In this interview: Andrea Köchling, tax inspector at the Hamburg Tax Office

Turning a blind eye to the documentation requirement? Tax advisers are still finding it difficult to persuade clients to keep procedural records. The most effective argument remains that a lack of documentation can result in severe penalties from the authorities. Yet there are good reasons to tackle documentation – for clients, but also for tax advisers and firms. In an interview with Paul Liese, Andrea Köchling, a tax inspector at the Hamburg Tax Office, explains what you should look out for and which arguments might convince your clients.

Andrea Köchling knows what she’s talking about. As an expert in Procedural documentation She is aware of the weaknesses, but above all the strengths. Documenting all processes offers opportunities that enable clients and law firms to position themselves more broadly and thus more securely for the future.

Paul Liese: A very good morning from Hamburg, from the hsp studio. I have a guest with me today: Ms Köchling. Ms Köchling, please do introduce yourself briefly.

Andrea Köchling: A wonderful good morning from me too – or ‘moin moin’, as we say here in Hamburg. My main job is as a tax auditor, and on the side I work as a freelance consultant specialising in procedural documentation. And it is in this capacity that we’ll be talking today. Thank you very much for the invitation. I’m also a freelance consultant specialising in cash management and VAT law issues relating to customs law.

Paul Liese: Fascinating! How important is process documentation in the context of all these issues?

Andrea Köchling: When it comes to the till in particular, it has now become extremely important. This is, of course, linked to the law on protection against tampering. That was back in 2016. And over the years, the Federal Fiscal Court (BFH) has also handed down numerous judgements dating from 2018, ruling that procedural documentation relating to the till system is an essential requirement for preventing manipulation. This means providing the programming logs so that one can demonstrate how the system has been customised – in other words, how the till has been programmed and adapted to the company’s specific practices. After all, everyone has different requirements regarding what they would like to see in a till. All of this, and very, very, very important: the immutability of the entries for business transactions. It has been ruled in court that this is an absolute requirement, and it is, of course, something we as tax auditors also pay close attention to.

Paul Liese: Right. If I run a cash-intensive business and I’m facing an audit, the first thing is the Cash register inspection – That’s a preliminary check, isn’t it? Do I need the documentation for that as well?

Andrea Köchling: Yes, definitely. That’s something we ask about during cash register inspections. It includes everything that forms part of this documentation. User manuals, instructions and the like are all part of it, as well as what the business owner should always have in an „emergency kit“. Especially during these cash register audits. I think a business owner really should put together an emergency kit like this. First and foremost, it should contain these programming logs and operating manuals. It’s also very important to have the phone numbers of your tax adviser, the till manufacturer and the till installer. After all, you always have a point of contact for the till systems if the technology fails or similar issues arise. And what I also consider to be very, very important is that the procedural documentation for the entire business should be included, specifically the instructions detailing exactly what staff are permitted to do with the till. Because when we turn up and the business owner isn’t there, for example, the staff effectively have to carry out their obligations towards us. But not every member of staff has the same authorisation regarding this till. And that, of course, must also be documented. Simply saying, „I can’t do that“, becomes rather difficult then.

What happens during a cash register inspection?

Paul Liese: Right. So here’s how I picture it: if I’m a business owner and I have a till, I’d keep a USB stick in the main till containing all the documents. And if there’s a cash register audit, the employee authorised to act on my behalf – because I’m not on the premises – can hand over the stick. Now let me put myself in the auditor’s shoes. What would I likely expect to find on the stick? Firstly, a document showing the data flows. How do the items get into the till? Where are the tax rates applied? How does the data from the till – including what I’ve sold – get fed back into the accounts?

Would that be the first thing an auditor would want to read, before going into more detail later to check how the till is set up? Or what does an auditor expect to see at a glance in order to get an initial understanding of how the business owner operates?

Andrea Köchling: Yes, exactly that. And then, at a deeper level, of course, how the data fields are described in detail. Because it does vary from till to till which fields are populated and which data records they contain. It’s also nice, of course, when we turn up with our USB stick and the data is transferred onto it straight away. But at the moment, it’s still very rare that we can take the data away with us straight away.

Paul Liese: So, the transaction data – what’s been done at the till over the last few days.

Andrea Köchling: Exactly. That’s what the DSFinV-K is supposed to sort out. That’s the interface where the GDPdU data export is meant to take place, so that we can come and collect the data straight away, rather than having to wait two weeks or more after the cash register inspection for the data to be sent to the office.

Paul Liese: How relevant is it, in a document like this, to specify whether the hardware is made by Casio, Y or Z, or what version of the software is installed on the till? How relevant is that compared to the actual workflow, the process and the data flows?

