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The Audit Podcast
Ep 281: Bridging the Gap Between Tax and Internal Audit w/ Michelle V. (ITT Inc.)
00:24:43
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- [00:00]
A
Yeah, I would say the big thing is like understand where the data is coming from. This data was not previously required. And so make sure that when you're talking to your tax senior doing that walkthrough, you know where the data is coming from and they understand the impacts of the information of that data being disclosed.
- [00:18]
B
Everybody, I want to tell you about the IIA Chicago chapter. They're having their 65th annual seminar titled Evolution Execution. It's on April 27, 2026, one day, eight CPEs, I'll be there. Some of my friends are going to be there. As I see the agenda, I'll be doing a panel with three CAEs on basically the future of internal audit. AI's impact on that and it really ranges. There's there on that panel, there's CAEs who are going through their AI strategies right now. There's CAE who came from a tech first company and used a lot of AI there has now moved on to a different role where it's not a tech company. And so some of the challenges potentially there's as well as a financial institution CAE who still hasn't fully been able to implement some of these tools that a lot of us have access to largely because they're regulators. And so the balance between those three I think makes up for a pretty solid panel. I'm also doing a session on AI, how it actually works, some copilot use cases for internal audit. So again it's on April 27th. There's five different learning tracks. There's a CAE track, a focus on AI, the human element, risk topics and advancing audit practices. So if you're going to be there, stop by, say hello. If you haven't signed up yet, please do so. If you've ever been to a conference and at some point you're like I didn't really get anything out of that or I don't have anything practical tactical to take back and do. That's why we started the Audit analytics and AI conference, because I can empathize. I did the same thing. That's cool. Can you show me how to do it? And so as part of the analytics and AI Conference, especially the spring conference that we have on May 20th this year from 9 to 4 Central, it's 9 to 4 Chicago time. We have six presenters, you can get seven CPEs and it's some of the best presenters that we've had over the five years that we've been doing this conference. So these are the ones that I've seen personally, three of which for sure. I have gone back and watched their recordings, you know, months later to go, I know they did this thing that was really cool. Let me go back and watch it so I can do it too. So there's no way that you won't have something you can actually do relative to analytics and or AI. So some of the fine folks we have coming back, Brittany McKinley, Brian McNally and Val Zappia from Elevations Credit Union, Macy's and Victoria's Secret, respectively, all three of those. I've gone back and watched their sessions from the prior years to see what they did so I could replicate it on my end. And then we have Paul Kerstein and Madeline Novelli from Vulcan Materials and they're going to show you how to use AI to build a, like a central hub of audit intelligence paired with a library of reusable AI prompts. So you can. So any auditor on the team can use analytics. We also have multiple people from the Williams Energy audit team. So they have a framework of using AI to do analytics. But then each one prefers different tools. So one person's like, I like Python. So they do theirs in Python. 1 likes R, they do it in R. 1 likes Power BI, they do it in Power BI. They also use data bricks. And so there's some functionality they do in Databricks for SQL or even Python in there if they wanted to. So it's one framework that gets applied and everyone kind of interprets it and uses it differently. Is fantastic. And then the last of our speaker slots, so we have five. The last one. We are having to keep a secret for now and hope to be able to tell you as soon as possible what that's going to be. But. But I think we can at least say it's going to be very innovative. All right, like I said, it is May 20, 9 o' clock till 4 o' clock central. You can search Audit Analytics Conference. It should be towards the top, if not the top. You can go to The Audit analytics conference.com links are in the show notes. You can go to my page on LinkedIn. Trent Russell, find me. There's links there if you follow me. It's pretty hard to miss some of the posts that we're going to be putting up for the commerce this year. So this is probably the most exciting I've been about this conference since the very first one that we did. All right, hope to see you guys there. Thank you. Hey everybody. Welcome to another episode of the Audit Podcast. I'm your host, Trent Russell. Today on the show, we have the internal audit leader from ITT and tax expert Michelle. And I know most of us are not tax people. Even hardcore CPAs mostly are not tax people. Don't see a ton of them in internal audit. I know when I was in external audit, there was what we called the assurance team or the core assurance team, basically the non IT auditors. One of, one of the people on our team had some kind of issue with their laptop and they said basically, hey Trent, you're