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Sarbanes Oxley : Technology : Financial Controls
Five Myths That May be Keeping Corporate Tax from Effectively Utilizing Technology
Debunking commonly held beliefs that cause slow adoption of information systems in tax and can contribute to risk, material reporting weaknesses, and ongoing inefficiency
By
Greg Prow
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Greg Prow
President and CEO
Planitax
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The economy is improving, investor confidence is returning, and company balance sheets are strong. Despite these signs, however, companies continue to keep a tight rein on hiring and spending. Adding to this challenge is the emergence of Sarbanes-Oxley and other regulatory requirements that have been a significant budget drain and are stretching resources to the limit.
How do you address the immediate challenges and simultaneously lay the groundwork to reduce costs and future risk? Most companies have traditionally turned to their accounting firm to get much-needed expertise and help. But because of the increasing cost of such services and regulatory restraints governing how and even whether the accounting firms can perform some of these services, an alternative is required.
The alternative: Tap your an accounting firm?s knowledge and expertise for specialized areas where it provides the most value, while leveraging a new model of hosted, subscription-based software to streamline processes such as data collection, file management, and audit support. These latter functions are better suited to automation.
Advanced technologies have taken hold in many other departments while the tax department has largely been left behind. A quick analysis of corporate tax budget spending provides some insight as to why this may be the case. Traditionally, corporate tax departments have primarily leveraged human resources to get the job done?a combination of lean internal staff and outsourcing to large accounting firms. It is estimated that on average more than 80% of a company?s annual tax budget is spent on human capital. Technology investments on the other hand have been a significantly underweighted portion of the budget?with annual spending in many cases at less than three percent.
With new pressures from a host of regulatory agencies as well as internal audit committees clamoring for transparency, accuracy, and currency, forward-thinking corporate tax departments are looking to shore up their operations and implement information systems designed to mitigate risk and exposure while also driving greater productivity. But commonly-held myths about technology cost, implementation, and ROI may still be keeping many tax professionals on the sidelines even while the pressures intensify.
Here are five technology myths that may be stopping you from optimizing your tax function?s operations and processes, contrasted with the reality of what today?s technology makes possible.
Myth #1: Technology solutions are too expensive.
The stories of large scale software implementations costing millions, going well over
budget, and requiring endless external IT consulting resources seem all too common. For many companies the challenge is not confined to implementing packaged software; it?s also applicable to internally-developed systems, in which up to 80 percent of the cost, much of it unanticipated, is incurred after the first version is developed. Typically these costs occur in areas such as delivery and rollout, training, integration, administration, providing upgrades and fixes, and ongoing maintenance. For many companies, the ?I? in ?ROI? was all they experienced.
Reality: A new software delivery model called Software as a Service (SaaS) is changing the way companies procure, use, and maintain critical software needed to run business operations. Just five years ago, renting enterprise-scale software on a monthly basis, having another company manage and ?host? critical data, and conducting secure financial transactions using the Internet were foreign and seemingly unfeasible concepts to many companies.
Today, the SaaS model of software delivery is enabling companies large and small to tap a wide range of advanced solutions by paying an affordable monthly subscription price, eliminating the capital cost, risk, and maintenance headaches of products offered just ten years ago. The new SaaS model leverages the ever-advancing capabilities of the Internet, Web Services, security, and other technologies to provide software on demand.
While this model is fairly new to tax, it has been delivering significant returns for many other functional areas of today?s corporations. In fact, according to a recent Macrovision report on trends in software pricing and licensing, SaaS may be the fastest growing segment of the application software market. Perhaps the most notable example of SaaS can be found in the Customer Relationship Management (CRM) software available today. Companies such as IBM and Salesforce.com have been using this model for delivery of software for a number of years. The SaaS model can also be seen at work in a number of ?service? areas; examples include financial management applications (NetSuite), expense management and payroll services (ADP and Concur), online conferencing (Raindance and WebEx), and support and help desk services (RightNow Technologies).
As a result of the SaaS model, companies have been able to eliminate large capital outlays for hardware and ancillary software such as database and antivirus solutions to procure a solution. And that?s just the tip of the cost iceberg. This model has also enabled companies to reduce dependence on expensive external IT and process consultants (which have been known to cost three - ten times the initial software cost) to tailor and implement systems.
Two main ways the SaaS model impacts costs are:
Renting Access vs. Buying Licenses. Until just recently, the ?perpetual license fee model? was the procurement standard. This meant the purchasing company paid a large initial fee for the right to use a software product for what appeared to be eternity?or as many companies learned, until the developer released a major new version that required the buyer to incur upgrade and migration costs. With the release of new software versions every 18 months on average, the long term costs were anything but predictable. Now renting or leasing options are being offered to companies on monthly, annual, and multi-annual terms as a way of easing the purchase hurdle and providing more flexibility. Upgrades and maintenance are usually performed by the technology provider?freeing up the IT team to focus elsewhere.
