A prepared, proactive tax department is crucial to a successful year-end close.
Sound familiar? That’s because the story isn’t new. Companies have the same problems year after year and can reduce their pain points by following the suggestions in this article.
Broadly, companies can set themselves up for the most effective year-end close process by:
- Considering how resource constraints and process decisions affect their tax departments’ efficacy;
- Evaluating automation options and the tax departments’ operating models; and
- Asking whether they can support their tax functions by collaborating with larger, more resource-intensive firms.
Resource Challenges and Improving Processes
One of the biggest problems companies face is a lack of resources, especially as tax systems continue to become more complex. Even long-established tax departments struggle with the time pressures that stem from condensed financial close periods in an ever-changing regulatory environment. Calculations are being completed, and journal entries posted, mere days after year-end, which is a tight turnaround for such a big task.
The challenge is only partly complete after pencils are down on the calculations. Tax departments must then turn their attention to preparing financial statement disclosures, explaining results to the C-suite, and handling auditor requests.
So, how do businesses address those obstacles?
Beginning the year-end process early, ideally months before year-end close, is key. It might seem daunting to do a lot of the work that early — and there will undoubtedly be competing department priorities — but preparing ahead of time can lead to efficiencies that will be vital to faster, more accurate closings.
As part of that early preparation, teams should refine estimates and catalog adjustments and inputs that go into the tax provision. It’s crucial that auditors be brought into the discussion at this point to avoid surprises and help ensure a smooth process.
Create a Flight Plan
A best practice is to implement a “flight plan,” or a checklist of all the things that need to happen as soon as the final trial balance is ready for tax consumption. A complete flight plan will include things like the calculation methodologies of each adjustment, the documentation of estimates used, and the order in which calculations must be completed, as well as SOX callouts. Because the tax team must understand information many steps past the journal entry, the flight plan should include all aspects of the provision process, such as auditor due dates and key dates or milestones for the broader close process (date of final trial balance, expected late entries, etc.).
Having a flight plan allows the tax department to adjust on the fly: If a late change comes through, the team will need to know how to process the changes and what portions of the calculations should be re-run. Without a flight plan, a tax team that receives late adjustments after having just finished the year-end process might not have the bandwidth to run multiple iterations at that point.
Key to the flight plan is a focus on bifurcating the tax adjustments into different tranches. Calculations that can be based off the actual trial balance can likely be done in a short close period using automation tools that are prevalent in the tax technology marketplace. Adjustments that are manual or not fully automatable need stronger processes and documentation.
For adjustments that can’t be automated, what estimation methodology will be used (assuming the tax team does not have time to complete full calculations in the close window)? Ten months of actual numbers plus two months of forecast or estimated numbers; 11 months of actuals and one of estimates? Estimates will require documentation explaining why they are appropriate and why material issues aren’t expected. Going through each adjustment, documenting calculation or estimation methodologies, and discussing that information with your auditors months before year-end will pay dividends during the close process.
Why is it important to optimize the year-end close process? Because numbers always change. Companies with a clear understanding of the risks that stem from inadequate tax and accounting practices demonstrate big-picture thinking and are better prepared for growth, change in ownership, or tax law changes.
Communicate Results and Prepare for Next Year
Once the entries are posted, tax departments should prepare to discuss with their executive teams the differences between tax KPI guidance provided throughout the year and actual results. It is critically important to be able to articulate the results to management clearly and concisely. Part of the flight plan must include repeatable, automated processes to present KPIs effectively and professionally.
Tax teams should have a post-mortem to discuss what did and didn’t go well during the close process. This is the time to discuss pain points and what could be enhanced before next year’s close.
At this stage — and especially if the C-suite is challenging the finance or tax function to become a more strategic partner — companies might consider the benefits of investing in additional automation capabilities or making other process-related improvements.
