Large global companies recognize that global compliance and reporting (GCR) risks are increasing, as many countries rewrite their tax codes, step up audits and focus more on tax collection, even as there are also dramatic changes in financing models.
Yet many of these same companies are not taking the opportunity to transform their global compliance and reporting systems, and in some cases are even overlooking “many essential subprocesses” such as the flow of financial data to GCR systems, according to a new report on global compliance and reporting from Ernst & Young.
Based upon interviews with 200 finance and tax executives at Forbes Global 2000 companies, many of which are also in the Fortune Global 500, the report finds that 64% of companies have experienced unplanned tax audits over the past year, while 45% were hit with unexpected tax assessments. Another 42% say they faced penalties while 17% suffered interruptions due to “lack of compliance.”
Curiously, while between 64% and 78% of respondents say local country resources are “vital” to successful compliance with tax and regulatory requirements, the trend in finance has been the reverse: Companies are attempting to cut costs by reducing in-country finance resources or redeploying them to global or regional centers. Some leading companies mix internal and external resources as a way of enhancing local expertise. Over 80% of companies that outsource one or more GCR process say using external service providers help give them the necessary level of local expertise.
Management models that emphasize efficiency and cost savings can “put pressure on local expertise,” says Steven Shultz, director of global compliance and reporting at E&Y. “As you go through the whole cycle of reporting and taxation and audits, you need to have those key relationships with the regulators themselves.” This can be important, for example, in Asian countries like China, Malaysia or Indonesia, where personal relationships play crucial roles, Shultz says.
The study found a surprising lack of supervision and control over local GCR functions among the companies surveyed. More than 40% of respondents cite a lack of global governance over statutory financial filings, while 60% report a lack of global governance over direct and indirect tax filings by their local units. Yet as the report’s authors note, “Strong corporate governance reduces the likelihood of unplanned audits and is a prerequisite for simplification, standardization, automation and centralization of key processes.”
The study concludes that global compliance and reporting is at a “tipping point,” and that most large global companies now realize they must transform GCR not only to achieve greater efficiencies, but to mitigate risk in an “increasingly hostile tax and regulatory environment.” At the same time, the study argues that the benefits—cost savings, avoidance of tax assessments and penalties, and improved accountability and control—are significant.