Daniel NewtonPartner, National Tax Office, ASC 740 Technical Practice Leader
The financial year-end close for most companies is in the rearview mirror, and lessons were learned on the effectiveness of tax controls during a virtual close. Last September we asked whether your tax internal controls were ready for a virtual close and offered high-level considerations to factor into your year-end close process planning. At year-end, we found that the close process raised some unique issues that must be addressed to ensure internal controls will operate properly in a remote environment, especially considering the uncertainty around continued remote work throughout 2021. Here’s what we discovered, and what you should keep an eye on this year.
1. Disjointed coordination and communication
In-person department and cross-department meetings were replaced with regular use of collaboration platforms such as Microsoft Teams and Zoom to maintain a means of sharing critical business information to assist team members in performing their job responsibilities. However, “out of sight, out of mind” can mean failure to ensure the right people have the right information to do their jobs. This disjointed coordination and communication, combined with tax departments often being “squeezed for time,” could result in testing errors related to the completeness and accuracy of information produced by the entity that then could lead to the breakdown of control processes.
2. Regular touch points and check-ins
Successful tax teams kept processes moving during the close process by having regular team virtual meetings. These huddles were used to identify and address issues before they impacted the close or became a breakdown in controls. These invaluable meetings helped avoid disjointedness by ensuring that communication was flowing between the right people within the tax department and with other departments, such as finance. The meetings were not only internal but were also held with the company’s external audit team.
3. Blurriness of roles
Tax is usually the last area of the financial statements to be completed and this was no different during the pandemic. Adhering to segregation of duties during the virtual close was critical to avoiding potential blurred responsibilities between the roles of the preparer and the reviewer or control owner. The ability to evidence the operating effectiveness of controls in that both the preparer and control owner performed their roles was critical in avoiding the impression that a control owner was “hands off.” Teams can benefit from the use of checklists, dashboards or detailed workplans where roles are clearly delineated.
4. Documentation and evidence
Documentation and evidence are key issues when ensuring that a company’s tax internal controls are operating effectively. Sufficient evidence of review avoids issues that could lead to blurriness of roles. As noted in Year-end Income Tax Provision – Are Your Tax Internal Controls Ready for a Virtual Close?, companies needed to ensure that their external auditors would be satisfied during their inspection of the level of documentation. Some companies addressed this issue by having their external auditor attend a virtual controls walkthrough meeting. Additionally, it is important to maintain documentation such as meeting agendas, screenshots and review notes that evidence inquiry and inspection.
5. Having a plan mattered
Whether a company had an in-house tax department or outsourced its tax function to an external service provider, having a plan that addressed roles and responsibilities in a virtual close mattered. Planning and coordination that occurred prior to the pandemic when many activities took place face-to-face was turned upside down when addressing what additional controls (or changes) would be needed as a result of working in a remote environment. Additionally, some processes were performed differently making it critical to ensure the operating effectiveness of tax internal controls. Early assessment of risk, review of judgmental areas and obtaining an understanding of business developments and significant transactions helped the tax function be successful.
The Path Forward
As jurisdictions begin to loosen their pandemic restrictions, many companies are now facing a future where their employees may work in a hybrid environment – partially working from home and partially working in the office. Some of the changes made to tax internal controls may need to be adjusted to be able to operate in a hybrid work model. Continued communication between tax, finance, external auditors and other third-party advisors will be critical to ensuring that internal controls over financial reporting maintain their integrity.