Installing on-premises vs. externally hosting. Installing internally, ?behind the firewall,? was another software implementation standard. This standard was driven by many forces?corporate data security, corporate network speed, and software development tools to name a few. This can be extremely costly for core areas such as HR and Customer Management, and altogether cost-prohibitive for many functional areas such as tax. However, application hosting (essentially having another company run and manage your software and data) has evolved considerably and has become in some cases more secure, more reliable and less costly than using an internal IT organization. In a ?hosted? model, a software company not only licenses or rents the software to the buyer, but also incurs the ?hidden costs? (normally borne by the customer) and complexity of operating and managing the software. These costs include: Hardware (servers), databases, operating systems, network (routers and telecom lines), security (firewall protection and backup) and facilities (floor space, temperature controlled environments, etc.). At the end-user level, costs also include training and support. For many companies, a hosted application option can be a more reliable and less costly alternative than their own IT organizations ? especially when their specific department may not be a top priority.
Myth #2: I?m never going to get the support I need from corporate IT
IT departments are primarily faced with managing mission critical applications. The increasing requirements brought about by ever-changing business practices, integration technologies, application upgrades, hardware upgrades, network management, and new security alerts, to name a few, have tapped already-limited IT resources. Moratoriums on capital equipment purchases caused by a tough economic environment have created further stress on IT budgets. So how does the corporate tax department command any attention and support from IT for solutions that improve compliance, increase productivity, and reduce risk?
Reality: New compliance regulations have increased IT?s attention on finance and tax, while new technology developments have made it easier on corporate IT by moving support and training outside the IT organization. Due to recent accounting scandals, new Sarbanes-Oxley rules, SEC enforcement actions, increased audit committee oversight, and the associated hit to investor confidence, corporate governance is seeing its most significant reform in decades. Topics like ?internal controls? have moved from the back burner to front-and-center. These forces are placing unprecedented pressure not only on corporate tax and finance organizations, but also on the IT organization to support these new demands. While there are varying opinions on execution components and priorities, there seem to be common views on the strategy.
Section 404 of Sarbanes Oxley requires companies to better manage processes and their associated controls associated with the financial statements. The tax function must support these processes and controls. As new methods to certify processes become more routine, many tax executives will leverage technology as a tool for enhancing accuracy, consistency, and data integration. Some have called this ?a quest for a single version of the truth.? According to a recent article in CFO magazine, many companies are still performing low-tech risk-mapping processes to gauge the impact of Sarbanes-Oxley. However, the real technology impact is believed to be just around the corner: First Albany Technology Strategy analyst Gerard Hallaren expects spending on compliance-related technology to grow to $12 billion through 2005?up by approximately $8 billion over the previous year. This is likely to come in the form of:
1) Content management tools that make it easier to document, link, retrieve, share, and archive critical data;
2) Analytics software to improve accuracy, speed and versatility of calculations, what-if scenarios and impact analysis; and
3) Data storage systems to support the volumes of data that will be created.
These new systems are expected to replace companies? homegrown databases and support the thousands of Excel spreadsheets that permeate today?s tax technology landscape. Auditors are going to have a hard time getting comfortable with the controls around the hundreds or thousands of individual spreadsheets now in use by many corporate tax departments. Echoing this, a tax executive in one company recently indicated that his own internal IT organization had committed a five-fold increase in dedicated IT support to begin bringing the tax function into the 21st century by equipping them with the tools to increase productivity and deal with new financial and regulatory pressures.
Another provision of Sarbanes-Oxley that is expected to impact the tax technology marketplace is the new auditor independence provisions in Sections 201 and 202. These provisions prohibit a public company?s audit firm from providing financial systems design or implementation services for their clients, if those systems aggregate information that is significant to the financial statements. Recent clarification from the SEC indicates these rules come into play for the tax function, as an audit firm cannot provide certain kinds of tax software to its clients, even if the system is used as an engagement tool (rather than being sold), or if the resulting entries are entered by client personnel. While many accounting firms have point solutions in specific areas, it remains to be seen what impact Sarbanes-Oxley will have for these firms? ongoing investment and support of these applications, opening the door to alternative non-audit solution providers. Beyond that, many companies? audit committees are adopting policies more restrictive than Sarbanes-Oxley or the SEC?s rules. For the tax function, this environment serves as a catalyst for better technology and technical resources ? one that will likely be supported by executive management.
Myth #3: It takes too long to get technology up and running
Similar to cost, time has come to be another hurdle in choosing a technology solution. In many cases this is understandable. However, this issue is primarily related to large scale software solutions that require enormous business process re-engineering, extensive software tailoring, and conversion from previous methods, as well as significant integration challenges. For tax professionals constantly under the pressure of compliance and deadlines, the risk of a black hole technology project has been far too high.
