Communication, information flow, and involvement of the Tax Department in corporate decision-making.

• Author: Arlinghaus, Barry P.

Communication, Information Flow, and Involvement of the Tax Department in Corporate Decision-Making

Introduction

Managing the tax function in today's complex and changing environments requires more than filing returns and dealing with tax audits. It requires tax management to be an integral part of the company's business team. In order to learn more about tax management's role in today's corporate environment, a survey was conducted that focused on senior management's perception of the tax function, the tax department's involvement in decision-making, information flow, and organization structure.

Two questionnaires were used to conduct the study. One questionnaire was developed for completion by the company's chief executive officer (CEO). The other questionnaire was developed for completion by the person who had primary direct responsibility for the overall tax function.

This is the third article in a series that reports the results of the two questionnaires. The first article, "CEO's Perception of the Role of Tax Management," appeared in the Spring 1989 issue of The Tax Executive (Vol. 41, No. 3, pp. 223, et seq.). The second article, "Organization and Staffing of the Tax Function," was published in the July-August 1989 issue of The Tax Executive (Vol. 41, No. 4, pp. 343, et seq.). This article reports the findings for the senior tax person questionnaire regarding the tax department's involvement in corporate decision-making, communication with those outside the tax department, information gathering, the use of computers, legislative review, and the use of outside advisers.

The author wishes to express his appreciation to those who have helped make this study possible. First, Tax Executives Institute (TEI) assisted by making its membership list available and provided partial funding, and members of the Institute's Corporate Tax Management Committee and other TEI members provided valuable insights. Miami University -- in particular the Department of Accountancy and the School of Business -- provided a significant amount of financial support. Numerous students, in particular Steve Cunningham and Mike Warmouth, assisted in the compilation of the data. Lisa Ehrichs provided invaluable assistance with computer input and the writing of programs that resulted in output for analysis.

Methodology

Information for this study was obtained by means of two questionnaires mailed to the senior tax person at 2,463 TEI member companies. The cover letter requested that the senior tax person forward the CEO questionnaire to the CEO for his or her independent completion and separate return.

In order to gain the insight necessary to develop meaningful questionnaires, interviews were conducted of tax executives at 15 midwestern companies during the Summer of 1987. Drafts of the questionnaires were sent to tax executives at the 15 companies where interviews had been conducted and to members of TEI's Corporate Tax Management Committee. Comments were received from 22 tax executives. The senior tax person questionnaire was reprinted as Appendix I to "Organization and Staffing of the Tax Function," which appeared in the July-August 1989 issue of The Tax Executive.

Questionnaires were numbered in order to facilitate the mailing of second requests and to enable the author to correlate CEO responses with those of the senior tax person for the same company. Confidentiality of responses was strictly observed as promised. The questionnaires were mailed in October 1987. Second requests were mailed in late November and early December. Aprroximately 30 percent of the responses received from each group were generated by the second requests.

Response were received from 588 companies. Surprisingly, there were 30 companies for which the CEO responded but not the senior tax person. There were 298 companies for which both the CEO and the senior tax person responded.

Overall, there were 558 returned and completed senior tax person questionnaires for a response rate of 22.7 percent. There were 328 returned and completed CEO questionnaires for a response rate of 13.3 percent. Not all of the respondents answered each question but most responded to nearly all of the questions.

Most of the senior tax persons responding were from smaller companies. Approximately 55 percent of the 558 questionnaires returned by senior tax persons were from companies with assets under $1 billion. Almost 86 percent of the responses were from companies with assets under $5 billion. On the whole, however, responses were received from companies representing a wide range of industries.

Decision-Making

Senior tax persons were asked to state, on a scale of 1 to 10(1 = idea stage and 10 = after transaction completed), at what point the tax department generally becomes involved in the decision-making process. The responses are summarized in Table 1. Whereas approximately 45 percent of the 541 respondents reported that the tax department became involved at a relatively early stage, nearly 23 percent of the respondents' tax departments did not get involved until transactions were either completed or nearly completed.

Only 71 of 554 responding companies had a formal policy governing when the tax department becomes involved in a transaction. Nevertheless, Table 2 shows that firms with a formal policy are more likely to involve the tax department at an earlier stage. Table A in the Appendix, by assets, shows the percentage of firms with a formal policy. The results were mixed.

The Chief Tax Officer's (CTO's) perception of senior management's attitude toward the tax department appears related to the point at which the tax department becomes involved in the decision-making process. For those companies for which the CTO reported that senior management thought the tax department's role was either primarily compliance or compliance and planning, only 13.6 percent and 36.9 percent of such tax departments respectively got involved in the decision-making process at an early stage. In contrast, for companies at which the CTO believed the tax department's role was considered to be primarily planning or as part of the business team, 66.2 percent and 77.3 percent respectively became involved in corporate decision-making at an early stage. Table B in the Appendix summarizes the responses.

As might be expected, the closer the CT was to the CEO in the corporate hierarchy, the earlier the tax department's involvement in decision-making. As indicated by the mean point at which the tax department got involved as shown in Table C in the Appendix, however, the difference is not that significant for those CTOs only one or two levels from the CEO.

Tax departments organized along functional lines (compliance, planning, etc.) and along organizational lines (industry, division, etc.) tended to get involved earlier than tax departments organized by either type of tax (federal, state, provincial, property, etc.) or a combination of functional and type of tax. The percentage indicating stages 1, 2, or 3 and the mean point by type of organization are provided in Table D in the Appendix.

Tables E and F in the Appendix show the point at which the tax department became involved...