The ability to create or plan for capacity is a challenge in virtually every industry, and one that impacts the quality of service and overall client experience. When your firm’s primary value comes from the experience provided to clients, then action needs to be taken to live up to, and exceed, their expectations. Today, tax & accounting professionals see the opportunities to offer their clients more, but they are struggling with their ability to deliver.

This is where we can look at other industries for ideas. How are other professions creating quality client experiences? What can be gleaned from these approaches?

The concept of incorporating customer service related roles within tax & accounting firms has been emerging. Every day, clients may have many questions that do not require the skilled expertise of accountants, tax preparers, or CPAs to answer. Yet, the model for most firms is to have these individuals be the first point of contact for clients. And as firms get deeper into their busy seasons, the level of engagement and client service they have time to provide can often decline.

Sometime this decline takes the form of prolonged response times to client questions; lack of detail in responses because of time constraints; and communications that are interpreted as abrupt or harsh due to the brevity of the message. In addition, client requests for additional services may be postponed to a less busy time for the firm, which can frustrate the client.

This is where customer services professionals can relieve some of this pressure, so the tax & accounting specialists’ time spent with the client is purposeful, impactful, and adds value.

Finding client success advocates

Dixie McCurley, partner of Digital Advisory and Client Accounting Services at Cherry Bekaert, calls this position a client success advocate role.  McCurley says their responsibilities are expected to include proactive outreach to clients — while not performing day-to-day accounting services — in order to ask clients how their business is going; any upcoming business changes for which the firm should be preparing; if there is anything else they need; and, specifically, how the firm is doing in delivering services to clients.

These client success advocates will handle change orders, scheduling meetings, and more, McCurley explains, adding that this role is similar to positions in managed service providers or software companies.

Practitioners considering adding client success advocates as a way of enhancing your client experience offering, might be wise to ask:

• • • Where do you find this talent?
    • What qualifications should they have?
    • What does the job description look like?

The firm Rehmann, a top 100, regional accounting and consulting firm, piloted a concierge role within their Finance and Accounting Outsource and Manage Service group in 2022. This year, they are rolling out this position across their service lines. While the details of the role’s responsibilities were built organically, the concept of this role developed over time, says Sandy Shecter, principal at Rehmann.

The concierge role at Rehmann focuses on the client on-boarding, and it puts someone in place that hand-holds clients through the process, while providing proactive communication and answering questions. The client concierge will also introduce clients to the firm’s processes and systems, and connect clients with the appropriate Rehmann team members at the right times. The full job responsibilities evolved around the talents of the right candidate. “Be open to a great talent and make a role that employs their strengths,” Shecter suggests.

To narrow the search for these client experience specialists, there are characteristics and skills that are beneficial for someone stepping into this type of position. Shecter identified the following attributes that Rehmann looks for in a concierge candidate:

• • • showing a strong interest in technology so the candidate can look into opportunities to automate and leverage technology more effectively;
    • being able to multi-task and work in a fast-paced environment (for example, like in the hospitality or restaurant industry);
    • remaining client-focused;
    • displaying an ability to think outside the box; and
    • willing to ask questions, propose solutions with confidence, and be a problem solver.

It’s important to note that technical accounting experience is not necessary to succeed in this role. A candidate does need to be a team player and willing to listen and learn.

Committing to success

Partners in some tax & accounting firms may be uncomfortable allowing someone else to have such an influential role in the clients’ experience with the firm. However, by allowing someone else to take over tasks and functions that don’t leverage their expertise, they ultimately are enhancing the clients’ experience to the benefit of the firm. This teaming concept supports the philosophy of a one-firm approach to client service, rather than individual partners managing individual books of business.

The success of Rehmann’s concierge initiative came down to the culture within the firm and the commitment from leaders and partners to cross-service clients, Shecter says.

For firms that feel this may be out of their reach at the current time, they should start small. Identify someone on the team, possibly an administrative team member, that has untapped talents. These team members could start performing these functions part-time, or seasonally, to test the model. As the role develops, the firm can bring in some success measurements to determine the impact on client satisfaction ratings and team productivity increases that are attributable to the new role. Then over time, other key performance indicators can be incorporated to further measure the success of the role.

Formalizing a firm’s focus on client experience through development of these roles is one clear way that tax & accounting firms can transform their business model to better meet the needs of their time-strapped talent and exceed their clients’ expectations.

Whatever the ESG concerns that emerge, both say, they are among an already full plate of work for corporate tax teams in 2023.

Readiness to take on ESG responsibilities

The extent to which corporate tax functions will be prepared to take on upcoming regulatory requirements around ESG will be a key factor in 2023. At the same time, tax leaders don’t seem too worried. The infrastructure upon which most tax teams can lean are the processes and governance already in place to meet current financial disclosure requirements, explains Sturgis. Indeed, corporate tax functions have solid protocols and procedures in place to comply with existing regulations, and they already have experience with calculating how much the company contributes to local economies in which the company operates.

Sturgis offers these essential actions that can help determine if the current process framework is adequate to absorb ESG requirements:

• • • Make sure tax leaders are able to articulate how the tax function is reducing risk.
    • Evaluate how the tax function is grasping the company’s current tax liabilities, which includes income tax, payroll tax, personal property tax, and value-added tax. In addition, a detailed understanding of those liabilities from state, local, federal, and international perspectives also is important.
    • Assess the tax compliance process and conduct a gap analysis against best-in-class practices.
    • Review processes to understand how new tax laws are being identified and evaluated.
    • Analyze how adding technology to processes might help reduce that risk.

