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.

There is good reason why some companies might be willing to specify when and where they pay their taxes. When income tax was first introduced to the United Kingdom at the turn of the 19th century, the very first return of income was a model of restraint and decorum. The taxpayer only had to certify that the amount being paid amounted to no less than 5% of their income for the year of assessment. And that was it. No description of sources, no amounts, no calculations, no claims for allowances and reliefs. The civil servant at the receiving end of the cheque had only the taxpayer’s assurance that he (and undoubtedly, at the time, it was a he) was paying the correct amount. That concern for the privacy of the individual has been turned both on its head and inside out by social media, but the boundaries still exist when it comes to sensitive commercial and financial information. The single biggest challenge of the knowledge economy is not the management of data per se, but the extent to which the custody of information passes from the individual or the business to the regulator, assessor or stakeholder. It places a whole new duty of care on the authorities that they might not be capable of managing. There is perhaps more data being created today than can ever be properly secured. So often when confidential data comes into the public domain, it is due to a human factor rather than a technological one. Judicious “leaks” can and have been used to influence popular perceptions and political policies. The Paradise Papers, the Panama Papers, Luxleaks and the leaks from US military archives have been the result of the actions of disaffected individuals like Edward Snowden rather than the activities of gifted hackers. The tax planning information that came to light from the Panama Papers and Luxleaks undoubtedly changed European tax policy. While there have also been occurrences of data breaches from persistent cyber attacks, it does seem that the real risks to data security come either from people knowing exactly what they are doing or, as was the case some years ago when HM Revenue & Customs lost thousands of taxpayer records, human carelessness. This phenomenon presents both a significant threat and a tangible opportunity for the accountancy profession. While individuals can and do blithely give away valuable personal information on social media for the exploitation of marketers and abusers alike, business is far more circumspect when it comes to publicising sensitive data. An EU initiative to create a public register of the activities of multinational taxpayers is currently stalling because there is conflicting advice as to whether such a register would be legislated for as a matter of EU tax law or as a matter of EU regulatory law. Despite this legal wrangling, some companies might be quite willing, for reputational reasons, to specify when and where they pay their taxes. New opportunities for the profession lie where there are options for this type of discretionary disclosure. Accountants have long been custodians of financial information, but now have the opportunity to be the curators of the information as well. Knowing how, when and where to disclose is becoming as vital a skill as assembling the information in the first place. Deciding, for example, to report in more detail on tax filing and payment in a company’s accounts could attract risks, but could also enhance the reputation of that business as a first mover in an area of legitimate public interest. Unlike those early tax returns, nothing is taken solely on trust anymore. But business reputation and trust can be enhanced by wise decisions on what to disclose and when. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland.

There are many good reasons to operate a practice through a limited company, but doing so brings its own problems. It is now common for accountants to carry out practice through a limited company. While there are good commercial reasons to do so, complications will eventually arise through the elapse of time and the realities of company law. The result can be difficulties and, more likely than not, acrimony. Heading off trouble through a shareholders’ agreement (SA) is best. An SA in the context of a professional practice is the equivalent of a partnership agreement, but more complicated. In effect, it is best for an SA to mirror as far as possible what would otherwise be a normal partnership agreement. Partnerships are governed by the Partnership Act 1890, a concise and well-written law that has never been amended. Originally drawn up to oversee business relationships before the advent of the limited company, the Act’s relevance since the early 20th century has largely been to professional partnerships; though this was not the intended purpose. The Act itself, in effect, constitutes a partnership agreement, though it can be amended by written agreement. There is an ease to the formation, administration and dissolution of professional partnerships. This is not the case with limited companies. In time, partnerships dissolve through resignations, retirements and death, or are restructured into new arrangements through mergers, new partners and so on. However, an actual ‘share’ in a partnership has no independent status and has no title or continuity save vis-à-vis the other partners; unlike a shareholding in a limited company, which has a distinct legal status and continuity. Also, in a professional practice operating through a limited company, the ‘partners’ (i.e. the shareholders) will be paid salaries, taxed in the normal way, as compared to drawings in a partnership. All is well in trading as a limited company until, inevitably, an event happens. It may be the resignation, retirement or death of a shareholder; or it may be difficulties regarding a marital