Andrea Köchling: That’s, shall we say, the introduction. Which till system am I actually dealing with? What model is it? Because there are certainly differences between them. That’s how I can tell, for example, whether it’s even a till that I’m allowed to use since 1 January 2017. Those are the basics. If I have a different data processing system, I’ll also need to specify what model or manufacturer it is and what version it’s on. So that’s the introduction, to start with.

PL: If I now apply this to a comprehensive set of procedural documentation that describes my company in its entirety, is it actually relevant whether the server is from HP, Siemens or IBM, or isn’t it really more about the software I use – how the data is stored, where the data is stored, and what the data flows are like?

Andrea Köchling: How the data is stored, where it comes from, how it is backed up, and so on, is, of course, part of the ICS, that is, the operational documentation. And that is actually one of the core tasks the business owner must carry out. The comprehensive procedural documentation for the entire company is divided into four sections. First, there is the general information; then there is the user documentation, the system documentation and the operational documentation. Two of these must definitely be produced by the business owner: the general description and the operational documentation. The other two are provided by the manufacturer of the data-processing system, namely the user documentation and the technical system documentation. And all of this together ultimately forms the procedural documentation for the entire company.

Paul Liese: So, from my point of view, the focus of the documentation is: What are the processes within my business? And which systems, which software and which data interfaces do I use to run my business?

Andrea Köchling: Yes.

Paul Liese: When I speak to consultants, I very often find that there is a widespread belief that process documentation is simply the same as scanning to replace paper documents. But there’s much more to it than that, because when I scan documents, it simply means I’ve received or sent post somewhere – but that doesn’t in any way explain or describe how the documents came into being.

Andrea Köchling: Yes. And above all: there will certainly still be companies that perhaps do not scan their documents. And they, too, need procedural documentation. I had an experience of this myself during an audit. I was auditing a very large company that generated 98 % of foreign turnover, so they had a great deal of interaction with customs and freight forwarders. They’d written their own programme to manage all these data streams. And then I asked to see their procedural documentation. The owner was then quite proud and placed the procedural documentation for document-replacing scanning from the German Tax Advisers„ Association on my desk in Word format – I think it was 60 or 70 pages, just that section alone – and I asked: “Is that all?” She burst into tears. Naturally, I felt terribly sorry for her. But document-replacement scanning wasn’t really the main focus at that company; rather, it was all about how this in-house programme actually worked. What does it do with the data? How are the customs data imported, queried or the like? So this document-replacement scanning was actually – and I’ll put this delicately – the least significant part of the whole business.

Paul Liese: I get the slight impression that, when you come to our company for an audit, it would be far more helpful if we provided you with a flowchart that visualises the company’s workflows in a process diagram, with the individual process steps clearly labelled to indicate who is responsible, what software is used, where the data is stored and what risks exist, rather than if you were given a 100-page tome about some servers or data storage systems and the like. Don’t you agree?

Andrea Köchling: Yes. That’s exactly what I keep saying in my talks and seminars: „If you can paint something, if you can draw something – organisational charts are the key here – then draw and paint.“ We’re all visual people. It’s much easier to remember if I can see the flowcharts than if I first have to read through 100 or 200 pages – depending on the size of the company – or perhaps even more. In my view and as I understand it, the organisational chart actually belongs straight away in the general description. It comes after the name, more or less. That’s absolutely crucial. And the same applies to the individual steps: if you can illustrate anything graphically, do so.

Paul Liese: Over the past few weeks and months, I have frequently had the privilege of drafting procedural documentation alongside a consultant and their client, and we went about it by visualising the processes. Whilst the client was explaining what he does in his business and how he does it, and we were sketching and describing it, the client always had to wait until I’d finished typing it up. And you could really see the client starting to think. Why do I actually do it this way? Is the way I’m doing this still right? And then a conversation starts, and that’s actually where the added value of the documentation lies. That’s why I now prefer to talk about „process documentation“ rather than ‘procedural documentation’. Because you think about it, discuss it and realise: ‘Hey, this process isn’t ideal as it stands. We can do much better than that.’