Management Reporting and Non-GAAP Details
Being able to quickly convey information to C-suite leadership will improve how the tax function is viewed. The tax department should implement a comprehensive management reporting process that goes beyond simply booking journal entries. It must be able to explain KPIs and navigate differences between the forecast and actual numbers from both a GAAP and non-GAAP perspective. That will generate trust with the C-suite and give tax a seat at the table in more strategic discussions.
Tax functions must effectively communicate with CFOs and other stakeholders, providing timely and accurate information to support earnings calls and investor relations. Tax teams may focus more heavily on the GAAP tax accounting details, but non-GAAP disclosures are also crucial in providing management a clear picture of a company's financial performance. If a tax department is going to implement provision software, build a KPI dashboard, or invest in its tech stack, it should consider a system that addresses both GAAP and non-GAAP reporting.
Tax teams need to know the numbers and also why the numbers are what they are. That information will be more readily available to teams with a best-in-class process and a team that is properly leveraging technology.
The Importance of Automation
Many tax departments rely heavily on spreadsheets. While spreadsheets serve an important role, tax departments should always be looking for ways to become more strategic, perform calculations more accurately and quickly, become less dependent on key people, and reduce risk throughout the system.
That said, abandoning spreadsheets isn’t the objective; rather, the goal is to implement a tax engine that facilitates complex calculations and enables real-time review and data-driven insights. One way to accomplish that is by embedding additional technology into various departmental processes. That could range from providing the tax team with a tool to transform raw data for one discrete calculation to the full-blown implementation of tax provision software.
If implemented properly, provision software can help move the tax function to the next level. It provides structure to the provision process; for example, in currency translation, effective tax rate reporting, rolling forward balances year over year, and enabling comparative reporting. All those steps are much more challenging when done in spreadsheets.
In some cases, increasing automation could be viewed as too disruptive or the company historically might not have had any audit issues that could act as a catalyst for investing in more technology and automation. But given the seemingly never-ending requirements a tax department has, expanding the use of technology should be considered.
If a company lacks a system or if its system is incomplete, the tax department could get caught flat-footed when trying to adapt to personnel or business changes. For example, what happens if a key tax provision employee leaves the company, or the company acquires or divests of a material business unit? If the process can’t handle changes like these, the company is at risk.
Automation is vital to streamlining the year-end and quarterly close processes and reducing the risk of error. Continuing to use outdated methods to prepare the tax provision may seem less burdensome or risky than implementing new technology or processes, but tax departments must look to the future to stay ahead of the curve. A best practice is to regularly evaluate the department’s level of automation and investment in technology.
Software platforms also provide a medium for the tax department to be more closely engrained in the business’s finance function. The tax department is constantly adapting to changes: in the business, in forecasts, and in tax laws. If it cannot quickly and accurately react, it will miss the mark when the CFO asks how those changes will affect the company’s effective tax rate or cash tax.
BDO’s Tax Automation & Innovation team works with companies to streamline their provision and other tax processes. We specialize in implementing tax technology but can also improve the provision process before and after the tax engine has done its work. We help clients develop flight plans and strategies for each step along the way, whether related to front-end data management, book/tax difference automation, or reporting results and sharing dashboards with the C-suite.
Insourcing, Outsourcing, or Co-Sourcing?
As noted, companies face the same question every year: Do we have the tools and experience we need to go it alone? Tax co-sourcing and outsourcing strategies give companies the flexibility to choose the level of support they need, whether it's full outsourcing or just assistance with specific tasks.
Co-sourcing allows companies to leverage BDO's experience and technology without bearing the full cost of software and staffing, making it a good option for small to midsize companies. Large companies with their own tax engines and technology stacks also can benefit from co-sourcing and outsourcing to manage the volume of work and supplement any technical areas that need extra attention. Or perhaps a company wants to prepare only parts of the provision and outsource the others, especially during peak times such as year-end close.
BDO can make that process run more smoothly, especially if your department has resource constraints or is not specialized in a particular area such as tax accounting.
No matter how experienced or mature your tax function, BDO can help. BDO offers a flexible total tax approach to address tax issues on a global scale with the agility to adapt based on your evolving needs. For more information, contact us.