CEO's perception of the role of tax management.

CEO's Perception of the Role of Tax Management

INTRODUCTION

Taxes have always been a significant cost of doing business. With federal, state, local, and provincial governments looking for increased and new sources of revenue, the effect of taxes upon corporate profitability will become even more significant. Managing the tax function in today's complex and changing environment requires more than filing returns and dealing with tax audits. It requires tax management to be an integral part of the company's business team.

In order to learn more about tax management's role in today's corporate environment, a survey was conducted that focused on senior management's perception of the tax function, the tax department's involvement in decision making, information flow, and organization structure.

Two questionnaires were used to conduct the study. One questionnaire was developed for completion by the company's chief executive officer (CEO). The other questionnaire was developed for completion by the person who has primary direct responsibility for the overall tax function.

This article reports the findings for the CEO questionnaire and responses to selected questions on the senior tax person questionnaire for those companies for which the CEO had responded. Follow up articles reporting the findings for the senior tax person questionnaire will appear in future issues of The Tax Executive.

The author wishes to express his appreciation to those who have helped make this study possible. First, Tax Executives Institute for making its membership list available, partial funding, and the insights provided by members of the Institute's Corporate Tax Management Committee and other TEI members. Secondly, Miami University--in particular, the Department of Accountancy and the School of Business--provided a significant amount of financial support. Numerous students, in particular Steve Cunningham and Mike Warmouth, assisted in the compilation of the data. Lisa Ehrichs provided invaluable assistance with computer input and the writing of programs that resulted in output for analysis.

METHODOLOGY

Information for this study was obtained by means of two questionnaires mailed to the senior tax person at 2,463 TEI member companies. The cover letter requested that the senior tax person forward the CEO questionnaire to the CEO for his or her independent completion and separate return.

In order to gain the insight necessary to develop meaningful questionnaires, interviews were conducted of tax executives at 15 midwestern companies during the Summer of 1987. Drafts of the questionnaires were sent to tax executives at the 15 companies where interviews had been conductd and to members of TEI's Corporate Tax Management Committee. Comments were received from 22 tax executives. The CEO questionnaire and selected questions from the senior tax person questionnaire are reprinted in Apendix I to this article.

Questionnaires were numbered in order to facilitate the mailing of second requests and to enable the author to correlate CEO responses with those of the senior tax person from the same company. Confidentiality of responses was strictly observed as promised.

The questionnaires were mailed in October 1987. Second requests were mailed in late November and early December. Approximately 30 percent of the responses received from each group were second requests.

Responses were received from 588 companies. Surprisingly, there were 30 companies for which the CEO responded but not the senior tax person. There were 298 companies for which both the CEO and the senior tax person responded.

Overall, there were 558 returned and completed senior tax person questionnaires for a response rate of 22.7 percent. There were 328 returned and completed CEO questionnaires for a response rate of 13.3 percent. Not all of the respondents answered each question but most responded to nearly all of the questions.

Most of the responding CEOs were from smaller companies. Approximately 86 percent of the CEOs were from companies with assets under $5 billion. Almost 91 percent of the CEOs were from companies with sales under $5 billion. The senior tax person response rate by size of company was almost identical to that of the CEOs.

CEO CONTACT WITH SENIOR

TAX PERSON

CEOs were asked how often they had direct contact with the senior tax person. A little fewer than half of the CEOs had either daily or weekly contact with the senior tax person. The responses are summarized in Table 1. As indicated in Tables A and B in Appendix III it appears that frequency of contact does not vary significantly by size of a company's assets or sales.

Frequency of contact does vary by background of the CEO. CEOs with a finance/accounting background, or a varied background including some finance/accounting, have more frequent contact with the senior tax person. Those with engineering/research, operations, or sales/marketing backgrounds have significantly less frequent direct contact. Table C in Appendix II summarizes the responses by CEO background.

The higher the chief tax executive is in the corporate hierarchy, the more frequent the contact with the CEO. Those tax executives whose contact is less frequent than monthly are farther removed from the CEO. Table D in Appendix II demonstrates, however, that the mean number of levels from the CEO does not vary significantly for those with daily, weekly, or monthly contact with the CEO.

CEO's ASSESSMENT OF

SENIOR TAX PERSON

Respondents were asked whether they were directly involved in evaluating the performance of the senior tax person. Approximately 40 percent answered yes. Table E in Appendix II reveals a somewhat mixed response by size of company assets. The results are similar for size of company as measured by sales.