Reality: Long, tough implementation processes are not required by the latest technology offerings. The lengthy implementation planning process, as well as the installation, testing, and rollout phases are evolving and being replaced with simplified products and straightforward, manageable processes. These do not require extensive technical knowledge or take weeks, months, or years to implement. By utilizing the SaaS model mentioned above, the technology environment, with all of its intricacies, is managed by the vendor. This leaves the end users more time to spend on getting their business done instead of waiting for the technology they need to do it. There is less need for a protracted software evaluation procurement cycle. The software can be quickly configured and used faster than a traditional functional software evaluation can be conducted.
In addition, with the emergence of more advanced security and data transfer technologies, companies can be sure that their data is safe and secure ? even when hosted outside their own firewall. Not only do these options offer lower costs and shorter implementation timeframes but they also allow companies to shift more risks to the vendor ? giving the vendor more incentive to get the job done quickly and correctly. This model is very customer-centric. It forces the vendor to make sure it?s meeting the needs of the customer--something most tax departments are surprised to discover, since they are not used to technology companies providing outstanding service as the norm.
Myth #4: We can do this cheaper and more effectively using the tools we have now.
As stated earlier, tax departments today rely heavily on spreadsheets. They are used for everything from data collection to complicated tax calculations. Spreadsheets are certainly the right tools for many uses, but they do not have all the functionality and security required to manage core business processes such as tax planning and compliance. Spreadsheets are stored on individual users? computers or in standard Windows file systems, creating a variety of challenges. The spreadsheets are difficult to understand or maintain especially when the individuals who created them leave the company. Since only one user can access the data at a time the programs do not allow collaboration or support work flows. Security is also a major issue ? while spreadsheets and databases can be password protected, the level of security does not allow for specialized access to information as determined by the user?s role. Finally, versioning and audit trails to track who made what changes can prove cumbersome if not impossible. What?s worse, errors can lead to material reporting weaknesses.
Reality: Today?s technology extends far beyond the capabilities of spreadsheets and local ad hoc databases, yet still enables the user to maintain control. Contemporary applications are designed to facilitate the sharing of information while simultaneously securing it. Information sharing is important to users for a number of reasons, including optimizing efficiency and validation. In most organizations, the source information used to file tax returns comes from a variety of places. When applications enable multiple users to each enter their portion of the information and speed the progress of the work, then the job is completed faster and with less effort. Spreadsheets do not lend themselves to multiple user entry or workflow.
Information security is of growing importance to everyone. Contemporary applications not only allow access to an application, but can also filter the information a given user sees, based on that user?s role. For example, in order to compute an R&D tax credit one needs to capture the appropriate payroll information. While spreadsheet storage of that information might lead to a security problem, modern applications can filter the data such that non-authorized users see only the aggregate sums, never the individual compensation. Since accountability is also of great importance, you?ll find that many contemporary software applications keep an audit trail of edits and updates. This is important for validation of the entries as well as efficiently managing the questions that inevitably arise later. Spreadsheets are simply not up to this task.
Myth #5: Getting multiple accounting and tax systems to communicate is difficult and cost-prohibitive
Most accounting and tax systems have been built with proprietary data access methods and roll-up structures. This requires tax departments to spend time mapping data and reconciling data manually (in spreadsheets, for example). This is because methods to integrate the various systems are non-existent or cost-prohibitive. This myth is based on the belief that software from one vendor cannot recognize data from another system, and that individual ?interface maps? must be created between every possible combination of applications in the marketplace that would ever need to communicate.
Reality: New integration methods that improve information exchange between applications have emerged. It is estimated that application integration issues can consume as much as 80 percent of IT budgets, and tax systems illustrate this issue more clearly than other departmental systems. For years, tax has invested in point solutions that perform a specific function but cannot be easily integrated with other systems. To use an appropriate analogy, it would be similar to railroads each having tracks of their own gauge, or telephones that only worked on their own network of wires, or automobiles that had to have their own gas stations. The entire software industry is adapting to address this problem. Many providers, including Microsoft and IBM, have been cooperating on new standards for application integration called Web services for a wide range of IT solutions. In addition to delivering integration at a fraction of the cost, these new standards will enable applications to be configured by end users instead of IT professionals?as easily as you configure your ?My Yahoo? home page. So what should you do? When evaluating new tax software solutions, ensure vendor products include Web services integration capabilities to ease your application integration burden.
Each one of these technology myths is based on last-generation client-server or, at best, Web-enabled solutions. The new realities are based on the availability of new software solutions delivered as a service. They represent a paradigm shift from the old mindset of rigid, closed systems to business user-centric Web-based solutions where the vendor bears the cost of managing the application. For tax, this model offers an abundance of advantages for operating in the current environment.
Which myths are keeping your tax department behind the times?
Greg Prow
President and CEO
Planitax
Greg Prow is President and CEO of Planitax, a provider of tax software solutions that target costly, inefficient, risk-laden processes such as document management, entity management and audit management.
Mr. Prow has more than 25 years of experience spanning corporate tax, operations, and public accounting including several years as a partner at PricewaterhouseCoopers. For more information on Planitax call 800-606-3080, or visit www.planitax.com.
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