If an investment in a company’s compliance system is really successful, then a company will have nothing to show for it — at least in the form of fines, litigation or adverse publicity. The absence of such events suggests that the process is working as it should, routinely identifying risks associated with noncompliance and notifying management in time to intervene.
But with little to show in the way of visible value, compliance can appear less deserving of corporate resources than, say, research and development. Indeed, how to meet expanding employment-related tax and payroll compliance requirements on a limited budget is a daunting challenge for senior finance executives, according to a recent survey conducted by CFO Research, in collaboration with ADP, a provider of human capital management services.
“We have a significant risk of missing deadlines, overpaying, underpaying or overlooking errors due to fewer resources and poor IT infrastructure,” said the vice president of finance at a company in the pharmaceuticals/biotech/life sciences field. He was one of 150 senior finance executives at U.S. companies with annual revenues of more than $100 million who responded to an online questionnaire. (The full report, “Managing Tax, Employment and Payroll Compliance in a Changing Environment,” can be downloaded at cfo.com/research.)
The survey respondents shared their opinions on fortifying compliance efforts at a time when businesses are facing increasingly stringent reporting and disclosure requirements, greater scrutiny and reduced tolerance for even minor infractions. “Just staying abreast of changes in countries’ regulations and tax changes is a challenge,” said the treasurer of a media/entertainment/travel company.
Indeed, about 80 percent of survey respondents reported that the task of monitoring tax, employment and payroll-related rule changes had become more time-consuming over the past two years. Furthermore, noted the VP of finance at a manufacturing concern, “penalties and interest for even small mistakes are large.” He spoke from experience: tax discrepancies “significantly impacted earnings” at his company last year. Similarly, the vice president of finance at a pharmaceuticals/biotech/life sciences company admitted that “we frequently live with the threat of an FDA shutdown due to poor documentation around FDA compliance.”
Such looming peril, however, isn’t translating into higher budgets for compliance. Slightly more than half of survey respondents expected that their company’s budget for compliance activities would remain the same over the next year. About 40 percent anticipated that their budgets would increase, but only slightly.
As the volume of regulatory changes has increased, so has their velocity. One survey respondent, the vice president of finance at a health care firm, said that a compliance failure (inaccuracies in the firm’s W-2 forms) was made that much more difficult to fix because “the short turnaround time to implement new federal tax changes was a problem — the window was far too short.”
In the survey, almost half of respondents agreed that over the past two years, their business has been under pressure to respond to regulatory changes within shorter time frames. Finance executives see the benefits of being more proactive. More than 40 percent of respondents agreed that their company “would realize measurable benefits if it took a more proactive approach to compliance in the area of tax, employment and payment regulation.”
While finance leaders see uncertainty almost anywhere they look — from their company’s shifting business model to the finance function’s evolving role — they surely see the need to, as the director of finance at a consumer packaged-goods company put it, make “an inventory of compliance requirements across all international operations so all requirements gain visibility and become easier to track.”
It’s an ambitious and worthy goal, and the stakes are rising. So what’s stopping them from getting it done?
Judging from the survey responses, the problem is that many finance execs have trouble figuring out where to start. After all, they aren’t building a compliance function from the ground up. And chances are that the existing system was constructed piecemeal, with capabilities added as needed. Rather than making a coordinated attempt to maximize efficiency, management’s effort has been disjointed, stitched together without any unifying platform or centralized system.
As one CFO summed it up: “Global tax compliance is spread across a very decentralized internal team and a multitude of outside vendors.” Solving one challenge at a time — rather than taking a more holistic view, and figuring out how to best achieve sustainable cost advantages — makes it difficult for executives to identify and improve existing weaknesses. In the survey, about 70 percent of respondents said that their company’s compliance activity relied on multiple, separate information systems. All those disparate systems and data sources, combined with the accelerated pace of tax, employment and payroll-related regulatory changes, can result in finance executives spending more time locating and collecting information than analyzing it.
An integrated compliance function, on the other hand, can help finance executives position a company for growth, enabling them to foresee compliance-related issues when they should — before the company expands into new jurisdictions. For those who create such outcomes, an expanded role in the company may await.