Comment

Investors are asking if it’s safe to invest again. Cormac Lucey explains why they might want to hold off for now “Is it safe?” That was the question asked of Dustin Hoffman in the movie “Marathon Man” as he was being interrogated while strapped into a dentist’s chair by Laurence Olivier (playing the role of an on-the-run Nazi war criminal), expertly reimagining our worst dentist nightmares. Much like Hoffman’s position, equity markets have become a nightmare. Investors keep asking themselves whether it is safe to invest again or whether this bear market has longer to run. Jeremy Grantham, the veteran investor, wrote an article on GMO.com in late August warning that the “current super-bubble features an unprecedentedly dangerous mix of cross-asset overvaluation (with bonds, housing, and stocks all critically overpriced and now rapidly losing momentum), commodity shock, and Fed hawkishness.” He concluded that we haven’t yet seen the bottom. Having pumped vast amounts of liquidity into the world economy to stave off the deflationary effects of the pandemic in 2020, central bankers were shocked by the firm inflationary response. They responded by tightening monetary policy – the usual precursor of recessions. It’s important to note that this move pre-dated the Russian invasion of Ukraine with its resultant economic disruption, and even more important to note that the conflict in Ukraine has fundamentally changed the rules of the economic game we had become used to. Zoltan Pozsar of Credit Suisse has written that, in recent decades, “the EU paid euros for cheap Russian gas, the US paid US dollars for cheap Chinese imports, and Russia and China dutifully recycled their earnings into G7 claims.” The problem is that global supply chains work only in peacetime, “but not when the world is at war,” Pozsar notes. While Russia is currently being forcibly disentangled from trade with the west, China may decide to voluntarily and slowly remove itself to avoid the shock of aggressive disentanglement should its cold war with Taiwan ever turn hot. Key monetary indicators remain recessionary. In the US, money supply is growing at a slower pace than inflation, meaning the real quantity of money in the economy is falling. The yield curve has just inverted, meaning short-term (two-year) rates of interest exceed long-term (10-year) rates. For several decades, this has been an unerringly accurate harbinger of recession. Unfortunately, central banks remain in tightening mode for those wanting equity markets to lift as inflationary pressures prove to be more than just “transitory.” They say, “Don’t fight the Fed” (the Federal Reserve) and with good reason. Caution is warranted. There are other challenges facing equities. On previous occasions over the last two decades, the depth of downturns has been eased by the fact that not all large economic blocs have been in recession at the same time. In the wake of the Global Financial Crisis, when the western world was in deep recession, strong growth in China helped ameliorate the global impact of the recession and accelerate its ending. Today, all major economic blocs are simultaneously threatened by recession, which risks making this recession deeper and longer. What might signal an equity market bottom? I’ll be looking for a combination of value, investor sentiment, and a change in central bank behaviour. Share prices would need to drop sufficiently to be reasonable value. In 2000 and 2007, this required price drops of the order of 50 percent or greater. Speculative sentiment among investors would need to be replaced by the cold fear that characterises true market bottoms and central banks would need to replace tightening with easing. A halting of central bank tightening would certainly trigger considerable euphoria. But, having been too slow to tighten, central bankers cannot risk their diminished credibility by taking their feet off the monetary brake before inflationary pressures have been well and truly suppressed. Remember: the Nasdaq crash kept deepening two decades ago, even after the Fed had started aggressively cutting interest rates. So, is it safe? I don’t think so. Cormac Lucey is an economic commentator and lecturer at Chartered Accountants Ireland

The absence of a global baseline for reporting sustainability-related information is a concern for many, as the number of signatories to a global call-to-action on the matter demonstrates, writes Fiona Gaskin In late August, 65 companies, investors, and professional accounting firms from around the world added their voices to the call for standard-setting efforts to more closely support a global baseline for reporting sustainability-related information. All were signatories to a statement issued jointly by the International Federation of Accountants, World Business Council for Sustainable Development, and Principles for Responsible Investment, seeking to establish greater compatibility between the concepts, terminologies, and metrics in use in current draft standards for sustainability reporting. The statement acknowledged the important work of the International Sustainability Standards Board, US Securities and Exchange Commission, and the European Commission, together with the European Financial Reporting Advisory Group, in their efforts to advance sustainability reporting. The number of organisations supporting the call for the convergence of standards demonstrates, however, that the absence of a global baseline for reporting sustainability-related information is a concern for many corporates, financial institutions, and professional services organisations. The problem is very real. When various jurisdictions and standard-setters issue concurrent, but differing, standards, the users of those standards are left with varying frameworks, which can be costly and inefficient to interpret and implement. These efforts, while well-intentioned, can create confusion by adding more noise as reporting multiplies, but with different standards and objectives. A fundamental question for those setting standards and regulations is the question of whether or not reporting should be focused on information useful to investors (i.e. the enterprise value), or information useful to a wider group of stakeholders (i.e. the impact value). Enterprise value primarily focuses on the impact of environmental, social and governance (ESG) issues on business—in other words, how does the world affect the organisation? Impact value focuses more on the impact the organisation has on the world around it. Both enterprise and impact value offer information that can help to hold companies accountable for their actions—whether that is to maintain or create value, or to minimise negative impacts on the planet and society. Indeed, it is possible to argue that there is really no practical difference between these two values, and that the exposure draft of the International Sustainability Standards Board’s general disclosure requirements standard already provides a few good examples. This is because it is reasonable to expect that a business operating in a way that has a negative impact on the planet and its people will—in the short-, medium- and long-term—have a negative impact on the business itself and, therefore, on its enterprise value. In the long run, which is where sustainability standards focus, enterprise value and impact align. We can see first-hand that the proposed range of emerging standards are already proving to be a challenge for corporates. To start, there is the difficulty in simply gaining clarity on the reporting landscape—what has to be reported on, and by when. Once this has been established, the need arises for an exercise in understanding the crossover between reporting obligations—in the area of metrics, for example. These requirements then need to be assessed against what the organisation is actually doing and reporting. This last step typically results in an action plan which requires time and resources to address the underlying actions. While the statement calling for stronger alignment of regulatory and standard-setting efforts around sustainability disclosure has wide-ranging support, those creating the regulations and standards will ultimately need to continue to collaborate and respond to the call to action. Given that we are at the infancy stage of sustainability reporting when compared to financial reporting, it would seem like such a wasted opportunity to create complexity when standardisation and transparency are what is needed. Fiona Gaskin is Environmental, Social and Governance Leader for Assurance and Reporting at PwC Ireland

The negativity directed at numerous high-profile politicians in recent months calls into question their role in governing professional conduct, but who should guard the guards themselves? asks Dr Brian Keegan There is an old saying from classical wisdom that you should only speak good of the dead, and Boris Johnson probably knows the Latin translation. Of course, the former British Prime Minister is happily anything but dead, even though his political career might be. One of the more surprising aspects of Johnson’s political demise has been the extent to which the normally moderate commentariat turned, not just on his premiership, but also on the individual. Calm reputable voices like The Economist (“he lacked the moral fibre”) and the Financial Times (“a wanton disregard for rules and for the truth”) delivered scathing editorials castigating the man and his morals to an extent typically reserved for the tabloid response to sex offenders. Ordinarily, it is the dignity of the office that protects the incumbent from the worst slings and arrows. Once their office has been lost, however, they become fair game, as Donald Trump and Nicolas Sarkozy, both former presidents of their respective countries, know well, having shared the ignominy of rigorous investigations into their conduct while in office. You do not need to hold a particularly exalted position, as the former Irish Minister of State Robert Troy will attest, to be a casualty of public concern over your actions. There can also be public unease where former office holders have used their previous positions in a manner perceived to be abusive. EU ombudsman Emily O’Reilly has called this the “revolving door of influence.” Despite all the regulation and governance guiding so many aspects of life (and Chartered Accountants are particularly sensitised to this), we don’t seem to be able to ensure good behaviour among our elected representatives, public officials and expert advisors. So, who regulates the regulators? Chartered Accountants will be familiar with the activities of the Institute’s Professional Standards department, but perhaps less so of the extent to which the Institute itself is under the scrutiny of the Irish Auditing and Accounting Supervisory Authority (IAASA), the Financial Reporting Council (FRC) and so on. Nor might they be aware of organisations such as the Monitoring Group, an international consortium of the great and the good, scrutinising the development of the auditing and ethical standards to which accountants must adhere. All of these regulators and meta-regulators are creations of the political system. The star of government regulation can fall as well as rise. The FRC is currently being reconstituted as the Audit, Reporting and Governance Authority in the UK. In Ireland, the Corporate Enforcement Authority has replaced the Office of the Director of Corporate Enforcement. In both instances, these authorities are granted additional powers and autonomy at the behest of politicians. There is also the sin of political omission. Where is the Northern Ireland