Evaluation of IRA tax incentive opportunities

The full implementation of the IRA could reduce the domestic greenhouse gas footprint in the U.S. by as much as 40%, given that there is more than $300 billion of climate-related and clean energy investment incentives from solar wind energy storage, hydrogen, carbon sequestration, clean aviation fuel, and charging stations for electric vehicles, says Hall. Because of the expansive incentives related to the IRA, any corporate tax function can be a vital and valuable contributor to a company’s ESG strategy execution around climate and the environment in 2023.

What is interesting about the IRA is its supercharge tax credits, which actually have been on the books for years. In addition, the law also offers extensive opportunities to enhance social initiatives — the “S” in ESG — which include: i) a low-income area provision that allows a company to leverage additional incentives if a company’s energy project is in a low-income community that is below or near the poverty line; and ii) an “energy community” special rule that encourages investment in communities that have historically been negatively impact by fossil fuel industries, while at the same time, are in need of economic revitalization.

ESG-infused cross-border tax regulations

In addition to the issues on the horizon around tax in the U.S., there are tax concerns related to ESG in other jurisdictions. Two notable ones, according to Sturgis and Hall, are the potential for a carbon border tax and IRA-like legislation in other countries. Indeed, they could increase the difficulty of the work by corporate tax teams, if passed.

For example, the implications of the European Union (EU) enacting a carbon border tax could be significant, notes Sturgis. The EU is already taxing carbon, but the carbon-based border tax complicates the incentives to keep the production of goods sourced and manufactured within national borders because these goods would be at a price disadvantage. Also, more jurisdictions passing their own IRA-type legislation to incentivize domestic investments would also have an impact. “A headwind on the IRA legislation in the U.S. is that our friends over in Europe were not too happy about it,” Hall says.

ESG here to stay in 2023

Political and financial headwinds are likely to slow progress around ESG in 2023. Sturgis and Hall point to the divided U.S. Congress and the high cost of capital that are likely to both slow companies’ efforts to take advantage of IRA incentives.

However, both anticipate progress over the long term because of ongoing rulemaking and the staying power of the importance of ESG among the public, investors, employees, consumers, and other stakeholders. As a result, corporate tax teams as well as their outside tax & accounting firms are likely to stay busy in 2023.

“Whenever [ESG] rules come out, they need to be implemented via controls and audited,” Hall states. “As accountants and CPAs, that is where we can help.”

A tax department operating efficiently can go beyond providing compliance work and instead make the shift to being a proactive business unit that provides the company with tax and business guidance to mitigate risk and improve profitability. However, leaders and department heads must first understand where their department stands before thinking or wishing to become proactive.

For example, how does a corporate tax department leader know whether the department is proactive or reactive?

Being proactive — creating or controlling a situation by causing something to happen, rather than simply responding to situations after they have happened — means that the department should be organized in such a way that even though all external factors cannot be controlled, the mechanism in place can help plan for the unknown or the out-of-left-field happenstance.

The nature of the types of work done by the corporate tax department and how that work gets done is under almost constant change — the recent local, national, and international regulatory changes is just the latest example. The use of technology also has collapsed borders, allowing individuals and companies alike to traverse with ease. Like the individual, many companies can stretch into parts of the world that would have been only accessible by a few large corporations in the past.

Yet, along with this ease of crossing borders, there is a complexity in navigating it, especially for doing business. Companies can grow by reaching customers across the globe, but the cost of doing business brings challenges, such as having to work within the legal and financial systems in which the customer is located.

Corporate tax department leaders must not only navigate the tax laws of a nation, state, and local government but now increasingly must deal with multi-nation rules, especially if their companies have customers around the globe.

Some corporate tax departments might find it hard to believe that they are not proactive simply because part of the nature of this department is to predict their company’s tax liability and ensure it remains tax compliant while paying the necessary amounts of tax.

Of course, there are some telltale signs that a tax department is not operating efficiently and therefore isn’t proactive. Taking a look at these four areas can help department leaders make a proper assessment.

1. Process management

Departments that use a systematic approach to ensure adequate and efficient business processes are in place are engaging in proper process management to better align business processes with strategic goals. For corporate tax departments, there may be different ways in which data is collected, reports filed, analysis provided, and feedback given back to the business that all may seem to work. However, if they rely primarily on manual work and are multi-stepped (to the point that it takes weeks and months to complete), it may be worth asking some questions of the department’s process management.

Indeed, does process management even exist within the department? Can it be articulated clearly, shown to work repeatedly, and stand on its own? Does it only work for the individuals that helped create it, or can someone new step in and have it work the same way? If the answer to these questions is no, proper process management isn’t in place.

2. Data management

How does the department gather data? Does it feel like a version of the Hunger Games that requires seeking, finding, negotiating, and trying not to step on a land mind? Is this a manual process, collecting various spreadsheets from around the business and then entering the information into the department’s management systems? Or, can the tax department software be integrated to extract data from other part of the business? Is it seamless? Manually processing data significantly increases the chances of error, makes it challenging to verify data sources, potentially creates a tax risk, and is time-consuming.