Table F in Appendix II shows that such involvement by the CEO varies by CEO background. Proportionately more CEOs with some background in finance/accounting are directly involved in performance evaluations. Relatively fewer CEOs with backgrounds in engineering/research, operations, or sales/marketing are involved in the process. This is consistent with the frequency of CEO contact by CEO background.

As might be expected, the higher the senior tax person is in the corporate hierarchy, the more often the CEO is involved in evaluating the performance of the senior tax person. This result is shown in Table G in Appendix II.

CEO responses to this question for selected industries is provided in Table H in Appendix II. Note that the industry groupings are based on information provided by the senior tax person questionnaire for these companies since it provided a more detailed breakdown by primary industry. Also, the information is provided only for those companies indicating a primary industry and for those industries for which at least five CEOs responded.

CEOs were asked to rank various criteria for evaluating the effectiveness of the senior tax person. They were asked to do so whether or not they were directly involved in evaluating the senior tax person's performance. Table 2 summarizes the responses. Effectiveness of tax planning and tax savings generated was considered by far the most important criterion. Effectiveness of communication between tax staff and senior management and the results of audits or reviews by tax authorities were the next most important. The accomplishment of budget goals and the opinions of outsiders, although considered important by some CEOs, were not considered important by most.

Rankings by size of firm and by size of tax staff are consistent with the overall ranking. The results are summarized in Tables I and J in Appendix II. Relative rankings by CEO background are consistent with the relative rankings overall except for those CEOs with a background in law. CEOs with a law background ranked results of audits more important than effective communication and the opinion of outsiders as more important than the accomplishment of budget goals for the tax department.

Respondents were asked to rank order various skills that the senior tax person should possess. Technical skills was considered the most important criterion. Analytical skills, creativity, and communication skills were the next most important respectively. Surprisingly, negotiating and administrative skills were ranked as considerably less important. Tble 3 summarizes the results.

For the most part, the pattern of rankings by size of firm is similar to the overall rankings. As indicated in Table 5 in Appendix II, technical skills are ranked as the most important except by those eight firms with assets in the range of $10 to $20 billion. Such rankings may be attributed to the small number of respondents. Administrative and negotiating skills are ranked either fifth or sixth regardless of size of firm. The rankings for analytical skills, creativity and communication skills are mixed but in the middle of the rankings.

The pattern of rankings by size of tax staff is also similar to the overall rankings. Table L in Appendix II shows that the relative rankings are somewhat mixed.

Relative rankings by CEO background are similar to the overall rankings. Analytical skill, however, was ranked as much more important and administrative skill much less important by CEOs with a law background as compared with the skill rankings by CEOs with various other backgrounds. Administrative skill was ranked fifth most important by CEOs with engineering/research backgrounds but was given its highest mean ranking by these CEOs.

CEOs were asked to rank order the importance of various areas of knowledge that the senior tax person should possess. Table 4 provides a summary of the rankins. It is clear that knowledge of tax law with a mean ranking of 1.29 is the most important. A distant second is knowledge of the company with a mean ranking of 2.70. Knowledge of accounting follows with a mean ranking of 3.38.

The pattern of rankings by size of firm and by size of staff generally follow that of the overall rankings. Surprisingly, the senior tax person's knowledge of tax law is also ranked as the most important area of knowledge for the larger firms and those firms with the larger tax staffs. These responses are summarized in Tables M and N in Appendix II.

CEO's PERCEPTION OF THE

RELATIONSHIP OF TAX

MANAGEMENT TO SENIOR

MANAGEMENT

The CEOs were asked a number of questions in order to determine the relationship of tax management to senior management. Tax management was defined to include the senior tax person and other tax management personnel.

CEOs were asked whether tax management kept them informed about the impact on the company of tax legislative developments. As indicated in Table 5, more than 77 percent responded either always or often. They were also asked whether tax management responded in a timely manner to their questions about taxes. Not surprisingly, more than 97 percent responded either always or often.

Respondents were asked whether tax management pointed out tax savings opportunities to senior management without being requested to do so. More than 80 percent responded either always or often. The CEOs were also asked whether they thought tax management responded in a timely manner to the questions of senior management about taxes. An overwhelming 94 percent answered either always or often. Table 6 provides a summary of the responses.

The senior tax persons were asked to respond to the same two questions. Responses to both questions for those companies for which both the CEO and the senior tax person responded are summarized in Tables 7 and 8.

