Comment

The banking system is driven by confidence and when that confidence evaporates, the risk of contagion becomes real and dangerous, writes Jim Power One of the abiding memories of the great financial crisis back in 2008 and thereafter was the virtual collapse of the global financial system following the implosion of the US sub-prime mortgage market.  This implosion created a domino effect around the world and its tentacles spread far and wide, devastating the Irish banking system.  The Irish banking system was ripe for devastation after nearly a decade of excessive lending and poor lending standards.  A banking system is driven by confidence, but when that confidence evaporates, the risk of contagion becomes very real and very dangerous. This has played out in recent weeks.  Silicon Valley Bank collapse In the second week of March, Silicon Valley Bank (SVB) became the second largest bank in US history to collapse and the biggest lender to fail since the 2008 crisis after customers rushed to withdraw cash due to fears over its liquidity.  SVB was a bank that loaned money to start-up companies mainly in the technology area and it also provided other financial services to both start-ups and other technology companies.  Another US bank, Signature Bank, was also shut down by the Federal Deposit Insurance Corporation (FDIC). The earlier collapse of crypto-bank Silvergate did not help matters.  The FDIC forced SVB bank to cease operations on 10 March. At the peak of the technology boom, SVB placed $91 billion of its $188 billion in deposits in long-dated securities such as mortgage bonds and Treasury securities.  The value of those bonds had fallen heavily over the past year, however, as the Federal Reserve increased short-term interest rates aggressively.  The value of its assets was also adversely affected by the sharp correction in the global technology sector over the past year.  The bank sought to raise funding of $2.25 billion to cover the losses on its bond portfolio, but without success. This contributed to a run on its deposits and the closure and eventual sale of the bank by the FDIC.  In an FDIC insured bank, up to $250,000 is guaranteed, but the problem for SVB, reflecting the nature of its client base (it had almost 40,000 customers), is that an estimated 93 percent of deposits were not covered as they are over the threshold.  For a normal bank, it is estimated that around 50 per cent of deposits are guaranteed.  This lack of insurance created serious concerns amongst depositors, and we basically witnessed an old-fashioned run on a bank.  Although slightly different, Signature Bank had similar difficulties. In response to the crisis and the risk of contagion, the US authorities responded quickly and aggressively.  First, Treasury Secretary Janet Yellen instructed the FDIC to make whole all depositors with both SVB and Signature Bank out of its Deposit Insurance Fund.  The aim was to shore up confidence among depositors at US banks. Concerns about moral hazard are being ignored for the moment. Second, the Federal Reserve introduced a new lending facility to provide additional funding to banks that run into liquidity problems.  The new Bank Term Lending Program (BTLP) will operate alongside the Federal Reserve’s existing repo facility and will provide loans at a duration of 12 months.  Crucially, the qualifying assets for access to these loans will be valued at par (rather than marked to market).  This should ensure access for institutions sitting on unrealised losses in their held-to-maturity security portfolios. Developments in Europe Recent banking problems have not been confined to the US. In Europe, CSFB has had to be acquired by its larger competitor, UBS.  In the case of CSFB, the vultures have been circling for some time due to a series of scandals in recent years. These have included the largest trading loss in its 167-year history after the implosion of Archegos Capital, and the closure of $10 billion of investment funds linked to a collapsed financial firm, Greensill.  It was revealed that the bank’s auditor, PwC, had identified material weaknesses in its financial reporting controls, which delayed the publication of its annual report.  It is possible to go through each of the troubled banks in turn and conclude that the problems are somewhat unique and are not reflective of the global banking system in general, but the list is getting longer. The heavy concentration of bonds on the SVB balance sheet created the main vulnerability for that institution, but there is once again a more general concern about bank regulation, and particularly the deregulation engineered by Trump in 2018 in response to intense lobbying and a somewhat warped ideological belief system.  His reforms basically reduced the regulatory supervision of smaller banks and indeed the CEO of SVB lobbied heavily for such a relaxation of supervisory standards in the past. The reality is that all banks need to be heavily regulated.  Central banks will continue to respond aggressively to seek to contain any banking problems that might arise in the months ahead.  The likelihood is that further problems will emerge given the move away from the intoxicating effects of artificially low interest rates. A decade of Quantitative Easing was always going to give rise to challenges.  The recent problems for Deutsche Bank clearly illustrate just how nervous the markets are at the moment and how an apparently relatively stable bank can get into difficulty.  Irish banking system For the Irish banking system, the main risks are more likely to be caused by global contagion rather than any inherent balance sheet problems.  In fact, the balance sheets of the Irish banks look relatively solid due to quite stringent capital requirements and other regulatory requirements introduced over the past decade.  We should be thankful for this, but also recognise that the radically changed monetary policy environment has the potential to cause difficulties in areas that might not appear obvious.  The current banking difficulties are likely to increase the cost of funding for banks, pressurise profitability, lead to tighter lending standards, reduced credit availability, and result in more expensive banking services.  Given the fundamentally important role played by banking from an overall economic perspective, such outcomes would undermine activity and damage growth prospects.  Perhaps, it will now take some momentum out of central bank interest rate tightening.  It is not 2008, but it still feels uncomfortable. Banking volatility can now be added to the long list of global economic risks we are facing. 

