Communication, information flow, and involvement of the Tax Department in corporate decision-making.

Communication, Information Flow, and Involvement of the Tax Department in Corporate Decision-Making 

Introduction

Managing the tax function in today's complex and changing environments 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 had primary direct responsibility for the overall tax function.

This is the third article in a series that reports the results of the two questionnaires. The first article, "CEO's Perception of the Role of Tax Management," appeared in the Spring 1989 issue of The Tax Executive (Vol. 41, No. 3, pp. 223, et seq.). The second article, "Organization and Staffing of the Tax Function," was published in the July-August 1989 issue of The Tax Executive (Vol. 41, No. 4, pp. 343, et seq.). This article reports the findings for the senior tax person questionnaire regarding the tax department's involvement in corporate decision-making, communication with those outside the tax department, information gathering, the use of computers, legislative review, and the use of outside advisers.

The author wishes to express his appreciation to those who have helped make this study possible. First, Tax Executives Institute (TEI) assisted by making its membership list available and provided partial funding, and members of the Institute's Corporate Tax Management Committee and other TEI members provided valuable insights. 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 conducted and to members of TEI's Corporate Tax Management Committee. Comments were received from 22 tax executives. The senior tax person questionnaire was reprinted as Appendix I to "Organization and Staffing of the Tax Function," which appeared in the July-August 1989 issue of The Tax Executive.

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 for 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. Aprroximately 30 percent of the responses received from each group were generated by the second requests.

Response 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 senior tax persons responding were from smaller companies. Approximately 55 percent of the 558 questionnaires returned by senior tax persons were from companies with assets under $1 billion. Almost 86 percent of the responses were from companies with assets under $5 billion. On the whole, however, responses were received from companies representing a wide range of industries.

Decision-Making

Senior tax persons were asked to state, on a scale of 1 to 10(1 = idea stage and 10 = after transaction completed), at what point the tax department generally becomes involved in the decision-making process. The responses are summarized in Table 1. Whereas approximately 45 percent of the 541 respondents reported that the tax department became involved at a relatively early stage, nearly 23 percent of the respondents' tax departments did not get involved until transactions were either completed or nearly completed.

Only 71 of 554 responding companies had a formal policy governing when the tax department becomes involved in a transaction. Nevertheless, Table 2 shows that firms with a formal policy are more likely to involve the tax department at an earlier stage. Table A in the Appendix, by assets, shows the percentage of firms with a formal policy. The results were mixed.

The Chief Tax Officer's (CTO's) perception of senior management's attitude toward the tax department appears related to the point at which the tax department becomes involved in the decision-making process. For those companies for which the CTO reported that senior management thought the tax department's role was either primarily compliance or compliance and planning, only 13.6 percent and 36.9 percent of such tax departments respectively got involved in the decision-making process at an early stage. In contrast, for companies at which the CTO believed the tax department's role was considered to be primarily planning or as part of the business team, 66.2 percent and 77.3 percent respectively became involved in corporate decision-making at an early stage. Table B in the Appendix summarizes the responses.

As might be expected, the closer the CT was to the CEO in the corporate hierarchy, the earlier the tax department's involvement in decision-making. As indicated by the mean point at which the tax department got involved as shown in Table C in the Appendix, however, the difference is not that significant for those CTOs only one or two levels from the CEO.

Tax departments organized along functional lines (compliance, planning, etc.) and along organizational lines (industry, division, etc.) tended to get involved earlier than tax departments organized by either type of tax (federal, state, provincial, property, etc.) or a combination of functional and type of tax. The percentage indicating stages 1, 2, or 3 and the mean point by type of organization are provided in Table D in the Appendix.

Tables E and F in the Appendix show the point at which the tax department became involved in decision-making by assets and size of tax staff respectively. Tax departments at companies with assets over $20 billion generally got involved much earlier than tax departments at smaller companies. The results were mixed for companies with assets under $20 billion. Tax departments with larger staffs generally got involved earlier than tax departments with smaller staffs.

Tax departments at firms where management had either a cash flow or a combination of earnings-per-share (EPS) and cash-flow orientation generally became involved in corporate decision-making at an earlier stage than where management had either an EPS or EBIT (earnings before interest and taxes) orientation. Table G in the Appendix provides a summary of responses by management orientation.

Involvement by the CTO or other tax department personnel with corporate committees apparently affects how early the tax department becomes involved in corporate decision-making. Tables H and I in the Appendix suggest that where the CTO was a member of the company's general policy group or regularly attended meetings of the company's executive council (or similar group), the tax department was more likely to get involved at an early stage. A similar relationship, as illustrated in Table J in the Appendix, exists where the tax department was represented on corporate-wide committees. There appears to be no relationship between the point at which the tax department becomes involved in decision-making and whether a company's internal audit staff audits compliance with tax policies (Table K in the Appendix).

