e-audit AnD MInIMIZATIOn OF RISKS OF THe TAX evasion

Transcription

1 n vergi İŞİ uot 681.3: : e-audit AnD MInIMIZATIOn OF RISKS OF THe TAX evasion Azer Asadov PhD. Student Azerbaijan university AZ1029. Baku, H.Aliyev avenue, 105. Asaf Asadov PhD Ministry of Taxes AZ1073. Baku, Landau str., 16. səh Abstract Purpose development of the analytic approach for systems analysis of auditing processes and e- audit for minimization of risks of tax evasion. Design/methodology systems analysis, compa - rative approach and generalization Findings approach to tax auditing as open system consisting of necessary elements (steps) allowing to import data, process data to information about tax risks builds practical knowledge sufficient to detect tax evasion with high reliability. Research limitations lack of studies concerning systems analysis of tax auditing based on implementation of e-audit. Practical implications development of the analytic approach to auditing system based on implementation of e-audit is served for saving time and human resources, while tax evasion detection probability is increased manifold. Originality/value novel proposed approach to integration of e-audit to auditing system is served for implementation of knowledge management for tax evasion detection. Keywords: e-audit, tax evasion, ACL program software Jel Classification Codes: E63, H26, K PDF processed with CutePDF evaluation edition

2 1. Introduction The electronic audit (e-audit) technique is used for analysis of electronic data during auditing of companies, especially for large companies with huge volume of electronic transactions. The first countries which started development and application of e-audit technique to tax audit in EU were Netherlands, Denmark and Germany. E-Audit Roadmap report of the European Union (for 2009) defines E-Audit as follows: The verification / checking of accounting transactions [and their sources/ origins] processed in an electronic environment, using analysis, evaluation and testing with audit methods, assisted by computerized tools. E-audit is the most important and main part of the modern field tax inspection. The difference between the desk tax audit and field tax inspection is that the desk tax audit is based on data of the declarations (i.e. tax returns) and financial reports, while E-audit is performed on the basis of the electronic transactions of the taxpayer directly imported from accounting system and cross-checking analysis with e-data of third parties. Any discrepancies in e-transactions revealed by a special e-audit software of tax authority during e-audit is completed by material inspection of source documents in the enterprise. However, the start of e-audit must be justified and this justification is the high tax risk of taxpayer revealed during the desk tax audit. In countries using e-audit system (leading countries of the European Union, USA, Australia, India) each taxpayer is legally obliged for keeping accounting transactions and maintenance of data in electronic format. Basically, two software products (ACL and IDEA) are used for tax e-audit. The mandatory data maintained in e-format (5-7 years) mainly consist of the following: structure, main modules, master files of e-accounting system, including the customers and vendors data, performed transactions, their sources, procurement invoices, account codes, alignment of accounting data, calculation mechanisms for net cost, expenses and revenue base for tax collection purposes. For starting of E-Audit e-auditor forwards data request letter to the taxpayer, receives a copy of the taxpayer s e-accounting database in electronic media, uploads the required files in his/her computer using special software and analyses data and tax evasion risks by means of various methods and internal database. Specific features of e-audit software such as ACL (read only format) prevents the modification of original structure of e-accounting files received from the taxpayer. Upon completion of the audit, all e-files are deleted (confidentiality of the taxpayer data is ensured). Legal basis of E-audit in Azerbaijan is regulated by Clauses , , , , , , 36.3, 42.1, 57.3, 71.4, 76.1, 76.2 and 76.3 of the Tax Code of the Republic of Azerbaijan amended which is force since