separation or a row with a difficult or non-performing partner. One way or another, the partner concerned or his/her estate will have a shareholding in the company that will continue to hold rights and entitlements. In the absence of a properly constituted SA, the disentanglement of the outgoing partner’s shareholding will be problematic and probably acrimonious. Remember too that clients belong to the limited company. It follows that an SA is essential to the good order and continuity of a professional practice. Legal advice thereon is essential, particularly to ensure that the SA does not contradict the constitution of the company and that the SA is capable of being interpreted and understood, rather than being vague and aspirational. This includes a careful review as to the ability to enforce all aspects of the SA. The primary focus of an SA in the context of anticipating events, as referred to above, falls under three headings. First, the relevant shareholding may be compulsorily acquired by the other shareholders (probably by the company itself acquiring the shareholding); second, a basis of valuing the shareholding; and third, a structure or schedule as to payment for the shareholding. Realistically, that basis of valuation is likely to be the outgoing partner’s issued share capital together with his or her share of undrawn profits. It is almost always contentious as to whether or not a profit share in an accounting practice has a capital value beyond the above basis of valuation. The existence of a limited company will make this more contentious. A short article cannot encompass the arguments thereon. The Valuation of Businesses and Shares, written by the author of this article and published by Chartered Accountants Ireland, sets out the fundamentals on valuing a professional practice. It also covers the area of partnership agreements and related matters. There are a range of issues not yet tested by experience as to professional accountants trading through a limited company. Remember that company law prevails, and not the traditional embodiment of professional practice. For example, a row with a partner may develop into a claim for minority oppression as set out in company law. A surviving spouse of a deceased partner may pursue a continuing share of the practice profits through inheritance of the related shareholding. There will be difficulties should a partner go through a marital separation. As always, there will be tax complications – quite different from partnerships – in the acquisition or devolution of shareholdings. Practitioners, late in life, can find themselves embroiled in disputes simply through the elapse of time. A careful, well-thought out SA is therefore essential. Des Peelo FCA is author of The Valuation of Businesses and Shares, 2nd edition, published by Chartered Accountants Ireland.

Chartered Accountants have a vital role to play in guiding Northern Ireland’s thriving SME sector through uncertainty and chaos. As a Chartered Accountant, I am very proud of the role I and my fellow Chartered Accountants play in supporting the growth and development of home-grown businesses in this part of the world. To celebrate the success of the small business community in Northern Ireland, which constitutes over 99% of the local business sector, Harbinson Mulholland – the business advisory firm and my employer of 17 years – recently recognised the top fifty ‘bread and butter’ firms at a special event at Titanic Belfast. The breakdown The league leaders were identified through research carried out by Ulster University Business School using the European Union (EU) definition of a small- and medium-sized enterprise (SME), which is less than 250 employees and turnover of up to £50 million. The results confirmed that entrepreneurial spirit is alive and well in Northern Ireland, which boasts more home-grown businesses per head of population than Wales, Scotland and all regions across the north of England. Almost 75% of them operate in just three sectors – manufacturing, construction and wholesale/retail. Twenty are based in Co. Antrim (five in Belfast alone), 10 each in counties Tyrone and Down, eight in Co. Armagh and one each in counties Derry/Londonderry and Fermanagh. Altogether, the companies earned just over £100 million in operating profit in their last reporting year on a turnover of £1.6 billion. Just under £170 million was paid out in wages to over 5,700 employees and 32 out of the 50 businesses are family-controlled. In the three leading sectors, 14 businesses were involved in construction, 12 in wholesale/retail, and 10 in manufacturing. Eight of the top 50 were involved in food production and distribution, six in car sales, and four in shop-fitting and joinery. Only two companies were in the information and communications technology sector and there were no SMEs in the hospitality or creative sectors.  Unique challenges Fellow practitioners will be all too aware of the challenges that are faced by this sector. Some of these challenges are unique to those located in Northern Ireland, such as the ongoing lack of a devolved government. Indeed, the inability to appeal to a local government and campaign for initiatives that will benefit these ‘bread and butter’ businesses is an ongoing source of frustration. Meanwhile, ongoing UK initiatives such as auto-enrolment for pension schemes means that the minimum employer pension contribution rate increases a further 1% to 3% from April 2019. Added to this, at the time of writing the ongoing state of flux with regard to Brexit provides further challenge. New technologies have enabled finance teams to move from what has traditionally been perceived as a data gathering and compliance role to a data analysis role. Our members in this sector are central to the development of strategy within their respective businesses. Within this sector