Tables L, M, and N in the Appendix show the relationship between size of company as measured by assets and the percentage of companies at which the CTO is a member of the company's general policy group, the CTO regularly attends meetings of the general policy group and whether the tax department is represented on corporate-wide committees respectively. There appears to be no relationship between the CTO's participation in the general policy group and size of the firm. The larger the firm, however, the more often the tax department was represented on corporate-wide committees.

A higher percentage of CTOs were either members of their company's general policy group or regularly attended policy group meetings for firms where management had a cash flow or a combination EPS and cash-flow orientation. The relationship exists but is not as significant for representation of the tax department on corporate-wide committees. These results are summarized in Tables O, P, and Q in the Appendix.

Table 3 shows the frequency with which the tax department answers questions about personal tax matters for senior management and operating personnel. Less than 50 percent regularly answered questions for senior management. Only about one-third of the tax departments regularly answered such questions for operating personnel.

Although the percentage of firms with tax departments getting involved in corporate decision-making early was somewhat higher for those firms where senior management questions about personal tax matters were frequently answered, the difference was not that significant. Table R summarizes these results.

Communication

A significant responsibility of tax management is to keep senior management abreast of tax issues and developments. Table 4 shows that informal communication was used by most respondents to inform senior management about the effect of taxes upon the company. Almost 94 percent of 498 respondents provided senior management with special written reports about tax matters. Relatively fewer respondents used regular monthly, quarterly, or annual written reports to communicate with senior management. Surprisingly, only a small percentage of the respondents communicated regularly via monthly, quarterly, or annual presentations.

Table S in the Appendix shows the relationship between the communication vehicle and the point at which the tax department becomes involved in corporate decision-making. The percentage of respondents who got involved early was considerably higher for those utilizing regular written reports and presentations than for those who did not do so. For example, almost 57 percent of the firms using annual written reports became involved in the early stages of the decision-making process as contrasted with only 38 percent of those that did not. Approximately 63 percent of the companies using monthly or quarterly presentations got involved early as contrasted with only about 38 percent of those that did not make such presentations.

There appears to be a relationship between the use of regular written reports and presentations to senior management about tax matters and the CTO's perception of senior management's attitude toward the tax department. Table T in the Appendix shows that the percentage of firms using written reports and presentations on a regular basis was higher for those groups of firms at which the CTO believed senior management viewed the role of the tax department as either primarily planning or as part of the business team.

Table 5 lists the topics covered in written reports to senior management. Approximately 93 percent of 526 respondents provided senior management with written reports on legislative developments. More than 90 percent of 505 respondents provided written reports about tax savings opportunities. About 87 percent of 509 respondents provided written reports on audit issues and their status. Considerably fewer reported on tax savings generated and returns processed.

The percentage of firms that became involved in the decision process early was higher for those that issued written reports on tax-savings opportunities, tax savings generated, and information about the effect of legislative developments on the company. Table U in the Appendix summarizes the relationship between topics covered in written reports to management and the point at which the tax department becomes involved in corporate decision-making.

Communication with operating personnel about tax matters is also an important responsibility of the tax department. Table 6 shows that most tax departments carried on informal communication with operating personnel. Considerably fewer tax departments communicated with either periodic written reports or presentations. Even fewer firms had either a tax policy manual or a tax section in the corporate accounting policy manual.

There also appears to be a relationship between communication with operating personnel and the point at which the tax department becomes involved in corporate decision-making. There was a higher percentage of firms with early involvement by their tax departments where written reports, periodic presentations, and other forms of communication were utilized (Table V in the Appendix).

Information Gathering

Respondents were asked for information on their company's system for gathering information for tax reporting. As reported in Tables 7 and 8, few companies had separate accounting systems for tax reporting. Firms either captured tax information in subaccounts or had to make adjustments to financial accounting information. Most companies used the same system for both their company and its subsidiaries.

Table 9 provides a summary of responses to a number of questions about subsidiary company tax information. Almost 37 percent of the respondents reported that all domestic subsidiary tax information was integrated into the parent company's system. In contrast, only about 15 percent of the respondents reported that all foreign subsidiary tax information was integrated into the parent company's system.

