Digitalisation has been making an increasing number of professions more efficient than ever. Not only are they to be automated in the future, but this process is already underway: faster, economical in terms of staff, more precise…. What is going on in the tax consulting and auditing sectors? How are the many processes at work being managed and directed by means of Big Data, digital signatures and AI? What professional profile will this sector be requiring? Is unemployment a threat or will a newfound freedom allow for other goals and tasks to finally be tackled? What might those new aims be?
In her Duet interview with Christian Klein, tax and auditing consultant, Dr Caldarola, author of the recent book Big Data and Law, chats on recent developments in the field of tax consulting and auditing.
For years people have been able to go to a bookstore and get software allowing them to do their own income tax returns. More recently, tax consultants no longer give in paper versions of income tax returns. Instead, electronic versions are being submitted. What changes have you already noticed regarding digitalisation and automation, what is currently being worked on and what will happen in the future?
Christian Klein: Digitalisation is a trend which has been developing for a long time, but its progress has been accelerating in the last few years, especially within finance departments. On the one hand, more and more data are being collected and stored. The volume of data held within companies is growing in leaps and bounds and doubles every two years. Part of the reason for this development is that business models are themselves becoming more and more digitalised, and mass amounts of data are being produced. Owing to this change, companies are more willing than ever to transform their internal processes. At the same time, however, only a small amount of this data is actually being used. The consulting industry has reacted to this situation by developing solutions which enable companies to manage this data more efficiently and use it for their business purposes. AI has still not been accorded the importance it deserves. This will surely change in the long term, particularly when it comes to recognising patterns and predictive analyses. At the moment, however, digitalisation projects are still mainly focused on basic matters such as process automatisation, data harmonisation and the improvement of data quality which already directly generate value without the aid of AI.
Currently, we can observe that part of our job involves accelerating and qualitatively improving how day-to-day business operates and how routine tasks are carried out. These include preparing financial statements and income tax returns, creating an integrated internal and external KPI and business performance reporting as well as fulfilling compliance requirements and monitoring business processes in terms of what is financially relevant.
A core aspect of taxation is minimising risks. Laws concerning sales taxes, in particular, have a lot of potential to be digitalised, as the relevant criteria used to evaluate and collect sales taxes, which are of course subject to the various national laws, can be easily implemented by a so-called tax engine. This is an exciting development, particularly for companies in global trade. In this way, even with the technology we already have at our disposal, we are able to have sales taxes automatically verified at every invoice receipt regardless of where the transaction has taken place or in accordance with which legal system. This type of automation brings risk coverage with regard to declaring sales taxes to a new level, when a subsequent and only sample-based invoice verification is replaced by a fully automated invoice-related verification process in real time. A tax engine is, therefore, a powerful tool to lower risks, reduce monotonous tasks and save costs.
The disclosure requirement according to the European Single Electronic Format (ESEF) is one example that illustrates new obligations regarding external financial reports. This format is a standardised electronic report valid throughout Europe which is meant for capital-oriented firms, whose annual financial statements must be reported via a defined taxonomy and are thus machine-readable. Even the auditor must issue a digital audit opinion on this new reporting. Incorrect ESEF reporting can even lead to a qualified audit opinion or a refusal of the audit report. This regulation means that the EU Commission has created a new situation which will surely lead to closer cooperation between companies and regulating authorities.
It is only a matter of time before the tax authorities increase their data requirements. They already have comprehensive access rights to financially relevant data, a right which the authorities have increasingly employed when it comes to tax audits. In such a case it is important to be able to have the data available as efficiently as possible and to be in a position to explain the automated processes in a comprehensible manner. The use of new IT solutions for the analysis of mass data and the verification of tax returns still has a long way to go, but it is already clear that such a development will surely transform the way we communicate with the tax authorities. In other countries, for example, communicating with the tax authority is automatic, meaning that a business transaction between two companies triggers a data report via a standardised interface to the tax authority at the same time. Obviously, those countries do not have subsequent annual income tax returns as we know it.
We can observe this trend in other areas, such as auditing firms expanding their ambition to be a long-term sparring partner. It is possible that the annual audit will develop into a pro-active and associative process by creating and maintaining an interface between the Enterprise Resource Planning (ERP) of the relevant company and the auditing software of the auditor. This offers totally new possibilities in the sense of permanent coverage real-time audits. These are not, in fact, new ideas. Rather, carrying them out has not been possible owing to the lack of standard interfaces, software solutions and the desire for change in companies, which are all necessary prerequisites.
To summarise, we can say that our profession is at the moment simply not prepared for these developments, just as the ERPs and IT solutions being used today are also not up to the task. Medium-sized companies, in particular, are facing some challenging times, but also promising ones. The real difficulty lies in recognising what is now possible thanks to digitalisation and then successfully applying these new developments within the company.
