Large global companies recognize that global compliance andreporting (GCR) risks are increasing, as many countries rewritetheir 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 opportunityto transform their global compliance and reporting systems, and insome cases are even overlooking “many essential subprocesses” suchas the flow of financial data to GCR systems, according to a newreport on global compliance and reporting from Ernst &Young.

Based upon interviews with 200 finance and tax executives atForbes Global 2000 companies, many of which are also in the FortuneGlobal 500, the report finds that 64% of companies have experiencedunplanned tax audits over the past year, while 45% were hit withunexpected tax assessments. Another 42% say they faced penaltieswhile 17% suffered interruptions due to “lack of compliance.”

Curiously, while between 64% and 78% of respondents say localcountry resources are “vital” to successful compliance with tax andregulatory requirements, the trend in finance has been the reverse:Companies are attempting to cut costs by reducing in-countryfinance resources or redeploying them to global or regionalcenters. Some leading companies mix internal and external resourcesas a way of enhancing local expertise. Over 80% of companies thatoutsource one or more GCR process say using external serviceproviders help give them the necessary level of localexpertise.

Management models that emphasize efficiency and cost savings can“put pressure on local expertise,” says Steven Shultz, director ofglobal compliance and reporting at E&Y. “As you go through thewhole cycle of reporting and taxation and audits, you need to havethose key relationships with the regulators themselves.” This canbe important, for example, in Asian countries like China, Malaysiaor Indonesia, where personal relationships play crucial roles,Shultz says.

The study found a surprising lack of supervision and controlover local GCR functions among the companies surveyed. More than40% of respondents cite a lack of global governance over statutoryfinancial filings, while 60% report a lack of global governanceover direct and indirect tax filings by their local units. Yet asthe report's authors note, “Strong corporate governance reduces thelikelihood of unplanned audits and is a prerequisite forsimplification, standardization, automation and centralization ofkey processes.”

The study concludes that global compliance and reporting is at a“tipping point,” and that most large global companies now realizethey must transform GCR not only to achieve greater efficiencies,but to mitigate risk in an “increasingly hostile tax and regulatoryenvironment.” At the same time, the study argues that thebenefits—cost savings, avoidance of tax assessments and penalties,and improved accountability and control—are significant.