Tax Reporting: Why Internal Audit and The Sarbanes-Oxley Act (SOX) are Essential

MS. SCHAWBENBAUER:  Hi, I'm Kristin Schawbenbauer.  Welcome to Tax Today, a Vertex Podcast series.  On today's episode, we'll be exploring controls and documentation, internal audit involvement, and our SAX group with Mike Bernard.
    Mike is Vertex's chief taxation officer and repeat contributor to this series.  Mike, welcome back.
    MR. BERNARD:  Thanks, Kristin.  I'm glad to be here.
    MS. SCHAWBENBAUER:  So this is a really interesting topic and, I guess, from my standpoint, when I think of tax reporting, I think of it just primarily being needed for the tax department, like your tax managers, your tax director, all of that.  
    So, Mike, tell me, what functional groups have an interest in tax reporting outside of tax management for instance?
    MR. BERNARD:  Yeah, Kristin.  So there's actually four groups that have an interest in tax reporting.  And when I talk about tax reporting, I'm talking about compliance.  I'm talking about actual tax returns.  It applies whether they are U.S. sales tax returns or whether they're VAT returns, so outside the U.S.  So there are two internal groups, internal to the company, the first is the SAX group or Sarbanes-Oxley group, and the second group is internal audit.
    And then there are two other groups that are outside of the company that have an interest in tax reporting, and that would be your test auditors, your financial auditors.  That applies whether you're a public company or a private company because you all have test auditors.
    And then lastly, and I think everybody knows, the other group that has a keen interest in what you're doing are government auditors; in other words, you're going to be audited at some point around that.  So let me just step through each one of them very quickly.
    First of all, for the Sarbanes-Oxley group, they actually have an interest in the financial reporting internal controls of a company.  And so tax is obviously a finance function.  And to the extent that your tax reporting, your collection or emitting of transaction taxes rises to a certain level, normally the word they use is material, then obviously there's a number of key controls that actually have to apply to your procedures.  And we'll talk about those a little bit later, Kristin.
    The second group is internal audit.  And the reason they're important is because they actually have an interest in auditing, both operational and finance functions.  They report often directly to the CFO and to the audit committee.  So they're going to want to make sure that any kind of risk around the tax department has been de-risked as much as possible so your controls, your compliance, your tax engines, everything that leads to a secure environment and a correct accuracy of your reporting is going to be really an important component of that.
    Then there's also the test auditors, so these are the financial auditors, again, whether you're public or private.  They want to make sure that you're following certain procedures because they have to, at some point, take the financial statements that have been given to them by the company and they have to express an opinion that the controls around the financial reporting have met certain standards.  And, obviously, the tax department, whether it's risk, a lot of us know there's certain risk.  I'm not talking about the actual positions that you take, but just that's one component of it, but actually, the actual processes around your reporting.  So they have to make sure that they have signed off on that and they are confident that you're meeting those proper controls.
    But then there's also the government auditors as well.  And so they want to make sure that whatever you've produced can be backed up, is verified, you rated your transactions properly.  
    So all of those groups have a keen interest.  They all have a different interest, but essentially, what the tax department's interest in all of that, the thread that runs through all of it is clean, accurate, and timely reporting.  
    MS. SCHAWBENBAUER:  Okay.  Yeah, wow, that's kind of mind blowing that there's so much.  It's almost like checks and balances and people looking over your shoulder, but it's so much more extensive than what I would have thought I hoped that resonates with, especially, our procurement office, who might not have any insight into some of these practices.  
    So talk to me then, you mentioned controls.  What are some of the controls that are in place for companies?
    MR. BERNARD:  Yeah, I mean, I think it doesn't really matter, Kristin, whether you're a large company, or a small company, or a midmarket, they're all pretty much the same controls.  And these are normally controls that you would find that the AICPA puts out or that your SAX group puts out or your test auditors have.  They're all pretty much the same as -- and again, my comments all relate around tax reporting, so actually filing a tax return.
