As the Biden administration pushes a new round of tax law changes, corporate tax departments are once again facing compliance pressure across multiple tax-related areas. For chief financial officers (CFOs) and tax and finance executives, a core focus is compliance with ASC 740 (Accounting Standards Codification Topic 740)—the standard that specifies how companies recognize income taxes in their financial statements. After all, inaccuracies in ASC 740 remain one of the leading causes of financial restatements and material weaknesses for companies.

The tax provision is part of the audited financial statements and therefore directly impacts a company's earnings and earnings per share. As a result, the tax provision is often one of the most scrutinized processes performed by the tax department. CFOs, chief executive officers (CEOs), audit committees, and tax departments all want to accurately understand the key drivers of the company's effective tax rate and the significant components of the tax provision.

Ensuring that the tax provision is calculated correctly is naturally a critical first step and a focus for many corporate tax departments. However, tax law changes often come with increased audit activity—due to the potential risk of material weaknesses—and failing to prioritize all key components of the tax provision calculation, from tax law change planning, calculation, and data management to best practices aimed at achieving audit readiness, can constitute a significant oversight.

Beyond the Tax Provision Itself

As any seasoned tax executive can attest, calculating the estimated amount of income tax expense a company should accrue for the current year under generally accepted accounting principles (GAAP) is a formidable task.

Companies invest significant effort to ensure this critical work is done correctly. However, if a company has to restate its financial statements due to errors resulting from a lack of planning and robust documentation, all that work will be rendered meaningless. Therefore, investing time upfront to integrate workflow and workpaper processes with tax provision planning and calculation can help companies avoid the unnecessary pain and expense of lengthy audits.

Workpapers are often the first items auditors request and are considered a key component of a complete, thorough audit. Workpapers provide evidence for auditors to form their opinion on a company's financial records and can include memos, spreadsheets, emails, schedules, and system reports. Despite their critical importance, regulators do not provide an official "workpaper guide" or a specific format.

Common Pitfalls in Workflows

Today, automation and workflow tools are fairly prevalent in many tax areas such as tax provision and compliance. These tools help streamline routine tasks like data entry and organize documents, emails, notes, tasks, and projects. Additionally, there are solutions focused on complex calculations and projections in areas such as fixed assets, net operating losses (NOLs), and equity compensation.

However, despite significant technological advances, there remains a clear gap in the industry between solutions that automate and document processes and those that perform calculations, analysis, and planning. In other words, these solutions remain siloed and are not integrated.

Take tracking tax law changes as an example: current workflow/workpaper tools excel at recording such changes for later retrieval but lack the ability to analyze, calculate, and document the impact of tax law changes in real time within the workflow and workpaper processes. This lack of flexibility is one reason companies continue to rely on spreadsheets and ad hoc solutions despite their well-known problems.

Ultimately, the creation of tax provision workpapers remains highly manual, spreadsheet-based, and largely dependent on repetitive and disconnected tasks. The result is a process that is time-consuming and fraught with risk, leaving no one satisfied.

The Future of ASC 740 Compliance

Market sentiment indicates that tax departments can expect a wave of new taxes and tax law changes now and in the future. Tax law changes typically stimulate additional audit activity to reduce the risk of potential material weaknesses.

To address the many factors driving corporate tax complexity, including ASC 740 compliance, companies are increasingly turning to technology and automation to ensure a more end-to-end, holistic approach.

As technology naturally evolves and is accelerated by market demands and conditions, complex planning, opportunity identification, and strategic decision-making are gradually being integrated into existing tax technology solutions and directly into workflow and workpaper processes, particularly in the area of ASC 740 compliance.

Forward-thinking companies are looking at next-generation tax automation technologies that unify corporate tax workflows—from workpapers to deliverables—and prioritize integration and connectivity between data and calculations. The result is that companies will be able to automate all key components of the tax provision—from tax law change planning, to calculation, data management, and best practices aimed at achieving audit readiness.