3 2. Problems of implementation of e-audit What are main problems in implementation of e-audit in general? 1) Lack of legal basis for electronic data providing by taxpayers and collaboration in explaining of details of operation of computer systems of taxpayers 2) Variety of accounting software used by taxpayers and difficulties to standardize process of extraction of necessary data from database of computer systems of taxpayers 3) Lack of e-audit methodologies for tax auditing prepared for different industries and for different types of taxes. 4) Lack of training materials with practical cases needed for training of e-auditors 5) Lack of trained auditors on e-audit in tax administration 3. Tax audit model based on risk analysis, e-audit and data mining tools In February of 2011 twinning project on e-audit between Netherlands and Azerbaijan is started and finished in May of The small group of selected auditors from the Special Regime Tax Service Department of the Ministry of Taxes was trained within cycle of workshops by experts from Dutch Tax Administration for application of ACL software in audit. It allowed carrying out few pilot studies of using of ACL by some participants of training program during the twinning project. Development of legal basis for e-audit by introduction and changing some articles to Tax Code since January, 2013 opens door for its practical implementation in Azerbaijan. But there are some obstacles which should be overcome for successful and broad implementation of e-audit in tax administration. First of all practical implementation of e-audit requires preparation of e-audit methodology taking into account special requirements and peculiarities of auditing of different industries and different type of business. It is necessary note that main area of application of e-audit technique is financial audit and fraud detection /1-3/. There are not publications about researches related with development and application of e-audit methodologies for taxpayers in different industries. In the present article we propose audit model based on step-by-step processes of extraction of information from different sources, planning and analysis of big data collected from taxpayers and 3 rd parties and our vision to systematization of e-audit technique implementation. The main task of the present article is providing ideas and solutions in order to sharply decrease time of field audit for tax bodies and taxpayers and increase of efficiency of detection of tax evasion, which plays important role for decrease of administrative expenses for tax compliance. 119

4 Global economic and financial crisis is on going; the level of tax evasion is stably high even in the developed countries (new tax evasion cases based on computer technologies are being revealed). These tendencies create difficulties for tax autho - rities, which in its turn necessitates implementation of new approaches and technologies in audit. Based on the experience of developed countries, Azerbaijan also needs in the implementation of a new audit model and methods that proved itself in the world audit field, based on computer technologies and resting on knowledgeable and skilled personnel. Platform of modern audit processes proposed for implementation in Azerbaijan consists of the following stages (Fig.1-Fig.3): 1. Assessment of risks and classification (clustering) of taxpayers, working in different sectors (banking, oil, trade, production, telecommunication services, etc.) to risk groups (low risks, medium risks and high risk taxpayers) by implementation of the most modern computer technologies-based intelligence analysis (data mining) for this purpose. This stage allows classifying taxpayers from different business sectors according to level of risks (L, M H) and selecting risky taxpayers for audit. 2. The next stage is initial planning of appropriate actions for collection of general and analytic information about selected taxpayers aimed with understanding of the taxpayer s business, analysis of computer and accounting system 3. The third stage is based on the results of analysis in the second stage and allows analyzing internal control system in the context of risks of manipulations with data by staff, strength and weakness of internal control system of company audited. 4. The forth next stage is related with detailed understanding of business processes, especially sensitive to tax evasion and fraud, for example sales and purchases, stock and inventory registration. In this stage audit team should identify necessary audit tests, prepare audit work plan of the taxpayer as a result of the initial risk assessment. 5. The fifth stage is related with preparation of notification and written data request and sending it to the taxpayer. After some period audit team starts e-auditing processes based on analysis of data and information collected in pre-planning stages (1) - (4) and after data request. The e-audit stage is related with data analysis of electronic transactions recorded in computer systems of taxpayer audited, first of all transactions related with the processes sensitive to tax evasion and fraud. The details of e-audit stages within whole chain of all steps of selection of taxpayers, pre-planning work and field audit are shown in Fig.1, Fig.2 and Fig The sixth stage is related with field audit, which is realized in the place of location of enterprise. 120

5 This stage will be efficient if audit team, including e-auditors finalize analysis of data collected and prepare detailed reports with detection of discrepancies in data, including indication of dates of suspensions transactions, areas and volume of possible taxes evaded. This data analysis reports are shared with regular auditors, which should find material evidence of risks detected. The sixth stage is finalized by preparation of final report about the results of audit, based on material facts, which is considered by taxpayer and signed in case of his approval. The results of audit are also evaluated by the audit management of tax authority. Fig. 1. Platform of modern model of audit processes (Source: it is developed by authors) 4. Cycle of e-audit processes and importance of ACl-based tests As it shown on Figs. 2-3 E-Audit related processes start from data planning stage, where computer systems of taxpayer selected for audit is studied from point of understanding of database of computer system and data flowing (input-output) in accounting system s modules. This stage includes interview step with management, chief accountant and IT specialist after analysis of questionnaires sent to taxpayer in advance. The purpose of this stage of pre-planning (step before sending of data request) is clarify what data could be available during audit, where sources of data (files in database) and information required are located within information systems of taxpayers, what financial, management and external audit reports are available. In the pre-planning step ACL could be useful also for carrying out of analytic procedures. These procedures include statistical analysis of key financial indicators of the same taxpayer during 5 years and comparative analysis of ratios of the same indicators of selected taxpayer with industry s averaged indicators. This allows reveal- 121

