Your Spreadsheet Security Blanket is Fraying at the Seams

October 2021

BY

Daniel NewtonTax Partner, ASC 740 Technical Practice Leader

Haley DobreTax Partner, Tax Performance Engineering

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The challenges that have surfaced from the unprecedented rise in remote work during the global pandemic have compelled many tax departments to reexamine their processes for preparing their income tax provisions. In light of these challenges, BDO’s Tax Performance Engineering team has fielded numerous questions from clients on the benefits of tax provision software solutions in the market over spreadsheets. Having completed a cycle of the virtual close, some companies that currently use spreadsheets to prepare their income tax provisions have already identified the need to evolve their processes and shift to software solutions, while others intend to stick to the status quo. The following discusses benefits, building a business case and expectations around software solutions that assist in the preparation of the income tax provision.
 

Why Change?

Continuing to use spreadsheets to prepare the income tax provision may seem less burdensome than switching to a software solution because of the challenges that software implementation and the resulting change management pose. However, this can lead to unintended consequences. For example, The Wall Street Journal[1] reported on a situation where a company disclosed that it had corrected accounting errors that originated in a spreadsheet. The company noted that the errors were a result of ineffective controls related to management’s preparation and review of spreadsheets, which compromised the integrity of the spreadsheets. While this situation did not involve the company’s preparation of the income tax provision, it does highlight some of the risks of relying on spreadsheets for complex calculations.

Other disadvantages of using spreadsheets include:
  • Version control issues
  • Unknown formula errors and incorrect calculations
  • External link breakage over time
  • Breakdowns in internal controls

Combined, these common issues from using spreadsheets could lead to significant and costly errors down the line. Meanwhile, there are many benefits to be gained from transitioning to a software-based provision process, including greater accuracy in the provision calculation and stronger internal control processes. Such software can translate local currencies into reporting currencies instantly, consolidate individual provisions for hundreds of subsidiaries into one for global internal and external reporting, and align data into a structured, footnote format at any point in the process. Further, embracing technology can elevate tax professionals from data manipulator to strategists, increasing the value-add of the tax department to the company. Also, new team members entering the workforce are trained on and expect to work with market software with simple user interfaces, APIs, etc. versus antiquated spreadsheet models.
 

Building the Case for Investment in New Technologies

Despite the above risks and benefits, acknowledging the need for change management related to the income tax provision is not always easy. When tax professionals are asked why they still use spreadsheets to prepare their company’s income tax provision, the responses generally vary from “the provision is straightforward and spreadsheets work just fine” to “migrating to a software program will take too much time and we currently do not have the budget for it” to “we lack the skillsets or time to administer the software.” Further, a company may not be concerned about the risk of a material weakness due to spreadsheets simply because it has never happened before.

That attitude is precarious, lacks forward-thinking and keeps the tax function in a reactive state. To overcome resistance to change, there must first be recognition that change is necessary and a desire for it to happen.

When building business cases and ROI analyses for investments in modern income tax provision software, it can be difficult to quantify the risk of not migrating to a more robust, secure solution, so the risk assessment may be susceptible to understatement. Furthermore, quantifying time savings for post-implementation of a tool can be overwhelming and cumbersome.

Therefore, a good place to start would be to conduct an assessment of the total tax process, including a survey of current time spent, which can help to determine the “current state” of the tax department. This can allow tax leaders to quickly discern where their team is spending too much time on low value-add work, such as reconciling, validating, copying and pasting in spreadsheets.

Senior tax executives are also becoming more aware of the benefits of technology transformation in general. For example, more than half of respondents to the BDO 2021 Tax Outlook Survey ranked “identifying and implementing new technologies” as their top investment priority. This suggests that despite the challenges in quantifying these risks and benefits, tax leadership may already be receptive to the idea of investing in tax provision software.  
 

Setting Expectations

Off-the-shelf tax provision tools provide enhanced functionality and automation, but don’t expect a fully push-button or touch-free provision process in the near term. Spreadsheets are still necessary in some capacity to allow the flow of data to and from various systems where APIs are unavailable (e.g., data exports from financial reporting systems and imports into provision or compliance software and vice versa). Abolishing spreadsheets isn’t the goal, rather, the goal is to implement a tax engine that facilitates complex calculations and real-time reviews. While we don’t advise saying goodbye to spreadsheets, we do recommend saying hello to provision software and bolt-on ETL (extract, transform, load) tools that will help accelerate tax provision reporting and evolve toward a more agile, innovative tax function.

It is likely that we will soon be embarking on another virtual close process. Now is the time to consider whether at least some spreadsheets can be replaced with automated solutions that facilitate real-time interaction with, and insights into, tax data and results.

 
[1] Trentmann, Nina. “Finance Chiefs Are Still Trying to Replace Excel With New Tools” Wall Street Journal, July 21, 2021.