in particular, the finance team has the opportunity to work in tandem with internal growth strategists; they have the skills necessary to analyse and establish key financial goals and assist in the formulation of plans that will achieve these goals. Navigating change Despite the challenges faced by this sector, it continues to grow and thrive. As practitioners, we wish to work alongside our clients and provide relevant guidance to help them navigate their future challenges and opportunities. Chartered Accountants are uniquely positioned to understand a variety of areas – not least regulatory change – and interpret these changes on behalf of our clients while helping them refine their commercial responses. Northern Ireland’s business owners face many challenges, from tax planning through to the fallout from Brexit. We, as Chartered Accountants, must continue to make it our business to help interpret and respond to these challenges – whatever they might be. Angela Craigan FCA is a Partner with Harbinson Mulholland, the accountancy and business advisory firm.

It might not be obvious, but we shouldn’t overlook the impact of a no-deal Brexit on the administration of Irish companies. As the clock ticks ever closer to the possibility of a no-deal Brexit, the potential impact on the day-to-day running of Irish companies must be considered. That we would find ourselves in this economic limbo was predicted by few, such that the need to focus on the micro rather than the macro never seemed like the best use of anyone’s time. Yet, if certain micro – and once seemingly procedural – elements related to the administration of Irish companies are not addressed by legislation, and the affected Irish companies take no action, those companies and their directors could find themselves guilty of an offence under the Companies Act 2014. Board composition Every company incorporated in Ireland must have one director who is resident in a member state of the European Economic Area (EEA). Many Irish companies fulfil this requirement by having a director who is resident in the United Kingdom (UK). Where the UK does not remain a member of the EEA, Irish companies so fulfilling this requirement must take action regarding the composition of their boards or risk the company itself – and its officers – committing an offence under the 2014 Act. In addition, and from an administrative perspective, the Companies Registration Office (CRO) will not accept filings from a company that lets this breach subsist. The action that can be taken by companies in this position is threefold: they can appoint a new director that is resident in an EEA state; they can purchase a two-year bond to the value of €25,000 to cover the payment by the company of penalties imposed arising out of offences committed by it under the 2014 Act and certain tax legislation; or they can apply to the CRO for a certificate confirming that the company has a real and continuous link with one or more economic activities that are being carried on in the State. There are practical considerations for the latter two of these options. A bond cannot commence prior to there being a need for it to be in place (i.e. there must be no EEA-resident director at the time it becomes effective) and the CRO will only issue a certificate of a real and continuous link in reliance on written confirmation from the Revenue Commissioners that it is of the opinion that such a link exists. To effect these options can therefore take time, which presently appears to be running out. Groups The 2014 Act allows an Irish company that is a subsidiary of a holding company incorporated in an EEA state to rely on an exemption from having to file its own single entity financial statements in the CRO and instead, file only the consolidated financial statements of its holding company. For an Irish company to be able to rely on this filing exemption, the holding company must guarantee certain commitments and liabilities of the Irish subsidiary and state this by way of note in its consolidated financial statements. Where the holding company an Irish company relies on to avail of this exemption is established in the UK and the UK does not remain in the EEA, the Irish company may have to file its single entity accounts going forward. The 2014 Act also allows an Irish holding company that is itself a subsidiary of an EEA holding company to avail of an exemption from having to prepare its own group financial statements where its own financial statements, and that of its group, are included in consolidated accounts for a larger group prepared by its higher EEA holding company. In this instance, where the relevant holding company is established in the UK, alternative provisions of the 2014 Act that apply to non-EEA holding companies would need to be considered to understand if a similar exemption could be relied upon for future financial periods. Audit If the UK does not remain in the EU, Irish companies that presently use firms in the UK to provide audit services may need to appoint new audit firms. This will present businesses with additional expense, particularly for those companies with financial year-ends falling early in the calendar year which may have to deal with a mid-audit handover to new auditors. Economic impact It is a well-acknowledged fact that a no-deal Brexit will present much economic uncertainty for Irish companies. The closer we get to a no-deal situation becoming a reality, the more pressure will come on companies and their directors to interrupt operations to deal with urgent but somewhat procedural matters, the breach of which could see them commit an offence under the 2014 Act. While clearly stating the obvious, the sooner there is certainty, the sooner ‘business as usual’ can resume. Claire Lord is a Corporate Partner and Head of Governance and Compliance at Mason Hayes & Curran. 