Welcome to the April edition of Accountancy Ireland At the time of writing, in advance of our Ulster Society Annual Dinner in Belfast, we optimistically await the next steps in the process to bring stability and certainty to Northern Ireland in the wake of the Windsor Framework, and hopefully a positive impact on the way our 5,000-plus members there do business into the future.   By the time you read this we will have welcomed an additional 265 members to the fold following our Spring conferring ceremonies in Belfast and Dublin, and I wish you all success in your careers within our community of Chartered Accountants. Outreach visit to the US and Canada In March, I had the honour of being invited to meet a gathering of our members in Toronto, before joining a small delegation from the Institute in New York.  We were invited to participate in roundtables with Ireland Inc., which included senior business leaders, US Congressman Richie Neal, US special envoy on the economy to Northern Ireland, Joe Kennedy III, and Minister for Education Norma Foley.  It was a privilege to attend the ringing of the opening bell on the NYSE and it is testament to our influence as a small country that Ireland got to open the day there, having seen the EY Ireland Entrepreneur of the Year delegation do the same some months ago.  The Minister then spoke at our own hosted event at the Irish Consulate General in New York where we welcomed our US based members and also heard from Ken Bishop of NASBA on the recently extended Mutual Recognition Agreement that Irish Chartered Accountants in the US can and do benefit from working there.  We were also delighted to attend the American Chamber evening where we met Tánaiste Micheál Martin. Moving to Washington DC, it was fantastic to see the political leaders of all the North’s main parties together attend the Ireland Funds dinner and the NI Bureau breakfast.  Council member Pamela McCreedy, Director of Public Affairs Brian Keegan, and I had a chance to catch up with them at these events and to emphasise the importance of stability to our members doing business in the local economy and in the wider spheres of the all-island of Ireland, UK, and broader global economies.  With over 1,000 Irish Chartered Accountants based in North America, we are incredibly proud of the impact they make on business there and how well they represent the Institute in everything they do. Reform of Leaving Certificate accounting syllabus In January, we had significant media coverage in respect of our call for reform of the Leaving Certificate accounting syllabus across national print media, on radio and online.  In February, Brian Feighan, representing CCAB-I, the Institute’s Brid Heffernan and I were invited to meet officials from the Department of Education to discuss ways in which the profession could work with the Department to improve the experience of our young people with accounting at second level.   A number of positive avenues were explored and we will continue to engage over the next number of months to advance the agenda in this regard.   It was positive to note that the Department is planning a Partners’ forum on syllabus reform which would welcome interaction with bodies like ours who wish to offer assistance in ensuring that, amongst other things, the system is supporting the real economic need for financial skills capacity in our business community. International Women’s Day The Chartered Accountants Worldwide global ED&I task force published the first global study to map career journeys of women in the accounting profession, exploring existing barriers on that journey and opportunities for employers to open career pathways for women to progress into more senior positions.  It indicates that while progress has been made, there is still a challenge for the profession in retaining female talent.  Most women surveyed felt they had a lot to offer the profession despite being a parent and are confident they can obtain a senior position. Barriers identified to overcome are a lack of confidence to progress careers, management style of superiors/company culture, and a lack of time off to care for children. Fantastic to be represented at the launch event by our very own Deputy President. Annual Dinner This is the first time I have had the opportunity in Accountancy Ireland to reflect on our Annual Dinner in January at the Convention Centre.   It was fantastic to see everyone gather again in person and to welcome newly appointed Minister for Finance Michael McGrath TD who addressed attendees, and Rachael Blackmore and Anne Heraty who offered great insights into their successful careers.  My thanks to all the businesses who supported the event by hosting tables and to the Institute team who ensured the evening ran so smoothly.  Pat O’Neill FCA President  

