Comment

Welcome to a new edition of Accountancy Ireland, the last in what has been an extraordinarily difficult year for most. The best-laid plans made last December are by now  unrecognisable after months spent adapting to shifting realities. Chartered Accountants Ireland started the year with the presumption that Brexit would be the main issue for members in their external environment. Although a global pandemic overshadowed it, the Institute has worked throughout the year to support members on Brexit-related matters and to advocate on their behalf. As we approach the end of the Brexit transition period, our events and updates have continued. We recently opened registration for the third intake of students for our Certificate in Customs and Trade and, in the final quarter of the year, launched a new Brexit Digest e-newsletter full of practical guidance for businesses in Ireland and Northern Ireland. In recognition of Chartered Accountants’ critical role in driving the sustainability agenda, the Institute also recently published the Sustainability for Accountants guide, along with a Sustainability Hub on our website. The fight against climate change is now a corporate imperative. Moving our gaze west, Americans have gone to the polls and the New Year will bring a new administration. In this edition, we look ahead to what the next four years might bring. Change is also afoot in global tax, and Accountancy Ireland looks at the OECD’s proposed reform of the global digital and corporation tax system. Closer to home again, the Institute has endeavoured to respond quickly and effectively to meet the needs of members during the COVID-19 pandemic. Our primary focus has been on providing timely, helpful and practical support to members as they serve their clients and steer their organisations. As an educator, we are acutely aware of the challenges facing students during these months. Our education provision has evolved dramatically over the last year and our CAP1, CAP2 and FAE programmes successfully launched on our new online education platform. Producing the highest-calibre finance professionals is more important than ever for our economy. This festive season will be very different, but I’d like to wish members and students a peaceful, safe and enjoyable Christmas. For those who find themselves in particular difficulty, remember that assistance is available from CA Support. You can find details on our website. Thank you to the committees, volunteers, management and staff of the Institute for their efforts during 2020. I hope that we can make a return to a more normal way of life in the New Year. Paul Henry President

Rachel Hussey asks whether gender quotas really do their job in bringing equality to the workforce and boards.Sometimes change needs help and, in the world of business, what gets measured gets done. So, like many advocates for change, I joined the debate as to the merits of gender quotas or targets as an effective means to address the lack of gender balance on boards and at senior decision-making tables. Quotas provoke strong responses, both in favour and against. Unlike most debates, however, we are all agreed on where we want to go, we just disagree on how to get there. There is a subtle difference between quotas and targets. Quotas are generally mandated by an external force, such as government or regulatory bodies, and they operate on a pass/fail basis with penalties for failure to reach the quota. Targets are voluntary in nature and are typically set internally by the business or industry. While there may be internal or external peer pressure to reach the target, lack of progress has less punitive consequences.There is a considerable amount of evidence that gender quotas for boards may not bring about systemic and sustainable changes. Quotas tend to drive short-term changes that are reversed once the quotas are lifted. For example, Norway introduced a 40% quota for boards of listed companies in 2006. The quota was reached by companies, but the side effects were counterproductive. A number of companies delisted before the legislation was introduced, thereby dodging the requirement. However, the biggest problem was that in the rush to meet the quotas, companies no longer focused on the pipeline of women in their businesses, which is the key to sustainable success. The Norwegians’ own studies show that eight years after the quota was introduced, there were no women CEOs in the country’s 60 largest companies. There was also no evidence of higher pay or more career-advancing opportunities for the vast majority of women in the workforce. Having more women at board level did little to benefit women. On the contrary, it failed to attract more women to climb the corporate ladder and it failed to open up more mid-career opportunities and better pay.By contrast, in the UK in 2011, Lord Davies set a target for FTSE 100 companies to have 25% women on their boards by 2015 (from a starting point of 12.5%). Lord Davies may have had the threat of quotas in his back pocket, but the target set was reached and exceeded. The percentage of women on the boards of FTSE 100 companies by the end of 2015 was 26.5%. Today, across the FTSE 350, the percentage of women on boards is 33%. In contrast to the quota approach in Norway, there was no reduction in the number of listed companies and no reductions in the numbers of women moving up the corporate ladder. The more recent Hampton-Alexander review has now extended the idea of targets to C-suite roles to drive similar progress at the top table.In Ireland, the 30% Club’s goal is that women should make up at least 30% of boards and senior management, and we believe that this should – and can – be achieved by voluntary means. We do not support the idea of quotas and, instead, our members drive accountability for their own progress through target-setting, leading to a greater focus on pipeline talent and more sustainable progress. In 2018, the government established Balance for Better Business, which has set targets for Irish companies. Its first target, 25% of women on the boards of Irish plcs, has been reached. Likewise, the government’s own target of 40% of women on State boards has resulted in a substantial increase in the percentage of women on those boards.And finally, there’s still the question of targets versus merit. For me, there no debate on this question. Targets focus on greater diversity in appointments, but never at the expense of the potential to do the job. It is easy to dislike the idea of others being selected solely on the basis of their status, and if merit-based criteria are not emphasised, people assume that they are non-existent. This is both unfair to appointees and to the wider employee population. It is our job as leaders to show that targets and merit are inextricably linked and there is no place for the perception or reality of a free pass.Rachel Hussey is Chair of 30% Club Ireland and a Partner at Arthur Cox.