    So I'm going to list them and talk just a little bit about each one of them.  So the first one is that your data actually is verifiable and accurate.  So you have to make sure that you're getting -- you being the tax department, are getting clean, accurate, and timely data from whatever systems feed into your reporting.  So it could be a sales system, could be procurement, could be AP, could be a lot of different functional groups, but you really have to make sure that that data is clean.
    And what I'm seeing more and more in companies is that the tax department is less responsible for actually making sure that that data is accurate and the responsibility is going more back to the groups that are actually producing that data.  And, obviously, here the key one is sales, is sales data.  
    The second thing that you have to be able to do is you have to actually take that data and properly stage it into whatever reporting tool you have.  So again, whether it's for transaction tax purposes, business licenses, income tax, obviously, you have to have the proper personnel and technology to take the data and actually stage into the reporting tool.  Whether you do the reporting internally or it's outsourced, that still has to be done.  And that's not always an easy thing to do because a lot of times the data comes to the tax department not in the proper format that is needed in order to put it into the reporting tool.  So that's some work that is very key.  And as long as you can automate that as much as possible with as little manual work around it, that's actually going to be the best way to kind of de-risk the whole process.
    Third is, as it relates to all of this, is one thing that tax departments have to do, and I don't know what tax department that doesn't have it, but this is something that does get reviewed by internal auditors, it does get reviewed by also SAX auditors and the test auditors, is that the tax department has a comprehensive calendar tool which shows all of the reporting, when they have to report all of the returns, be it income, again, transaction taxes, VAT, sales and use tax, business license, telecom if you're responsible for that.  Anything in that area, you need a comprehensive tool that does that.  And so that actually has to be a part of the controls. 
    The fourth one is that you also have to have timely filing of it so that you're have a process.  Again, whether you're insourced or outsourced for it, that you're properly filing those things on time, so actually filing the calendar and that the payments are actually done properly.  So a lot of times what we see today is tax departments have either outsourced or insourced a single point of payment from the treasury group so that you're not having to deal with a lot of checks or a lot of wires.  There are payment processors where you can fund them, say, monthly and they will actually distribute all of those liability checks or wires to the proper tax jurisdiction.  That's really important because sometimes, whether you're small or large, it can be either 10, or 100, or 1,000 and the scale can go up very quickly.  It's really hard for the tax department to kind of follow that, but if you have a payment processor that actually can do that, that is a key way to automate and actually de-risk and actually improve your controls in the tax department.
    And then lastly, once you get done with all of that, once your data is clean, once your staging has been done properly, once you've followed the calendar, and then you've also done timely payment, and you've also done timely reporting, then the last thing you have to be able to do is store the data that backs up the return.  So one of the benchmarks that we see in some of our customers who have our best practices and controls is that that data is what we call audit ready; in other words, it's stored centrally.  It's not in a paper file.  It's in a digital format.  It backs up the direct numbers on the tax return.
    If an auditor wants to audit you, they can do it -- a lot of times, auditing is now done -- these are government auditors, can be done remotely.  And so you can literally put that information out on a share, or send it to them on a file, and they can actually look through there and actually audit your return.
    So that would really be the five controls, I'd say, are kind of benchmarks, they're best practices.  We see them in great companies both small and large and midsize.  So that is where I would see those controls actually being very helpful to tax departments.
    MS. SCHAWBENBAUER:  Yeah, that does make sense.  And I think that what you explained is really, if you will, the lifecycle, the never-ending lifecycle of tax and everything that touches it, and what they have to work on continually.  So it's pretty amazing. 
    So talk to me now, how does Vertex and maybe a tax calculation system or services, and things like that, come into play?
    MR. BERNARD:  Sure.  So again, my comments are directed both at U.S. sales tax and for VAT purposes.  So when I was previously in industry, I had actually had done four implementations around a tax engine.  So remember what the purpose of the tax engine is.  It's able to take a transaction and do it very quickly.  You bump up a transaction against the tax engine and out comes a rating for sales tax or VAT, or for exemption purposes based upon either the use or the geography of that particular sale.  