Assembly to ensure that devolved regulation is appropriate to the needs of Northern Ireland? This is why there should be no sympathy for any politician caught in breach of standards or regulatory compliance. They are directly responsible for the regulatory environment in which Chartered Accountants and other financial professionals earn their living. It is intolerable that their conduct be in breach of the kind of standards they require us to observe. Another Latin tag for this, with which Boris Johnson may also be familiar, is “Quis Custodiet Ipsos Custodes?” — “Who Guards the Guards Themselves?” It cannot be left to journalists from the Financial Times, Handelsblatt, or The Economist to do the guarding. All of the negative attention garnered by politicians over the summer might not change the future behaviour of elected representatives holding a duty of care over professional conduct. Dr Brian Keegan is Director of Advocacy and Voice at Chartered Accountants Ireland

The Irish economy needs a strong pipeline of accounting talent to support both FDI and domestic business, and the Leaving Cert Accounting syllabus is key to achieving this. Pat O’Neill and Brian Feighan explain why A growing number of Leaving Cert students are choosing to study accounting, but at a time of rising demand for accountancy skills in Ireland, more must be done to encourage an even greater number of second level students to pursue a career in the profession. Figures from CareersPortal.ie show that the number of second level students studying accounting for Senior Cycle in 2021/22 was the highest it had been in a decade, revealing a 70 percent rise at higher level since 2011. Although this trend is welcome, Pat O’Neill, President of Chartered Accountants Ireland, believes that more could, and should, be done to encourage second level pupils to study accounting for the Leaving Cert at a time of significant “capacity constraints” within the profession, and to better reflect the reality of what the profession entails in today’s world. “The pipeline of new talent entering the accountancy profession is not sufficient to fill the job opportunities available and Ireland is experiencing a real shortage of professionally qualified accountants,” O’Neill said. “Our economic pillars of large foreign direct investment and successful domestic businesses require appropriate levels of accounting talent. There is a real need to encourage more young people to pursue a career in the field to help address this shortage.” Critical shortage Accountants are on the Critical Skills Occupations List, compiled by the Department of Enterprise for professions experiencing a shortage of qualifications, experience or skills required for the proper functioning of the economy. The Northern Ireland Executive has also listed accountancy as an in-demand skill in Northern Ireland. “At a time when the Government is looking to address the vulnerability of tax revenues amid a slowdown in the global economy, it is perhaps surprising that there was not a greater focus in Budget 2023 on addressing some of the structural issues here at home, which are potentially undermining Ireland’s attractiveness as a continued location for foreign direct investment,” Pat O’Neill said. “Among these issues are the availability of suitable rental accommodation for workers and the availability of appropriately skilled staff to support such inward investment.” The key skill sets required to address the latter lie in accounting and finance, O’Neill said. “New multinational operations establishing a base here need appropriate in-house finance functions and capacity in professional services firms to support their transactional and regulatory compliance needs,” he said. “In addition, we have a significant and vibrant shared services sector in Ireland, which operates in many instances with a focus broader than pure transactional activity. Many of the organisations in the sector here operate EMEA or global centres of excellence, already employing large numbers and contributing significantly to the corporate tax base. Clearly, we have to look at growing the ‘funnel’ of entry into the accountancy profession.” Fit for purpose A “fundamentally important” part of addressing the shortage of accountancy skills in Ireland will be ensuring that the Leaving Cert Accounting syllabus is modernised for developments since the 1990s when it was first introduced, O’Neill said. “It is imperative that the syllabus is made fit for purpose in the 21st century and that it introduces young people to the breadth of the modern accountant’s role, engages them, and ignites interest in the subject as a career choice for school leavers. Otherwise, some students may be deterred from a career in accounting, and we won’t have the bench-strength to support businesses on this island,” he said. Chartered Accountants Ireland is a member of the Consultative Committee of Accountancy Bodies-Ireland (CCAB-I), which last year made a submission on this matter to the Department of Education, including the findings of its review of the current Leaving Certificate Accounting syllabus. “Subjects taken at Senior Cycle play a key role in influencing the third-level and career choices of students, so Senior Cycle Accounting offers a unique opportunity to engage, inspire and offer a career pathway, not just to the next generation of accountancy professionals, but to anyone with an interest in finance or enterprise,” said Brian Feighan, FCA, Chair of the CCAB-I Working Group for Promoting the Profession, and founder and CEO of LearnAltus, a provider of financial and executive education solutions. “Ireland needs a strong pipeline of talented students who are keen to progress their studies and careers in accountancy, through both apprenticeship routes and third-level pathways. It is essential that the Leaving Cert