Corporate tax professionals need better tools to manage data in post-Sarbanes environments.

Tax departments continue to shoulder a great deal of responsibility for regulatory reporting. In most cases that responsibility is woefully out of balance with the resources and tools available to them. And the job is not getting any easier. The need to have accurately documented tax positions and comply with section 404 of the Sarbanes-Oxley Act of 2002 is pushing tax professionals to consider new on-demand software that does not blow the roof off shrinking operating budgets.

Today, corporate tax departments are faced with a daunting array of responsibilities and pressures that were unheard of five years ago. The compliance burden alone has grown significantly as heightened regulations are forcing unprecedented tax transparency, accuracy, and currency:

* Regulatory agencies, including the SEC, the PCAOB, and the IRS, have all increased their scrutiny and are requiring more transparency and currency, forcing the need for much greater data accuracy;

* Still evolving Sarbanes-Oxley compliance and reporting requirements are driving unprecedented focus on internal controls over data;

* Company management is requiring greater detail and accuracy on transactions while at the same time tax is struggling with time and resource constraints;

* Regulatory agencies are becoming more technologically adept in the areas of audits, analytics, and forensics to improve their own ability to raise revenue from corporate taxpayers; and

* The continued passage of new federal and state tax laws continue to complicate the tax filing process and reporting requirements.

Addressing these new issues not only strains budgets and internal staff; it can also have a far more negative effect on the company as a whole. Increasingly sacrificed are the valuable planning and strategy activities that make the tax department a true business partner to the company and can help drive competitive advantage.

For years, tax departments have relied on a fairly consistent arsenal of assets, including tax technical knowledge, execution skills (such as gathering data and managing the return process), and financial information systems and technology. Combined, these assets enabled the tax department to manage planning, compliance, and audit processes. The relative weighting of each asset in the mix has remained consistent, principally because the environment has not changed. The mix has most commonly been exemplified by significant use of outside tax technical resources, less than optimal use of internal execution skills, and minimal use of contemporary technology.

With the tax provision frequently representing a reduction of 30 to 40 percent of a company's income, however, tax professionals are re-thinking the assets they employ and how they apply them.

From a technology perspective, tax-specific software tools that address Sarbanes-era challenges have been nonexistent. Software for completing returns, spreadsheets, and databases--long the mainstay technologies used by tax--do not effectively support broader tax processes and planning. Use of existing technologies could lead to internal control weaknesses related to tax. Case in point: In some recently publicized cases, these weaknesses were deemed to be material and required special disclosure which in turn affected investor confidence.

Before Sarbanes-Oxley: Stability Shaped the Mix of Assets Used by Tax

The lack of environmental change has meant that the mix of assets has remained largely adequate. Generally speaking, tax has relied on a blend of the following assets:

Tax Technical Knowledge. For many companies, internal broad or deep tax technical knowledge has not been easy to develop or maintain. Because tax is a highly complex and specialized area, it may not be cost-effective to maintain internally the breadth of skills necessary. Factors such as corporate operating dynamics and tax code complexity have driven many companies to seek outside assistance where specialized knowledge can be aligned more appropriately with the company's specific needs.

Execution Skills. This refers to the internal tax department staff and the myriad tasks departmental employees perform. Staffs time is largely devoted to fulfilling the multitude of requirements that accompany the daunting tasks associated with planning, provisioning, filing, and managing audits.

Information Systems and Technology. Spreadsheets, word processing, email, and the network file system have long been the primary tools for many tax departments. The reasons are straightforward: They are easy to use, flexible, and appear at first glance to be inexpensive. Many companies also employ discrete, commercially available software products. An example of this would be compliance software, which performs a focused task--calculating and filing federal and state tax returns.

The current mix of these assets has been heavily weighted in favor of the acquisition of outside expertise to assist with technical tax positions and the management of the tax compliance process. As such, little need for technology has been required. In those cases where very large tax departments with large tax budgets were involved, technology was specifically designed for their purpose at significant cost. The availability of widely-distributed tax software technology has never been cost-effective. Recently, the need for a new alignment of the asset mix has been thrust upon today's tax department.