And yet, even when technology is employed, it’s only as good as its users. Leaders should assess whether current technologies are efficient or actually are creating more work or processes for the department. Often staff — whether incorrectly trained or simply preferring to use their own methods — utilize just certain parts of a software program and rely on manual labor to do other tasks.

In these cases, workers time is not being used efficiently. Further, not having proper data management systems in place also causes bottlenecks in the work flow of department as employees wait for pieces of data in order to move forward. These inefficiencies can create a potential opportunity for risk, such as missing or incorrect data that leads to erroneous results.

3. Compliance & reporting

How long does this process take? Quite often, reporting is the final step in the process and as such, can be significantly impacted by how well or how poorly the previous process were conducted. Again, if there are many manual steps here, it will likely result in wasted time and resources while increasing the chance of risky mistakes.

4. Analysis

Corporate tax departments have always been an advisory to the business by the very nature of their role in providing tax planning. However, this role has increased as departments are now expected to provide insights into tax implications related to deal-making, mergers, business divestitures, and environmental, social & governance (ESG) initiatives to name a few. For departments that aren’t functioning optimally, leaders will find that they cannot provide useful or beneficial advice to the larger businesses because departments themselves lack the bandwidth and resources needed.

Tax departments and their leaders should strive to manage processes and data efficiently and effectively. By utilizing automation and having a clear mindset about the role of the tax department within the organization, a leader can improve the department’s work process, relieve the stress on overworked employees, and provide invaluable information to the business to make it more profitable.

Indeed, this kind of transformation within corporate tax departments has happened, led by leaders who have recognized and adjusted to the new realities of the business and taken advantage of improved technology and process management techniques.

We spoke to Marsha Huber, Director of Research at the Institute of Management Accountants (IMA), and a pioneer in this emerging area of study since 2014, about the key findings from her neuroaccounting research.

Understanding the brain & how accounting expertise is developed

In the beginning, a novice learner, such as an accounting student, has a lot of technical knowledge and neurons in the brain that contain bits of knowledge. However, these neurons have not yet developed into neural networks that enable learners to connect the dots and weave concepts together. “A novice auditor can follow checklists, but it takes a few years for the neurons in the brain to form networks to fully grasp the knowledge to the point where they can tie concepts together that they could not have done as a novice,” says Huber.

As accountants build their expertise after 10 years in the profession, the neural pathways expand and grow together. This is why an audit partner has the ability to forecast potential problems and determine mitigating plans and actions before they occur.

Huber’s electroencephalogram (EEG) studies of the brain with accounting students and their ability to identify relevant and irrelevant financial accounting terms provides proof. The novices’ brains did not recognize accounting terms that did not fit within a particular financial accounting schema. The more experienced students’ brains, however, did identify the irrelevant terms despite not being asked to do so.

Key takeaways for team managers & accounting employers

By using the insights from neuroaccounting, accounting team managers and accounting industry employers could maximize team performance and engagement among their professional workers. Some of these key concepts include:

Understand learning is nonlinear and grows in spurts — The basics of learning are irregular and vary among learners. Indeed, it takes time to learn, and the brain also learns in context. A novice may not be able to apply learning to different contexts, whereas an expert can. In addition, a learner’s knowledge grows in spurts. Learners often forget what they initially learned, but as time goes by and the brain makes better sense of things, the learner will level up.

Learning can occur during a class for one person, when working in a group for another, and still, working independently for someone else, according to Huber. As knowledge develops in learners, accountants can experience mini a-ha moments when new knowledge breaks through to the conscious mind from the subconscious mind. Insights tend to come when not actively working on the problem.

Increase the creation of “flow” time — Huber recommends that accounting employers create opportunities for employees to experience flow. “Because of neuroscience, we understand that being ‘in the zone’ or ‘flow’ can produce exceptional output,” Huber explains, adding that this practice and bring amazing feelings of energy and focus to work.

Activities that enable flow are having no-meeting days and taking breaks, such as siestas, in the afternoon. Employers should allow employees to block off uninterrupted time to create time for flow.

Investing in time for rest allows for incubation, where neurons can figure out better solutions and develop the neural networks of expertise. In a study that Huber conducted, she found that accounting students napped more than professionals (and other students), hypothesizing that they needed to replenish the energy they expended while learning complex content.

Learning on the job is a recipe for success for accounting professionals, of course, yet it also makes sense to remove the stigma of napping and allow for incubation and the neural networks in the brain to build expertise from the learned experiences during the day.

Understand the brain science of manipulation on accountants’ ethics and decision-making — Finally, understanding the implications of neuroscience indicates that some accountants are more prone to being manipulated than others. “Mirror neurons” in the brain unconsciously will cause some to mirror or imitate the actions of others.

This has implications for the accounting profession. Researchers studied this phenomenon in controllers. In essence, because of the way the brain thinks and functions, friendlier controllers could be manipulated more easily than unfriendly controllers. Controllers that mirrored other people were more likely to make questionable ethical decisions when pressured by others.

Managers of accountants also benefit from neuroaccounting in team assignments — Huber highlights the key takeaway of her work: That managers need to understand better how their teams are wired and play to each team member’s strengths and preferences through four profiles, which are:

1. 1. 1. Clarifiers ask a lot of good questions to get the group moving in the right direction from the start;
      2. Ideators like to brainstorm and explore new ideas;
      3. Developers identify pros and cons and enjoy developing mitigation plans; and
      4. Implementers prefer to focus on execution.