on the IT audit team. Can you fix my laptop? And I said, hey, you're a cpa. Will you do my taxes? And they went, well, I don't really do that. I went, aha. I'm not help desk support. Of course I googled it the same way, you know, they would have googled it if they were looking to fix themselves and it wasn't a problem. But nonetheless, tax isn't like a huge thing that I hear from most internal audit departments. But Michelle is a tax expert. She led tax at itt. They recognized how good of a leader she was and basically said, hey, come be the cae. We actually talked if you're interested in kind of that transition in Michelle's first like hundred days and things like that. We did an episode with Michelle a while back around all of that. Anyway, and catching up with Michelle towards the end of last year, she mentioned this guidance on effective tax rate that was coming in 2026 and she said it's super important. And I said if you say so. And as a tax thing, I don't know much about that, so I'll take your word for it. And, and so anyway, that is pretty much the entire conversation is around this effective tax rate. It is important. This is a pretty punchy, quick hitting episode, so would recommend taking the time, if nothing else, if you're talking to someone in tax or maybe at a board level and you mentioned something like this, I think it could go a fairly long way. So with that said, again, given my lack of tax expertise, we are now going to just go straight into the episode and let Michelle tell us what's going on. All right, here we go. All right, Michelle, any personal or professional prompts? ChatGPT, Copilot, whatever your LLM of choice is that you've been using anything novel or that you found, even as a audit leader that you found to be helpful.
- [06:48]
A
Yeah, yeah, I would say we were just on an audit recently and the country uses an erp like that's very common in that country, but no one else uses it. And so my Team didn't really have a lot of background. Background in it. And so I was like, how do we get better information? Because I just felt like there was a lot of, like, you know, they didn't have a lot of reports. And I went to Copilot and I told it, okay, this is the system I'm in. This is the type of audit I'm doing. What are the reports that I should be requesting? And so it gave me this whole list. And then when I. I didn't wait, I didn't send an email that said, hey, send me this report. I just went right to the person's office. I sat down, I said, hey, this is the report I need. And I said, I'm going to show you exactly where to go, because co pilot gave me all the screenshots. And person was like, oh, no, no, we don't have that report. And I was like, oh, no, no, just click this button and click this button. And we got at least four reports that the people who use this system every day didn't know existed. So I would say, like, that was super helpful. I never would have, never would have thought because, you know, like, if you're an SAP, everybody knows how to use SAP. But when you're using this, like, really remote system, that's not common. I would say that one was. That one was really valuable because again, like, I don't want a screenshot of what the information is, and I don't. I don't have time to get a login and access. But, like, I just sit there, get what I need. And yeah, it was, it was super helpful.
- [08:05]
B
That is a. That's a first on that one, especially the. Since it's so nice. Yeah, thank you. I'm glad you didn't say it was travel. So for those that don't know, like, when we tell guests that we're having this question, we used to not really give any kind of guidance. There's just like, whatever answer, however you want to. And after about the 18th episode, it seemed like of someone going, I used to help me with my travel plans. I went, we got to stop with the travel. Like, we get it. That's what most people are doing. So try to get something more novel. This is the first time I've ever heard anyone using it in that way, especially for, like, like a unique erp like you're talking about. I think that's very creative. Is there anything on the, like, personal side? I'll give you a second to think about it. Anything there that you found?
- [08:47]
A
I Got one, I got one. And I actually have to say I owe it to you because listening to your podcast, the, the AI ones, I had not used Claude at all. And I was, I was trying to get. We had a group of high school students coming in and I was like, ah, they're not going to understand what internal audit means. I need it to be like, engaging and quick and fun and like, these kids are all used to TikTok and shorts and like, how can I make internal audit sound as fun? And so Copilot was just not helping me create something fun and creative. And I remember you talking about Claude. So I went to Claude and I put in a prompt like, hey, create an engaging, you know, presentation for high school boys. And it was phenomenal. Like, the PowerPoint that came out of it was like, how to catch it, how to catch cheats or how to like, I mean, it was really, really interesting. And then I was able to walk them through it. It was like the coloring, the dynamics, like I would say for visuals. I was super impressed with Claude. So, yeah, that was, that was, that was my, my fun. I guess you call it personal use because it wasn't work related.