Julia Rowan answers your management, leadership and team development questions I feel I need to constantly prove myself, meaning I work very long hours. I spend hours drafting reports, checking other people’s work and preparing for meetings. I’ve been aware of this for a long time and my boss and others tell me that I don’t need to do it, but I don’t seem to be able to change. First, it’s important to acknowledge that changing our behaviour and habits can be really difficult. For you, it sounds like there is an unaddressed fear (possibly unconscious) at play here.  A great way to become conscious of what is unconscious is to write about it. Whether you feel very stressed or just a bit anxious, stop what you are doing and write about what is happening and how you are feeling. Then keep writing and see what comes up.  You are not attempting to analyse or rationalise what is happening—you are simply describing it to see what thoughts arise.   Over time, your fears will come out in your writing. Our fears can seem ridiculous—”people will laugh/I’m letting the side down/they’ll find me out”—so we hide the fear, letting it have all the power.  By getting the fear down on paper, we lessen its power and then we can interrogate the fear—”when is the last time people laughed at me/I let the side down?”.   In my experience with clients, they don’t have any examples. In fact, they will often come up with examples of the opposite: “people took me seriously, I was complimented for my contribution”.  If acknowledging and addressing the fear through writing doesn’t enable you to change your habits, it may be worth talking to a professional to help you through it.  I am heading up a cross-functional project team which will have high-level impact. People turn up for meetings, the discussions are constructive and polite, but there is little or no follow through. Everyone is very busy, but getting this project over the line is one of my key objectives and I worry I might fail. Many factors could be causing this blockage, including people’s core responsibilities, personal motivation, support for the project objectives, commitment to the project, team norms that have been formed, or your chairing style, etc.  I suggest that you organise a meeting to examine the progress on this project, face-to-face, in a nice room. This gives you the opportunity to have a very open discussion with the team. You need to lean into the reality of what is (and is not) happening and get very curious. Leave any hurt or defensiveness aside. The usual ‘stop, start, continue’ approach may be useful to get the conversation going. Make sure to pay attention to what is working. This gives people the psychological permission to address what’s not.   You may need to go a bit deeper and explore some of the issues mentioned above, which may feel awkward. Design the process so that people feel safe answering the questions—getting small groups to explore questions, for example, or providing post-its and pens for people to write. Even if you feel a bit hurt by some of the feedback, lean into it.  If the project is paramount, getting support from HR or a professional could be useful either in helping you to prepare or in running the session for you. Julia Rowan is Principal Consultant at Performance Matters, a leadership and team  development consultancy. Email questions to julia@performancematters.ie

Western perceptions of Central and Eastern Europe are shifting, sparking far-reaching change inside NATO and the EU. Judy Dempsey explains why The European Union is changing, and so is NATO. While these changes may not be immediately discernable, they will have repercussions for EU policies, not just in relation to Ukraine and Eastern Europe, but also Russia.  And they will have a lasting impact on NATO, as it focuses increasingly on defending the Baltic States and other Central European members. Russia’s brutal war against Ukraine is the catalyst for these shifts, which have several aspects, not least those rooted in the historical and political differences between Western and Central Europe.  The Soviet totalitarian system was imposed across Eastern and Central Europe after 1945, while their Western counterparts benefited from reconstruction efforts under the Marshall Plan.  Western Europe built this part of the continent on the foundations of prosperity, democracy and a peace project embodied by the European Steel and Coal Community, the precursor to the EU.  It wasn’t until the fall of the Berlin Wall in 1989, and subsequent collapse of the Soviet Union, that Central Europe came back to Europe. The dream of a Europe “united and free” was finally realised, in theory at least.  And herein lies the basis for another shift brought home by the war in Ukraine. Central Europe has never trusted Russia’s intentions, whether in Belarus, Georgia, Moldova, or Ukraine.  