Tax Analysts Blog

The Use of Big Data in Auditing

Posted on Mar 5, 2015

I’ve been hearing the term “big data” a lot lately. Not being an IT professional, I assumed rather naively that big data was, well, data that was big. As it turns out, my simplistic definition isn’t all that far off. According to Webopedia, big data is a term used to describe a massive volume of both structured (i.e., inventories, orders, or customer information) and unstructured data (i.e., data gleaned from the Web or social media sites). The problem with big data is that it is so large that it is difficult to process using traditional means.

Most businesses are inundated with data on a daily basis. By itself, that isn’t anything new. But a recent trend is to look closely at what gets done with the data that is received. Companies that regularly obtain massive data sets are very interested in improving how they process big data because it can increase operating efficiency or provide new information on revenue or customer trends.

Businesses aren’t the only ones trying to figure out what to do with big data. Auditors, including state tax auditors, are trying to determine how big data can help them do their jobs.

Before beginning an audit, an auditor generally gathers as much data about a company as reasonably possible. General information about a company can be gleaned from current and past returns and workpapers, as well as from the company’s annual report and Form 10-K. The goal is to fully understand the taxpayer’s overall operations as well as the industry (though the auditor likely has some knowledge of the industry).

State tax auditors are also keenly interested in understanding a company’s operations in their state. If the company is not headquartered in the state, does it maintain a sales office or have warehouses or manufacturing facilities in the state? That will also lead to the auditor’s making a list of any affiliated companies and determining their presence in the state.

But one of the most important research tools that auditors use to obtain information about a company is the Internet. Because most companies maintain a website, the auditor will likely find a good deal of information about a company’s business on its website. The Internet can also be a source for a company’s advertisements or press releases announcing new products, acquisitions, or dispositions.

The discovery process has historically produced a lot of information for tax authorities. But given an increased focus on analyzing big data, tax authorities may request more information about a company’s transactions and customers because they will be able to use software to detect inconsistencies.

While big data may not be the first thing that comes to mind, auditors are aware that the massive (and constant) amounts of data that pour into businesses could result in quicker, more accurate reporting. And that same data could also result in more productive audits. A 2014 white paper from the American Institute of Certified Public Accountants concluded that advances in data science could be applied to the auditing industry to improve the effectiveness of audits and provide new forms of audit evidence.

For state auditors, big data (like other types of data) could be used to better evaluate and select taxpayers for audit. While there are definite downsides to the use of big data by tax authorities, big data is here to stay and it will be interesting to watch how auditing practices change.

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