- [09:48]
B
I like that there was. I would always tell people, when I interviewed them, when we did like recruiting and stuff back in the day, I tell them, they'd be like, what do you guys, like actually do? And so initially, the first thing I tell them, I was like, well, we audit banking and insurance software. And you can see their faces just like melt off. Like, oh my God, that sounds like the worst job ever.
- [10:08]
A
Yep.
- [10:08]
B
And then I go, I mean, that's technically exactly what I do, but. And then I always tell them the story about on Office Space, you know, like, have you seen Office Space? Every single one of them said yes. I go, all right. You know how like they use the software and the virus basically to steal money and it's too much? They're like, yeah. And I go, we make sure that doesn't happen. Which we do through change management controls like SOD had, we, you know, whatever. And that's usually when they go like, oh, okay, that's way cooler than the other way you put it. But anyway, so that's. Yeah, that remind me of those, those days.
- [10:41]
A
It's funny because I literally use the office space every time I talk about change management when I'm like, meeting with someone and they. Because, like, finance people don't really understand why we need to have all these rigorous controls around the, you know, the, the code that goes into the software And I'm like, okay, well, just imagine that someone, like, creates a PO that automatically rounds up $3 and then that $3 is into another account.
- [11:02]
B
Like, come on, let's gotta check those decimals. You gotta check the decimals every time. All right, so a couple of months ago, Michelle, you and I were talking and you mentioned some new tax stuff for 2026. And I went, I don't know what you're talking about, but I know you're good at explaining this technical stuff to other people. And so people are interested. Go check out the previous episode we had with Michelle where she does a really good job explaining some tax stuff to auditors and how we could actually use the information that she gave us. So anyway, I went, that's great. We should have you back on. Give us kind of the update on what's going on. We just sat here for the sake of the audience and you, Michelle, I'm not going to reread this, but even in putting it into, you know, an AI tool and basically asking it to summarize it, I just put ASC guidance, effective tax rate 2026. I've read it three times now, twice to myself, once allowed to you, I still have no idea what it's talking about. I mean, not even a little bit. So maybe if you could start us off with, you know, when we did talk and you were telling me about this, you're going, like we should, you know, let's do another episode. Explain just exactly what it is that we're talking about. And for anyone who knows even a little bit more about tax than I do, which is practically everybody enough to where they would kind of understand what's going on.
- [12:21]
A
Yes, absolutely. And I'm actually, I'm going to share my screen real quick because I think that's always helpful for people to see.
- [12:28]
B
So while you're doing that, for those that are listening just through the audio, if you want to see the visualization, you can go to the YouTube channel and find it there.
- [12:36]
A
All right, so. So what's changed? So previously. So background is your income tax footnote, right? It's in your 10k under ASC740, which is the old standard, you would have to have a rate reconciliation and that rate reconciliation. And you had to. So rate reconciliation is one which basically is like, hey, the tax rate in the US is 21%. What are all the adjustments that get me to what my effective tax rate is? And depending upon where you operate. So if you're in Bermuda, which doesn't have a corporate tax rate, then you're going to have a pretty low effective tax rate if you're in Ireland, pretty low effective tax rate. If you're in Europe, you're going to be a little bit higher. Right. And so, so previously you had to disclose your effective tax rate and you had to disclose the amount of tax you had to pay. Right, the income tax paid, but, but in total, not by geography. And then you had to give a little bit of language about your valuation allowance, this, this last bullet here. But that's all you had to do. Now it's a lot more detailed, it's a lot more granular. So your rate reconciliation, previously you'd break out maybe 5%. Now you've got all these additional categories. Previously you had to disclose your total tax paid. Now you've got to disclose your tax paid by jurisdiction. So federal, state, international. And then on the valuation allowances, you now specifically have to include those valuation allowances and what's caused them to change. So I would say just in general, it's gotten a lot more granular. I think the important thing for internal auditors to know and where I think we bring value to the organization is that the data points have changed. So the tax provision, all the information that tax uses, they summarize it, they put it in the tax footnote. Well, now tax has to provide more significant detail than before. So the question becomes, where is that data and what are they doing to ensure it's complete and accurate? Well, who's really good at complete and accurate? Internal auditors. And so this is where I think we bring a lot of value to the conversation, is asking them, hey, what's your plan? So if you're a public company, you, you put this in your tax footnote in 2025, if you're a private company, you're going to be doing it this year. So for everybody who's got, who's a private company, and I would say, really, everybody should be paying attention to this because, yeah, maybe this is the first year that tax was, you know, attempting to do it. And, you know, they were probably very involved in getting to those data points. I would say now we need to audit it and make sure that their data points are accurate and we need to continue to monitor it because that's like, if you think about your, your, the more common, like, tax return, okay, great, yeah, there's a tax return, it's there, you can see how much you paid. But if you have 15 different entities that are all filing your own tax returns, it's Going to be really hard for you to be able to validate that information if you don't really kind of understand what, what the pieces are.