    And so, obviously, there's no other way to do it.  You can't do something like that manually.  It has to be automated, so there has to be some connectors built between, say, your sales data and the tax engine that Vertex has.
    And so you can use it in two areas, and these are two areas that I used it when I was in industry.  The first was on the sales side.  Now, that should make sense to the folks on the podcast because, obviously, if you're selling something, everything you sell has to be properly rated.  Again, based on geography, use, it's either taxable or exempt, and you have to be able to do that quickly.  
    So what the tax engine does is it provides intricate detailed mapping of all the different products and geographies and gives you a correct tax.  Now, you can understand why that's important is because obviously if you're selling something, you want to make sure that your customers have a very good experience if an invoice comes and an invoice -- everything that's on that invoice is correct except the sales tax, you're going to hear about it, so it's going to be -- it's not going to be a good experience with them.  It doesn't matter if it's a small item or if it's a very large and expensive item, you still have to have that sales tax correctly because they could either short pay you, and then it becomes a customer issue, and then it becomes expensive to rework the invoice.  
    So literally, you want that automated as possible, and we use the Vertex engine to actually do that for five divisions in the company that I was at.  
    The second place where we get a lot of interest and we've seen a lot of interest, particularly over the last two years with our customers, is in the procurement space.  So this is where -- and I think a lot of the tax professionals know this, this is where the procurement office is actually acquiring goods and services to either be used in a manufacturing process or they're being consumed by the company themselves in their own businesses.  And so when most businesses buy all these products and services, you want to make sure that all of that sales tax or VAT is rated properly so that you're not overpaying.  The other too is you want to make sure you're not underpaying too, as well, so you're meeting your obligations.  
    So what a tax engine does is it actually -- you can take those procurement purchases and actually bump those up against your Vertex engine and actually get a proper rating.  So it becomes incredibly important to do that, particularly if you're, in the States at least, buying it on an exemption certificate or what we call direct pay.  Direct pay is where you buy everything without paying sales tax, and then you actually pay use tax based upon where you actually placed those goods or services into use, or how you use them.  
    So it becomes an extremely valuable tool, a very great that tax can actually add value by working with the procurement group, putting in an automated sales tax engine, and then actually receiving direct benefit from that because then you're only paying sales or use tax based upon where those goods or services actually put in place.
    I would say those are two very good examples of it.  And it's something that tax departments are doing.  We've seen a lot of interest around -- particularly in the procurement space, as I said earlier.  So that would be very helpful for tax departments to consider that.
    MS. SCHAWBENBAUER:  Yeah, it seems like an easy option, an easy check-the-box kind of a thing and to make for efficiencies, to cover you for a risk, make sure you're compliant, and giving your employees the right tools to be able to do their jobs to protect the company to adhere to the government.  So I think that should really resonate with our audience, so I appreciate that.
    That'll do it for today's show.  I'd like to thank our guest Mike.  
    MR. BERNARD:  Thank you, Kristin, for having me be here. 
    MS. SCHAWBENBAUER:  And thanks to our listeners.  Make sure to tune in for our next episode when we'll discuss trends and P2P and tax to keep in mind when automating.

Episode 1: Why is Indirect Tax in Procure-to-Pay So Critical?

Episode 2: The Differences in Tax in the Procure to Pay Process: U.S. vs. Global

Episode 3: Indirect Tax in Procurement – Landscape, Opportunities, and Challenges

Episode 4: Indirect Tax in the Procurement Landscape: Opportunities and Challenges with Global VAT

Episode 5: Industry Perspective: Integrating a Tax Engine for a Global Motor Manufacturer

Episode 6: Aligning Tax and Procurement to Streamline Business Processes

Episode 7: Key Considerations When Deploying a Tax Solution for Procurement

Episode 8: Invoicing Explained: Understanding Indirect Tax During the Procurement Process

Episode 9: Keys to a Successful Procurement Platform Implementation

Episode 11: Technology Trends in P2P and Tax Automation

Episode 12: Understanding International Accounting: Global Indirect Tax and Procurement

Episode 13: Integrating Vertex with SAP Ariba: An Overview

Episode 14: Consumer Use Tax Audits: Pain Points and Solutions