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Summary
Increasingly, companies are looking at speeding their accounting close as part of a broader initiative to improve the execution of the entire close-to-report cycle. One reason for managing the closing cycle more effectively is to have additional time to calculate the tax provision, particularly since FIN 48 (which took effect earlier this year) has complicated the process for many corporations. Our recent research shows that executing the closing process faster and more effectively gives a company more time to prepare accurate tax books that best manage their tax exposure. Conversely, we found that a large majority of companies use spreadsheets and manually rekeyed data to perform important tax calculations. This wastes time and is prone to error. We assert that, at the very least, companies need to have a central data repository for tax information if they hope to manage their tax exposure in today’s demanding environment of accountability.

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Ventana Research recently completed a primary research study entitled “The Fast, Clean Close” (sponsored by Longview Solutions and media partners Business Finance, the Institute of Management Accountants and Technology Evaluation Centers). The study collected information and opinions from 424 validated participants who work in companies with more than 1,000 employees; of these companies, more than half have complex corporate structures, including multinational operations and multiple legal entities. The study demonstrated that companies can benefit by managing their tax compliance, provision and planning more effectively.

Companies face two sets of IT issues in managing their tax liabilities: data and analytics. Before they can hope to improve the effectiveness of their analysis, organizations must improve their handling of data. In a large majority of companies, data collection for tax purposes is a manual process. One common reason is that when the company configured its enterprise resource planning (ERP) system (or systems), it did not set things up with its tax people in mind. A corporation’s organizational structure usually parallels its legal entity structure, but the two are rarely an exact match. Since legal entities, not business units, file tax returns, tax professionals typically spend about half of their time simply collecting information they need to prepare returns. This problem is not unique to tax departments, but this is an area where better data management can address three pressing issues. One is giving public companies more time to work with and review tax data; another is facilitating the audit defense process and enhancing the ability to prevail in a negotiation. The third need, which can be addressed only by freeing up the time of the tax professionals, is  allowing them to do more comprehensive tax planning.

The need for better tax data management has been intensified by the implementation of FIN 48 by the Financial Accounting Standards Board and the reduced leeway U.S. public companies have in accruing tax expense. FIN 48, which applies to both public and private U.S. companies and non-U.S. companies that file financial statements with the U.S. Securities and Exchange Commission, specifies new disclosure requirements about a company’s uncertain tax positions – areas where the corporation’s accounting treatment for tax purposes may be challenged by a tax authority. The objective of the interpretation is to harmonize how companies treat this exposure and increase transparency for public investors. The practical implication has been an increase in the end-of-period workload for companies in calculating and documenting their exposure.

Ventana Research thinks a central tax data repository is the most sensible approach. Its purpose is to capture the data from the books of original record, retaining all of the item details so that, for example, the legal entity information is preserved. The tax books ought to be kept separate from the rest of the accounting and reporting systems because of the need to maintain small but extremely important differences in detail (again, for example, legal entity versus management organization perspective). The need to preserve tax records for a given period and the equally important necessity of eliminating these records when the retention period expires is another reason for a separate data warehouse. Moreover, good data governance can be best preserved by limiting access to a small group of tax professionals and maintaining a separate audit trail for tax-related items.

Assessment
Ventana Research advises all companies with complex legal or ownership structures to improve how they manage the data they need for tax compliance, audit, provision and analysis. Not only will improved data management give companies that much more time to minimize their taxes, it also will provide more time to work with or present the financial and management accounting information and reduce the risk of errors leading to a tax misstatement. We believe a dedicated centralized tax data repository is a cost-effective approach to address these issues.

Related Research Notes
Better Process Enables Faster Close
Research shows that process management produces results

Software Drives a Fast, Clean Close
Research shows the right tools help improve results

Saving Time and Taxes
Having more time to consider how to minimize corporate tax liabilities

Closing Faster Should Have Priority
Research shows some companies have made progress, but more is needed