I’ve written before about the increasing importance of having a solid technology base for a company’s tax function, and it’s important enough for me to revisit the topic. Tax departments are entrusted with a highly sensitive and essential task in their companies. Taxes usually are the second largest corporate expense, after salaries and wages. Failure to understand this liability is expensive – either because taxes are overpaid or because of fines and interest levied for underpayment. Moreover, taxes remain a political issue, and corporations – especially larger ones – must be mindful of the reputational implications of their tax liabilities.

In this context of seriousness, there are five interrelated requirements for the work that tax departments do:

  • The work must be absolutely accurate.
  • Corporate and tax executives must be certain that the numbers are right – instilling confidence is key.
  • Certainty depends on transparency: Source data and calculations must be demonstrably accurate, and any questions about the numbers must be answerable without delay.
  • Speed is critical. All department tasks related to tax planning, analysis and provisioning can become sources of delay in core finance department processes. Being able to quickly execute data collection and calculations allows more time to explore the results and consider alternatives.
  • Control of the process is essential. Only particular trustworthy individuals can be permitted to access systems, perform tasks and check results. Control promotes accuracy, certainty and transparency.

vr_Office_of_Finance_15_tax_depts_and_spreadsheetsThese requirements form the basis of a business case for a tax data warehouse. Properly executed, it promotes all of these qualities. However, our forthcoming benchmark research on the Office of Finance shows that not many corporations have adopted one. Rather, most companies rely mainly or entirely on spreadsheets for provisioning income tax: managing  data, calculations and modeling. More than half (52%) of companies use spreadsheets alone to handle income taxes while just 10 percent use a dedicated application designed for that purpose. Desktop spreadsheets are a poor choice for managing taxes since they are error-prone, lack transparency, are difficult to use for data aggregation, lack controls and have little ability to handle more than a few dimensions at a time. To deal with these deficiencies companies have to spend more time than they should in assembling data, making calculations, checking for errors and creating reports. 

There are strong reasons to change this reliance on inappropriate tools. One is that more companies must deal with an increasingly complex tax environment. Despite decades of talk about simplifying the tax code in the United States, it has grown ever more intricate. For those with a long memory, there was some simplification in the 1980s, but since then complexity has returned with a vengeance. Moreover, as corporations grow and expand internationally, their legal entity structure becomes more multifaceted, and their source systems for collecting and managing tax data can become fragmented. Unless the tax function is completely centralized, companies that operate in more than a handful of tax jurisdictions can find it hard to coordinate their tax data, calculations and processes. Centralization is not a cure-all, either, as the lack of local presence poses its own issues in tax management in coordinating with local operations and finance organizations.

Another reason is that national taxing authorities are beginning to improve their coordination with one another, which means that tax departments will have to deal with increasing complexity in reporting and a more stringent compliance environment. In 2013, the Organization for Economic Cooperation and Development (OECD) published a report titled “Action Plan on Base Erosion and Profit Shifting”, which describes the challenges national governments face in enforcing taxation in an increasingly global environment with a growing share of digital commerce. The OECD also is providing a forum for member governments to take action (including collective action) to strengthen their tax collection capabilities. Although the process of increased government coordination is likely to take years to unfold, the outcome almost certainly will be to put additional pressure on companies that have legal entities domiciled in multiple countries. The impact is likely to mean longer and more frequent audits (including concurrent audits by multiple tax authorities) with more detailed requests for information. Increased data sharing among tax authorities will make it even more critical that the tax data – and all the minutiae of adjustments, reconciliations and year-to-year permanent changes – be absolutely accurate, consistent and readily available.

In addition, governments worldwide are increasing their electronic collection of tax data. This enables them to improve scrutiny of tax returns by applying analytic techniques that highlight errors and discrepancies as well as to identify suspicious activities or potentially aggressive tax treatments. Eliminating paper forms allows tax authorities to require even more data from companies. In this environment, having accurate, consistent data becomes essential. Having time to consider the best tax-related options thus becomes even more valuable.