- [15:33]
B
So again, if there are for like the IT auditor that's listening or something like that is going like, okay, I hear what she's saying. It sounds important. Where do you. And again, anyone who I hope doesn't take this the wrong way in terms of, obviously you can't just say this is where it sits on like a given risk assessment. But roughly, if we did like a top 10 risks or something like that within. So this year you're talking private within private. For example, where would this kind of sit? Does that make sense? Like, I'm trying to frame it up for people to go, okay, I get it. Michelle's like tax guru, so this is important. How much do I need to consider putting this, some kind of reconciliation of the completeness and accuracy accuracy procedures on my audit plan? What do they need to consider?
- [16:20]
A
I would say you definitely want to have this on your audit plan. The reason I think you definitely want to have it on your audit plan. And even if you're public, like I would say it should be on your plan. Because when you think about your P and L, your P&L, 21%, at least of that P and L is taxes. And so we're now asking the tax team to provide granular level detail that they haven't previously had to provide. And so I think it's important that internal look and make sure, hey, how are you backing that up? So for example, one, when you talk about it, change management. So the, the system that tax is using probably isn't ready for all this change. And so how are they going to do it? Is it going to be spreadsheets? Are they going to be sending emails back and forth that says, hey, hey, we operate in, you know, in Ireland, you know, let me reach out to the control in Ireland and ask him to confirm how much cash tax he paid. If your ERP systems aren't set up to report your cash tax paid in Ireland and you need it to start making those changes, or maybe you were working on that last year, how did they do it? Did they go through the appropriate change management process? And then if your total taxes is 100 and you are able to kind of qualify like five of your jurisdictions, but you're not sure about this other 15 other jurisdictions and it just lumps into other. Is anything that's in other, you know, material.
- [17:44]
B
Why now? Why is this coming about now? And I guess it's kind of an opinion, right? I would assume because it's tax law. So it's more of maybe almost an opinion. But why are we seeing this now as opposed to any other time in the past, do you think?
- [17:57]
A
Yeah, I think there's probably been a desire for it in the past, but maybe not. And I would say the desire is probably on the investors, certainly on the tax authorities. If you think about all of the previous, like, let's just take like five, ten years ago where there was this discussion from, are companies paying their fair share? Right. And so how do you know if companies are paying their fair share? Well, you look at their effective tax rate. Well, well, are they paying their fair share to which country? If you have, as an example, if you're, if you're operating and your biggest operation is in Ireland or your biggest operation is in, is in, let's say Germany right now, now I know, right, as, as an internal auditor, I know where my biggest operations are. And so I say, okay, well, my biggest operations are in these two countries. Let me go look and see are they disclosing taxes paid in that country and if they're not. So if I've got some big operation in Ireland and there's no breakout for Irish tax, I'd say, well, why is that? Well, either, either they're not paying tax in Ireland because there's some special tax incentive which, well, wait a minute, what do I need to do to comply with that tax incentive? And is tax paying attention to that or did they miss something? Right. And so I think both of those things are important to verify and to validate that they've included all the right jurisdictions. Well, one thing I was going to say that, that like, if you haven't started the process, what do you, what do, what is, what are, what is being communicated to the tax departments. And I would say most tax departments are being told, take your footnote from 2024 and try to throw it into this new requirement and see what additional data points you need. So I think if I were going in and auditing this, the first thing I would do is meet with the tax team and say, how did you get the data? What did you do? What was your thought process? Just a walk through to say, you know, where did you start? And if they say, oh, well, we just sent an email and asked everyone to confirm their tax numbers. Well, that's right.