To put this into practice, managers could give new problems to clarifiers to clarify challenges, then, hand the challenge to ideators to brainstorm solutions, who send potential solutions to developers to analyze pros and cons and recommend a way forward to address the problem, and finally, hand it off to the implementers to execute the plan.

As an advocate and researcher in neuroaccounting, Huber says she hopes that an increased understanding of how the brain learns will enable more efficient training practices and help to close the talent gap in finding employees for current entry-level roles in the tax & accounting profession.

“We aren’t using neuroscience to train our people at all,” Huber says. “And if we used neuroscience and understood it, people would learn better, and we would teach better.”

However, does your tax & accounting firm know precisely what its work limit is? And can you say with certainty how far under or over that limit the firm is operating at any point in time during the year? If not, then “capacity planning” may be the management concept you’ve been looking for.

What is capacity planning?

Put simply, “capacity planning is the process of determining the maximum amount of work an organization is capable of completing during a specific period of time,” says Heather Sunderlin, a senior consultant in Thomson Reuters’ Tax & Accounting group. “If I have a one-cup measuring cup, it can’t hold a gallon of water — and the same holds true with accounting firms.”

During tax season, for example, many one-cup firms take on a half-gallon of work and hope there’s no spillover, even though a mess is inevitable. However, a firm that has engaged in capacity planning already knows exactly how much work it can handle given its existing client base and staff capabilities. There is no need to guess, and when crunch time comes, managers don’t have to bite their nails and hope their staff can rise to the occasion — because they will already know the answer.

With that knowledge comes control and power.

“Knowing with certainty how many billable hours are available and whether the firm is over or under their maximum capacity can help firm leaders determine when they need to hire people, and at what skill level,” Sunderlin explains. “It can also help managers understand how to delegate work more efficiently, and, if the firm has identifiable skills gaps, whether [those gaps] can be filled through learning and development.”

Capacity planning also can help in giving firms a long-term look at their strategy going forward, she adds, noting that “capacity planning can force a firm to take stock of its current client base, determine whether to off-board clients that are no longer a good fit, and on-board clients that are more closely aligned with their ideal client persona.”

In these and other ways, a firm that engages in capacity planning has much better information available to help it execute its business strategy and manage its growth, Sunderlin says, adding that in this way, staff burnout also can be avoided and morale improved.

What does the capacity-planning process look like?

The goal of capacity planning is to figure out how many billable hours are available at each level in the firm, and how close (over or under) the firm is to hitting that number. The basic process looks something like this:

1. 1. 1. Determine the number of available hours at each level of the firm by counting the number of total hours (i.e., number of staff x 40 hours/week x the number of weeks), then subtract holidays, paid time-off, short workweeks, and other non-billable time commitments.
      2. Determine how many of those available hours are realistically billable.
      3. Calculate the firm’s total capacity by multiplying billable hours at each level by the number of staff members at that level. For example, if the Total Available Hours for each staff member during the busy season is 600, and 95% of those hours are billable, the total billable hour goal for each employee at the Staff Level is 570. If there are five employees at the Staff Level, then the firm’s Total Capacity at the staff level for the busy season is 5 x 570 = 2,850 hours.
      4. To determine whether the firm is under capacity (can take on more work) or over capacity (cannot take on more work), you simply need to know how many hours employees have been assigned during the busy season and compare the target number. The same process can be repeated for managers and senior-level executives.

Project management is key

To get those numbers, however, reliable project management (PM) is a must.

“PM allows a firm to see what work is scheduled in a given time frame, which is critical for capacity planning calculations,” Sunderlin says.

Indeed, one key indicator that a firm could benefit from capacity planning is if they aren’t managing projects, tasks, budgets, and assignments, and don’t have numbers available for calculating capacity. Because if a firm doesn’t have those numbers, says Sunderlin, “it means the firm likely has no idea what their workload is in relation to their actual capacity.”

If the firm has accurate capacity-planning data, however, Sunderlin says a firm’s management can:

• • • make more informed hiring decisions;
    • delegate work more efficiently;
    • develop training to fill skills gaps;
    • evaluate the quality of its clientele; and
    • develop a better barometer for overall stress and morale in the workplace.

Not a one-and-done solution

For capacity planning to work, however, Sunderlin cautions that it “should be a continuous and ongoing part of the management process, not a one-and-done calculation.”

A firm’s capacity isn’t static — it is always fluctuating, she explains. Some people get sick. Some work faster than others. Some get bogged down by problem clients. Some work too hard for their own good. By gaining an understanding of these variables over time, capacity planning makes it possible to ensure that employees aren’t overwhelmed, and it also helps firms avoid the trap of “taking on too much work and hoping it will all get done, somehow, some way,” which is a perfect recipe for unnecessary stress, Sunderlin says.

“Ultimately, capacity planning focuses on a firm’s most important assets, which are its people,” she explains.