Regulatory Burdens Challenge "Business as Usual"

Until recently tax executives have been able to do business and execute responsibilities substantially as they had the year before, perhaps with some modest adjustments or enhancements, perhaps not. The assets were familiar, and the processes were tested. Challenges for the most part were predictable, albeit stressful. The tax environment has changed in large measure due to the following:

* Compliance requirements have increased significantly;

* In response to increasing tax code complexity, corporate tax strategy has become much more sophisticated;

* Tax shelter scandals and corporate malfeasance have fully thrust corporate tax practices and processes into the spotlight;

* Companies looking to wring every cent of quarterly profitability are compelling their tax departments to do more with less and provide "just right" tax provisions and estimates; and

* The amount of time required to perform virtually all non-compliance related tasks has increased sharply.

Operating in the New Tax Environment

Close inspection of current tax assets, their capabilities and limitations, and what is required to build a solid tax operation suggests the following:

* Just throwing bodies at the problem is not a viable long-term option. It does not scale. Furthermore, cost controls have effectively put a ceiling on adding internal and external tax resources.

* Growing complexity of tax technical knowledge will force a more judicious and targeted use of outside consultants. The use of expensive outside resources to address the problem is not cost-effective and will not yield the desired goal of mitigating risk. Furthermore, credibility, cost-effectiveness, and integrity (not creativity) have become the new measuring sticks for selecting and procuring these resources.

* Manual and repetitive tax processes must be automated. There are a host of processes and tasks (such as data collection and file management) that are clearly better suited to automation. This goes to the heart of achieving efficiency and smartly deploying the limited human resources available and, most important, implementing the requisite internal controls.

* Discrete, independent, siloed tasks need to be thought of as part of the greater integrated tax process. Particularly in larger tax departments, the functional areas of planning, compliance, and audit operate independently. Compartmentalization increases as the number of people managing individual tasks grows, which is exacerbated further when managing international, domestic, and local taxes. The tax department needs to be able to track and ensure that various activities and tax events are assigned to the proper individuals and are completed in a timely manner on a department-wide basis. Yet while virtually all corporate tax departments share the need for a similar tax calendar, for common source data that is not scattered throughout the company, and for myriad interdependencies that require collaboration, few have the capability to achieve it. What's more, many software solutions have been developed to support these discrete tasks independently, leading to non-integrated point solutions.

* Greater emphasis on the entire tax lifecycle of information flow and integration is forcing tax information systems to adapt. The specific mix of technology assets currently used by tax professionals has been largely confined to standard desktop software such as the ubiquitous spreadsheet. But that spreadsheet--like many other single user desktop software packages used in tax today--is applied not as a specialized tool to run offline analysis, but instead as a process support tool--something for which it was not originally intended and is not truly capable of handling. In addition, there are a swarm of software providers targeting niche processes; in fact, it is estimated that today there are nearly 100 individual software products (as well as entirely custom products) from which to choose, each designed to address a specific tax department challenge. This number, moreover, does not take into account products developed internally by corporate IT departments. While broad availability and a wealth of options can be viewed as a good thing, the proliferation of these "point solutions" has also contributed to the disparate and fragmented nature of information systems that now permeates most tax departments.

So what specifically does this mean for the tax department and the systems that support it?

* Tax needs bullet-proof data collection that ensures greater accuracy;

* Tax needs more current data collected contemporaneously at the source;

* Tax needs secure, real-time access to all relevant data;

* Tax needs a central accessible repository source for all information used by the department; and

* Tax needs flexibility in its systems that will continue to support internal controls as tax processes grow and evolve in years ahead.

Clearly, there is significant value to be gained by rethinking the mix and application of assets. Leveraging technology is becoming more central to that asset mix. Facilitating this transition, solutions built on contemporary technologies are emerging that are obliterating the old barriers of large capital investments, long drawn-out implementations, and systems integration nightmares.

In the broadest sense, applying contemporary technologies throughout the tax process enables tax professionals to gather more data, more comprehensively, and at less cost. Web-based surveys, workpapers, document scanning, and integration with existing enterprise systems dramatically reduce manual processes and time and also improve data integrity and accuracy. Data gathered must also be archived in such a way that it can be easily and instantaneously accessible, facilitating rapid response to requests. This would also facilitate the examination of historical trends, thereby enhancing planning efforts.

GREG PROW is President and CEO of Planitax, Inc. Before joining Planitax earlier this year, Mr. Prow worked for Mobius Venture Capital as Chief Operating Officer and Managing Director, and before that he was the tax partner in charge of PricewaterhouseCoopers's San Jose office. He has also worked at Coopers & Lybrand and Borland International. Mr. Prow received his J.D. degree from Santa Clara University and is a member of the California and American Bar Associations.