Managing corporate income taxes is a challenge for chief financial officers. Tax codes are often complex, so tax accounting as well as the data required for tax provisions and tax compliance are different enough from statutory accounting to create significant workloads for the tax department. Today, the worldwide trend to higher taxes and growing tax code complexity is increasing the payoff for digitizing an organization’s tax function.
Demands on the tax department have steadily increased over the past decade as statutory accounting and tax authority reporting requirements have become more arduous. Using dedicated tax applications enables tax and accounting departments to operate more effectively, freeing up time to spend on tax analysis and plans to minimize tax expense while respecting tax statutes and avoiding abusive tactics. Software also enables greater forward visibility into future expense and provides more control to ensure consistent application of tax policies and minimize compliance risk. Yet, our Office of Finance Benchmark Research reveals that only one-third of companies use analytics to actively manage a tax strategy and, potentially, reduce tax costs.
The tax provision process is a core responsibility of tax departments. This process estimates the amount of income tax a corporation will have to pay to tax authorities in the jurisdictions in which it operates. Tax accountants derive the number by adjusting the reported net income with a variety of permanent differences, such as expenses that are not deductible, and temporary differences – for example using allowable accelerated depreciation for tax purposes and straight-line depreciation for financial reporting. Historically, spreadsheets were the tool of choice for tax provision because, until recently, technology limitations meant that tax accountants did not have an alternative. Despite the growing availability of alternatives, spreadsheets are still popular: Our Office of Finance Benchmark Research found that 59% of tax departments use spreadsheets exclusively for tax provision, while just 22% utilize a third-party tax application.
However, spreadsheets are a major barrier to making the tax function more productive and effective. One well-known issue with spreadsheets is that they are error-prone, which is not a risk that tax professionals should have to bear. To be certain that the tax provision and other tax-related calculations are correct, individuals must double- and even triple-check the numbers. This overlaps with a second major issue with spreadsheets: They are time-consuming. Our spreadsheet research finds that those working heavily with spreadsheets spend on average of 18 hours a month (the equivalent of more than two full workdays) just maintaining their most important spreadsheet. Spreadsheets are so time-consuming that they prevent individuals from doing more valuable work — in this case, tax analysis and planning.
Another related issue is that using spreadsheets for the tax function diminishes visibility into an organization’s tax provision and tax positions. Using spreadsheets takes so long that executives get to the numbers late in the financial close process. This matters because of the impact that tax expense has on a business’s profits. In addition, spreadsheets are black boxes: That is, they are difficult to control, and it’s difficult for anyone other than the spreadsheet’s owner to understand their construction. Often, assumptions are buried in formulas and hard to uncover. It’s not well understood whether these formulas are inconsistent or wrong, and it’s not easy to spot them. Even with advanced spreadsheet management techniques designed to make updates consistent (such as applying the LAMBDA function in Excel), it’s hard to be certain that some cell wasn’t overwritten with another number.
Some people who work intensively with spreadsheets still view them as a form of job security because of their opacity. These workers think they’re indispensable because they are the only ones who understand how these spreadsheets work. This is one of several reasons why use of spreadsheets persists in functions where they constitute more of a problem than a solution. However, these spreadsheet jockeys should recognize that the inherent inefficiency, lack of visibility and propensity for errors of spreadsheets make them vulnerable to being replaced by better technology.
To succeed or even survive, tax professionals need to embrace automation because:
- Using software provides the ability to manage tax-sensitive data, streamline the provision process and provide executives with deeper insight into tax costs.
- Working within a controlled process that uses a unified set of relevant tax data brings transparency.
- Applying technology tightly controls 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.
- Operating with an authoritative data set makes tax department operations more efficient.
- Having tax data and tax calculations that are immediately traceable, reproducible and permanently accessible provides executives with greater certainty and reduces the risk of noncompliance and the attendant costs and reputation issues.
- Maintaining an accurate and consistent tax data store enables corporations and tax departments to better execute tax planning, provisioning and compliance.
The best career decision that tax professionals can make is to embrace technology that allows them to be more productive and enables them to spend more time on work that fully utilizes their training and experience. Information technologies, especially artificial intelligence and other forms of cognitive computing, will transform how they work, driving a fundamental change in what they do. The real value of tax professionals is not their ability to overcome spreadsheet limitations but their training in understanding income taxes. Once freed from the drudgery of performing computations, massaging data and checking (two or three times) for errors, tax professionals can turn their attention to performing analytical work aimed at optimizing an organization’s tax spend – and thus ensuring their value as workers.
I recommend that midsize and larger organizations — especially those that operate in multiple tax jurisdictions and have an even moderately complex legal entity structure — use dedicated software to automate income tax provision and analysis functions. Using dedicated software rather than relying on spreadsheets helps the tax department, and those working in it, increase their strategic value so they won’t be obsolete tomorrow.