Issues on the ESG horizon

Adding to the complexity is the proposed rule by the Securities and Exchange Commission (SEC), The Enhancement and Standardization of Climate-Related Disclosures for Investors, which is likely to spur a ton of activity among public and private companies, according to April Little, Partner, Tax Risk & Advisory Services at Grant Thornton. “As we get closer to the SEC finalizing their rules, we’re going to see public companies have to start disclosing various aspects of their emissions described in three scopes,” Little explains. These scopes include:

• • • Scope 1 emissions — These are direct emissions from sources of operations owned or controlled by a company;
    • Scope 2 emissions — These are indirect emissions from purchased utilities, such as electricity, gas, and other energy sources; and
    • Scope 3 emissions — These are all other emissions associated with company activities, including those of its supply chain, which include many private small-to-medium sized enterprises (SMEs). [Note: As proposed, Scope 3 emissions disclosure is only required if material and is not required for smaller reporting companies.]

With the anticipated finalization of SEC rules — which is expected to be met with a lot of legal challenges — corporations need to establish appropriate processes, policies, and governance over the reporting is essential. Tax professionals, CPAs, and accountants “are in a great place to really jump into the fray on that data gathering exercise because we understand how the data fits into financial statements, where it comes from and how to make sure that it’s complete and accurate,” Little says.

When finalization of the SEC rules is completed, third-party ESG assurance is another avenue of growth for CPAs. “For companies looking to make progress on ESG to strengthen relationships with key stakeholders like customers or lenders, it’s important to consider both ESG strategy as well as ESG reporting and compliance,” says Marjorie Whittaker, Managing Director of ESG and Sustainability at Grant Thornton. “Both elements are critical to the success of an ESG program and provide meaningful opportunities for CPAs to add value.”

Whittaker explains that many of the elements of ESG transparency are similar to those found in traditional financial reporting and assurance. “For example, establishing reliable baseline performance data, making sure that reported information is fairly presented, balanced, and meets the requirements of the applicable reporting standard — all of those skillsets are resident within CPA firms,” she adds.

Business opportunities for accounting firms

In particular, reporting requirements on Scope 3 emissions in the near term will cause the most headaches for multinational corporations and their suppliers because the rules will require large companies to estimate greenhouse gas emissions from their supply chain partners, whether they are a public or private company. In addition, many of these vendors are SMEs, located across the globe. Yet, the more proactive SMEs see what is coming even in Asia, and they are preparing now to provide the necessary of information in anticipation of the finalization of the SEC rules.

This and the aforementioned growth in complexity is a huge market opportunity for tax & accounting and consulting firms. Early movers, such as public accounting firm Sensiba San Filippo (SSF), are seeing tremendous growth in their already robust multi-disciplinary ESG practices.

SSF’s sustainability practice advises SMEs on their sustainability strategy as part of the Sensiba Center for Sustainability, which launched in 2020, under the leadership of Jennifer Cantero. Before 2020, the firm’s practice was centered on consulting companies through the B Corporate certification, but expanded when an audit partner approached Cantero about getting the Fundamentals of Sustainability Accounting Credential, which equips professionals with the “knowledge and skills to understand the link between financially material sustainability information and a company’s ability to drive enterprise value.” The credential is awarded by the Sustainability Accounting Standards Board (SASB), which is one of the popular ESG frameworks that sets standards for disclosing financial material sustainability by businesses.

The firm’s growth path of its sustainability practice came from already existing clients that operated in manufacturing as part of the food and beverage industry. The firm’s practice includes an assessment of their current operations based on a comparison against a standard, usually using one of the well-known frameworks, such as SASB. Within this service, there is a whole range of targeted benchmarking evaluations, which include product life cycle assessments, pay equity analysis, and information security exercises.

Another key part of their services is examining and calculating a SME’s carbon footprint with recommended options on how to reduce it. SSF analyzes collects, compiles, and analyzes raw data from the client’s records, which is essential for a rigorous review. “That’s the superpower of the accounting world is that we can go in and do a pretty good job of analyzing data to determine its quality,” Cantero notes. “We’ve been doing it for a millennia on the financial side, and now we’re just applying those principles to all the non-financial data.”

Another advantage for accounting firms in building their own sustainability practice is that they are then able to wrap in already-existing services that fall under ESG. For example, SSF already provides services related to data privacy regulation audits, such as the European Union’s General Data Protection Regulation. Firms can then conduct those audits based on recognized methodologies, such as the American Institute of Certified Public Accountants’ Service Organization Control (SoC) 1, 2, and 3, which reports on various organizational controls related to security, availability, processing integrity, confidentiality, or privacy.

Whether the proposed rules on climate disclosure are finalized next year or later really does not matter, because institutional investors’ demands around transparency and risk management will remain — as will corporations’ obligations to meet these demands. In this environment, the business opportunities for tax & accounting firms around sustainability and ESG transparency is growing and will continue to do so.

Clearly, it is well past time to innovate in the tax & accounting industry, but the question immediately arises: Who is responsible for developing innovative ideas and driving innovation within a tax & accounting firm?

People within many organizations often can feel like innovation is someone else’s job. They hesitate to share ideas, believing they aren’t creative enough or that there must be a good reason why those ideas haven’t been tried. Or they get so bogged down in the details of the work, they can’t see the problem or even view it from a different perspective. And unfortunately, most tax & accounting professionals don’t believe they have the time or skills to innovate.

First, the good news is that innovation is not as complicated as we make it. Innovation is simply a “new idea, method or device”; so, one way to innovate then, is to make something new out of items that already exist. Take, for example, the smartphone. All the pieces of the smartphone had been invented previously, but it took someone, or a group of people, to reimagine how the components could be put together to improve how we communicate, work, and live. This means that anyone can innovate by tapping into their knowledge, experience, perspective, and awareness of a problem or a need that people have.