In this increasingly complex and demanding environment it is good news that technology, such as a tax data warehouse, has advanced to become feasible and affordable for the kinds of organizations that can benefit most from it. A tax data warehouse addresses all of the needs of a tax department listed above. A single source of data minimizes errors and ensures consistency. It also promotes transparency, especially when used in conjunction with a dedicated direct tax management application. Because it is possible to exactly recreate the assumptions, data and methods used and because the data and the calculations are consistent, the answer to “where did that number come from” can be found quickly and with complete assurance. The process is better controlled, access to the records and application is more secure, and the entire process is much more easily audited than when working with spreadsheets. Since all of the numbers and assumptions are kept intact and readily available, an audit defense can be performed with less effort and greater confidence. In addition, the ability to create multiple scenarios with different assumptions and treatments enables tax and legal departments to determine the best approach for the company’s risk tolerance. The financial impact of these benefits can be considerable because most companies that operate in multiple direct (income) tax jurisdictions spend considerable amounts of time gathering and assembling data manually. As noted, they often use spreadsheets – sometimes dozens or even hundreds of them – for tax calculations and data storage. These spreadsheet-based systems are built on a weak foundation because of the data issues inherent when there are multiple systems of record and inconsistent data-related processes.

vr_fcc_tax_effectivenessThe evolving tax environment means that tax departments must be in the mainstream of finance organizations. Our research on the financial close finds that a majority of finance executives do not know how long it takes for the tax department to complete quarterly tax calculations. Executives who are not tax professionals usually do not appreciate the important difference between finance and tax data requirements. Corporations are constantly changing their organizational structure as well as acquiring and divesting business units. As these events occur, accounting and management reporting systems adapt to the changes both in the current as well as past periods. Tax data, on the other hand, must be stable. Legal obligations to pay taxes are based on facts as they exist in specific legal entities operating in a specific tax jurisdiction in a specific period. From a tax authority’s standpoint, these facts never change even as operating structures and ownership evolve. Audit defense requires a corporation to assemble the facts and related calculations, sometimes years after the fact. A general finance data warehouse does not deliver this capability because it is not – and for all practical purposes cannot be – structured to satisfy the needs of a tax department, particularly those that operate in multiple jurisdictions.

To ensure accuracy and inspire confidence in the products of the tax department’s work, it important for tax departments to tightly control the end-to-end process of taking numbers from source systems, constructing tax financial statements, calculating taxes owed and keeping track of cumulative amounts and other balance sheet items related to taxes. Transparency is the natural result of a controlled process which uses a single set of all relevant tax data. A readily accessible authoritative data set makes tax department operations more efficient. Reducing the time and effort to execute the tax department’s core functions frees up the time of tax professionals for more useful analysis. In a more challenging tax-levying environment, having tax data and tax calculations that are immediately traceable, reproducible and permanently accessible provides company executives with greater certainty and reduces the risk of noncompliance and the attendant costs and reputation issues. Having an accurate and consistent tax data warehouse of record provides corporations and their tax departments with the ability to better execute tax planning, provisioning and compliance.

Regards,

Robert Kugel – SVP Research

One of the charitable causes to which I devote time puts on an annual vintage car show. The Concours d’Élegance dates back to 17th century France, when wealthy aristocrats gathered with judges on a field to determine who had the best carriages and the most beautiful horsepower. Our event serves as the centerpiece of a broader mission to raise money for several charitable organizations. One of my roles is to keep track of the cars entered in the show, and in that capacity I designed an online registration system. I’ve been struck by how my experiences with a simple IT system have been a microcosm of the issues that people encounter in designing, administering and using far more sophisticated  ones. My most important take-away from this year’s event is the importance of self-service reporting. I suspect that most senior corporate executives – especially those in Finance – fail to appreciate the value of self-service reporting. It frees up the considerable resources organizations collectively waste on unproductive work, and it increases responsiveness and agility of the company as a whole.