Cormac Lucey explains why, after decades of deflation, we could be on the cusp of a financial regime change.Falling interest rates have been the constant backdrop to my adult financial life. In late 1981, US 10-year government bonds yielded an annual return in excess of 15%. Since March this year, they have been yielding less than 1%. UK and Irish bond yields have followed suit, with gilts now yielding less than a third of 1% and Irish Government bonds offering a negative yield meaning you must pay for the privilege of lending to Micheál Martin, Leo Varadkar, Eamon Ryan et al. This development was not some mere technical development on arid financial markets. They have propelled property prices upwards – as a given rental stream is worth an even-greater capital sum if its cost of capital keeps falling. The same logic has pushed equity values higher and higher. The US stock market’s cyclically adjusted price-earnings ratio now exceeds 30. That level was only previously seen in the years around the tech bubble peak of 2000.I fear that we are now on the cusp of financial regime change. A recent study by Man Group, a London-based investment management firm, contends that prevailing economic regimes “reach their apotheosis, and then change, when the extreme conditions they have created lead to permanent policy change”. It then predicts that current extremes in deflation, inequality, debt levels and globalisation may lead to four major transitions in the next decade.There will be a switch in policy emphasis from monetary to fiscal. With central bank interest rates already at or about zero, there is little scope for further reductions as negative interest rates would only further weaken the commercial banking system without yielding generation of significant economic stimulus.The owners of capital have pocketed huge gains over the last four decades while the share of national income going to labour has steadily decreased. As inequality here in Ireland may have diminished over that time, it has increased in other states, especially in the US. That has helped breed seething political discontent. One way to abate that agitation is for politicians to favour labour over capital, the second big transition that Man Group predicts. The third shift that the report expects is one from globalisation to localisation. It has passed by almost unnoticed, but global trade as a percentage of global output peaked back in 2007/2008. Superimpose that on a trade war between the US and China, trade blocs seeking self-sufficiency in personal protective equipment and a scramble to pre-purchase possible COVID-19 vaccines and you can see why this prediction is already unfolding before us. The final prediction is a consequence of the others: it is a move from deflation (or, strictly speaking, disinflation) to inflation. According to the Institute of International Monetary Research, broad money has grown by 26.7% in the US over the last 12 months, a record in the US’s modern peacetime history. That is an international outlier, but strong money growth has also been evident in India (12.1% growth over the last 12 months), China (11.4%), the UK (11.3%) and the euro area (+8.9%). Nominal national output closely tracks broad money. Real national output has been hit by the pandemic and the consequent recession. Fast-growing nominal income combined with slow-growing real income suggests a noticeable (above 4%) rebound in inflation in 2021 and 2022.If Man Group’s four predictions come true – and I think that there’s a very good chance that they will – it will represent a complete regime change for financial markets compared to what has prevailed over the last four decades. Get ready. Cormac Lucey FCA is an economic commentator and lecturer at Chartered Accountants Ireland.