Specifically, in the tax & accounting profession, firms have several problems and needs to be resolved, including:

• • • getting more work done in a more efficient manner;
    • staying current on regulatory changes;
    • providing services that are relevant and appealing to new generations of clients;
    • building a profession that attracts talent; and
    • establishing a sustainable work/life integration.

No one person within a firm can solve all these challenges, of course. Yet, through collaboration and piloting ideas, answers can, and are, being found.

The role of leaders

It is not the role of leaders to generate all the ideas. In fact, as leaders advance in their careers, they get further away from many of the day-to-day tasks, making it harder for them to innovate around daily process improvements. Nevertheless, leadership strongly impacts innovation within the firm. As leaders share more openly and gather feedback from their team on the vision and direction of the firm, the firm’s talent is more likely to develop ideas that are relevant and timely.

To build a culture of innovation, leaders must first adopt the mindset of innovation, which is often described as a growth mindset. When operating from a growth mindset, leaders recognize failures will happen and accept them as valuable learning moments. If the reaction is punitive, rather than accepting, the professionals and staff within the firm will be more reluctant to vulnerably share ideas or attempt to try something different in the future. Leaders need to recognize successful innovation will include initiatives that won’t succeed; therefore, they should encourage their teams to learn from the misses and refocus on the desired result.

Leaders also enable innovation by clearly defining resources — such as budget, personnel involved, time allotted, and the timeline — when project ideas are approved. When resources are clear, team members have the confidence to experiment, test, and pilot within the boundaries that leaders have set.

Any innovation includes some risk of additional costs. To sustain the trust extended to the team that’s innovating, leaders should establish expectations about how frequently they want status updates on the initiative. There should be agreement about what success looks like and how it will be measured. Achieving the project as it was initially envisioned at first should not be the measure of success, since any good innovation process will be iterative and incorporate feedback along the way. Instead, measure success by how well the initiative solves the problem or fills the identified need.

The role of talent

Talent within the firm has various perspectives on processes, clients’ needs, effectiveness of technology, training, and much more. They should break the routines of SALY (same as last year) and ask themselves how things can be improved going forward.

When talent brings ideas to leadership, they should communicate the benefits of the innovation, not just what it is. Too often we assume the listener understands the benefits of the idea, but that is not always the case. When proposing the idea, talent needs to describe how the firm, clients, and the team will be better off as a result of making the investment in the idea.

In a culture where innovation is especially encouraged, many people may have ideas, so not all of them can be implemented at once. If an idea is not initially accepted as something to investigate, this does not mean the idea is worthless. The person bringing the idea to the table should ask for additional feedback to gain insights into how to adjust it or how to re-propose the idea at a later time. The key is to not get discouraged, but rather to keep watching for opportunities to contribute innovate solutions.

The innovation process should be looked at as a symphony with everyone in the firm playing in concert. This process also takes everyone being receptive to change. To accomplish this, leaders and talent must share with their colleagues the benefits of making a change by communicating how employing the innovation affects their workflow and processes. The key is to not leave them wondering what will be required of them if this innovation comes to fruition, so it may be wise to over-communicate at first.

Innovators also should recognize that innovation is exciting for some and nerve-racking for others, and they may need to adjust their message to address the concerns of a particular audience. Yet when these steps are followed, this process toward innovation can put your firm on the path to finding new solutions to the old problems the entire tax & accounting industry is facing.

Corporations’ contributions to the communities in which they serve is one of the biggest proactive drivers of a company decision to create and implement an ESG strategy. Indeed, one of the biggest, yet least visible, ways companies achieve this objective is through the payment of taxes to local communities in which they operate.

There are many tax related ESG credits and incentives to reward positive corporate behavior, as well as taxes to disincentivize negative ones. Corporate tax functions are critical to practices that best serve company objectives through the financial support of the communities they serve.

Surprising to many tax novices, there are many elements of an effective ESG policy that can factor into a company’s tax strategy. For the environment, these include water efficiency and curbing emissions; social goals include ensuring human rights, promoting diversity, equity & inclusion (DEI) policies; and governance includes strong business ethics and anti-corruption policies.

Encouraging changes in behavior by taxation and incentives is increasingly common in the environmental area, for example. Across the world, many countries are encouraging movement away from products and practices that cause environmental damage through tax incentives or disincentives. Such taxes can address carbon and other pollutants, plastics, landfill waste,water pollution, and certain chemicals. As a result, there has been a rapidly evolving landscape of new taxes involving carbon, waste, water, plastic packaging, and chemicals. Thus, as governments enhance their focus on measurable improvement in the environment, companies simultaneously are able to take advantage of many credits and incentives in the environmental area.

Under the social category, corporate transparency on how income taxes are paid on a country-by-country basis can demonstrate that corporations are not avoiding, evading, or artificially reducing taxes in any particular geography.

Further, obtaining tax credits and incentives for diversity and corporate giving are common social tax initiatives and can include:

• • • Hiring & retaining a diverse workforce — For example, the Work Opportunity Tax Credit allows tax breaks for employing targeted segments of the workforce such as those receiving government assistance and individuals who have been unemployed long-term or have a felony conviction. And Opportunity Zone credits incentivize moving a business to a government-designated area that qualifies for renewal efforts.
    • Charitable contributions — Tax deductions incentivize corporations to give back to the communities in which they operate by providing funds, community service hours, or donations-in-kind.