vr_ss21_spreadsheets_arent_easily_replacedElectronic reporting began as a solution to paper print-outs, reducing the resources required to transmit information needed by individuals and making it easier for them to find information. Over the past couple of decades, these enterprise reports also have become much easier for IT professionals to create and maintain, but they are still time-consuming and aren’t particularly flexible. Rather than have their IT department create another version of a report, people often copy an electronic report, paste it into a spreadsheet, reconfigure the information to suit their needs and distribute the modified spreadsheet to a group of people. For this and other reasons IT departments have found it difficult to get business people to stop using spreadsheets. Our benchmark research on spreadsheets finds this is the number-one impediment to change. Spreadsheet users value control and flexibility. This is precisely what self-service reporting delivers without the time-consuming hassle of manually creating and distributing spreadsheet reports.

It’s useful to think of self-service reporting as an attitude and approach to using information technology than as a specific software product or category. It starts with the basic assumption that individuals in organizations must be able to retrieve information they need from the systems they use. This does not replace periodic enterprise reporting, dashboards, scorecards and other such “push” communication methods. This is not the once-voguish concept of “democratizing business intelligence” either; that was still too complicated for the vast majority of users. It’s more like replacing telephone operators with a direct dial system. (Note to readers under 40 years old: Once upon a time it required human intervention to connect your phone to someone else’s.) The goal of self-service reporting is to make broad sets of data readily available and give people the ability to access it (subject to permissions) as well as easily organize and display it in the form and format that works best for them.

In the early days of business computing, simply collecting and having access to company data was a breakthrough. Over the past decades, corporations automated and instrumented a broad range of functions, and the challenge lay in collecting and managing the data. Although companies still face many issues in data management, devolving reporting to the individual is now a critical issue companies must address. Well-designed self-service reporting improves the productivity of individuals in both IT and the rest of the organization. The controller of a midsize company recently told me people had been spending one-and-a-half days per month creating reports for senior executives and operating managers after the monthly and quarterly accounting close. Talk about unproductive use of resources! This is an extreme example but emblematic of time routinely wasted on something individuals ought be able to do on their own. From the IT side, far too much time is devoted to creating and maintaining reports – it’s akin to still having switchboard operators on staff to route calls.

Self-service reporting exists both as a feature of enterprise applications and in stand-alone products designed to work with applications that lack this capability. In deciding whether to replace existing software and in any vendor selection process, it’s important to assess benefits of self-service reporting capabilities. This is especially true as mobility increasingly is built into enterprise business applications. Anytime, anywhere access to information is one of the most important reasons why companies invest in mobility and demand this capability in the software they buy. Being able to drill down and around in the data contained in such reports provides a powerful incentive to replace spreadsheets. But there are also stand-alone products that can provide self-service reporting capabilities within legacy systems.

For our service organization this past year I still created a limited number of spreadsheets for individuals and groups that are not on our system. The only data issues we had were created when someone copied and pasted information from our reports into another spreadsheet. Errors are inevitable, and even in our local event there are unfortunate consequences when they occur. For example, telling someone who has just spent hundreds of hours preparing his or her car that the vehicle is not eligible for an award because it was not on the list of judged cars (even though our system showed that it was supposed to be judged) provokes the same level of irate response one might expect when a CFO is informed that there’s a material error in the published financial statements.

Self-service reporting is fast becoming a standard capability within businesses. It’s part of a generational change that is redefining corporate computing. People beyond a certain age still expect information to be given to them. Younger people want to get the information they need themselves and expect to have the ability to do so. IT departments must identify opportunities to offer self-service reporting and implement it wherever possible. Business users – especially those in finance roles – should familiarize themselves with self-service reporting – especially stand-alone tools that they can use and administer – and implement it wherever it is feasible.

Regards,

Robert Kugel – SVP Research

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