Accounting curriculum and examinations reflect the skills of the modern accountant and inspire the next generation of accountancy professionals, entrepreneurs and business leaders,” he said. Language of business Accountancy is the “language of business”, Feighan added, and financial literacy and financial competence are key drivers of economic prosperity across all levels of society in Ireland. CCAB–I views the second-level teaching of accounting skills at Senior Cycle as highly valuable and strategically important for the Irish economy and has conducted its review of the current Senior Cycle Accounting syllabus to include the higher and ordinary level examination papers and solutions from recent years, as published by the State Examinations Commission. “Working with the key stakeholders in education, our goal is to help deliver a new Senior Cycle accounting specification that reflects the skills of the modern accountant and inspires the next generation of accountancy professionals, entrepreneurs and business leaders,” said Feighan. “The current Leaving Cert Accounting syllabus was introduced 25 years ago, and we have seen very significant changes in the profession in the intervening period. Take, for example, the impact of technology on the profession. Advances in artificial intelligence, robotic process automation and data analytics have transformed the role of accountants, enabling them to focus on their role as key advisors on major business decisions.” Skills such as critical thinking, problem-solving and communication are now more central than ever to accountants’ work, Feighan added, as is guiding companies in measuring and reporting on sustainability. “In our submission to the Department of Education, we outline how the syllabus can be reinvigorated to give Senior Cycle Accounting students greater insight into these trends. We have seen encouraging work undertaken in this vein with the new Junior Cycle Business specification, and this more rounded approach will help attract even greater numbers towards the accountancy discipline from an early age,” he said. Pace of progress Notwithstanding the growing number of Leaving Cert students choosing to study accounting, O’Neill is nevertheless concerned about the pace of progress at secondary level. “The needs in Ireland and among Irish businesses for suitably qualified accountants exists in the here and now. There needs to be a real sense of urgency from all parties on bringing our accounting education syllabus into the 21st century,” he said. “We are very supportive of the desire of the Department of Education to do this, including recognition of the time required to redraft syllabus content and the appropriate training requirements necessary for our teachers to be in a position to deliver the new syllabus. The profession is willing to be involved in helping this to become a reality.” Chartered Accountants Ireland educates more than 7,000 students in an academic year and has more than 31,000 fully qualified members on this island and around the world. To support engagement with accounting in schools, in 2019 Chartered Accountants Ireland launched the Boot Camp programme for Transition Year and Senior Cycle students (for more, see page 27). Now in its third year, the programme is used by close to 4,500 students in all 26 counties. Collectively, these students have completed over 63,000 online lessons. “Accountancy has never been as accessible as a profession, and Chartered Accountants Ireland is working to continue to build the talent pipeline to support growth across all sectors of the economy,” said Pat O’Neill. In addition to the well-established Training Contract pathway familiar to many, since 2009 Chartered Accountants Ireland has offered a flexible route, working and training with one of the many companies in different sectors that train Chartered Accountants through their dedicated graduate programmes. “There are many options for the next generation to join the profession, whether directly out of school via Accounting Technicians Ireland or after university or college,” said O’Neill.

The increasing polarisation of American politics and recent Supreme Court decisions suggest the onset of a new age of conservatism, and Europeans should be worried as the centre fast erodes. Judy Dempsey explains why  First came the US Supreme Court decision to overturn Roe v Wade, the ruling that declared abortion a constitutional right in 1973. Then came its decision to limit the authority of the Environmental Protection Agency to set standards on climate-changing greenhouse gas emissions for existing power plants—it is up to Congress to set the norms, the Supreme Court concluded.  Both of these decisions—evidence of the increasing polarisation of American politics—will feed into the agendas of politicians standing in the mid-term elections in November.  Pro-life supporters will be encouraged by the statements of Supreme Court judges who mentioned banning contraception. Climate change opponents will push the ‘denial button’, despite the evidence to the contrary.  And the polarisation of American politics is only set to deepen as the centre fast erodes.  President Joe Biden, saddled with rising inflation, the war in Ukraine, and working out how best to deal with Russia and China, does not have the executive powers to overturn these Supreme Court rulings.  So, what does this all mean for Europe, America’s main ally? Europeans seem perplexed and inured to what is happening in the United States, a country that played such a pivotal role in getting Europe back on its feet after the Second World War ended in 1945. Washington actively supported the creation of today’s European Union and, for over seven decades, the US has provided a security umbrella to Europe. The era of shared values and commitment to democracy and security is waning, however. The trends emerging in the United State—polarisation, isolationism, and an increasingly dysfunctional political system—should worry Europeans. For one thing, the conservative swing in the US could encourage the mobilisation of populists and their leaders in Europe, who believe the European Union is becoming too liberal and too obsessed with imposing its values on citizens.  