Reflecting on the mounting challenges tax departments face, Michael Holt recalls a large organization he worked with recently that wanted to install a tax provision software package. One of the main goals of the project was to take some of the pressure off the company's tax professionals during the year-end close. How heavy was their workload? Eighteen-hour days. Plus weekends. "For about two to three weeks, those people did not go home," says Holt, global director of Jefferson Wells's tax accounting automation center of expertise.
For tax departments stretched thin by routine processes -- not to mention a slew of rising challenges such as globalization, the demands of enterprise risk management, and the tougher regulatory environment -- technology is a traditional ally. But companies have a long way to go to realize the full benefits of automation, according to a recent tax reporting study completed by Business Finance and Longview Solutions. The study involving a survey of some 240 tax and finance pros at a wide range of companies revealed spreadsheets still dominate tax reporting. On average, they're used for 54 percent of this process. (See Figure 1.) Surprisingly, about one-quarter of $1 billion-plus companies, and 24 percent overall, use nothing else. Third-party tax software is used for one-third of the reporting process, on average, and custom software for 8 percent.
The control issues posed by spreadsheets are well known, as is the difficulty of ensuring the accuracy of the data they contain and the integrity of the files themselves. "Spreadsheets produce more spreadsheets," notes David Davidson, senior executive with Accenture and leader of the firm's tax excellence practice. They can easily proliferate to the point where companies are "challenged in trying to find a single version of the truth."
Spreadsheet sprawl may also be partly to blame for the hectic schedules and crushing workloads that too often accompany the drive to integrate the tax reporting process with the accounting close. Twenty-two percent of survey respondents describe these processes as "very integrated." (See Figure 2.)
Steve Martucci, managing director with tax advisory firm Levyti Consulting in McLean, Va., is unimpressed. "Clearly, best practices would say that the better the alignment of taxes with financial reporting, the more effective companies will be at owning the results; there will typically be fewer return-to-provision adjustments and better opportunities for planning and risk management," he points out. "The fact that 78 percent are only somewhat, or not at all, integrated tells you that there's a big disconnect, and it's questionable as to whether this disconnect relates to people, processes, or data."
The latter -- specifically, data accuracy -- is the top concern related to accounting for income tax, cited by 35 percent of Business Finance Longview survey respondents. (See Figure 3.) It's especially worrying for companies with foreign operations, which may be juggling data for statutory reporting, IFRS reporting, and U.S. GAAP reporting and running the numbers through a bunch of transformations, notes Martucci. In written comments about control issues, participants complained about "accuracy of foreign-location U.S. GAAP reporting," "deferred taxes, foreign," and "lack of commitment from foreign controllers."
In general, companies lack reliable systems that they can leverage globally to collect income tax data; most rely on questionnaires and other (often Excel-based) data-gathering tools. They typically end up with highly summarized, low-quality data. Says Holt: "Put yourself in the shoes of a controller in Germany, and your U.S. tax person says, 'Here, fill out this spreadsheet,' and it's going to take six hours to do it. This is not going to be your highest priority. In fact, you may just say, 'I don't have time -- you figure it out.'"
It all comes back to the time crunch. Respondents say that they don't have enough time to prepare for and react to changes; this was the second most frequently cited concern related to accounting for income tax. Lack of time to analyze transactions topped the list of factors that bog down this process, closely followed by inefficient processes and use of technology. (See Figure 4.) Survey participants say that their organization spends, on average, 61 percent of its time on data collection and 39 percent on analysis.
The right technology can reverse those figures. Organizations that have a business performance management (BPM) system in place may be able to leverage this tool more extensively for their tax processes. "Many companies have some component of tax in their enterprise performance management system, and typically what they are measuring is a high-level component of tax such as the effective tax rate," says Davidson. But the effective tax rate doesn't necessarily give you a good indication of your tax function's performance, he adds; it's largely dependent on your industry and the geographies you're operating in.
He recommends a more integrated, bottom-up approach, in which "for each transaction -- whether it's an accounting transaction or you're capturing information at the source -- you're leveraging metrics that relate to tax, as well as metrics that relate to the rest of finance and to the business, and building up from there."
Martucci sees an increasing trend toward the use of financial analytical tools in the overall tax process in areas such as cash tax variances, budget versus actual, and cash tax to effective tax rate reconciliations. "There is a significant demand by tax departments to move into the framework of dashboard reporting," he notes.
Nearly three-quarters of respondents believe that global tax reporting should be included as a factor in assessing the overall business performance of an enterprise, but the extent to which this is actually being done remains an open question.
Whether the advent of IFRS will be the catalyst for a massive revamping of tax processes and technologies remains to be seen, too. Only 13 percent of Business Finance Longview survey respondents say that their organization is considering an early adoption of the international standards; not surprisingly, the percentage is higher among $1 billion-plus companies (19 percent). But as the SEC's proposed milestones draw closer, they may provide just the impetus that forward-looking organizations need to jettison their spreadsheet-based models -- and with them, the endless cycle of late nights and lost weekends at year-end close.
To download a complete copy of the study results please visit www.longview.com/taxstudy. [1]