6 A.Asadov, A.Asadov Fig. 2. Tax audit processes modernization model in Azerbaijan Pre - PlANNING (Source: it is developed by authors) ing trends and irregularities in the business behavior and financial indicators of taxpayers and as result localize areas of business processes which should be further analyzed on more detailed transactional level by ACL. For this step auditor is needed in electronic data which he asked by sending to taxpayer the data request letter with description of required data, format and period. 122

7 Fig. 3. Cycle of e-audit processes based on implementation of software ACl (Source: it is developed by authors) For deeper analysis of tax evasion risks of selected taxpayer it would be useful to have audit knowledge base, where schemes of tax evasion in different industries and results of industry-specific evaded cases with taxpayers audited earlier are collected. This valuable information could be useful for preparation of audit plan, where scope and tasks (audit objectives) of ongoing audit are described. It would be useful to involve in audit plan risks proposed in pre-planning stage and audit tests for checking these risks. The OECD published Guidance (OECD, 2010, Guidance on Test Procedures for Tax Audit Assurance) provides some example of catalog of simple tests categorized according to tax audit objectives. Unfortunately there are not publications, where audit tests are categorized for audit objectives and based on using e-audit techniques for analysis data of taxpayers and 3 rd parties. For systematization of using e-audit technique in field audit practice it is very important to develop catalog of ACL-based tests, categorized for common audit objectives and tailored also for specific industries and types of business. It is necessary also to know which data (files, fields) are required for each of ACL-based tests and how to find these data in accounting and other information systems of taxpayers and 3rd parties. As direct start of e-audit auditor should import files received from taxpayers and required data existing in the internal database of tax administration into personal computer with ACL software. Then e-auditor should check for integrity of imported data and correctness of transfer data of taxpayers to personal computer. After proper 123

8 importing of required files e-auditor should extract necessary data from files and prepare the data tables with corresponding fields for analysis by using ACL functions and audit tests. The aim of data analysis is finding and identifying possible anomalies in data, which could be results of errors and/or tax evasion/fraud. The e-auditor could select tests most important for his audit case from the catalog of ACL-based audit tests and spend less time for auditing process, while efficiency of tax evasion is more guaranteed. 5. data collection sources during e-audit Main sources of data required for carrying out of E-Audit are the followings: 1. E-data contained in the database of the Ministry of Taxes, including financial indicators of e-tax returns, results of desk tax audits and previous field tax inspections, e-data received from state authorities and banks; 2. Files, documents, reports containing e-data maintained by taxpayers in accounting and management information systems pursuant to the requirements of e-audit (accounting records related to the electronic transactions); 3. E-data belonging to third parties. The definition of the third party is given in Clause of Tax Code of Azerbaijan republic: Resident or non-resident person audited by tax authorities desk or field tax inspections, directly involved in provision of goods (works, services) for the activity of the taxpayer. Banks are considered as third parties for audited taxpayers and are served as the main e-data sources. According to Clauses of the Tax Code in case of failure of the audited taxpayer to provide documents about bank transactions, in most cases the tax authorities may obtain such information directly from banks without applying to the court. 6. Which taxpayers are more suitable for e-audit? Pursuant to Clauses and of the Tax Code of Azerbaijan Republic E- audit is implemented for the taxpayers maintaining electronic accounting system. Implementation of e-audit is primarily necessary in the following cases: 1. International companies engaged in oil sector (contractors and subcontractors); 2. Local and foreign companies of holding type with multiple branches and ope - rations in country and outside in various countries; 3. Large and medium trade and service companies performing numerous e-tran - sactions via e-cash registers and POS terminals; 4. Banks, insurance and leasing companies; 124