Sole traders: a contingency plan is required

Andrea Köchling: It’s great that you’ve given that example, because that’s actually my favourite part of process documentation: namely, the clear benefits and added value for the company. Some tax advisers have told me: „No, I can’t sell that to my client at all. They don’t want it.“ Then I said: „Oh, what a shame. Why don’t you explain the full benefits to them?“ I can optimise processes. I might even be able to save costs. If I have a procedural description for a role – and this is actually something that’s always been in place – people who might be new to the company can get up to speed more quickly. No knowledge is lost when someone leaves or anything like that. I might also have a certain degree of protection if I say: „Right, dear tax authorities, I have here a Tax Compliance System. “Everything’s working fine here. I haven’t tampered with anything here. I’ve backed up my data. I’ve protected my data.„ And what I think is very, very important – and this applies to sole traders – is that I don’t just need security or protection for my electronic data; entrepreneurs, especially sole traders, actually need a contingency plan for themselves as well. Because in many long-established, traditional businesses – where the company has been around for several generations – the senior partner has everything stored in his head: the contacts, when and where he met whom, how it all works. If anything were to happen to him, the heirs would be in a sorry state. Because that knowledge would be lost. As harsh as it sounds: you’re no doubt familiar with the “follow-in-the-footsteps’ theory; to put it respectfully, the tax authorities really don’t care. The heirs have a duty to ensure that everything carries on as before. They then become our points of contact. Recently, a tax adviser told me: ‘The owner has passed away. Nobody knew how to carry on. The company had to close down.’ That’s absolutely disastrous.

Paul Liese: That brings me to the point that this sort of documentation is also helpful if you want to sell your business as part of a business succession plan. There’s a second term I like to use as an alternative to „procedural documentation“, namely the ‘business owner’s handbook’. It sets out everything: how the business operates, how responsibilities are organised, and ensures that, should I ever be unable to carry out my duties, staff know what to do and who to contact. That’s why I’ve now come to the conclusion that the tax authorities meant no harm when they told businesses: ‘Please draw up some documentation.’ Even in the context of the current pandemic, I believe that companies which have such documentation are better prepared for situations that cannot be assessed at short notice and which change from one day to the next, simply because they know exactly what they need to do. If we go back to the topic of cash registers: we had the VAT change on 1 July 2020. Now we’re on the verge of reversing course, with everything reverting to the previous system on 1 January. Those who knew who had set up the till, how it was configured, and where the programming logs were kept knew immediately what needed to be done. I can imagine that in the coming years, one key focus of audits will be how the transition went and whether it was carried out correctly. If you don’t have the documentation and can’t prove how you switched everything over and then reverted it, you’ll always end up in disputes, and that’s so unnecessary.

Andrea Köchling: Yes. I’d like to come back to the added value of procedural documentation. Recently, a tax adviser told me: „I only take on new clients if they provide me with procedural documentation. I read through it first to get an idea of whether the client is a good fit for me at all, whether I actually want to take them on, or whether I think they’re not the right fit for me.“ That, for example, is one added value. And the other added value is quite clear: some things simply go faster. They can be implemented more quickly. I can look it up or check the version history: „On such-and-such a date, I changed this and that.“ We tax auditors are always looking at the past, after all. Sometimes you can’t even remember what you ate three days ago. So how am I supposed to know what happened on 1 July three years ago? That simply makes a tax audit much quicker. Namely when the business owner can check and say: „Have you forgotten? It was such-and-such.“ And then the other side says: „Oh yes, gosh, that had slipped my mind too. I hadn’t thought about it since.“ That can certainly be an added benefit.

Paul Liese: This issue has been around since the 1990s, and then it was set out in very specific terms again in 2015 and reaffirmed in the new GoBD. If you’ve finally decided that you’d like to do something like this, how do you go about it? What would you recommend?

Andrea Köchling: I’d say it’s a bit of a matter of personal preference. There are, after all, plenty of free Word documents available. At the DFKA – that’s the German Association of Cash Register Operators – you can, for example, download free forms for cash register documentation from their website and fill them in. The German Association of Tax Advisers provides Word documents that you can fill in, print out and customise. Personally, I prefer to do it online. There are now some very good online providers that aren’t expensive at all. That’s actually another misconception that’s often in the minds of taxpayers and even tax advisers. Along the lines of: „Procedural documentation like that costs €20,000.00 or €30,000.00. I’m just a small business. I simply can’t afford any of that.“ That is absolutely not true. There are genuinely affordable online tools – and ‘affordable’ doesn’t mean ‘cheap’ or ‘poor quality’ – that work well.

Paul Liese: In terms of weighing up the risks: if I’m handling a lot of cash right now, I’d start with the till records, because that’s the first thing that could unexpectedly come my way without me having two weeks„ notice because someone’s announced they’re coming. And the next step is to document my entire business. I think the simplest approach, methodologically speaking, is to say: “First of all, I’ll think about my processes – how does my business work? – map out these processes and write them down.’