Table 7 indicates that for 240 companies for which the CEO thought tax management either always or often pointed out tax savings opportunities to senior management without being requested to do so, there were 204 senior tax persons who responded either always or often to the same question. As shown in Table 8, for 276 companies for which the CEO thought tax management responded either always or often in a timely manner to questions of senior management, there were 267 senior tax persons who responded either always or often to the same question. These results suggest that the CEOs, for the most part, believe that tax management is doing a good job in responding to senior management. Furthermore, the results suggest that for some companies the CEOs believe tax management is doing a better job than thought by senior tax persons at the same companies.

The results in Table O in Appendix II suggest that CEOs at larger companies think tax management pointed out tax savings opportunities more often than at smaller companies. The results may in part be due to the smaller number of responses by CEOs at larger companies. The results regarding timeliness of response by size of company are mixed.

CEO's PERCEPTION OF THE

ROLE OF TAX MANAGEMENT

Several questions were asked in order to determine the CEO's perception of the role of tax management. CEOs were asked to indicate whether they agreed or disagreed that tax management's primary responsibility is tax compliance. They were also asked whether they agreed or disagreed that tax management's primary responsibility is tax planning. Almost 50 percent of the CEOs either agreed or strongly agreed that tax management's primary responsibility is tax compliance. More than 80 percent either agreed or strongly agreed that tax management's primary responsibility is tax planning. Table 9 summarizes the responses.

These results indicate that compliance work is considered important but planning more important by most CEOs. Some CEOs, however, believe compliance is the more significant responsibility carried out by tax management.

Tables P and Q in Appendix II provide the mean responses to these two questions by assets and staff size respectively. It appears that planning as contrasted with compliance is considered to be a more significant responsibility of tax management as the size of the company increases in terms of either assets or size of tax staff.

CEOs were also asked several questions to determine whether they believed that tax management is doing a better job when it takes a more aggressive position in tax matters. They were asked whether they believed tax management is doing a good job when the IRS accepts tax returns as filed without levying any additional assessments against the company. Table 10 shows that more than 56 percent either disagreed or strongly disagreed with the statement that tax management is doing a good job when returns are accepted as filed. Another 18 percent of the respondents were uncertain.

Respondents were also asked whether they believed tax management should always adopt interpretation of the law that is most favorable to the company and then rigorously defend it. More than 71 percent either agreed or strongly agreed that tax management should do so. Table 10 summarizes the responses to this question.

Tables R and S in Appendix II correlates the responses to these questions with the size of the company in terms of assets and staff size. The mean rankings for the responses to these questions do not vary significantly by assets. More CEOs at companies with the larger tax staff believe tax management is not doing a good job when returns are accepted as filed. In contrast, more CEOs at companies with the smaller tax staffs believe tax management should adopt an aggressive interpretation of the law.

The senior tax persons were asked to select the statement that they believed best described senior management's attitude towards the tax department. The objective of the question was to determine whether they thought senior management viewed tax as primarily a compliance function, compliance and planning, primarily planning, or as an integral part of the company's business team.

Tables 11 and 12 correlate the responses of CEOs for the questions about tax management's role with the responses of the senior tax person regarding how the tax department is perceived by senior management for those companies for which both the CEO and senior tax person responded. For 138 companies for which the CEO either agreed or strongly agreed that tax management's primary responsibility is compliance, 97 senior tax persons believed senior management viewed tax as either primarily a compliance function or as a compliance and planning function. Of the 233 companies for which the CEO either agreed or strongly agreed that tax management's primary responsibility is planning, only 100 of the senior tax persons thought senior management viewed tax as either primarily a planning function or as an integral part of the company's business team.

In Tables 13 and 14, the responses of CEOs for the questions whether tax management does a good job when returns are accepted as filed and whether tax management should adopt an aggressive interpretation of the law are correlated with the responses of the senior tax persons about how the tax department is perceived by senior management. Of those 71 companies for which the CEO either agreed or strongly agreed that a return should be accepted as filed, the senior tax person at only 45 of these companies believed senior management viewed tax as either primarily a compliance function or as a compliance and planning function. For the 206 companies for which the CEO either agreed or strongly agreed that an aggressive interpretation should be adopted, only 80 of the senior tax persons believed senior management viewed tax is either primarily planning function or as an integral part of the company's business team.