Shifts in the regulatory landscape across geographies also are important to determine a corporate tax function’s role in a company’s ESG strategy. Corporate income taxes are one of the most foundational components of the governance strategy, starting with the “tone at the top” and including a strong tax risk management policy.

“A robust tax risk management policy, in line with the board and C-suite’s overall governance strategy for an organization, guides how the tax piece of the organization operates by outlining how decisions are made,” explains Grant Thornton’s Little. When addressing governance strategies, such policies target core investments that an enterprise makes, such as deciding where to locate a facility and finding tax planning opportunities, “while still ensuring that the company is paying the right amount of tax globally,” she adds.

The “tone at the top,” according to Little, guides how tax decisions are made, particularly those that have ESG implications. For example, a company may choose to enter into a transfer pricing arrangement to shift profits from one jurisdiction to another, which is a decision that may be perfectly allowable within the transfer pricing guidelines for the two different jurisdictions. However, to align with governance goals, the tax risk management policy may help steer the company to determine its portion of the global tax base to both jurisdictions rather than minimizing the overall tax.

Typically, tax risk management policies are more detailed and robust in Europe because they are required for public companies across the European Union and in the United Kingdom. “Companies operating in those geographies generally have to post these policies on their website or make them publicly available,” Little says.

Involving tax at the beginning

A company’s ESG journey generally starts with a decision by a company executive to move forward in the ESG space. This declaration is typically followed by a benchmarking exercise to understand what industry peers are doing; a materiality assessment to determine which ESG issues matter most to the company’s stakeholders; and a determination of what data is available for reporting and how to measure progress.

During the ESG strategy formulation, there are important implications for tax. For example, the tax function can help to minimize taxes incurred along the supply chain and increase return on investment by identifying credits and incentives. This is especially important for companies with operations in the EU and UK because these geographies dictate a tax framework for disclosure in that ESG landscape.

The tax function then helps conduct scenario-planning around accounting methods, such as performing a cost segregation study to enhance or accelerate deductions from a tax perspective. To maximize the value of the deduction, depreciation methods can be changed to accelerate or defer a deduction.

Detailed tax decisions such as these that align with a company’s ESG strategy can have a sizable effect on a company’s ability to achieve its twin goals of generating profit and acting responsibly as a corporate citizen.

To get started, recent research shows that forward-looking tax department leaders have already started to uncover their total picture, developing a strategy to embed ESG principles into tax policies and practices, communicate tax impacts as part of regular disclosures, and put governance mechanisms in place to ensure tax decisions are sustainable moving forward.

There’s a reason for this discrepancy. The investment industry is strictly regulated, with clearly defined requirements, workflows, and safeguards that mandate how trades must be executed, fulfilled, paid for, settled, and documented. Unfortunately, no such requirements exist in the retail and e-commerce world. That means it’s up to business owners — or, more accurately, their bookkeepers or accounting firms — to employ their own processes for reconciling accounts.

Yet, even in the absence of such overriding standards, accounting professionals can still aspire to give their retail clients a reconciliation experience that mirrors the investment industry standard. How? By emulating a clearing house mentality.

Clearing houses: The nerve center of execution & settlement

In the financial world, traders don’t deal directly with each other; instead, both sides of the transaction rely on clearing houses, government-registered entities that serve as intermediaries between buyers and sellers of securities.

Clearing houses ensure that the transaction requirements are met, either making sure the trade is executed at the right price, paid for, and delivered; or by ensuring payment is received and validated before releasing the securities. Close coordination among clearing houses provides an extremely efficient transaction management system with multiple levels of validation, protection, and problem resolution.

If only similar efficiency existed in the retail world.

A decade or so ago, account reconciliation in the retail industry was relatively easy. Most sales occurred on location, with customers paying by cash, check, or credit card. Today, thanks in part to the changes brought about by the global COVID-19 pandemic, retailers have a seemingly limitless variety of Internet-based e-commerce and digital payment vendors from which to choose. Business owners may sign up with several different platforms, without considering that each generates its own proprietary reports, which often do not necessarily comply with generally accepted accounting principles (GAAP).

Accounting professionals can still aspire to give their retail clients a reconciliation experience that mirrors the investment industry standard by emulating a clearing house mentality.

A few e-commerce platforms may deposit net payments from sales directly into retailers’ bank accounts; however, in most cases, sales platforms allow multiple payment options with each credit card and online payment company making their own separate deposits, following their own schedule.

Then, retail businesses’ bookkeepers and accounting firms have to log on to each payment company’s portal to download these payment reports, reconcile them with their clients’ sales records, and then make sure they match up with deposits made to businesses’ bank accounts. They must also account for and book fees, commissions, and loans usually removed before the deposits are made.

And if this system wasn’t complicated enough, many retailers’ own business practices often make matters worse.

For example, when a restaurant closes at night, managers are supposed to add tips to open credit card authorizations and then close and submit them immediately. In reality, many wait until the next day to do this. If they wait too long, these authorizations may expire, essentially giving diners a free meal. Other businesses allow weeks or months to elapse before reconciling their accounts, often discovering that their books are woefully out of balance.