They warned their Western European counterparts about the consequences of Russia’s invasion of Georgia in 2008, how Germany’s dependence on Russian gas would give the Kremlin a geostrategic weapon to divide Europe, and how Russia’s first invasion of Eastern Ukraine in 2014 would not stop there.  All the while, several West European countries played down such fears, even suggesting that the Central European attitude towards Russia was outdated and just plain anti-Russia. It was time to move on. Poland and the Baltic States can now confidently say “we told you so” following Russian President Vladimir Putin’s Ukraine invasion, his use of energy to threaten other countries and his ambitions to prevent Ukraine and other countries in the region from pursuing a democratic, pro-European path. These shifts are having an impact inside both the EU and NATO. Successive French and German leaders who forged very close ties to the Kremlin have had to change their perception of Russia’s trajectory.  Since 1989, these two countries have viewed Eastern Europe through the prism of Russia, as if neither was a truly independent sovereign state.  This perception has finally faded as Berlin and Paris now see the defense of Ukraine as being vital to European security—and vital for Ukraine’s survival as an independent, sovereign country. This has strengthened the backbone of the EU in terms of sanctions against Russia and support for Ukraine.  Perceptions of Central Europe have also been essential to NATO’s new emphasis on Northern Europe.  Russia’s war in Ukraine has persuaded Finland and Sweden to join NATO—a move that strengthens the alliance, but also halts, for the moment, the EU’s ambitions for strategic autonomy.  The war in Ukraine has exposed the EU’s lack of common security and defense culture, which explains why the Central Europeans have become even more “Atlanticist” as they seek to bolster the defense of Europe.  Their next task—their biggest policy shift—will be working out how to integrate Ukraine and Eastern Europe into the EU and NATO. And that’s a whole other chapter. Judy Dempsey is a Non-Resident Senior Fellow at Carnegie Europe and Editor-in-Chief of Strategic Europe

ISQM1 has created a valuable opportunity for firms to embrace technology and data management for greater efficiency. Liam Mullane explains why Like Christmas, the 15 December deadline for implementing the International Standard on Quality Management 1 (ISQM 1) has come and gone.  Now, you need to turn your attention to ensuring the System of Quality Management (SoQM) you have designed is operating effectively.  It’s also a good time to look back at all the controls you have designed as part of your ISQM1 implementation and identify any potential opportunities there may be to optimise these processes.  But first, let’s look at one of the significant changes introduced by ISQM1—your firm’s Risk Assessment Process (or RAP) for designing, implementing and operating your SoQM.  The RAP will potentially have led to a significant increase in the number of formal controls your firm needs to implement, monitor, and test.  This new requirement is also iterative, resulting in firms adjusting their SoQM for the new quality objectives and/or quality risks identified. This process gives rise to other opportunities to enhance your SoQM on a yearly basis, including “embracing technology” and “data management”. Embracing technology Most firms will have invested significantly in audit technology over the past decade with continued investment planned into the future.  If you haven’t done so already, however, now is the time to consider whether your firm has invested sufficiently in your internal quality control processes—key components of your SoQM.  Some firms may have a manual process for engagement budgets, for example, and a separate manual process for the assignment of resources to engagements.  There is a risk that these two manual processes may not be consistent in decisions made, and this could have a direct impact on audit quality.  This could, therefore, be the ideal opportunity to embrace technology and merge the two sub-processes into one work stream. Automaton in itself should be a key consideration on a go forward basis. ISQM1 has resulted in most firms creating numerous formal controls across their practice.  If the controls and processes are manual in nature, there is a valuable opportunity for automation.  The benefits of automation include more consistent application and operation, less risk of error and manual input, efficiency and, ultimately, improved compliance.   Data management  ISQM1 has eight components and, as firms design and develop different controls to address the relevant quality objectives, a key input to a lot of these controls will be data.   