- [19:56]
B
Yeah.
- [19:57]
A
Yeah, exactly. So I would, I would kind of go from there. I would take that as my starting point. The other thing I would ask is did you make any changes in your tax software in order to capture this information? Did you work with finance? Did you work with investor relations? What does the tax footnote now say? Because let's, let's just pretend for a minute that I'm a big company and everybody knows that I have operations in Germany and their, Germany's not listed on my tax footnote. Well, who cares about that? Well, when your investor relations, either your cfo, your CEO are out at some conference and they get the question, hey, how come you're not paying taxes in Germany? Do you think you're, you better be prepared, investor relations better be prepared to answer that question. And the tax team has hopefully prepared them for that. And if they haven't, that's where internal audit comes in. Right? Internal audit is sort of like we connect to all the pieces so we have that walkthrough, we make sure they understand, but we also have the conversation with investor relations. Hey, are you thinking about the kind of questions that investors are going to be asking when they look at our income tax footnote?
- [20:59]
B
And then I would assume on the public side, if nothing else, some kind of advisory, high level project, effectively ask those questions that you have. And I'm sure they are aware of the change in the implications, but probably not, potentially not so aware of how internal audit could, could help them.
- [21:16]
A
Yeah, And I think a lot of that is that people see a tax law change or they see a tax and they're like, oh, tax is going to handle that. We're not worried about it. They don't necessarily think about how it touches all these other pieces. Right. So with tax is all of a sudden relying on, let's just say, for example, you have jurisdictional reporting where cash tax paid is getting reported in your erp. But no one really cared about that number because in total, it only got reported in total. So like if, if, you know, if Brazil put the wrong tax number in and Chile put the wrong tax number in, but in total it amounted to nothing, you don't care. Well, now you do care because you need to evaluate each country, each jurisdiction to say, okay, am I paying tax and material place? So tax has to rely on finance getting the information right. Investor relations has to think about what questions could come up as a result of this. And then you also need to think about, okay, now the tax authorities, all these governments now have information and they might say, hey, Microsoft, be better, better, better be paying a lot of tax to these four countries. And those tax authorities are expecting that and they look at that Tax footnote. And they say, hey, wait a minute. Or how come Microsoft isn't paying all this tax to us? Or, you know, name any big company that that's operating. Everybody wants to get a piece of Apple's revenue. Everybody wants to get a piece of Amazon's revenue. So now tax authorities have a lot more visibility to that information. But also think about esg, right? ESG is, it's all about, like, who's paying their fair share. Right. And so the tax authorities are going to come at you, the ESG activists are going to come at you, your investors are going to come at you. And so internal audit plays a really good role in making sure that finance, investor relations tax, that everybody's looking at this from the same angle and you're auditing it to that same level. I would say, like the risks before of tax, you know, taxes, they always say like top 10 causes of material misstatements is tax. I will say that kind of that's still there. I would say it gets a little bit higher because you have all these different disclosures that you now need to provide that you didn't have to before. You have to carve it out differently.
- [23:27]
B
All right, Michelle, I'm going to hand the microphone over to you. What else? Anything else you want to leave the audience with?
- [23:32]
A
Yeah, I would say the big thing is like, understand where the data is coming from. This data was not previously required. And so make sure that when you're talking to your taxing, you're doing that walk through, you know where the data is coming from and they understand the impacts of the information of that data being disclosed and that you're looping in all the right people. Investor relations, finance, if they're making changes to the erp, make sure everybody understands this is, this is not a simple like, oh, we're just going to provide one level of detail. It's information that wasn't previously required. So it'll be fun getting at that data.
- [24:06]
B
Hey everyone, thank you very much for listening to this episode of the Audit podcast. Whatever platform you're listening on right now, I'm sure there's a subscribe button somewhere, so please hit the subscribe subscribe button there. If you're listening through itunes or Spotify, feel free to go give us that five star rating. It only took me about 16 seconds to give myself a five star review and it really helps to get future guests to come on the show, so we'd really appreciate that. Lastly, be sure to check out the show notes and follow us on all our social media channels on Instagram, on LinkedIn and on TikTok. Also, if interested, please sign up for our weekly newsletter from the Audit Podcast. Thank you all. Have a great one.