A retailer that hasn’t done consistent profit & loss reporting, for example, may discover — once it tries to reconcile its accounts — that they may have booked thousands of dollars in online sales over that period that were never posted to the retailer’s bank account. At that point, it may be difficult to get that revenue back.

Adopting a clearing house mentality

Daily reconciliation is tedious and time-consuming work, of course, but it’s completely necessary, especially if you’re in the retail industry. Without it, retailers and their accounting firms can’t know exactly where they stand, financially. More importantly, they may be unable to identify and resolve missing or incorrect payment situations, which, unfortunately, have been occurring more frequently, particularly among newer startup payment companies that are more interested in signing up new customers than delivering reliable financial data.

In the absence of any retail industry settlement regulations like those among security traders, accounting firms should aspire to adopt a kind of clearing house mentality. This means making a commitment to downloading and reconciling sales and deposit numbers every day.

Accounting automation platforms can help simplify this process. But in order to succeed, accounting firms need to educate their clients about their roles in making sure the clearing house model works. This means emphasizing the importance of choosing reliable payment vendors, closing open credit card authorizations quickly, and convincing cost-conscious retailers that paying for daily — rather than weekly or monthly — account reconciliation is in their best interests.

If clients need convincing, ask them to use their own investment experience as an analogy. If they understand how efficient daily reconciliation can benefit their bottom lines as business owners in the same way that clearing houses benefit them as investors, they’ll be more likely to get on board.

We had previously discussed how outside audit and accounting firms can help their corporate clients with ESG activities, now we examine how internal corporate auditing functions have a role to play as well.

Indeed, internal audit functions help both increase transparency because most companies self-define ESG program requirements on what information is disclosed publicly, and help directors perform their oversight duties through the audit committee interaction with the corporate board.

Role of internal audit

A company’s internal audit function can step in to help implement consistent sets of standards and establish an internal independent mechanism by leveraging ESG program governance as part of a company’s overall governance program. This is crucial because currently, the lack of transparency on what information is disclosed publicly increases the importance of this type of internal independent audit function.

The short term challenge for internal audit functions is getting up to speed on the company’s ESG efforts, but fortunately, ramping up knowledge is something with which these teams often have experienced. The first step is to understand the ESG landscape of the industry and sector of the organization. Benchmarking what the company’s competitors are doing, attending industry conferences, staying current on changes to government policy and legislation, and keeping tabs on the varying perspectives among internal and external stakeholders are all critical to effectively assessing and managing ESG risks while balancing those risks with other high-priority auditing requirements.

Similarly, it is equally important for internal audit teams to understand the current state of the company’s internal strategy, maturity, and risk appetite as it relates to ESG topics. Critically, internal auditors must: i) understand the organization’s appetite for ESG risks, ii) grasp how ESG is aligned with and integrated into the company core strategy; iii) identify which company teams own specific ESG processes; and iv) map out the current state of reporting to internal and external stakeholders.

The last two factors are of key importance, because the audit function needs its role to be explicitly valued by leaders of the company who direct, govern, and own a data or delivery function within the company’s ESG program.

Further, integrating ESG assurance into the annual audit plan, especially when the level of ESG knowledge within the team is low, is another key challenge to conquer. To overcome this, audit team leaders should analyze how ESG could be integrated within the existing risk assessment program, then focus on larger issues that will deliver quick wins to maximize the impact and value of assurance.

To assess the level of integration of sustainability within a company’s operations, the following questions — suggested by the Institute of Internal Auditors (IIA) — should be considered:

• • • How do internal audit teams work with external auditors on ESG assurance?
    • To what extent does internal audit provide assurance on structures, systems, and processes for decision-making and reporting?
    • What controls exist that outline how data is collected, analyzed, and reported?
    • What are the policies and processes that measure, monitor, and report on progress towards company commitments?
    • What role does internal audit play to influence a shift in mindset to integrate sustainability into governance and operations?

Internal audit’s role in the “G” of ESG

Perhaps the most important role for internal audit teams in ESG strategy is in governance and teams’ ability to perform its responsibilities around testing internal controls to better assure accuracy in ESG information and information integrity in ESG data disclosure and reporting.

Appropriate governance around ESG will involve the oversight group that creates and directs mechanisms to harmonize ESG into the strategic objectives of the organization. It also includes management’s outlining all of the financial and nonfinancial inputs and investments, as well as an assessment of materiality for adequate operational performance.

Finally, the independence of the audit function from the oversight and delivery functions is the most critical part of its role in governance and ESG assurance. For example, the IIA’s Three Lines Model demonstrates how internal audit teams fit into the varying responsibilities across the governing body. Importantly, the independence from the ESG governing body and the management allows for the audit function to: i) maintain a reliability of internal control over ESG data collection, analysis, and reporting; ii) determine how the various corporate functions involved with ESG data are interacting regularly; and iii) monitor the evolving regulatory framework in order to anticipate ESG disclosure regulations.

When a company’s level of maturity around ESG is in the beginning stages, one of the key challenges for internal audit is getting senior management on board, especially in understanding ESG risks and how internal audit can help alleviate those risks. A company’s internal audit function needs to be seen by partners as a trusted advisor with an obligation to highlight on-going, new, and emerging risks that are not being addressed. In this way, audit functions can have the most effective pathway to influence a positive outcome in a company’s ESG operations.