Computer use in corporate tax departments.

Computer Use in Corporate Tax Departments

OVERVIEW

Against a background of constantly changing and increasingly complex tax reporting requirements, the tax departments of the largest U.S. corporations have become heavily automated, a trend that is likely to continue well into the 1990s. The extent of computer use, the breadth of applications, and the level of satisfaction with respect to productivity and quality of output confirm a highly successful process of computer integration into corporate tax work over the last decade.

More than 400 respondents to a survey conducted by KPMG Peat Marwick of Fortune 1000 companies confirm that computers are used by most tax departments of major corporations. Sixty percent of those companies surveyed have computerized more than half of their tax department's functions, and approximately one-third have computerized more than 70 percent of the department's work. Nearly all respondents (95 percent) use microcomputers, one-third use only microcomputers, and more than half (53 percent) use both micro- and mainframe computers. The trend toward increasing reliance on microcomputers is continuing and over the next 12 to 24 months, four in ten respondents will increase the number of microcomputers they use.

Respondents expressed strong agreement on the benefits of such broad scale computer use. The vast majority of respondents (94 percent) reported that their departments are realizing and even exceeding anticipated gains in productivity, and 97 percent say they met or exceeded anticipated gains in quality.

This study underscores just how successful and widespread the integration of computers into tax work has been. The principle reasons cited for purchasing computers are anticipated improvements in productivity (87 percent), meeting an increasing volume of work (82 percent), improving accuracy 79 percent), and keeping pace with the complexity of changing tax laws (56 percent). It is clear from the survey results that these goals are being met.

That two-thirds of the respondents have achieved ratios of one or two tax professionals per microcomputer attests both to the magnitude of productivity gains and the willingness of corporations to continue to invest in hardware as a result of initial successes. The extent of computerization is also impressive. One-third of the survey group has already computerized 70 percent of tax department functions, a greater proportion than had been expected. It is worth noting that the most commonly automated function is tax planning (73 percnet)--the area that offers most of the hard tax dollar savings that might come from computerization.

PROBLEMS ENCOUNTERED

Some of the problems commonly associated with computer use--such as unauthorized access to systems, intentional destruction of program data, and theft of hardware--were reported by less than 5 percent of respondents. The most significant problems for the survey group were loss of data files due to operator error (47 percent) and equipment malfunction (30 percent). Despite these concerns about data loss, 83 percent surveyed failed to back up their data at least daily, and nearly 30 percent had no backup policy at all. More than half of the respondents reported backing up data to floppy disks. The sheer volume of data and the inherent inefficiency of using floppy disks for this task are probably the reasons why only 17 percent back up on a daily basis.

While it is encouraging that tax departments are not encountering many of the problems that have received broad attention in the press, the failure to adequately back up data is a ticking bomb. It raises questions about the ability of these departments to manage growing computer utilization effectively. A similar danger is that in their enthusiasm for expanding computer applications, tax professionals will not properly manage the process of designing new software. New applications must be written and documented so they can be used by the entire staff, proper training must be undertaken, and ease of updating must be an important design consideration. To proceed otherwise is to risk losing control of the accuracy and integrity of the data.

Our continuing research confirms that hardware and software costs constitute only about one-third of the total cost of microcomputer automation. The major expense is in the service and support of the system--components that we believe critical to its success. For example, the survey found that among companies providing any kind of formal training nine in ten met or exceeded productivity goals. The absense of training more than doubled the percentage of companies that fell short of productivity targets.

NETWORKING

The critical issue of how information is to be shared among users will assume greater importance as networking technology, still in its infancy, continues to evolve over the next several years. Among respondents with more than one microcomputer, almost one in five have already networked their system, and nearly half of that group have at least ten computers in their network. The principle advantages anticipated from networking are savings achieved through the sharing of peripheral equipment, productivity gains through sharing documents, and control over data backups. Eight out of ten involved in networking felt they had achieved the anticipated benefits.

Meanwhile, microcomputer technology is poised to substantially increase storage and memory capacity. New operating systems, such as OS/2, Xenix, and Unix, will enable tax departments to process several tasks on a microcomputer simultaneously. Alongside these developments more than 69 percent of all respondents will be interfacing data, and 62 percent will be purchasing software; almost half of the respondents (46 percent) will be purchasing hardware; and 43 percent will be writing specific applications.

EQUIPMENT

IBM currently dominates the mainframe and microcomputer markets. Ninety-seven percent of mainframe users and 87 percent of microcomputer users have IBMs, and four out of ten respondents have already purchased IBM's new PS/2 computers. Vendor competition is keen and after IBM, the most popular brands of microcomputers are Compaq (40 percent), UNISYS (11 percent), NCR (11 percent), Wang (6 percent), and Apple (4 percent).

Mainframe computers are almost all used for general ledger and fixed asset accounting work. Microcomputers, on the other hand, are used for tax planning, tax accounting, preparation of federal and state income taxes, and word processing.

SOFTWARE

Packaged software (78 percent), including heavy use of spreadsheet applications (89 percent), is the route being taken by a majority of respondents. About one in five are using custom programs prepared by a third party, and about 40 percent indicated they will be writing specific applications in the next few years.

Asked about the relative importance of various criteria for selecting computer systems, respondents identified the following six major factors: user friendliness (79 percent), vendor support (78 percent), timeliness of updates (77 percent), ability to prepare tax returns from data (74 percent), technical tax capabilities (74 percent), and vendor reputation (74 percent).

Service and support are provided only in part by the vendor. The need for managerial control over every phase of computerizing tax departments is critical to the ultimate success of the system.

SURVEY PARTICIPANTS

Questionnaires were sent to senior tax professionals at 815 Fortune 1000 companies, and 414 responses were returned, a response rate of about 51 percent. Nearly half of the respondents are in manufacturing businesses, and 20 percent are in financial service businesses such as insurance and banking. The typical respondent (46 percent) heads a tax department of a company having gross annual revenues of $1 billion to $5 billion (46 percent). Almost one-third work in organizations with revenues of less than $1 billion, and about one in five are part of organizations with revenues in excess of $5 billion.

TAX DEPARTMENT PROFILES

Respondents are almost evenly divided between those with fewer than ten tax professionals (57 percent) and those with more than ten. Two-thirds have centralized their tax-related functions, and about the same number file 61 or more state income tax returns.

The manufacturing companies tend to operate in more states than financial service companies and are, consequently, more likely to file a larger number of state tax returns--as many as 151 or more income tax returns in 21 to 40 states. A manufacturing company's tax function is more centralized than a financial service company's. Financial service companies generally operate smaller tax departments having fewer administrative personnel.

SUMMARY

This survey has shown that corporate tax departments are heavily computerized and are becoming more so every day. They are continuing to buy hardware and software and are taking cautious steps toward networking. Many are even beginning to write their own software applications.

Although appropriate hardware and software are key components of successful computerization, our continuing research indicates that the majority of the total cost of microcomputer automation goes into the service and support of the system. Careful consideration of the service and support components is critical to the ultimate success of the system.

The day-to-day management of the system's effectiveness as well as the setting and attainment of long-term goals is the responsibility of the corporate tax executive. Strong management control over this new technology will maximize the realized benefits and help prevent serious problems, such as obsolescence, accidental loss of data, and turnover in a key position where critical knowledge has been concentrated.

ROBERT J. WELLS is the Partner-in-Charge of Tax Technology for KPMG Peat Marwick as well as the Firm's associate National Director for State & Local Tax Services. Mr. Wells, who is resident is the firm's Montvale, New Jersey, office, is a graduate of St. Peter's College in Jersey City, New Jersey and a member of various professional and civic organizations. He has designed and instructed Peat Marwick's training courses on multistate taxation and computer usage by tax professionals and has also served as an instructor for Tax Executives Institute and other professional organizations.

JAMES D. KEENE is a Senior Manager in KPMG Peat Marwick's Executive Office Tax Technology Department. His primary responsibility is to assist corporate tax executives in automating their tax departments. He is a frequent speaker on the automation of corporate tax departments and other tax systems related topics.