Andrea Köchling: Exactly. That’s exactly how I’d go about it too. Another misconception that still crops up every now and then is that the entrepreneur thinks: „There’s this huge mountain I’ve got to climb right at the start. I’ve no idea where to start. How on earth am I supposed to do this? I’ve got nothing.“ But that’s not true. Because there are already lots of bits and pieces within the business. It’s just that people haven’t really realised it. They simply don’t realise that these are already parts of a process documentation system. Take job descriptions, for example, or who’s responsible for what, who has which passwords, where I store the data, where my server is located. All of this is information that’s certainly already been written down somewhere within the company. And procedural documentation is essentially the consolidation – the complete compilation – of all the information that exists within the company.

Paul Liese: That’s right. Essentially, I’m bringing my entire business and all the documents I already have together in one place, organising them, sorting them, adding the connections between them, and then I’ll have a complete body of work. And what my team and I are currently working on is bringing this documentation to life. Many people write procedural documentation, then it ends up gathering dust in a cupboard, and at some point – two or three years later – they realise it needs updating. But we’re working to ensure it becomes a living document, so that once you’ve outlined these individual process steps, you can also assign specific tasks to the responsible persons within the responsibilities for each step – for example, new debtors, new creditors, checking VAT registration numbers, and so on. By describing processes, the employee in charge can see how the process works and can respond by saying: „Perhaps we could do it this way or that way; that would make it more efficient.“ This automatically generates versions of my documentation and involves the whole team. After all, there’s no point in having a quality management representative in the company who gathers information from departments left, right and centre, only for it to be shelved and become out of date after just half a year.

Andrea Köchling: That’s exactly as you quite rightly said. The contents of procedural documentation must also be put into practice. I can’t just draw one up now and then leave it lying in a cupboard somewhere or stored on a hard drive for 20 years. Whenever something changes, it has to be updated. The thing is – there was a change to the GoBD – that you don’t have to keep every single version for 10 years, just the most recent one. This happened to me recently during an audit. I requested an invoice from the financial accounts, and there was a note in the book saying, I received the invoice and it listed a completely different company as the supplier. So I said, „I don’t understand this.“ The background to the whole thing was that the company I’d received the invoice from had taken over the other company mentioned in the book entry. But that wasn’t obvious to me. The lady in the accounts department was able to explain it to me in detail. She said: „Let me just have a look in the master data. Ah yes, on such-and-such a date, this company was taken over by the other one. I’ll send that to you straight away. I’ve got a letter here where they state that.“ Absolutely brilliant.

Reflecting on and optimising processes

Paul Liese: If the ERP system can store master data in an auditable format. That’s another issue altogether. Is the system GoBD-compliant? Is it capable of doing that?

Andrea Köchling: Of course, there are also those specialists who simply overwrite everything. And then you can’t see what was overwritten and when, because the changes aren’t recorded. That brings us back to the issue of GoBD compliance and immutability. And then, of course, there are still tax advisers who take an extreme view, saying: „I’m not actually interested in GoBD at all. It’s not a law. The GoBD states that every data-processing system requires procedural documentation, and that’s been the case since November 1995, because it was already in the GoBS back then. I’m not interested in any of it. It’s not a law. I won’t do it. I don’t need it. And that’s what I tell my clients too.“ You can do it that way. Personally, I find that very unfortunate and also a great pity. We’ve just highlighted all the benefits, and you’ve experienced them for yourself. The business owner starts to reflect on the processes again and think them through. „Why do I do it this way? Well, because I’ve been doing it like this for 20 years. Okay, but a lot has changed from a technical point of view. I could optimise that.“ And that’s exactly what makes it so exciting for the tax adviser. I have so many more opportunities to advise the taxpayer, to engage with them and say: „Look, if I change this, I’ll have a whole range of different tax options.“ I just find it such a shame that there are tax advisers who, unfortunately, spread this kind of fear-mongering mentality, who say: „The nasty tax office wants this now, so you have to do it.“ I just think that’s such a shame. Because I can’t discuss the GoBD with a tax inspector. It’s an official directive that he has to follow. Whenever a tax adviser like that comes to me, I always refer them to Section 146 of the German Fiscal Code. It summarises the principles of proper bookkeeping. Separate, traceable, unalterable, and so on. Those are all the principles.

Paul Liese: I get the feeling that tax advisers who act in the way you’ve just described are actually afraid of what they might find at the client’s premises when they’re drawing up the documentation. I often find that when advisers draw up documentation with their clients, they only then come to understand how the client actually works and suddenly learn how data is generated which ultimately ends up in the tax adviser’s financial accounts or is included in the annual accounts.

