criticisms was the tools’ “lack of flexibility or compatibility.”

A lot can change in four years, though. Best-of-breed tax software providers are touting big advances in connectivity in the newest generation of their products. And there’s substance behind the hype. “The market is changing around tax accounting applications,” says Ravi Gupta, partner in Deloitte’s tax management services group. “They used to be little stand-alone applications, but the vendors are putting a lot more investment into developing them and working to integrate them with compliance, because that’s where the value is.”