Almost 49 percent of respondents stated that all domestic subsidiary tax information was provided by tax-reporting packages. About 42 percent of the respondents reported that all foreign subsidiary tax information was provided via tax-reporting packages. Public accounting firms played a relatively minor role in providing subsidiary tax reporting information. As reported in Table 9, however, the role was a little greater in the case of foreign subsidiaries. Approximately 44 percent of respondents stated that parent and all its domestic subsidiaries used the same chart of accounts. Almost 29 percent of the companies reported that all their foreign subsidiaries used the same chart of accounts as the parent company.

Relatively few subsidiaries had their own tax departments. Only 11 out of 521 respondents reported that all their subsidiaries had their own tax departments. Another 120 reported that some of their subsidiaries had their own tax departments.

A considerable number of respondents reported that tax returns were prepared on site at division or plant accounting departments. More than one-half of those responding to the question reported that payroll, sales, use, and property taxes were prepared by division or plant accounting departments. These responses are summarized in Table 10.

Table W in the Appendix shows the percentage of each type of return that was prepared by the division or plant accounting department by how the tax department was organized. How the tax department was organized appears to have had an effect on whether such returns were prepared at the division or plant level. The lowest percentage of returns prepared at the division or plant level was for companies whose tax function was organized by type of tax.

Respondents were asked to state their source of forecasted information for tax planning and estimated tax computations. Almost one-third of the companies reported that forecasted information for such purposes was supplied by the financial accounting department. The next most often cited source was the tax department followed by various combinations of sources. Table 11 reports these findings. As reported in Table 12, only 55 percent of the respondents either always or often relied on the validity of forecasted information provided by those outside the tax department.

Use of Computers

The computer plays a significant role is assisting tax management in carrying out its responsibility for compliance, planning and keeping senior management abreast of tax developments. In order to determine the nature and extent of computer usage, respondents were asked a number of questions about their tax department's use of the computer.

Tables 13 and 14 summarize the responses regarding the type of computer used for data storage and return preparation. The respondents were just about evenly divided between those whose data was stored on a mainframe and those whose data was stored on a minicomputer. Most respondents used the minicomputer for return preparation and tax planning.

Almost 49 percent of 536 respondents reported that their tax department had a minicomputer dedicated to it. Interestingly, a higher percentage of smaller companies had a minicomputer dedicated to their tax departments as contrasted with tax departments of larger companies (Table X in the Appendix).

Relatively few tax departments -- only 7 percent of 539 respondents -- had systems-data processing personnel assigned to them that reported directly to the CTO (or someone who reported directly to the CTO). Only 20 percent had designated systems-data processing personnel assigned to them but that reported to the head of the systems-data processing department. The majority of the systems-data processing personnel were assigned randomly or from a pool.

The cost of systems-data processing support, as shown in Table 15, was charged to the tax department at approximately 40 percent of respondent companies. It was charged to the budget of the accounting department at almost 18 percent of the companies. More than one-third of the respondents stated that there was no charge for such support -- it was just part of general corporate overhead.

Tables Y and Z in the Appendix show that the larger the firm in terms of either assets or staff size, the higher the percentage of firms where the cost of computer-data processing support was charged to the tax department's budget.

Firms at which the CTO believed senior management viewed the tax department's role as part of the company's business team had the highest percentage of firms where the cost of such support was charged to the budget of the tax department. In contrast, the group with the highest percentage of firms where the cost of such support was just part of corporate overhead was those firms at which the CTO believed senior management viewed the tax department's role as primarily compliance. Table AA in the Appendix summarizes these results, and Table BB shows that the group of firms where the tax department became involved early in the decision-making process had the highest percentage of firms whose tax department was charged for computer and data processing support.

Tables CC and DD in the Appendix show the mean number of personal computers in the tax department by assets and staff size respectively. As expected, the larger the firm the higher the mean number of personal computers.

Companies at which the CTO believed senior management viewed the tax department as part of the business team had the highest mean number of personal computers assigned to the tax department. Those companies at which the CTO believed senior management viewed the tax department's role as primarily compliance had the lowest mean number. These results are summarized in Table EE in the Appendix.

The mean number of personal computers was generally higher the earlier the tax department got involved in the decision-making process (Table FF in the Appendix). Table GG in the Appendix summarizes the responses by type of organization. Tax departments organized by type of tax had the lowest mean number of personal computers assigned to the tax department.

Surprisingly, the closer the CTO was to the CEO, the lower the mean number of personal computers assigned to the tax department. Table HH reports these results.

Table 16 shows how tax department personal computers were related to other company computers. Approximately 71 percent of tax department personal computers were stand alone. Another eight percent were networked with each other. Ten percent and eleven percent were fully and partially integrated, respectively, with the corporate mainframe or minicomputer. Table II reports these results by size of company as measured by assets.