These results suggest that the perceptions of CEOs are not in agreement with the perceptions of senior tax persons regarding the attitude of senior management toward the tax department. The results may in part be attributable to the fact that the senior tax person was asked to respond regarding senior management's attitude rather than that of the CEO. It does indicate, however, that at a number of companies a perception gap exists between the CEO and the senior tax person.

INFLUENCING LEGISLATION

CEOs were asked whether tax management needs to become more involved in influencing tax legislation. As indicated in Table 15, 62 percent of the CEOs either agreed or strongly agreed that tax management should become more involved in legislative matters.

The senior tax persons were asked to respond to the same question. Responses for those companies for which both the CEO and the senior tax person answered the question are summarized in Table 16. For the 176 companies for which the CEO either agreed or strongly agreed that tax management needs to become more involved in influencing tax legislation, approximately 85 percent of the senior tax persons at those companies also believed tax management needs to do more.

Tables T and U in Appendix II provide a summary of the CEO responses by assets and size of tax staff. The results indicate that relatively more CEOs at the larger companies believe tax management needs to become more involved. This is particularly true for those companies that are larger as measured by assets.

CEO responses to this question for selected industries are provided in Table V in Appendix II. The information is provided only for those companies which indicated a primary industry and for those industries for which at least five CEOs responded. The industry groupings are based on information provided by the senior tax person questionnaire for these companies.

CEO's SOURCES OF

INFORMATION

Most CEO's first learn about tax developments from either their senior tax person, the business media, or their CFO. Senior tax person and business media were cited the most often as the most frequent source of timely information. Senior tax persons and business media were ranked first by 108 and 102 CEOs respectively. CFOs were ranked first by 57 CEOs. Senior tax persons and CFOs were ranked as the second most frequent source by 73 and 65 CEOs respectively. The responses are summarized in Table 17.

Although other sources such as industry associations, CPA firms, outside legal counsel, and in-house government affairs were ranked relatively low as sources of information, there were a significant number of CEOs who ranked these as their first source.

Relatively more CEOs with engineering backgrounds ranked business media ahead of their senior tax person and CFO as their most frequent source of information. The CFO was cited more often than either the business media or their senior tax person by CEOs with a marketing background as their most frequent source. The senior tax person was cited more often than either the business media or their CEO by CEOs with either a finance/accounting or legal background.

Table W in Appendix II summarizes the rankings of information sources by assets. The senior tax person is the most frequent source except for CEOs at companies with assets under $1 billion or between $10 and $20 billion. Business media is the most frequent source for CEOs at these companies. CEOs at larger companies consider the CFO to be a more important source than do CEOs at smaller companies. As expected, in-house government affairs is a more important source for larger companies. CPA firms are a relatively more important source for smaller companies.

Rankings of sources of information by staff size are provided in Table X in Appendix II. The results are more mixed. The results indicate, however, that in-house government affairs is only an important source for those CEOs at companies with tax staffs over 15. CPA firms are only a significant source for those CEOs at companies with tax staffs under 16. The importance of industry associations as a source appears to bear no relationship to size of tax staff.

Table 18 provides information about which topics CEOs would like to receive more tax information. More than half of the CEOs wanted more information about tax planning opportunities. Thirty-five percent of the CEOs desired more information about federal tax legislation. Approximately 18 percent of the CEOs wanted to know more about state, provincial, and local tax legislation, and about international tax issues.

A significant portion of CEOs at all but the largest companies wanted more information about planning opportunities. Table Y in Appendix II sets forth a summary of results by size of company as measured by assets. Also, Tables Z and AA in the Appendix II provide a summary of responses for selected industries for those CEOs desiring more information about federal tax legislation and planning opportunities.

CONCLUSION

This article summarizes the responses of CEOs to questions about the role of tax management. For the most part, the CEOs believed tax management was doing a good job keeping the CEO and senior management informed on a timely basis about tax developments. In fact, the results suggest that for some companies the CEO believes tax management is doing a better job than thought by the senior tax person at the same companies.

Compliance work is considered important but planning more important by most CEOs. However, some CEOs believe compliance work is the more significant contribution made by tax management.

There appears to be a perception gap between the CEO and the senior tax person at some companies regarding how senior management views the role of tax management. The results suggest that senior management expects tax management to have a planning orientation. In contrast, tax management at these same companies believes senior management views tax as primarily a compliance function.

The senior tax person, he CFO, and the business media were cited as the most frequent source of tax information for most CEOs. A number of CEOs indicated that they desired more information about tax developments. This presents an opportunity for tax management at these companies.