If more and more is being automated within your field, will the user rely on the result obtained from machines? Does this mean that prior knowledge and abilities will disappear, like doing math in your head has been replaced by calculators or reading a map by navigation devices? Or will new abilities develop in their place? If so, which ones?
Digitalisation is meant to provide us with an improvement in quality and efficiency as far as our daily work is concerned. Generally speaking, with regard to finance and tax departments, the most time-consuming tasks are usually routine ones, like collecting data and then preparing, checking and reporting them. On average, accounting offices spend 70% of their time collecting and preparing data and only 30% remains for the execution of the original task. In this regard, digitalisation can free up valuable time.
If we continue using the example of tax engines, those who use it no longer have to search for the proverbial needle in a haystack by random sampling during a monthly tax validation. Anomalous cases will be automatically passed on to tax experts via a workflow, who can then examine them in detail. Those technologies can help to really improve day-to-day business in these areas and can provide more time for financial experts to work on things that require more effort. Data will be available in real time and are to be used for tax purposes in order to identify risks at an early stage and to make data-based decisions. It is not that tax experts will be replaced, but rather they can spend their time focussing on value-creating activities including an expansion of these activities. Using new digital technologies changes the duties and functions of the tax department.
Will this monitoring result in a new type of profession just like software programming for automation in finance? Will it even be possible for a group of people to understand the many steps and correlations, all of which is done by AI in a moment’s work?
That is a very important aspect which is often not considered enough. The less manual activity exists in the process being worked on, the more technical regulations come into play. These regulations are, for instance, decision routines which have been programmed and which automatically run in the background. The more we rely on these automated processes, the more important it is for us to understand them at a conceptual level and to check them at the technical. Otherwise, there is the risk of highly automated processes being used which can be seen as a material risk to the true and fair view of the financial position and performance of a company due to the mass transactions taking place. These regulations must, therefore, be professionally examined and approved when they are still being developed. Furthermore, control mechanisms need to be implemented and regularly monitored within the relevant processes. Internal control systems are fundamental to adhering to compliance requirements. This is an area to which tax consulting and auditing firms strongly orient themselves. Auditing firms have specific experts for IT-relevant financial processes working on their auditing teams. The interrelationship can thus be seen to take on even more importance, together with the significance of IT expertise.
In my opinion, the term AI is currently still very much driven by a marketing perspective. Data are being collected, structured and processed. These data are then subject to probability calculations in a further step in order to come to certain predictions. In short, we are talking about probability and stochastics. A complex business, to be sure, but a very structured one which can be considered rationally, documented and, of course, verified.
In today’s world, many companies are not really concerned about the probability element. While there are still areas which use solutions capable of making predictions, such as the automated planning of what is needed in the consumer goods and trade industries, most companies, however, emphasize other aspects. These include, in a preliminary step, working with mass data, structuring them, processing and reporting them in a meaningful way. Today, this is where the approach to consulting begins, an area which is already generating a lot of value.
With increasing automation responsibility disappears because people rely more and more on machines and are no longer able to have a complete overview of the process in question because it has become too complex. We can compare this with production lines which first appeared with the advent of the Industrial Revolution. Even in this situation it is no longer possible for a single employee working at the assembly line to know where the raw materials and assembly parts have been purchased, how they have been processed or how and where they have been sold. In this way, individual workers no longer feel any sense of responsibility for the end product. Responsibility, however, is quite significant in your profession. Will the concept of responsibility change?
The use of new technologies is of course accompanied by bigger challenges and more complex situations. The stability of the system and data security are also given greater significance. The challenge lies in deriving what is known about legal requirements in tax and accounting and to successfully implement and monitor them using new technologies in company-specific IT solutions. Responsibility for data and reporting processes is increasing because they are the basis of company taxation and financial reports. More is being required of employees, their competencies and responsibilities, but also on the organisational structure and supervisory bodies.
For example, the IT domain bears a comprehensive responsibility for securing the necessary infrastructure, creating the required data transmission as well as for adhering to IT governance. With regard to the skills needed for analysis and reporting, however, a robust development of expertise in finance organisations can be observed. Apart from understanding the process, a certain basic comprehension of automation is needed as well. Nevertheless, this does not mean that a tax expert must now also develop data banks. On the other hand, what I have noticed to be valuable and what I myself apply is establishing “competence teams” within the finance organisation. Apart from process managers and tax experts, there are also BI experts and analysts, who themselves have a basic knowledge of bookkeeping and understand the issues involved in the fields in question.