One example is the Polish government, which has made systematic moves to control the appointment of judges as well as banning abortion. A right-wing win in 2022 could embolden Warsaw to take further steps to curb women’s rights or put a chokehold on judicial powers.  In Hungary, Prime Minister Viktor Orban has clamped down on the courts, the media and non-governmental organisations. Orban is hoping for the return of a Republican administration in the US in 2024, urging them to take the same steps against the media as he has. In France, Marine Le Pen’s National Rally now dominates the far right in the French National Assembly.  Then there is the state of democracy across Europe. According to the Economist Intelligence Unit, Europe (alongside North America) is host to the worst-performing democracies since 2006. These trends are bad news for pro-democracy activists in authoritarian countries. They look to the United States and Europe as models of tolerance, integration, prosperity, and hope.  In a nutshell—though not as drastic as what is happening in the United States— the centre and culture of consensus in Europe is weakening.  Without a centre that fosters listening, tolerance, dialogue, and leadership, from top to bottom and vice versa, democratic structures will become degraded.  China and Russia could only capitalise on a decline that would weaken the influence of the West.  The question is: are European leaders heeding the warnings? Judy Dempsey is a Non-Resident Senior Fellow at Carnegie Europe and Editor-in-Chief of Strategic Europe

Russia’s War in Ukraine changed many assumptions held by European governments, but Judy Dempsey asks is Europe prepared to embrace significant strategic issues that will change the status quo? Russia’s full-scale invasion of Ukraine in February could radically re-shape the European Union.  And it’s about time.  For too long, the EU and most member states were content in the comfort zone that did not have to deal with issues that would fundamentally change their way of doing things. These included energy, security, the future of enlargement and Russia. Until Russia’s second invasion of Ukraine, there was a tactic consensus that Europe could continue along the path of perceiving Eastern Europe through the prism of Russia and depending on Russian energy. The EU accepted the independence of Ukraine, Moldova and Georgia, not to mention Belarus. However, among many big member states, their sovereignty and independence were ambiguous.  While it was never publicly stated, this part of Europe, whose history and culture are unknown to many EU member states, was considered in Russia’s sphere of influence. In several ways, Russia’s all-out attack on Ukraine has changed that perception. First is the energy issue. It is only a matter of time before Europe will wean itself off Russian gas and oil. This dependence had given President Vladimir Putin immense leverage and blackmail over several EU countries, particularly Germany.  The EU, and German Chancellor Scholz’s Green coalition partners, say they now want to become independent from Russian energy as soon as possible. Despite the considerable pressure from German industry and its business lobbies tied to Russia, who wish to retain the status quo with Moscow, don’t underestimate this goal.  The reality is that Russia’s war in Ukraine has become the catalyst for speeding up Europe’s transition to renewable energy and alternative sources of supplies. As dependence on Russian gas decreases, so will the Kremlin’s geopolitical influence. Another impact of Russia’s aggression is security. Neutral Finland and Sweden are poised to join NATO. These two countries that have long cherished their neutrality now recognise that their security needs to be boosted. Joining NATO would fill a big security vacuum in Northern Europe, where Denmark and Norway are members of the US-led military alliance. The Baltic (NATO member) States will be more than reassured with Finland and Sweden on board. In short, Putin’s aggression in Ukraine has given NATO and the transatlantic alliance a new lease of life. It is changing the geo-security architecture of Europe. It will be interesting to see how Ireland deals with its long-standing neutrality stance.  Another big issue is enlargement that is tied to the future direction of Europe. President Emmanuel Macron’s speech at the conclusion of the Future of Europe conference set out how to make the EU more efficient by having a qualified majority voting system for certain policy issues and having a much closer, structural relationship with Eastern Europe.  But what about making the EU more politically integrated? This would require a treaty change that several member states oppose. However, this is where the war in Ukraine comes into play. European governments cannot retain the status quo when its own security and that of its eastern neighbours are at stake.  For a union with ambitions to be a global player, muddling through is no longer an option. It’s going to require a major shift in the mindset of EU countries to end Europe’s comfort zone that, until now, didn’t take its – nor Eastern Europe’s – security vulnerability seriously.  If it doesn’t make that shift, Europe will fail to use the war in Ukraine to develop a strong, integrated and secure Europe – with Eastern Europe as part of that house.  Judy Dempsey is a Non-Resident Senior Fellow at Carnegie Europe and Editor-in-Chief of Strategic Europe.