My dad did tax returns by hand. No computers, no electronic calculators. Carbon paper was the big time-saving tech innovation at CPA firms of the early 1960’s.
Then computers came along. Tax preparation became much… Harder. Yes, auto-calculation made the basic math easier. But the era of basic math was over.
Complexity exploded. Soon, it was literally impossible to do a tax return by hand for even reasonably simple small businesses. Take Depreciation as just one example. The IRS taxpayer guide for “Residential Rental Property” mentions Depreciation 233 times.
The Solution is the Problem
Systems grow to exploit all available resources… Then keep growing.
Rabbits keep breeding until they eat all the food and many starve. Equilibrium is the horribly uncomfortable place where starvation and reproduction are in balance.
Computers disrupted the balance. An arms race escalated between rulemakers and businesspeople. Taxpayers concocted complex strategies to exploit the tax code, and the IRS made complicated new rules to close the loopholes. The cycle continued for decades, and we are left with tax rules that are impossible to understand perfectly even with the best computers and advisers.
Tax is just one example. Compliance departments have ballooned to keep up with regulations covering labor, finance, environment, privacy, and so on…
Enforcement by Lottery
It is literally impossible to comply with every law at all times. We don’t bother trying. Almost everyone drives faster than the speed limit, and very few drivers come to a complete stop at every stop sign.
Very few violations are punished. A police officer must witness the infraction. Even then, police generally punish only the most egregious violations. But they can indeed issue a ticket for crawling past a stop sign at a snail’s pace. It is illegal.
Regulators can similarly impose harsh penalties for a great many common occurrences in your office. Your IT consultant probably has access that violates privacy ordinances. Your football/basketball betting pool is almost definitely a crime. Have you properly accounted for every single invoice, reimbursement and minute of labor and reported them properly to all relevant government agencies? Has everyone in your organization complied with every rule in every jurisdiction at all times since inception? No way.
Every now and then we hear about a massive fine, maybe for Google or HSBC. Then we hear about a small business nailed by a tax audit or product recall based on paperwork.
But we don’t worry. We make a good faith effort to comply. Any infractions are minor, and the regulators are not focused on them. Our odds are pretty good in the enforcement lottery.
Everyone Is a Winner!
The equilibrium has shifted again. The lottery era is ending. It’s not a lottery if there are no losers. Your car may already know every traffic law you break. Your business will be similarly transparent soon, if not already. We are entering the era of maximum compliance.
You still make mistakes. You don’t automate your compliance risks. But the authorities are automating their oversight.
Cameras are everywhere. Conversations are increasingly recorded in the age of Siri and Alexa. All of your emails, all the directories, every database, and the entire cloud is searchable. Searching is easier than ever with AI.
Your mistakes will be found. It is a matter of time. Technology overwhelmingly favors the enforcers. Unlike the “lottery era”, minor mistakes and oversights are likely to have consequences.
Nirvana Is Coming
Technology helps businesses with compliance. Tools can guide us before we act then manage recordkeeping afterward. The tools are improving rapidly, but there is a long way to go. Heaps of manual effort is still needed to monitor every deal, every staffer, every interaction, every invoice, every company-paid meal, every JV partner, every customer…
Nirvana will come when compliance is no longer a thing.
Your world will change when your “smart assistant” really understands your schedule. When you set up a lunch meeting, your “calendar” understands who the counterparty is, what the relationship is, whether the meal is tax-deductible and/or reportable as a gift to “politically exposed persons”, and what regulations are likely to be relevant based on the topics discussed and people present.
At the end of the meal, all relevant data is captured where it is needed: CRM, KYC/Compliance, Accounting, Tax… Discussion notes will be routed where they need to go: some will be flagged as being subject to confidentiality, others may be raised to the compliance department or perhaps even the Board if that’s what governance standards require.
When you want to launch your widget into the Elbonian market, your system understands the requirements, both in that market and in others (e.g., sanctions list?).
In this future world, there is no fear of the regulatory enforcement actions because you’re always compliant. More importantly, the hit-or-miss enforcement lottery is replaced with an ongoing regulatory awareness.
Think about credit cards work today: Fraudulent activity is caught in real time through ongoing monitoring and AI. Issues are resolved in hours. Imagine if tax reporting worked the same way. Imagine if product launches worked this way. Small issues would be flagged in real time instead of months or years later, after massive penalties or an expensive recall.
In the Meantime…
- Don’t cut corners. More than ever, mistakes are likely to get caught.
- Start off right. It’s so much harder to fix things later.
- Streamline and automate. Exploit technology to help. The world has gotten too complex for manual processes, paper invoices, etc. That’s a recipe for high costs, low quality, and a high chance of compliance problems.
- Don’t expect technology to be the whole answer (yet). We still need expert humans (for now)