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Comment

What is stress, and is it bad for you? The dictionary definition of stress is “a state of mental or emotional strain or tension resulting from adverse or demanding circumstances”. In a medical or biological context, stress is viewed as a physical, mental, or emotional factor that causes bodily or mental tension. Stresses can be external (arising from environmental, psychological or social situations) or internal (stemming from an illness or a medical procedure). Stress can initiate the ‘fight or flight’ response, a complex reaction of neurologic and endocrinologic systems. And so we start to see the see-saw relationship we have with stress. It is needed to charge our body and mind, so we can best prepare to deal with challenging situations. It also releases adrenaline to make us the strongest and most productive we can be – this is our friend. However, it is when this delicate balance is tipped that it becomes our foe. The two sides of stress For me, good stress is the feeling before an Ironman – I am nervous, tense, anxious (and indeed, often questioning why I am here!) However, I know that this feeling means my body is preparing for pressure and that the adrenaline being released will fuel my muscles. It is the feeling before a presentation in work or a tough meeting – to some extent, it is a comfort as I know that this will ensure my reactions are charged and I will deal with unanticipated questions. However, stress becomes a problem when it significantly affects our emotional well-being and our ability to function at home, work or in our relationships. For a professional accountant, this pressure can sometimes arise from our work environment and as a member of the community of accountants, we should all be aware of the warning signs in others. Critically, the pressure often begins at the start of our career when we are juggling study, lectures, learning the tools of our trade with clients and dealing with our peers. However, throughout our careers, the lifecycle of an accountant exposes us to different pressures at different times.  It is okay not to be okay While we have come a long way in our ability to talk about our mental health, our profession appears slow to fully embrace the acknowledgement that it is okay not to be okay. From my interaction with students in the profession and my peers, who are often employers, we are still not 100% comfortable, or indeed perhaps don’t fully understand the impact stress can have on a person. Also, not all places of work have a safe environment in which individuals can talk openly. Yes, I am generalising here, but would you honestly feel 100% comfortable telling your employer that you were off on sick leave with mental health issues? If the answer is no, then as an employee or an employer we have an issue. And let us be honest, statistics demonstrate that we should see these sick certs as, on average, stress, anxiety and depression account for nearly half of all sick days taken in Ireland and the UK. Stark statistics Is stress, and the related side-effects when it becomes too much for us, more prevalent in accountants? Research by the Chartered Accountants Benevolent Association in the UK shows that more than eight out of 10 accountants suffer from stress-related problems. Over a quarter of accountants said they drink more than the recommended level and the study revealed that the suicide rate for female accountants is three times higher than the average for other occupations. Stark statistics. So, what can we do as a profession?  Well, we can ensure that our workplaces are open and transparent and that, most importantly, all staff can talk, voice their concerns and articulate when they are feeling stressed. We don’t need to go full throttle and bring in the massage chairs and yoga mats (even though this has been proven to help). However, we do need to ensure that as a community of accountants, we are there to assist each other and spot the warning signs. It is okay not to feel okay – and the more we say it and really believe it, the more we will help break the stigma of mental health and ensure that the profession is a compassionate one that supports its members and enables and empowers people to speak up. If any of the above strikes a chord with you, please note that CA SUPPORT is available to all members to help with matters of mental health. Sinead Donovan FCA is a Partner in Financial Accounting and Advisory Services at Grant Thornton.

Jun 03, 2019
Comment

Critical behavioural errors can dog investment decisions. Here are seven of humanity’s most prominent weaknesses. At one point in the 1973 movie, Magnum Force, Inspector Harry Callahan (played by Clint Eastwood) uttered the line: “A good man always knows his limitations...” It is important that investors should know their limitations too. Behavioural finance is the study of the influence of psychology on the behaviour of investors. It finds that investors are not always rational, suffer from systemic biases and are limited in their rational self-control. The first step to combatting these often unconscious biases is to be aware of them. What then are the critical behavioural errors that can dog our decisions? The following errors were identified recently by Joe Wiggins, a fund manager with Aberdeen Standard Investments. Myopic loss aversion We are more sensitive to losses than gains and overly influenced by short-term considerations. Often, investors check their portfolios frequently – even if they are operating with a long-term investment horizon. Making frequent investment decisions can worsen your investment results. A 2015 study by the Central Bank of Ireland found that 75% of the retail contract for difference (CFD) clients who invested in CFDs during 2013 and 2014 made a loss. Integration We seek to conform to group behaviour and prevailing norms. Like a limping wildebeest at the back of a herd in the Serengeti, we want to keep pace with the herd for fear of being picked off. The problem is that, in investment markets, the herd is more often wrong than right. That is why Warren Buffett said it is wise to be “fearful when others are greedy and greedy when others are fearful”. Recency We overweight the importance of recent events. In 2006, one had to look back over a decade and a half to observe a year-on-year decline in Irish residential property prices. Accordingly, most market participants grievously underestimated the possibility of a severe property bear market. Today, memories of the property crash are fresh in people’s minds, and many are fearful of another residential property crash. However, that is quite unlikely with rent yields considerably above mortgage rates. Risk perception We are poor at assessing risks and gauging probabilities. We allow the emotional hope of investment gains to override logic in evaluating risks. At the height of the residential property price bubble, houses in some parts of Dublin (such as Howth, Dalkey and Blackrock) were selling for more than 100 times the annual rental income those properties could command. However, many investors were more fearful of missing out on continued gains from the property market despite the dismal long-term return prospects those valuations suggested. Overconfidence We overestimate our abilities. Not only is the recorded investment performance of retail investors poor, but so too is the record of professional fund managers. The empirical evidence strongly suggests that the vast majority of investors would be better off buying low-cost funds that track market indices. Nevertheless, millions of us persist with the belief, hope or illusion that we can do better managing our funds ourselves. Results We focus on outcomes when assessing the quality of our decisions. Even as the Irish property market got more and more overvalued between 2004 and 2007, and risks continued to mount, investors mostly stuck with it because they were enjoying positive outcomes. Stories Captivating stories often persuade us. If you get the chance, watch Alex Gibney’s documentary, The Inventor: Out for Blood in Silicon Valley about the rise and fall of Elizabeth Holmes and Theranos. It depicts the journey of a woman and her company, propelled forward by several captivating stories: replacing injections with thumb-pricks for taking blood samples; replacing an expensive blood-testing duopoly with access controlled by clinicians with cheap tests that individuals could order; having a female entrepreneur enjoy the same success as Apple’s Steve Jobs. But it was all a fraud. In making financial decisions, it is a case of the forewarned being forearmed: the more we are aware of our limitations, the better we can avoid them.   Cormac Lucey FCA is an economic commentator and lecturer at Chartered Accountants Ireland.

Jun 03, 2019
Feature Interview

Conall O’Halloran FCA, President of Chartered Accountants Ireland, outlines his plans as he prepares for a busy year in office. After six years as Head of Audit at KPMG Ireland and more than 20 as Partner, Conall O’Halloran is very well-prepared to assume his position as President of Chartered Accountants Ireland. The timing is fortuitous given the feverish debate over the value and future of audit. But that is just one of the many issues the Cork native plans to address during his presidential year. Speaking at the Chartered Accountants Ireland AGM following his election on Friday 17 May, Conall noted that his tenure as President would also focus on broadening the public’s understanding of the role and value that Chartered Accountants bring to business and society, and widening access to the accountancy profession at graduate level. Building blocks of the profession At the core of his ambition for the profession, however, is quality. That, he said, begins with the profession’s trainees. “When I graduated from University College Cork with a degree in engineering, Chartered Accountancy offered the most flexible and most appropriate route into business with any degree of authenticity,” he said. “And over three decades later, that still holds true. The training, the discipline and the analytical skills are embedded in a foundation of ethics and integrity, and it is this that makes Chartered Accountants a very compelling proposition as business leaders.” Despite the negative publicity levelled at the profession, Conall points out that demand for the services of Chartered Accountants – particularly in the areas of audit and assurance – continues to increase year-on-year. This, he adds, is mirrored in the number and quality of candidates pursuing a career in the most versatile of professions. “We continue to attract top-quality candidates to this day and they are the profession’s basic building blocks,” he said. “If you don’t have the right foundations in place on day one, you can’t expect quality further down the road. Chartered Accountancy is very fortunate in that respect and that’s very precious to me, to the Institute, and to the wider profession.” Rising to new challenges However, Chartered Accountants and the profession as a whole are facing into an era of new challenge. From regulation to technology, the business landscape has changed in recent years but in Conall’s view, the biggest changes are yet to come. “While there have been huge advances in technology, most of what our audit trainees do today isn’t vastly different from what previous generations of audit trainees did,” he said. “But we are on the cusp of massive change. The larger firms have invested heavily in their data analysis tools and electronic audit capabilities, which are capable of achieving a transformational change in the quality of evidence available to the auditor.”   To help the profession thrive in this new data-driven environment, Conall plans to focus on enhancing the routes of access to a career in Chartered Accountancy in an effort to harness the profession’s full potential. “We are very fortunate that our large- and medium-sized member firms train the vast majority of our students, but there are many other very capable candidates who simply aren’t interested in that particular training mechanism and would prefer to begin their career in industry,” he said. “Training in professional practice is a wonderful discipline, but it isn’t for everyone so I will focus on working with senior Chartered Accountants in industry to reinvigorate our industry training programme while at the same time, the Institute will continue its work on the syllabus to ensure that we train Chartered Accountants who are much more IT savvy.” The value of audit Further change may be forced on the profession as the UK’s various audit reviews are concluded and acted upon. From the Kingman recommendations to the current review by Lord Brydon and the Competition and Markets Authority (CMA) Study, the profession – and audit in particular – is under unprecedented scrutiny. Speaking on the issue following his election, Conall noted that he has recently been looking to the UK and reflecting on the fractured relationship with the regulator, the Financial Reporting Council (FRC) and with society. “Many of the reforms recommended by Sir John Kingman’s recent independent review have now been accepted by the FRC and by the profession and politicians generally. However, the wider review by the Competition and Markets Authority and also the independent review into ‘The Quality and Effectiveness of Audit’ being conducted by Lord Brydon will be fundamental to our future and the future of business more broadly,” he said. “I think we need to be very careful here in Ireland that what works, and indeed what may be required to work in the UK, is not necessarily or automatically right for Ireland. I will work very hard as President to ensure the profession delivers what is expected of us by society and regulators and ensure the very particular strengths that we have in Ireland are protected and nurtured.”   He added: “It is very clear to me that the absolute focus of KPMG and all the large audit firms is on audit quality. We have had a very strong and robust auditor oversight regime in place in Ireland now for many years, and it is heartening to note that our audit regulator, IAASA, has confirmed that, following its recent complete round of inspections, the quality of audit here is generally of a good standard. However, we need also to recognise IAASA’s shared role in driving quality and take actions ourselves to reinforce public confidence in audit.   “Take for instance auditors’ provision of non-audit services to audit clients. The reality for almost all Irish public interest entities (PIEs) is that auditors do not provide any consulting services and only modest levels of tax services. However, because the profession campaigned for a more permissive regime over many years, the impression was created that audit was somehow a loss-leader for the provision of other consulting services. This is absolutely not the case in the PIE market here in Ireland but as a profession, I feel we could have shown more leadership and more respect for the societal role auditors play when we campaigned for more relaxed rules,” Conall continued. “While we need to do a better job of explaining what we do to the public, audit committees can also play an important role in representing and reporting to shareholders,” Conall added. “They understand what we do and the positive feedback from audit committee chairs with regard to the quality, robustness and integrity of our work is incredibly powerful and a great endorsement of what we actually believe about ourselves. What we as auditors read about ourselves in the press is completely alien to how we see ourselves and how we actually deliver our duties to the public.” Acting in the public interest Conall is also very clear on how auditors can play their part in rebuilding trust with the public and key stakeholders; particularly focusing on anything that could damage the perception of audit independence. “That’s the core area where society wonders if we are acting in their interest, or not,” he said. “While the quality of our audit work is difficult for the public to assess, any suspicion that our independence is impaired is easily understood and very damaging to our relationship with society and we do recognise that much more keenly now. I think that all firms and PIE auditors understand that they have an incredibly important societal responsibility and that they treasure the responsibility very carefully.” The voice of business Despite the dialogue and debate surrounding the profession, Conall is extremely optimistic about the profession’s prospects for the future and members can expect to see the Institute take a more prominent position on a range of issues affecting businesses and the economy on the island of Ireland. “Chartered Accountants Ireland is the largest professional body on the island and I think anyone would say that we represent the gold standard in accountancy,” he said. “But beyond our technical capabilities and business acumen, we can also add value by commenting on economic and tax policy, and by essentially acting as the voice of business to help Government and policy-makers understand the consequences of the many options placed before them. Yes, they have to listen to many interest groups also – but when they hear a view from a body like Chartered Accountants Ireland, they take it as being balanced, informed and fair.”   And as with past presidents, Conall will also lead the Institute as it navigates the unpredictable terrain of Brexit – but he has lauded Chartered Accountants Ireland for being to the fore and discharging its all-island remit in the best interest of society both north and south of the border. “We were one of the first business bodies to publicly express a view on Brexit and although there are members who may not have supported our position, we were very strong and very public,” he said. “I also think that while Brexit will certainly challenge our ability to operate as an all-island body, it will not prevent us and my sense is that there is little appetite in the UK to diverge significantly from EU standards in any meaningful way – there is no commercial rationale to do so.”

Jun 03, 2019
Innovation

Past issues of Accountancy Ireland have examined the transformative effect of technology on how we work, but what about the impact of technology on workplace culture? Technology is not only transforming the way we work; it is also changing how we work together. As technology companies flocked to Ireland to take advantage of the talent pool, they also introduced many new perks such as on-site gyms, free food and festival-style summer parties to name but a few. How can small and medium-sized enterprises (SMEs) and the start-up community compete with such perks when it comes to attracting and retaining talent? In this article, I examine some of the ‘smart working’ initiatives deployed by companies to win the war on talent. Flexible working arrangements Today’s workforce is now more connected than ever. With the promise of 5G on the horizon, this connectivity is only going to improve. As long as we have an internet connection we can, therefore, work from any location on the planet. Removing the need to be physically present in the office enables employers to introduce flexible working arrangements. Remote working, for example, has increased in popularity over the last few years. There are many benefits for both employees and employers, such as cost savings and increased productivity. Utilising collaborative working tools such as G Suite or One Drive enables individuals in different locations to work together and, should they need to meet as a team, video conferencing makes that possible. Some business leaders still struggle to get comfortable with the idea of their employees working remotely (i.e. from home). This mindset tells your team that you don’t trust them, and it needs to change. Otherwise, employees are more likely to seek employment with an organisation that offers remote working. Many organisations also afford their employees the flexibility to set their working schedule provided employees work a minimum of 37.5 hours per week. How those hours are completed is the responsibility of the employee. This flexibility enables employees with a long commute to utilise that time as part of their working day. Organisational benefits There are many reasons why organisations should consider flexible working arrangements for their employees. They include: Higher output: organisations that focus on outputs, not inputs or attendance, tend to have a highly engaged and efficient workforce; Attract talent: traditional rules on office hours and attendance serve to limit the talent pool available to organisations. In a fast-changing world that requires a high degree of specialisation, flexible working arrangements can attract more talent; Employee retention: employees who feel more empowered and trusted with their working day will be loyal to the organisation that gives them the flexibility they desire; and Sustainability: organisations can do their bit to help save the planet. If employees who drive to work each can work from home at least one day a week, this will reduce carbon emissions. Unlimited annual leave Netflix led the way when it introduced an unlimited annual leave policy, with many organisations now choosing to adopt this policy as a means of attracting and retaining talent. Whenever I mention this to business leaders, the word “unlimited” brings fear to their eyes. It is a bit misleading; it would be more apt to describe it as a ‘take what you need’ annual leave policy. The overall aim of an unlimited annual leave policy is to create a results-driven culture of trust. The intention is not for employees to take weeks or months off work without proper notice and approval. However, it does remove the need to track annual leave, overtime and time owed in lieu. Employees can benefit from being able to easily take time off for personal needs, such as medical appointments or school visits. They will also be less likely to call in sick because they can take breaks when needed. This flexibility, if set up correctly, can help increase employee engagement and improve efficiency. The Don Draper clause The latest talent-attraction trend is to add a provision to employees’ contracts so that employees regularly receive a strange, funny or creative personalised gift paid for by ‘The Don’. The clause, which is negotiated by the employee, can include chocolates or vouchers. It could also include a day off work for the employee’s birthday, spa days or rollercoaster rides. Check out #DonDraperClause on Twitter for some inspiration. The thinking behind this trend, which has been around since 2014, is to reward employees and make them feel part of an organisation that treats them well and as human beings. Conclusion From the trends emerging from the tech and start-up community, one critical thing is the importance of treating employees as individuals, not as a resource.w Organisations need to stop using phrases like “our employees are our greatest assets”. They should instead focus on the individual if they genuinely want to create a workplace culture that is fit for the future. Michael J. Walls ACA is the Founder and CEO of Dappr and the 2018 Young Chartered Star. A new world of work A variety of emerging workplace trends can now be seen in non-tech environments. Here are five of the most notable developments: Ditch annual appraisals: back in 2014, Deloitte reported that only 8% of companies believe that appraisals are worth the time and effort devoted to them. So why are we still doing them? New approaches under consideration include a move towards employee-led coaching and mentoring, which is less formal and enables real-time feedback on performance. Bonuses aren’t the only way to reward employees: organisations are beginning to reject traditional bonus schemes in favour of reward practices based on a different set of assumptions. Bonuses now have an element of surprise. They are timely and based on what people value and want, and they are personal and not always about money. Chill-out area: modern offices are now setting aside space to encourage employees to take micro-breaks from work. The chill-out space is a designated relaxation area where employees can unwind. Usually furnished with soft seating like cushioned chairs, bean bags and sofas, it should be a stress-free zone and not merely a more comfortable seating area for high-powered business meetings. Digital learning: employees can get additional training from anywhere with the emergence of online learning. Tools such as LinkedIn Learning or the Institute’s online CPD courses enable employees to access courses from anywhere to learn a new skill or keep up-to-date with the latest CPD. Diversity and inclusion: it isn’t enough for organisations to tick boxes on their diversity checklist, ensuring that they have the desired quota of minorities for reporting. The inclusion part is now more critical than ever. I for one am delighted that employees and society are now ensuring that organisations follow through when making statements regarding diversity and inclusion.

Jun 03, 2019
Financial Reporting

The Employment and Investment Incentive Scheme (EIIS) remains an excellent source of equity funding for qualifying companies.   The Employment and Investment Incentive Scheme (EIIS) has been a critical source of funding for Irish small- and medium-sized enterprises (SMEs) over the years. The scheme allows Irish taxpayers to claim up to 40% income tax relief on an investment in a qualifying Irish SME. While the scheme has been on the receiving end of some bad press of late, the legislation governing EIIS was updated as part of Finance Act 2018. The new legislation has re-written and re-ordered the previous legislation to make it easier to follow. While there has not been much change to the tax relief or the type of companies that can qualify for EIIS funding, there have been significant changes to the administration of the scheme and to the permitted investment structures, which I believe will have a positive impact. Up to €15 million available for companies The changes to the Finance Act did not materially alter the type of company that can qualify for the relief. The European Union’s (EU) General Block Exemption Regulations (GBER) continue to govern companies that are eligible for EIIS investment. A company must be carrying on a qualifying trade within the State or through a branch in the State, or it must act as the holding company to a qualifying company. An EIIS investment cannot be made directly into a subsidiary, although a subsidiary can benefit, and its tax affairs must be in order. The Finance Act introduced a new definition to the legislation called a ‘RICT Group’. A RICT Group can raise up to €5 million EIIS in any 12-month rolling period and up to €15 million in its lifetime. When looking at a qualifying company, one must also consider its RICT Group, the definition of which aims to identify other companies connected to the qualifying company through common control or ownership. A qualifying company or any company in its RICT Group can raise only one of the following three types of EIIS investment: Initial risk finance: any past or present member of the RICT Group cannot be trading for more than seven years; Expansion risk finance: for a RICT Group trading for more than seven years, the EIIS investment must exceed 50% of the average turnover for the preceding five years, and the company must be entering a new market or launching a new product or service; or Follow-on risk finance: for a second or subsequent EIIS investment, the RICT Group must have foreseen this investment in the original business plan from the time of its initial risk finance. Any companies raising EIIS investment must consider their original business plan and all future needs for EIIS funding. The legislation continues to contain significant anti-avoidance provisions. Qualifying investment A positive change introduced in the Finance Act is the type of shares in which an EIIS investor can invest. Previously, an EIIS investment could only be by way of ordinary shares with no preferential rights. From 1 January 2019, the EIIS investment can be made by way of redeemable preference shares, which is very similar to the investment structure used by Enterprise Ireland. As always, the shares must be newly issued, fully paid up, and the investor’s capital must be at risk (i.e. no guarantees for the four-year minimum holding period). 40% tax relief for investors An EIIS investor must not be connected to the company in which they invest unless they have been granted EIIS or SURE relief on all previous subscriptions into the company. The SURE and SCI schemes were also re-written in the Finance Act, and are aimed at founders, promoters and other connected parties. The scheme is open to all Irish taxpayers who can claim income tax relief of up to 30% in the year of investment and a further 10% three years later subject to the company meeting particular employment or research and development (R&D) expenditure requirements. As you can see from the example in Table 1, investors can earn a good after-tax return if the company merely returns the investment after the four-year minimum holding period. Quicker tax relief claims The process for claiming tax relief is the most significant change contained in the Finance Act. In the past, a company would typically apply to the Revenue Commissioners for outline approval in advance of raising an EIIS investment. Revenue would indicate whether it believed the company would qualify or not. This opinion was not legally binding. Once the investment was completed, the company would again apply to Revenue for tax relief certificates. This process caused the majority of delays and generated negative press for EIIS. Since 1 January 2019, companies can only ask Revenue a limited number of questions before it raises EIIS investment: What is included in the RICT Group? What type of investment is proposed (i.e. initial, expansion or follow-on)? Is the company a firm in difficulty? Once the company has received the investment, it now self-certifies the initial tax relief (up to 30%) to the investor by issuing a ‘Statement of Qualification’ or ‘SQ EII 3’. The certificate can only be issued to the investor once at least 30% of the funds invested have been spent. The SQ EII 3 certificate is required by the investor to make their tax relief claim. The company is also required to file a RICT Form with Revenue to advise that they have issued EIIS tax relief certificates. The company must also include the investment in its corporation tax return for the relevant year of assessment. On meeting the relevant employment or R&D expenditure conditions after three years, the company will follow a similar process to issue further tax relief certificates for the second tranche of tax relief (up to 10%). Market size In the years following the recession, EIIS grew annually. However, the implementation of the full GBER regulations in 2017 caused a significant decrease in tax relief approvals due to the increasing complexity of cases. It also caused Revenue processing delays, which have been well publicised. There is insufficient data available for 2018, but it is likely that tax relief approvals will experience another significant drop. With the improved legislation and self-certification process, EIIS should see resurgence from 2019 onwards and hopefully grow towards the €100 million level again. Funding options There are a large number of EIIS providers in the market, from regulated designated investment funds to various investment brokerages that offer access to their private client base. Companies should continue to seek EIIS funding, as the tax break for investors can facilitate access to significant equity funding. Given the amounts raised in the past, there is plenty of demand from investors at a time when there is a concurrent shortage of growth capital in the Irish market.   Mark Richardson ACA is an investment director with the Goodbody EIIS Funds in association with Baker Tilly.

Jun 03, 2019
Audit

Accountants involved in preparing financial statements can expect increased scrutiny and challenge of their accounting estimates from their auditors. I suspect that most accountants would agree that non-accountants believe the numbers in financial statements are more precise than they really are. Accountants, on the other hand, are much more conscious of the level of estimation that goes into many of those reported numbers. I must admit I didn’t become aware of the level of estimation involved until I entered the real world of auditing and accounting. I certainly don’t recall gleaning it from my accounting lectures or from the texts I read for my exams. I spent many long days patrolling the aisles and shelves of warehouses and stockrooms torturing myself about the best estimate of just how much could be realised from excess and out-of-date lines of inventory, conscious that they had to be written down to their estimated selling price less estimated costs to complete and sell.   What followed was long hours quizzing credit controllers while worrying about whether the 5% bad debt provision was the best estimate of the extent to which the amounts due from customers would not be collected, and whether the credit controller was too optimistic or too pessimistic. Estimating the useful life of buildings and plant is key to the depreciation charge, an area of estimation where you might think an engineer would be more qualified than an accountant, though a futurologist might be better when it comes to the question of technological obsolescence. On the liabilities side of the balance sheet, significant judgement is applied in estimating the amount of defined benefit pension obligations, including mortality and inflation assumptions, as well as assessing the likely outcome of legal claims and court cases, where the assumption about success or failure can be critical to the numbers included in the financial statements. These are the some of the traditional areas of estimation uncertainty an accountant needs to consider. And, all of this was before the challenge of estimating value in use and fair values poked its head into so many areas of accounting.  The implications of the new auditing rules for accountants in business So, why is it appropriate to focus on estimation at this point? Well, since the issue of IFRS 9 and its emphasis on expected credit losses on loans and receivables upped the ante on estimation still further, auditing standard setters have seen fit to upgrade the rules on how to audit all types of estimates. Inevitably, as auditors direct more attention to estimates, accountants in business involved in financial reporting will feel the heat of incisive questions from their auditors as they apply the new rules to the myriad of estimates underlying the financial statements.  The Irish auditing standard setter, the Irish Auditing and Accounting Supervisory Authority (IAASA), issued its new standard on auditing accounting estimates (ISA 540) in late 2018 with mandatory effect for audits of financial statements for periods commencing on or after 15 December 2019. That may seem some time away but, of course, early adoption of the more demanding rules is permitted, and some auditors may consider it appropriate to apply the new rules early. The implications of this for accountants in business are likely to vary significantly depending on the auditor’s assessment of the risk that incorrect estimation may cause a material misstatement. Among the areas of particular focus in the updated ISA 540 is the requirement for the auditor to show adequate professional scepticism and to be on alert for management bias.  There is also a strong emphasis on the auditor documenting – in detail – the management estimation process, including the assessment of material misstatement risks. The level of subjectivity underlying these estimates, and the degree of estimation uncertainty, will affect the design and completion of this process. Of course, some auditors may have already been applying the new rules or, indeed, may have assessed that the new rules will not add to their audit effort. Accountants in business will wish to avoid any late surprises as a result of their auditor introducing additional audit procedures or placing increased demands on them. It is worth remembering, too, that the auditor will seek written representations from management on certain matters, including areas of accounting estimation, and will often report to the board or the audit committee on areas of judgement and estimation, both of which can take up more senior audit effort. Further, for many listed companies, the auditor’s report to the shareholders will explain how the auditor has addressed significant estimates. When the updated ISA 540 was being developed, many commentators, including some Irish auditors, had concerns that it might put an unnecessarily large burden on the audits of smaller companies. The final version of ISA 540 has attempted to allay those concerns by suggesting that the risk of material misstatement may be less significant in smaller companies with a consequent lower level of audit effort required. It will be useful for company accountants to be aware of where their auditor’s assessment of this risk lies along the spectrum and the consequences for the degree of audit effort required. Preparing to justify accounting estimates The degree to which the auditor decides it is necessary to devote effort and focus to the estimates can affect how accountants in business should prepare to justify their own estimates. That preparation might include more detailed documentation of the appropriateness of the estimates, the level of estimation uncertainty involved and the rigour of the internal control process surrounding the estimation process. This should help the auditor conclude on their reasonableness, and reduce the degree of effort spent drafting documentation they are required to complete.  For some complex or specialised areas of estimation, company accountants may wish to ensure that their auditors have the necessary skills or expertise to assess the reasonableness of the estimates to reach their conclusions promptly. This may arise in areas such as actuarial assumptions for pension obligations, valuation techniques for derivatives and unquoted financial assets, the likely outcome of legal claims and uncertain tax positions, and technical provisions in insurance companies, to name a few. Conclusion There is no getting away from the vital role that estimation plays in financial reporting. Consequently, there can be no denying the importance of the auditor’s procedures in auditing those estimates, notwithstanding the level of interrogation and challenge this may entail as the auditor seeks to conclude on the reasonableness of the estimates. Clearly, it is desirable that maximum co-operation between management and auditor is achieved by early communication, explanation and clarity on the level and type of audit work planned, and the degree to which management and accountants in business can enhance their documentation of the estimation process. After all, making accounting estimates is the prerogative of management, and management should have every opportunity to justify them to the auditors to ensure that the new, more onerous auditing rules neither add significantly to the cost nor disrupt the harmony of the audit.   Terry O’Rourke FCA is Chair of the Accounting Committee at Chartered Accountants Ireland. 

Jun 03, 2019