b'Everything ultimately flows into taxes, Neuman says.Data Visualization as an Auditing Tool Every dollar that the company earns or every dollar ofDuring a busy season, an auditor might work 70 to 80 expense that they report ultimately affects that tax number.hours a week. In 2020, two then-masters students in the So not only is it able to predict issues with respect toSchool of Accountancy at the Trulaske College of Business, reporting taxes but also some of these other areas that weNick Higginbotham and Luke Nash, wondered how they might be more interested in because theyre potentiallymight use their time more effectively and efficiently. much larger dollar amounts, such as predicting misstate- Enter data visualization. ments of revenue.In the past few years, more and more accounting firms Now regulators and investors can use interim estimates ofhave been graphically representing data to spot trends and the annual effective tax rate as signals of the likelihood that aanomalies, says Will Demer, an assistant professor of firms internal controls are ineffective.accountancy and RubinBrown Faculty Scholar who served Your average investor can take two companies, compareas the students faculty adviser on the project. Based on the volatility of those numbers and make a decision aboutconversations with partners from some of the big accounting which one they think has better financial reporting quality,firms, data visualization is something that they are increas-which means that they can rely on those financial statementsingly using, he says. This was a great opportunity to help a little bit more, Neuman says. Regulators are alwayspromote some of these tools and give some examples of how interested in trying to identify which companies should bethey could be used in practice. audited. So if they are considering a pool of 50 companiesIn an applied article published in the Journal of Accoun-and they only have the resources to look at 20, well, thistancy, Making Audits More Effective Through Data might be one way that they go about narrowing that groupVisualization, the co-authors highlight four ways in down. If that estimate is really volatile, they might want to bewhich auditors can leverage client data. a little bit concerned about numbers being reported on theOne way auditors can use data visualization is for journal financial statements because they might not be completelyentry testing. For companies that process a large volume of accurate.transactions and have numerous accounts, data visualization The paper, Interim Effective Tax Rate Estimatescan make outliers obvious and help the auditor quickly iden-and Internal Control Quality, appeared in Contempo- tify unusual patterns and potential risks that may haverary Accounting Research.The unexpected informationof income earned or expense incurred for that quarter. However, one valuethe estimated tax rateis an estimate we can learn from the of the annual tax rate for the company. Financial accounting standards require companies to esti-volatility of tax expensemate their annual tax rate each quarter and include it in the interim report. Why is this important? To estimate annual How have you gauged the quality of a companys financialtax expense, managers must estimate annual income. Thus, report? Maybe you considered the audit report, whether thequarterly tax estimates serve as a signal of expected future firm met earnings targets or how quickly the financial state- earnings. ments were filed. You could learn from each of these items,Because these estimates are partly based on managements but not until after year-end. What if there were an easily-ob- forecasts of taxable income, annual tax rate estimates could tained metric providing information about the quality of theprovide insight into financial reporting quality issuesfinancial statements prior to year-end?specifically, the quality of systems that generate the reports. Public companies are required to issue quarterly financialBecause annual tax rates are estimated each quarter, we can statements to inform stakeholders and other interestedsee revisions to the estimate throughout the year. These parties about operating results as the year progresses. Mostrevisions can signal one of two thingsthe companys oper-people are interested in the quarterly earnings numbers,ations are changing or the companys financial reporting which offer insight into the firms earnings trajectory for thesystems are insufficient to generate accurate forecasts. year. But not all estimates in the quarterly report are createdWhen controlling for changes in operations, Professor equal. Most estimates provided are simply the amountStevie Neuman and her colleagues found that companies 16 School of Accountancy'