Andrea Köchling: That may well be the case, yes. Although one does have to stick up for tax advisers now and then. I think the job can be quite difficult at times. They’re caught between a rock and a hard place. On the one hand, there’s us – the tax authorities, and tax audits in particular – demanding compliance; on the other hand, there’s the client who says, „You didn’t tell me that,“ even though the adviser has told them 40,000 times and sent them letters and so on and so forth. But when it actually comes to additional tax payments following a tax audit, it’s always the adviser’s fault. Even though that’s absolute nonsense. Because, of course, there are also clients who say: „So what? I’m a small business. I’m audited once every 50 years. I’ll take that risk. I don’t care about any of it.“ Of course, there are clients like that too. And in such cases, a consultant can only protect themselves by saying: „I informed him on such-and-such a date. Then I informed him again. He simply doesn’t want to,“ and, if necessary, get him to sign a statement to that effect. I also know of tax advisers who say: „We’ve now drawn up a letter. We highlight the benefits of procedural or process documentation. And if the business owner doesn’t want us to draw it up, or help with its preparation, or whatever else in this context, we get them to sign it. We get that in writing.“

Paul Liese: That makes perfect sense, because there are clients who don’t want that. I always categorise clients as A, B and C. The A client listens straight away to what the tax adviser tells them and says: „Yes, let’s do it – you, as my adviser. That’s important. Let’s get started.“ B clients tend to say: „Do I really have to?“ And C clients don’t want to at all, until it hits home. But what I often find, too, is that advisers struggle to set a price for their service of compiling documentation with the client. And I keep coming back to the point that advisers – particularly now during the pandemic – have an interest in getting their clients to switch to digital methods for sending supporting documents to the practice. And by that stage at the latest, you’re already in the process of reviewing the case. What is the best way for the client to get the documents to the firm? That is, after all, the very first step in case documentation. If I immediately jot down what I discuss with the client regarding how the documents are sent to the firm, and also note down how the documents they send me are actually generated, I’ve already completed a large part of the documentation. It always sounds like such a huge task to write up documentation, but actually it isn’t at all if you follow the right methodology – taking a targeted approach with a process flow and mapping out all the interdependencies associated with it.

Andrea Köchling: Yes. In my seminars, I always provide a brief guide: „Why not start small? The general description. Just have a go at that first. And then you’ll see where the key areas are.“ There’s an online procedural guide that uses these questions. It’s like a roadmap. It asks questions that you can answer with „yes“ or „no“, or you can say, „In my case, it works like this and that,“ and actually describe the process. I’ve also seen online tools that act as an auditor’s portal. That means you don’t end up with 100 pages of printed paper; instead, the auditor can access the document online in read-only mode. And these tools also allow you to assign tasks. As you just mentioned: several people are working on a single document. Everyone has different responsibilities. Naturally, there’s an administrator who has full access rights. They can then say: „I’m still missing something here and there. Here, cash register manufacturer, that’s your part.“ Or: “I’m still missing this, that and the other. That’s Ms XY’s part. She looks after payroll.” Or whatever. So that you can say: “You need to contribute to the overall document.”

Paul Liese: Exactly. I think, to sum up, one could say that documentation presents an opportunity. And that’s not just for the tax authorities, but actually for me as an entrepreneur.

Andrea Köchling: Yes.

Paul Liese: From that perspective, the positive pressure that the tax authorities exert to some extent is actually intended, in my view, to help me prepare for things, run my business more effectively and minimise risks, because it encourages me to engage with these issues and develop accordingly.

Andrea Köchling: Absolutely. I agree.

Paul Liese: Thank you very much for your time and for the interesting information, and for giving us an auditor’s perspective on what the expectations are and what advice you’d like to give the company – and that you really only want what’s best for the company, which is something I’ve always seen that way from the outset and still do. So, the buck actually stops with those who fail to do so.

Andrea Köchling: Yes. As I said, the benefits and advantages actually outweigh the drawbacks for the business owner. I can understand that, of course. You’re a bit reluctant to tackle it at first. But I always like to compare it to going to the dentist. It might hurt a bit the first time. But once you’ve got through it, it’s plain sailing.

Paul Liese: That’s exactly right. Well, thank you very much for your time.

Andrea Köchling: I’d be delighted.

Paul Liese: Stay well.

Andrea Köchling: I hope the same for you, and of course for all our listeners and viewers as well.

Paul Liese: Exactly. We hope that all our listeners stay healthy and get through these difficult times successfully. See you soon!