Des Peelo explains the one pertinent question business leaders should ask before making any major decision.Better information means better decisions, which, in turn, means better outcomes. The critical point here is that understanding what the information is, and what it is not, makes for a more informed decision.Concerning major decisions, what is the most dangerous word in the vocabulary of politics, economics, or business? Most people would say ‘risk’, meaning that the result could go wrong, have a poor outcome, and/or have an unexpected adverse effect.Major decisions arise in many circumstances. Directors consider a significant business acquisition or seek to confront a crisis; a politician is pressed on a problematic public issue; an economist is asked to advise on substantial infrastructure spending. All involve risk. The human instinct is to avoid risk or at least minimise it.There is a more dangerous word than ‘risk’, however. That word is ‘assumption’. I have witnessed several difficult circumstances or court hearings where the evidence, written or verbal, involved statements like “I assumed…” or “the assumption was…” In other words, something has gone wrong in using an assumption. As Albert Einstein said: “Assumptions are made, and most assumptions are wrong”.Assumptions are higher up in the decision-making tree than risk. In fact, assumptions create risk. Decisions are made to create an outcome in the future. That purpose, by definition, means making assumptions as to the components necessary to make that decision. An understanding and assessment of risk, therefore, means evaluating the validity of the assumptions.There can be a pyramid of underlying assumptions in a situation. Take, for example, the view that investment in an improved rail network is a ‘given’ good idea (an assumption in itself). Assessing the viability of such an investment necessarily involves assumptions as to passenger volumes, fare prices, capital costs, timescale to completion, availability of finance, and so on. It is instructive to witness the debates about the development of public transport around Dublin, such as an underground rail service and airport link. On differing assumptions, any such capital expenditure can be justified or debunked.Assumptions are not facts, though often presented as such. Indeed, most assumptions are reasonably benign and have a historical comparison or rational basis. But assumptions are made by people and often reflect perceptions, prejudices, and biases. They are seen as valid if they conform to already held views or experiences.Even further back in the assumption analyses are demographics (i.e. the breakdown of the population as to age, location, birth rates, and so on). Almost any significant political or economic decision necessitates knowing and understanding the influence of underlying demographics. The three phases of life – education, work, and retirement – have evolving characteristics and interpretations. Statistics are endless and often challenging to interpret as to trends and reasons why, yet they likely influence significant decisions.Back to the decisions. An insistence on knowing and understanding the key assumptions is the obligation of those tasked with making decisions. For instance, the avoidance of subsequent large cost overruns in capital projects can only be addressed through a prior rigorous assessment of the underlying timescales, cost estimates, comparisons with similar projects and, most critically, a testing of the individuals and/or firms on their capabilities in making the assumptions.The history of major business acquisitions is littered with casualties. The cause is often later identified as being a lack of informed reasoning in making the acquisition in the first place, the underlying assumption being that it must be a good idea because the advisers said so.The pertinent question to ask before a major decision is, therefore: please list in order of importance or risk the top ten specific assumptions in making the project/circumstance work. But remember: vague assumptions (such as a “buoyant economy” or “no change in interest rates”) do not count as specific assumptions.

Annette Hughes discusses the root causes of Ireland’s housing affordability and supply problems, and the possible solutions.Successive governments have had housing and the restoration of a properly functioning housing market as a priority for many years. Despite numerous initiatives, policies, and reports highlighting the persistent problems in the market, EY-DKM’s new report, Putting Affordability at the Heart of the Housing System, has found that the issues are many and complex and there is no single, quick fix.The report, which was prepared for the Irish Home Builders Association (IHBA), highlights the structural defects in the market that have led to rented accommodation costing more per month than a mortgage. Our analysis also shows that there is a significant affordability gap for first-time buyers (FTBs), as their income is insufficient to purchase the median FTB property in 13 mainly urban areas out of 34 areas examined.The report also finds that the deposit required is a significant barrier to homeownership. The average deposit paid by FTBs is 14% of the property price, with many getting support from parents. The cost of the average deposit varied widely, however, as did the time taken for first-time buyers to save it. Saving periods ranged from nearly two years in Kilkenny to more than 15 years in Galway City, Wicklow, Waterford City, Cork City and Dublin City due to differences in income, expenditure, and house prices.36,000 new homes are required each year over the next 21 years to meet housing demand in Ireland but this is unattainable if urgent action is not taken to address affordability issues.A series of measures could reduce the delivery cost of residential development. These include direct financial supports for FTBs, a root and branch reform of the planning system, waiving development levies, accelerating the servicing of zoned lands, actions to address the cost of funding for builders, a full assessment of the impact of new regulations, and the introduction of tax incentives to stimulate development in key locations.The increased tax relief for the ‘Help to Buy’ scheme announced in the July Stimulus should be extended to 2025 and a State-backed shared equity scheme for affordable units on private lands, supported by a Government-funded equity loan of 25-30% of the price, should be introduced.The State takes an estimated 20% of the average delivery cost of a new home. The report, therefore, suggests that consideration should be given to reducing this component for FTBs.A key recommendation is restructuring the planning process to enable, where appropriate, outline planning permission to be obtained early in the process. This would reduce the time frame for delivery, which could, in turn, reduce the cost of financing. The cost and availability of development finance are also covered, with the suggestion that Home Building Finance Ireland (HBFI) should consider accessing EU loans to provide funds at more competitive rates.The quality of new homes in Ireland is much higher than in the past, reflecting new regulations and higher building standards – all of which have a cost. Estimates suggest that these policy-imposed costs account for around 20% of the total delivery cost of a new home. The report recommends that any new regulations under consideration should be carefully evaluated against their impact on the viability of residential construction and subject to a cost-benefit analysis.Under tax considerations, the Government is urged to consider expanding the scope and duration of tax relief available under the Living City Initiative to include newly constructed apartments in designated urban areas to provide a buy-side incentive to encourage their construction.This report is intended to support the Government in achieving the stated objective of putting housing affordability and homeownership at the heart of the housing system. The solutions, while varied, need not be complicated. The early adoption and implementation of even a small number of the recommendations could make an almost immediate difference to many homebuyers and developers, and set Ireland on the road to meeting its housing requirements for the next two decades and beyond.Annette Hughes is Director at EY-DKM Economic Advisory.