Respondents were asked which tax returns they prepared using a vendor-provided tax package. As indicated in Table 17, more than 45 percent and 37 percent used vendor-provided packages to prepare federal income tax and state and provincial income (franchise) tax returns respectively. Tables 18 and 19 summarize by vendor the packages used to prepare federal, state, and provincial income tax returns. Table 20 shows the percentage of various tasks performed by vendor-provided and in-house generated programs.

Approximately 39 percent of 532 respondents reported that their company used a computerized tax research service. Table JJ in the Appendix shows that the group of companies that became involved early in corporate decision-making had the highest percentage of companies using a computerized tax research service. There appears to be a relationship between the percentage of companies using a computerized tax research service and the CTO's perception of senior management's attitude toward the tax department (Table KK in the Appendix). Companies where the tax department was believed to be viewed as part of the business team had the highest percentage of companies using a computerized tax research service. Table LL in the Appendix suggests there is no relationship between use of a computerized research service and how the tax department was organized.

Larger companies in terms of either staff size or assets had higher percentages of companies utilizing computerized tax research services. These results are shown in Tables MM and NN in the Appendix.

Table 21 shows the various computerized research services that were being used. Lexis was by far the most commonly used service.

Legislative Review

Respondents were asked for information on the extent to which they believed that tax management needed to become more involved in influencing tax legislation. As indicated in Table 22, more than 80 percent either agreed or strongly agreed that tax management should become more involved.

Tables 23 and 24 suggest that the majority of the task of monitoring federal, state, provincial, and local tax legislation was performed by tax department personnel. Approximately 70 percent of federal monitoring and 73 percent of state, provincial, and local monitoring was done by tax department personnel.

Overall, most of the testimony work at both the federal and the state and local level was done by tax department personnel, industry associations, and professional groups. Approximately 37 percent of federal testimony and 40 percent of state, provincial and local testimony was prepared by tax department personnel.

Approximately 11.2 percent of total budgeted tax department man-hours a year were spent monitoring federal tax legislation. Another 2.2 percent was spent providing testimony on federal tax legislation. Approximately 8.9 percent and 2.0 percent of budgeted man-hours were used to monitor and provide testimony regarding state, provincial, and local tax legislation.

Table OO in the Appendix provides the percentage of budgeted tax department man-hours spent monitoring and testifying by point at which the tax department becomes involved in corporate decision-making. The percentage of budgeted man-hours spent on each task by the CTO's perception of management's attitude toward the tax department is shown in Table PP in the Appendix. It is difficult to generalize about the results shown in either table.

The percentages of budgeted man-hours spent monitoring and testifying by size of company as measured by assets and by size of tax staff are shown in Tables QQ and RR in the Appendix. Again, it is difficult to generalize, though the largest companies as measured by either assets or staff size spent a considerably higher proportion of man-hours monitoring and providing testimony regarding state, provincial, and local tax legislation.

Use of Outside Advisers

Outside advisers play a significant role in assisting corporate tax departments with tax compliance and planning. Advisers perform a broad range of tax or tax-related functions. Table 25 shows the mean percentage of each tax function performed by outside consultants and tax advisers. More than 40 percent of appraisal and litigation work was done by outside advisers. Relatively little return preparation was done by outside advisers. Almost 32 percent of international and foreign subsidiary compliance work, however, was performed by outside advisers and consultants.

The decision to use outside legal counsel was made by the CTO at more than 63 percent of the 550 firms that responded to the question. The chief financial officer (CFO) made the decision at 14 percent of the firms. Selection of legal counsel was done by the CTO at 51 percent, by in-house legal counsel at 18 percent, and by the CFO at 16 percent of the respondent firms. The cost of outside legal counsel was charged to the CTO's budget at approximately 50 percent and to the budget of in-house legal counsel at almost 22 percent of the firms. These results are summarized in Table 26.

Table SS in the Appendix shows that the larger the size of the tax staff the higher the percentage of firms where the CTO made the decision to use outside legal counsel. The impact of the size of the firm as measured by assets is shown in Table TT in the Appendix. Interestingly, although the CTO made the decision at the majority of firms regardless of size, the highest percentage of firms whose in-house legal counsel made the decision was at firms with assets over $20 billion.

As shown in Tables UU and VV in the Appendix, there is a somewhat similar relationship between selection of outside legal counsel and size of firm. In-house legal counsel, however, made the selection at a higher percentage of firms regardless of firm size.

The larger the firm, the higher the percentage of firms where the CTO's budget was charged for the cost of outside legal counsel. Tables WW and XX in the Appendix summarize the results by assets and size of tax staff.