But even the way we work together requires changes in the structure of the organisation. A strictly vertical hierarchy quickly reaches its limits. What has often been found to be suitable is a BI competence centre which then coordinates cooperation between IT and finance with regard to the topics and resources in question. A competence centre is the right place for processes to be managed end-to-end by experts from relevant departments, for a high level of responsibility for governance, for establishing workflows and tool solutions and for sharing cross-departmental knowledge.
Responsibility is increased further via the development of control mechanisms which are integrated within the processes themselves. The internal control systems must be developed in conjunction with automation and are to be controlled by means of internal revision as well as an auditor. It is clear that digitalisation will transform the work and indeed the profession itself of revision.
A lot of work is done on paper in your profession, whether we are talking about invoices, bills of lading, contracts and much more. A data protection agent might think that this is all “unstructured data“, for the various data cannot be found in specific fields, but rather on a single or many pieces of paper. Furthermore, not everyone writes their invoices, bills of lading, contracts etc. in the same way, meaning that individual data are to be found in various places and in various formats. However, a basic requirement of digitalisation is for the data to be structured. How is this latest challenge being managed?
The heterogenous nature of data quality and data source are indeed one of the main challenges in implementing any strategy involving digitalisation. This can occur, to name one example, if the systems being used within a company do not “communicate” with one another, a situation which can lead to system breaks. Interfaces are not always available, and many companies already have more than one ERP system at work because they have been allowed to develop in this way over the course of time. In the end, it all depends on the pre-existing conditions, and not everything has to be changed and developed from scratch on a greenfield. A tried-and-true method has been to see which information is already available by means of the company using a data warehouse solution and then expanding on it for tax requirements. At this point, things start to get technical. Depending on what strategy has been chosen, one might form a “tax data lake”, which is based on various data sources. These sources might be several ERP systems, data banks, but also Excel reporting packages. These data are then prepared for tax purposed using so-called ETL lines (Extract, Transform, Load) and made visually available via some sort of reporting solution. In this way, various quite distinct data structures can often be harmonised. These solutions do not depend on any one system, offer completely up-to-date reporting simply by pressing a button and, depending on the type, can even have the option of direct analysis. These are all Business Intelligence solutions which rely on a close collaboration with the existing IT.
Apart from how data are set up and processed, a basic principle is also required which specifies how master data are to be managed. Many companies are not aware of the benefits of control keys and Incoterms, even though the larger ERPs, in particular, inherently have this functionality already.
Digitalisation usually leads to standardisation but also to less corruption. Owing to the increase in computer-supported documentation, how will individual cases be handled which do not fit the norm?
By means of digitalisation, for example, an algorithm can be used to calculate an independent and expected value and included into a procurement event in the ERP system. When the associated incoming A/P invoice differs significantly from this value, an accounting clerk will automatically receive a message. What this shows is that case processing is carried out using a predefined work process, so that there is little room for manipulation.
In terms of sales and marketing, BI analyses can aid in closely monitoring revenues which were generated and reported by external agencies as well in testing them for their plausibility. This test is done, to name an example, by comparing the data reported by an external source with a value internally calculated using so-called “shadow billing”.
Even tax authorities have begun cooperating with universities and research centres, such as preliminary involvement with processing of mass data by looking at, for example, whether data are checked and evaluated for unusual patterns. In this way, it is possible to identify international networks and whether tax loopholes are being exploited more rapidly.
Owing to the pandemic, companies have been allotted financial support from the state, the VAT was lowered for a certain amount of time, and companies had to adjust their cashes as well as, in general, their bookkeeping. All these activities are associated with a lot of consulting, work of all kinds involving time and effort. Do you think digitalisation will help your profession to react more quickly to such developments, thus enabling a sort of press-the-button adjustment?
Basically, the pandemic has again significantly increased the need for digitalisation and the focus on processes. For example, in addition to temporarily changed tax rates, a statutory moratorium on payments also meant that comprehensive adjustments had to be made to the dunning process at short notice. Customers were afforded the right to suspend payment owing to a legal moratorium for a certain period of time which naturally had an immediate impact on communication and overdue notice procedures. With regard to a bulk business, this means making a change in a highly automated process. These types of adjustments cannot be realised by pressing a button because, aside from a technical change, thorough preparation, assessment and also monitoring are required.
The pandemic has significantly accelerated the need for transformation and has also demonstrated that the successful application of new technologies makes it easier for companies to react more quickly and to better manage companies even in challenging times.
My key message is:
“The task of a finance organisation is increasingly becoming that of an enabler for companies in order to efficiently manage and develop their business. The motivation to change through the use of new technologies and the openness to further develop team skills and collaboration structures are key factors for a successful transformation.”Christian Klein
Mr Klein, thank you for sharing your insights on recent developments in the field of tax consulting and auditing.
Thank you, Dr Caldarola, and I look forward to reading your upcoming interviews with recognized experts, delving even deeper into this fascinating topic.