9 5. Telecommunication companies; 6. Processing centers; 7. Companies specialized in e-commerce; 8. Power, gas and water supply companies rendering utility services. 9. Internet services and mobile payments providers. 7. resuls Practical results of implementation of e-audit for tax authorities and taxpayers in years in Azerbaijan are the following. As it is follows from analysis of the results of 30 cases of application in years of e-audit methodology to large taxpayers in Azerbaijan working in different industries (oil, banking, production, etc) main advantages of the e-audit are as follows: Time consumption for tax inspections is considerably reduced (about 30%) both for tax authorities and tax payers; Tax authorities may simultaneously audit numerous taxpayers from which accounting data and other data are collected by using e-audit, performing resultseffective field tax inspections with in-advance revealed risks of tax evasion in certain business processes and periods with high reliability; Ratio of additional taxes calculated during field audits to turnover of companies checked by using e-audit methodology in comparison with previous field inspections carried out by conventional auditing procedures is increased in 2 times. Social and commercial prestige of disciplined taxpayers increases, while the tax authorities implementing e-audit technologies receive an opportunity to detect all taxpayers with evaded taxes, thus increasing the tax discipline and budget revenue at reasonable expenses. literature 1. David Coderre. (2009). Computer-aided fraud prevention and detection. Edited by John Willey & Sons, Inc. (Canada), 280 p. 2. David Coderre. (2009). Fraud Analytics techniques using ACL. Edited by John Willey & Sons, Inc. (Canada), 158 p. 3. Tommie W. Singleton and Aaron J. Singleton. (2010). Fraud Auditing and forensic accounting. Edited by John Willey & Sons, Inc. (Canada), 317 p. 125

10 Əsədov Azər Asəf oğlu Azərbaycan Universitetinin dissertantı Əsədov Asəf Əli oğlu fəlsəfə doktoru, Azərbaycan Respublikası Vergilər Nazirliyi e - audit və vergidən yayınma risklərinin minimallaşdırılması Xülasə Tədqiqatın məqsədi e-auditin tətbiqi yolu ilə vergidən yayınma risklərinin minimallaşdırılması üçün audit proseslərinin sistemli təhlili məqsədilə analitik yanaşmanın tətbiqi. Tədqiqatın metodologiyası sistemli təhlil, müqayisəli yanaşma və ümumiləşdirmə. Tədqiqatın nəticələri verilənlərin idxalına, onların emalına və risklərin müəyyənləşdirilməsinə vahid və acıq audit sistemin daxili elementləri (mərhələləri) kimi baxıldıqda, vergidən yayınma halların müəyyən edilməsi etibarlığı artır və bu barədə zəruri praktik bilikləri əldə etməyə imkanlar yaranır. Tədqiqatın məhdudiyyətləri e-audit prosesləri daxil edən vergi auditə sistemli təhlil baxımından yaxınlaşması ilə əlaqədar tədqiqatların olmaması. Tədqiqatın praktiki əhəmiyyəti e-auditin vahid vergi audit sistemi daxilində tətbiqi vergi auditi zamanı sərf edilmiş vaxt və insan resursların azadılması ilə yanaşı vergidən yayınma hallarının aşkarlanma ehtimalının dəfələrlə artırır. Tədqiqatın orijinallığı və elmi yeniliyi ilk dəfə yeni analitik yaxınlaşma təklif olunur ki, o e-auditin vahid audit sisteminə daxil etməklə vergidən yayınmasının aşkarlanması məqsədilə bilik menecmentin tətbiqinə imkanlar yaradır. Açar sözlər: e-audit, vergidən yayınma, ACL program təminatı. Азер Асадов Асаф оглы диссертант, университета «Азербайджан» Асаф Асадов Али оглы кандидат наук, Министерство Налогов Азербайджанской Республики Электронный аудит и минимизация рисков налогового уклонения Аннотация Цель исследования разработка аналитического подхода к системному анализу процессов аудита и электронного аудита для минимизации рисков уклонения от уплаты налогов. Методология исследования системный анализ, сравнительный подход и обобщение Результаты исследования подход к налоговому аудиту как открытой системе, состоящей из необходимых элементов (ступеней), позволяющих импортировать данные, перерабатывать их в информацию о налоговых рисках, создавая практические знания, достаточные для обнаружения уклонения от уплаты налогов с высокой надежностью. Ограничение исследования отсутствие исследований, посвященных анализу систем налогового аудита на основе внедрения электронного аудита. Практическая значимость исследования разработка аналитического подхода к системе аудита, основанной на внедрении электронного аудита, служит для экономии времени и человеческих ресурсов в ходе аудита, в то время как вероятность обнаружения уклонения от уплаты налогов увеличивается в разы. Оригинальность и научная новизна исследования предлагаемый подход к интеграции е-аудита в сис тему аудита служит применению управления знаниями для выявления уклонения от уплаты налогов. Ключевые слова: электронный аудит, налоговое уклонение, программное обеспечение ACL. Məqalə redaksiyaya daxil olmuşdur: Təkrar işləməyə göndərilmişdir: Çapa qəbul olunmuşdur: