Comment

Comment

While social media has made it easy to express one’s views, our electoral process deserves more consideration. Almost every hour of the day, there is some electronic device asking us to like or dislike, to swipe left or right, to make a comment or express a view. But do we run the risk of forgetting that marking a ballot paper in a voting booth is of far more consequence to liking a sentiment expressed in a tweet whose provenance we barely know? Elections are important, but the conduct of this year’s presidential election in Ireland suggests to me that we might be treating our democratic process less seriously than we should. First of all, the two major parties decided not to field a candidate. One of them didn’t field a candidate in 2011 either. What does that say about the significance of a national poll, presidential or otherwise? Accountability What does it say about the electoral process if local government representatives can nominate, but afterwards have so little accountability over the campaign or conduct of the candidates on the ballot paper? That doesn’t happen when candidates are nominated through the political party system. The end result was that we ended up with a campaign and an election that was hard to take seriously. I have no quibble with any of the individual candidates; rather with the quality of the debate. Over the course of the campaign and the televised debates, it seemed to me that the candidates barely touched on the primary duty of the president, which is to protect the constitution. Instead, we focused on matters that are entirely peripheral to the function of the highest office in the land. Surely one of the most democratic countries in the world (according to the Economist Intelligence Unit) can do a bit better than that. Poll surge It is hardly surprising that one of the main talking points was the dramatic rise of the candidate, Peter Casey, over the course of the campaign. In the space of a few days, Mr Casey’s share of the vote went from 2% (in an opinion poll) to the actual result of 23% of votes cast, leaving him in second place in the contest. A 20% surge in polls just doesn’t happen in elections involving established candidates or political parties. Even in the 2011 general election, held in the wake of the financial crisis and which was by general election standards an outlier event, the swing to Fine Gael was just 9%. Candidate selection If we are to have seriously elected representatives, the process begins not at the hustings, but at the time of candidate selection. Like any profession, political tradecraft has to be learned. It is perhaps unfair to expect any candidate to show seasoned political skills without having served an apprenticeship in local government or another form of elected office, or alternatively having been involved with a political party in campaigning for others. A merit of the party political system is that it has a structure which can provide a route to higher elected office, and then can support those who attain it. There are currently six elected representatives in the Oireachtas who are Chartered Accountants representing three political parties. Many of our members have a direct entitlement to vote in Irish Seanad elections by virtue of their University qualifications. The Institute itself, along with a number of organisations such as IBEC, ISME and other institutes and voluntary bodies, has the power to nominate candidates for Seanad elections. Perhaps this same power should be extended to nominating candidates to presidential elections. If nothing else, it might help focus future campaigns and provide a reminder to the political parties and councils that national elections are indeed of consequence. Dr. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland.

Dec 03, 2018
Comment

The obligation to report has changed under Companies Act 2014, with the result that the path to prosecution may be more direct. Statutory auditors are required to make a report to the Director of Corporate Enforcement where, in the course of carrying out an audit of the financial statements of a company, the auditors are of the opinion that there are reasonable grounds for believing that a category one or category two offence under Companies Act 2014 has been committed. Where auditors fail to make a notification when required to do so, the auditors themselves are guilty of a category three offence. This obligation to notify is not a new requirement introduced by Companies Act 2014; however, the Act did seek to resolve a difficulty that had arisen under prior Companies Acts relating to similar reporting requirements imposed on auditors under that legislation. Under the prior Companies Acts, the obligation was to report suspected “indictable” offences. However, the determination as to what actually constituted an “indictable” offence was unclear given that offences could be tried either summarily or upon indictment at the election of the prosecuting authorities. Increase in the number of offences to be reported? This change from indictable offences to category one or two offences should result in significantly greater certainty. It is worth noting that the number of category one and two offences under the Act is significantly less than the number of indictable offences under the previous Companies Acts. However, despite this reduction in number, can we expect that, arising out of the greater certainty as to what comprises an offence that requires a report to be made, the number of reports made will actually increase? Wider range of offences to be reported? What is also clearly evident from the statistics relating to reported offences published by the Office of the Director of Corporate Enforcement (ODCE) is that the reports made by auditors under the old regime related to two key areas – offences relating to loans to directors and the offence for failure to keep proper accounting records. Might this also mean that, with the greater clarity brought by Companies Act 2014, a wider range of offences will now be reported? The range of offences that can now be reported under Companies Act 2014 also includes a new reportable offence. This offence occurs where a director or directors of a company are party to the approval of statutory financial statements that do not give a true and fair view, knowing that the financial statements do not give such a view, or being reckless as to whether this is the case. In this regard, where auditors give an opinion other than a clean opinion, and the directors – knowing that the auditors have taken such a view – approve the financial statements, there will naturally be a question as to whether this would cause the auditors to form the opinion that there are reasonable grounds for believing that the director or directors have committed an offence, such that the auditors have a reporting obligation. The implications for directors The duty of directors to ensure that the company of which they are an officer keeps adequate accounting records and that (among other things) the company prepares statutory financial statements in accordance with the requirements of Companies Act 2014 that give a true and fair view of the assets, liabilities, financial position and profit and loss for the financial year are fundamental principles of company law. This has not changed. It is never enough to simply assume that this is being done as where it is not, a director and the company for which it has responsibility could face an ODCE investigation and possible criminal prosecution. The directors of a company must know or be capable of finding out at any time, the company’s financial position. The directors must be in a position to understand the company’s transactions and must take responsibility for the correct presentation to the required standard of the company’s financial affairs for a given period in its statutory financial statements. There were always implications for not doing so; the certainty that Companies Act 2014 now brings in terms of the circumstances where a failure to comply with the accounting requirements of the Act requires statutory auditors to report those possible offences to the ODCE could make the path to prosecution more direct. Claire Lorde is a Corporate Partner and Head of Governance and Compliance at Mason Hayes & Curran.

Dec 03, 2018
Comment

While there are arguments for the exclusion of worker directors, it is worthwhile to consider the alternative view. BY PROF. PATRICIA BARKER Prof. Niamh Brennan, writing in the June issue of Accountancy Ireland, addressed the issue of conflicts of interest threatening the ability of directors to look after the interests of the company unimpeded by a personal interest they may have in a specific issue or, indeed, in the ongoing business of the company. Niamh’s points are very well made and she promotes a pro-social good-of-society perspective, which is a very desirable outcome. Niamh, in her reflection, raised the question of whether it is possible for worker directors on State bodies to avoid conflict of interest given that they must, as directors, act in the best interests of the company. Meanwhile, by virtue of their election by the body of workers, they must also act in the best interests of their electorate. It is, indeed, an important question to consider. The arguments for excluding worker directors are well set out by Niamh. In reaching a conclusion, it is worthwhile to consider the arguments in favour of worker directors. 1. Employee experience Organisations are gradually recalibrating their perspective on good governance by reflecting on, and articulating, what their corporate culture is rather than focusing on compliance with increasingly bulky and onerous codes of practice. Much work has been done in researching the broad types of culture that can be observed, ranging from a clan culture (where the emphasis is on people, teamwork and consensus) to an innovative culture (with emphasis on entrepreneurial vision) to a market culture (with emphasis on market share, competition and goals) and a hierarchical culture (with stress on procedures, stability and smooth execution). The board members have to establish and drive their strategy and business plan from their cultural base. In organisations espousing the first two types of culture mentioned above, it would be important to hear the employees’ experience and perspective on the board. Arguably, the voice of the employee would also be significant in the other two groupings. 2. Clear delineation We should consider the fundamental assumption that the worker directors have a conflicting interest in pursuing upward pressure on payroll, while the interest of the board is to pursue the maximisation of residual profit for the shareholder, with a concomitant downward pressure on payroll. This notion is probably less valid now than in the days of clear delineation between the management on one side of the industrial relations (IR) ditch with the serried ranks of the workers on the other, engaged in battle. Many organisations are much flatter now and the human capital invested by skilled employees often means that they have an informed and vested interest in the long-term sustainability of a reputable and high-quality organisation, the same interest as other directors. In other words, their interests as employees merge with their interests as directors. What might give rise to question, however, is more likely to be the interest of executive directors in the private sector who have a conflicting interest in producing high profits (associated with their performance-related pay) against the interest of sustainable performance over a period longer than their contract of employment. 3. Fresh perspectives I am unaware of any research which shows that worker directors behave in a manner counterproductive to the creation and implementation of an agreed strategy and business plan. In my experience, they bring a perspective that adds to the debate and, in many instances, alert the non-executive directors to issues that would otherwise go under their radar. 4. Widespread acceptance Although the 5th Company Law Directive and so-called ‘Vredeling Proposal’ were not implemented in Ireland and the UK, other EU member states have implemented their provisions, including the worker director provision, and conflict of interest has not emerged as an issue for their state or private companies. Conclusion So, while there are arguments on both sides of this question, my own conclusion is that, on balance, having engaged worker directors on the board is better for the organisation than excluding them. Prof. Patricia Barker FCA is Adjunct Professor of Accounting at Dublin City University and a former Council member at Chartered Accountants Ireland.

Oct 01, 2018
Comment

In judging a board’s effectiveness, one must consider its power to exercise control, monitoring and oversight roles. Corporate governance is a complex system of moving parts, with boards of directors as the central governance mechanism. Corporate boards are assumed to have full power to exercise three key accountability roles – control, monitoring and oversight roles. However, these taken-for-granted assumptions may not apply to all boards. Boards’ power limits may constrain their assumed ability to exercise control, monitoring and oversight roles. Understanding the limitations of the boards of directors’ role has implications for other governance mechanisms in that complex system. Assuming boards can exercise control is, in many cases, a myth. It is important to understand board power limits in practice, otherwise there is a risk of an expectations gap on the part of investors and regulators between what boards are expected to do versus what they are capable of doing. Such an expectations gap can, for example, lead to investors not exercising their governance roles because they assume others are doing it for them; and to regulations that assume governance roles incapable of execution in practice. Dr Margaret Cullen and I have studied investment fund boards, an extreme board type. We find that directors of investment fund boards cannot exercise control roles, or even monitoring roles. Their role is merely one of oversight. The explanation for this finding is that, because of its dominant power position, the fund promoter exercises the control and monitoring roles. We believe our findings extend to boards of directors of other organisational types or contexts such as subsidiary boards, boards of state-owned entities and organisations with powerful founder shareholder-directors. In such contexts, boards operate under a constraint, often arising from the power dynamics around the board or from shareholder power dynamics (e.g. parent-subsidiary relationships, government-state-owned entity relationships). These insights led us to differentiate the three terms – control, monitoring and oversight – to understand the distinction between these roles. Dr Cullen and I distinguish monitoring and control by virtue of the level at which each is applied. We consider monitoring to involve direct review/observation of management performance, inter alia, through ongoing performance management assessments. Monitoring may be accompanied by consequences for employees who do not perform adequately – in other words, the exercise of control. Monitoring must precede control, but monitoring may occur on its own without subsequent control actions. If there are consequences following monitoring, they can be so minor as to not amount to control. We characterise oversight as “keeping a watchful eye”, acting on behalf of investment fund shareholders’ interests in our study. Oversight is indirect. Those exercising oversight cannot take direct action, they can only obtain consequences through another party. Oversight is not an extra layer of control. It is an extra layer of indirect monitoring. The word “oversight” is frequently used to describe the work of audit committees. They are an extra pair of eyes and ears for corporate boards. Our distinction between direct monitoring and indirect oversight depends on the degree of observability. Direct monitoring implies a degree of proximity to those being monitored, an ability of principals to monitor agents themselves and an ability to establish and implement direct performance management processes. For example, traditional boards receive presentations from the CEO and senior managers and can thus directly monitor, face-to-face, their performance. This is not possible in investment fund boards as investment funds have no direct employees. Indirect oversight, in contrast, implies overseeing the mechanism or construct without the powers of direct observation, arising from observability at a distance and lack of proximity or the ability to take direct action.  We must also acknowledge the role of shareholder activism. Shareholders indirectly observe management and may take direct action as a result. For example, shareholders may vote against a resolution (e.g. CEO pay in a say-on-pay resolution) at an annual general meeting. For each of the three terms – monitoring, control and oversight – there is a continuum of behaviours from highly proactive directors to “spectator” directors, depending on effort levels expended by directors in executing their roles. To conclude, in judging the effectiveness of boards of directors, their power to exercise control, monitoring and oversight roles has to be considered. Not all boards can exercise the three roles. Prof. Niamh Brennan FCA is Michael MacCormac Professor of Management at UCD College of Business.

Oct 01, 2018
Comment

The media’s focus on the largely theoretical issue of border controls is smothering debate on the possible loss of very practical rights. Teaching on the Chartered Accountants Ireland Diploma in Corporate Finance course in Dublin recently, I asked a class of around 30 students for their estimates of the proportion of the eventual UK-EU deal that had already been successfully negotiated. About half the class reckoned between 0-25% of the deal had been done with nearly everyone else indicating either 25-50% or 50-75%. One solitary class member indicated his belief that more than three quarters of the deal has already been agreed. What is the reality? In early July, Michel Barnier, the chief Brexit negotiator for the European Union, declared that 80% of the deal with the UK has been already agreed! The biggest remaining point of difference in the Brexit talks remains the Irish border, where the public stances adopted by the parties are irreconcilable. Unless the UK is to remain inside the Single Market, which it won’t, there will have to be post-Brexit border checks between the UK and the EU. As far as the border between Ireland and Britain is concerned, those checks will have to be between Newry and Dundalk (something the EU and the Irish Government are not prepared to countenance) or between Larne and Stranraer (something the UK Government won’t contemplate). Something will have to give, but what? Here is my suggested way out. In my view, it would be a breach of the Good Friday Agreement to erect border checks between Great Britain and Northern Ireland, unless the people of the North voted to change Northern Ireland’s constitutional status. The EU-UK border will therefore have to be between Dundalk and Newry. If that is to be the case, we then need to consider how much work would need to be done at the border regarding the movement of people and goods and the supply of services. Having lived in Northern Ireland for the first decade of my life with all my grandparents living south of the border, I crossed the hard border that used to exist very often. To be perfectly honest, it was never that much of a practical encumbrance. If the Common Travel Area is maintained, there is no compelling argument for checking people driving across the border. Goods being supplied commercially will need to be regulated and subject to checks, and the supply of services will need to be policed where those services are delivered. That means that only goods going across the border in commercial quantities would need to be controlled at the border. I am sure that it is not beyond our authorities’ wit to come up with a smooth system to allow for that. Why might Ireland give way on its current negotiating stance? It could be justified if, in return, the EU rights of Irish residents living in Northern Ireland were secured. Under current Brexit proposals, Northern Ireland residents with Irish citizenship plus those who identify as British but are entitled to Irish citizenship (i.e. nearly everybody living in Northern Ireland) risk losing a range of EU rights including access to the European Health Insurance Card, access to EU student fee rates, the right to vote for MEPs, plus the right to be joined by non-European Economic Area (EEA) family members. These are very important practical rights whose impending loss is getting very little media attention compared to the, largely theoretical, cost of reinstalling some limited border controls. It would make sense for the Irish Government, under pressure from the other members of the EU seeking to finalise an increasingly agreed Brexit in order to avoid severe economic disruption, to give way gracefully on the largely symbolic question of our detailed border arrangements if it can thereby protect the practical rights of Irish people living north of the border.   Cormac Lucey FCA is an economic commentator and lecturer at Chartered Accountants Ireland.

Oct 01, 2018
Comment

Welcome to the October issue of Accountancy Ireland. A new academic year is starting and we’re inviting a new batch of potential Chartered Accountants to learn, train and develop into future leaders with our Institute. Promoting the profession  Over the summer months, we’ve been busy promoting our qualification, demonstrating the wealth of opportunities open to Chartered Accountants and seeking to bring the brightest and best into our profession. In our Open Evenings and our meetings with careers teachers and students at all levels, we’ve been quick to highlight the high quality of our education programme, the fantastic career opportunities it presents and the flexibility we offer to our students. Enhancements to qualification  This year, we announced a range of enhancements to our education programme, including agreements for the provision of specialisms with the Institute of Banking and the Chartered Institute of Public Finance and Accountancy. These developments are important as they enable us to keep in step with skill-sets that both potential students, and employers, are looking for. Growth in member and student numbers and increased gender diversity In August, the UK’s Financial Reporting Council issued its annual Key Facts and Trends analysis. It shows that our Institute remains the largest and fastest growing professional body for accountants in Ireland, with our membership growing by 5.3% in 2017 and by almost 19% since 2013. The study also revealed a rise in the percentage of our female membership. Women make up 41% of our overall membership, a 9% rise on our 2008 figure of 32%. We acknowledge that we have more work to do to further grow this number, but we see the positive growth in gender diversity over the last decade as a great indicator for the future. There was also a positive in terms of overall student numbers. Despite a drop in student numbers across the UK and Ireland, our Institute beat the trend, attaining student growth of 5% in 2017.  Brexit  Members should also be aware that we are very focused on Brexit and its impact on our professional qualification. It’s a priority for our members that Brexit must not affect their right to work and practice across the island of Ireland and in the UK. We want to ensure that the Irish Chartered Accountant qualification continues to be recognised in the UK post-Brexit and similarly, that the UK qualification is recognised in the EU. We remain dedicated to informing the wider debate around Brexit. We also continue to call for the certainty which businesses on both sides of the border need in order to prepare effectively for the new trading relationship between the UK, the EU and the Republic of Ireland. I would recommend that members take a look at the resources and articles on the Brexit section of our website. We will continue to have a strong voice on this, and on the other business issues which matter most to our members. Barry Dempsey Chief Executive

Oct 01, 2018