Robotic process automation has had a limited impact on shared service centres, but all that is about to change. It isn’t often that an initiative comes along which can revolutionise an entire industry. Much like the first iPhone, robotic process automation (RPA) is expected to have a significant impact on how various accounting functions operate in the future. Limited positive impacts for shared service centres It is clear to see how technological advancements have influenced our day-to-day lives in recent years, from Alexa ordering your take-away and telling you the daily weather forecast to the countless number of apps that help to make our lives that little bit easier. So far, this impact has not been replicated in the daily activities of the shared service centre. For the most part, changes in this sector have been relatively small with only a minor impact on the roles of Chartered Accountants. Cost-saving initiatives have focused on automation and the introduction of a lean/six sigma approach. These initiatives have helped increase efficiencies, lower costs and ultimately produce more rigorous reporting processes. However, with both automation and lean/six sigma, there are limitations to the potential efficiencies and cost savings an entity will generate. Most organisations have maximised the potential in these areas. A new normal RPA is the next big ticket item everyone is talking about, but as with all new things there is a sense of uncertainty. It is similar to the launch of the iPhone back in 2007 – people weren’t certain that it would be a success. People were unsure as to what impact it would have on society. And so, the same issues arise when it comes to implementing RPA. It will be slow to be implemented but once it is, it will have a significant impact on the accounting industry and specifically, shared service centres. Robotics’ foothold Significant advances in RPA capability mean that computers can now look after key areas of a shared service centre including accounts payable, where it has made a significant impact on the processing of invoices within the enterprise resource planning system; accounts receivable with credit collections, application of cash and the posting of journals; and the day-to-day general ledger function. The cost of implementing such systems can be high initially but given the cost saving attributed to labour efficiencies, it won’t be long before cost comes down. Adapting to change Even though RPA will be able to fully automate some key processes end-to-end, it is important to remember that they cannot fully replace the role of humans. Yes, robots are more efficient and cost less – but humans can think outside the box. What happens when there is an issue the machines can’t process? There will be a need to manage, monitor and constantly assess the outputs of these machines to ensure they are doing what they are meant to. Job roles will change and people will need to adjust. It will be a case of adapting to change, which we have done all our lives. An exciting future It is exciting to consider the full impact RPA will have on a shared service centre when fully implemented, and the results should speak for themselves. However, it is critical that Irish organisations are seen to be leaders in embracing this change and working with partner organisations to instigate efficiencies and synergies.  To date, Ireland has been attractive as a location for shared service centres due to our multitude of talent and resource, and RPA is no different – we just need to access a new resource now to develop this area, hence the need to focus heavily on STEM subjects in third-level education in order to build a pipeline of professionals for this sector. This leads me to another hobby horse – STEM subjects must be promoted to our female population. It is a fascinating area at the minute and the likelihood is it will continue to grow and develop significantly over the coming years. Sinead Donovan is a Partner in Financial Accounting and Advisory Services at Grant Thornton.