Economists may have a plethora of letter-named predictions for the post-pandemic recovery, but Chartered Accountants are depending on a ‘B-shaped’ comeback. Dr Brian Keegan thinks we need to look to Brexit and the US general election for any real answers.Professions are notorious for using jargon, and different professions have preferred styles for their jargon. Doctors tend to abbreviate the ailments they treat, like the “flu”. Accountants tend to prefer acronyms such as IAASA, IFRS and FRC. Economists, on the other hand, use labels, often with reference to the chief protagonist within the economic phenomenon, hence “Laffer curve”, “Keynesianism” and, even at a stretch, “Pope’s children”.Creeping into the commentary at present is an alphabet soup of labels to describe the nature of the post-pandemic recovery. At the outset, we all hoped for a “V-shaped” recovery, denoting a rapid fall-off in activity matched by an equally rapid recovery. Then, more creative economic types, possibly channelling medical concerns over a second surge of the pandemic, started talking about a “W-shaped” recovery. This way, things will start to get better, lapse again and then recover more fully. The latest commentary talks about a “K-shaped” recovery, whereby some sectors of the economy will recover quite quickly, but others will continue to decline. However, judging from our most recent members survey, there is an expectation among Chartered Accountants of what could be termed a “B shaped” recovery, whereby over time most sectors will loop back to their level of activity post-pandemic. Almost all of our respondents thought that business activity would eventually get back to something resembling pre-COVID-19 days. The main area of disagreement was the amount of time this might take, with our members in the Republic of Ireland expecting a quicker recovery than our members in Northern Ireland. The expected difference in recovery time between the north and south of the island is borne out by the ultimate truth serum of economic status, which is the analysis of tax receipts published each month. Counting money will always give a more accurate picture than counting questionnaire responses. Not only that, because of the recurring nature of tax payments, it is possible to trace a coherent and reliable set of comparisons. Tax receipts in Ireland overall have remained remarkably stable, despite the impact of the pandemic. Yet, tax receipts in the UK are showing a serious decline year-on-year. One reason for the difference is down to timing. Ireland counts tax receipts from 1 January; the UK from 6 April by which time, of course, the pandemic was in full surge. However, the differing financial years do not fully explain the disparity. Consumption has fallen in both countries, as evidenced primarily by VAT receipts, but production, as evidenced by income tax and corporation tax receipts, has not shown the same decline in Ireland as in the UK.Resilience in production over consumption could prove to be critical in the coming months since coronavirus is only the first international crisis of 2020. Despite the behaviour of the respective governments, we are all paying too little attention to the impact the end of the UK’s transition period with the EU in December will have on Irish business. There is also insufficient attention being paid to the economic policies of the two main contenders in the US presidential election, nor much being discussed on how the outcome of that election could shape US trade, international corporation tax policy and foreign direct investment because of the focus on the country’s civil discord.The recovery prospects on the island of Ireland will indeed be B-shaped in 2021, but not because of the shape of the economic trajectory. Think instead about the impact of Brexit, and whether or not there is a Biden presidency. Dr Brian Keegan is Director of Advocacy & Voice at Chartered Accountants Ireland.