The decision to use public accounting firms for assistance with tax matters, as reported in Table 27, was made by the CTO at 79 percent of responding firms. The selection of which firm to use, however, was made by the CTO at only 52 percent of the firms. The CFO and audit committee made the selection decision at approximately 25 percent and 15 percent of the firms respectively. The cost of such assistance was charged to the CTO's and CFO's budgets at 74 percent and 19 percent of the firms, respectively.

As expected, the larger the tax staff or the size of firm assets, the higher percentage of firms where the CTO made the decisions to use and select public accounting firms for assistance with tax matters. The responses are summarized in Tables YY through DDD in the Appendix.

Respondents were asked whether a public accounting firm other than its auditor could be selected or has been selected to assist with tax matters. Almost 61 percent of 537 respondents stated that a firm other than the one that serves as the company's auditor could be selected. Approximately 63 percent of 547 respondents stated that a public accounting firm other than its auditor has been on occasions selected for assistance.

The earlier the tax department became involved in corporate decision-making, the higher the percentage of firms where a public accounting firm other than its auditor could be or has been on occasions selected for assistance with tax matters. Firms whose CTO believed senior management viewed the tax department's role as either primarily planning or as part of the company's business team had a higher percentage of firms which could select or have selected other public accounting firms for assistance with tax matters. These results are shown in Tables EEE and FFF in the Appendix.

Almost 40 percent of the respondents stated, as reported in Table 28, that their company's federal income tax return was reviewed by an outside adviser. Only eight percent of the respondents had their state, provincial or local income tax returns reviewed by outside advisers. Approximately 31 percent stated that some of their company's returns were actually signed by outside advisers.

As might be expected, the larger the firm in terms of either assets or staff size, the lower the percentage of respondents whose company's federal or state, provincial, and local returns were reviewed or signed by advisers. The only exception to this relationship was for returns signed by advisers by assets. In this case the relationship was somewhat mixed. Tables GGG through LLL in the Appendix provide a summary of these results.

Tables MMM, NNN, and OOO in the Appendix show that a higher percentage of respondents reported that their company's returns were either reviewed or signed by advisers for companies where the CTO believed senior management viewed the role of the tax department as primarily compliance or compliance and planning. At companies where the CTO believed senior management viewed the tax department as part of the company's business team the percentage of respondents whose company's returns were reviewed or signed by advisers was considerably lower.

The use of outside advisers and consultants is costly. The mean dollar amount paid to advisers ranged from $83,000 for companies with assets under $1 billion to $1,083,000 for companies with assets over $20 billion. For companies with assets under $1 billion, more than one half of the fees were paid to public accounting firms. More than one half of the fees were paid to law firms for companies with assets over $1 billion. Tables PPP and QQQ in the Appendix show the mean dollar amount paid to outside advisers by assets and size of tax staff.

Respondents were asked to state whether their company's use of outside advisers increased or decreased during the five years since 1982. Almost 58 percent of the 458 respondents who answered the question stated that the use of outside advisers increased during the period. About 29 percent indicated that their use of outside advisers decreased. The remaining 13 percent reported that their use of outside advisers did not change.

Table 29 shows the mean dollar amount of fees paid to outside advisers during its most recent fiscal year by whether the use of outside advisers had increased since 1982. Firms that had increased their use of outside advisers paid considerably more than those who either decreased their use or had experienced no change. (Changes in the use of outside advisers were related to changes in tax staff size since 1982 in "Organization and Staffing of the Tax Function," which was published in the July-August 1989 issue of The Tax Executive.

Summary

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. As a result, the opportunity exists for tax departments to play an increased role in corporate decision-making. The study shows that there is room for an expanded role at many companies.

Involvement by the CTO or other tax department personnel with corporate committees impacts on how early the tax department becomes involved in corporate decision-making. The more formal and regular the communication between the tax department and corporate management, the earlier the involvement of the tax department in corporate decision-making.

Companies where the CTO believed senior management viewed the tax department's role as part of the company's business team had the highest percentage of firms where the cost of computer support was charged to the budget of the tax department. These companies also had the highest mean number of personal computers assigned to the tax department. Formal recognition of the tax department through the budgeting process and computer support appears to result generally in an expanded role for the tax department in corporate decision-making.

The tax department's role in corporate decision-making is also reflected in the use and selection of outside advisers. The more involved the tax department is in corporate decision-making, then generally the more freedom the CTO had to select and use outside legal counsel and consultants.

Barry P. Arlinghaus, Ph.D., C.P.A., is a Professor of Accountancy, School of Business Administration, Miami University, Oxford, Ohio. He is current chairman of the Taxation Committee of The Ohio Society of CPAs. He has published a number of articles in professional journals including The Tax Executive.