Data can be a key input to different controls in various processes (i.e. there is an interplay across ISQM1). In order to ensure a coherent and efficient SoQM, this data should be consistent.  Accountants tend to love spreadsheets—but, like everything, there is a time and a place. Where possible, all data should be gathered in a data warehouse, which is checked for completeness and accuracy.  This is a key input to ensuring your SoQM operates appropriately across all components. As they say, “rubbish in, rubbish out”.      Last word The operation of ISQM1 by 15 December 2022 has been a great achievement by all of the implementation teams across the various firms, but the work doesn’t stop there.  Your firm must now continue to develop your SoQM with the iterative process, using the opportunity to embrace new technology to make everyday tasks more efficient, while also considering your approach to data management.  ISQM1 is raising the standard for all—we must grasp the opportunity with both hands. Liam Mullane is a Director with KPMG

The West is now at economic war with Russia and the consequences may well shape our lives for decades to come. Cormac Lucey explains why Enormous change sometimes occurs without us even noticing. The appointment of Paul Volcker in 1979 to head up the US Federal Reserve ushered in a decade of transformation.  Margaret Thatcher and Ronald Reagan took the top political jobs in the UK and US, unleashing four decades of falling interest rates, lower inflation, and rising financial asset prices.  The Berlin Wall came down, China pushed for greater trade with the West, and economic globalisation accelerated. Back in 1979, few could have foreseen the immense change that lay ahead.  By contrast, the Russian invasion of Ukraine last year was impossible to ignore. Vladimir Putin may have expected little resistance to his “special operation”, but the Ukrainian response has been intense and courageous. And the West has shown surprising unity in agreeing a two-pronged strategy: providing advanced weapons systems to Ukraine while also imposing unprecedented economic sanctions on Russia.  In addition to targeting key individuals associated with the Putin regime, western nations are trying to limit Russia’s access to money. Major Russian banks have been removed from Swift, the international financial messaging system.  Russia has been barred from making debt payments using foreign currency held in US banks. And western Europe has frozen the assets of all Russian banks, blocked Russian firms from borrowing money, and placed limits on Russians deposits in European banks.  The EU has banned imports of Russian coal, refined oil products and oil by sea. It is unprecedented for a large power (and permanent member of the UN Security Council) to be subject to such sanctions.  The closest we’ve come in recent history was perhaps US President Franklin D Roosevelt’s attempts 80-odd years ago to curtail an expansionist Japanese Empire.  In 1940, Roosevelt closed the Panama Canal to Japanese shipping. Responding to Japanese occupation of key airfields in Indochina, the US froze Japanese assets the following year and established an embargo on oil and gasoline exports to Japan.  By December 1941, Japan had attacked Pearl Harbour and triggered war with the US.  Today, the West is waging economic war on Russia and the consequences—less evident than the immediate conflict—may well shape our lives for decades to come.  Unlike Japan in 1940, Russia today is a plentiful supplier of commodities and not easily besieged.  It has powerful neighbours in China and India, both of which are quite content to continue trading with Russia, despite the West’s sanctions. But China has its own unsatisfied territorial claim over Taiwan, which could provoke similar sanctions from the West. This has resulted in China seeking to reduce its economic dependence on the West, just as the West scales back its reliance on China.  The result is a new era of deglobalisation, ‘reshoring’ and ‘friendshoring’. Taiwan Semiconductor Manufacturing Company (TSMC)—the world’s leading manufacturer of microchips—is at the epicentre of the resulting tensions.  In a recent speech, TSMC founder Morris Chang observed: “Globalisation is almost dead. Free trade is almost dead. And a lot of people still wish they would come back, but I really don’t think they will be back for a while”.  This is evident in TSMC’s decision to locate its newest fabrication plant in Arizona in the US—a location it would hardly have chosen prior to the Ukraine War.  Has the world of peace, uninterrupted trade and economic globalisation been replaced by one of large trading blocs operating in parallel, but separate from each other? It looks like it. Unfortunately, we will all probably lose out as a consequence. Cormac Lucey is an economic commentator and lecturer at Chartered Accountants Ireland