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The Risks of Using Microsoft Excel to Calculate Your Income Tax Provision

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The Risks of Using Microsoft Excel to Calculate Your Income Tax Provision

We all like Excel.  It’s familiar, easy to use, and is included on just about every computer on the planet.  Excel has cool functions that can calculate just about anything (and even has a wizard to help you get there).  You can follow the progression of your calculations by looking at the formula.  You can link different files together so that a change in one is reflected in another without having to manually update it.

Unfortunately, these benefits are far outweighed by the risks associated with using Excel.  There is the risk of human error, which is probably the biggest risk of Excel, and the main reason why financial statement auditors are pushing more companies to use software for their tax provision calculation.  Excel is a complex software program, and it is easy to make mistakes when entering data or creating formulas (or copying/rolling data from one period to the next). Even a small mistake can have a significant impact on the calculation of the income tax provision.  Conversely, many of you can attest to receiving SoX control deficiencies for a single bad formula (out of hundreds or thousands), even though it had little or no impact on the calculation results.

Then there is the risk of file version control.  It can be difficult to track changes to your Excel spreadsheets, which can lead to errors, inconsistencies, confusion, and ultimately, extra work. This is especially true if multiple people are working on the same spreadsheet.  How many of you look at your network drive and can see five, ten, or even 15 different versions of the same provision calculation?

Excel lacks transparency.  Do you have someone on your team who “owns” the Excel model, and if they left, you’d be lost?  It can be hard to understand and audit Excel workbooks, which can make it difficult to identify and correct errors. This is especially true for complex spreadsheets that use multiple formulas and functions.  Many provision calculation files have thousands of formulas, and you must find all issues/errors before a team of auditors does (and issue you a deficiency).

Security is a major risk factor in Excel.  Spreadsheets are not as secure as other types of software, and they can be easily hacked or corrupted. This could lead to the disclosure of sensitive financial information or the disruption of the company’s tax compliance process.  Anyone with access to the file can make changes with ease, and those changes are difficult to track.  It is always frustrating when you open your provision file and see a different ETR than you were expecting because someone went in and made a change without your knowledge.

These are just some of the areas of risk when utilizing Excel for your corporate income tax provision.  When using Excel, it is important to have a robust system of controls in place to mitigate some of the risks. However, many of these risks disappear when you use a software solution instead.