Comment

Comment

While technology has its benefits, it is important to remember that we sometimes need to take our time to do our best. I feel about 102 years old writing this article, as I fear I will be seen to bemoan the advances of technology and run the risk of coming across as a technophobe. Luckily for me, neither is true. Having qualified at a time when a laptop was a COMPAQ computer that you needed to be a weightlifter to bring on audit with you, I fully welcome the benefits that technology has brought us. However, I do acknowledge that, with all the advancements we have witnessed in the past 20 years, and with every screed of benefit it brings us as professional accountants, it also brings risks which we must acknowledge in our profession and, particularly, our education and training. There are many facets of benefits and threats, and people much more qualified than me have done SWOT analyses of the influence technology has on our profession. However, for me, the biggest risk technology brings us is the pace at which we  are forced to lead our professional lives.  Yes, it is a double-edged sword. This pace ensures we can shorten the life-cycle of our deliverable, be it a report, a trial balance or a lecture. I have to ask, though: when does this demand for speed become a threat to the very cornerstone of our profession? A threat to our ethics As a profession, we know that ethics is the foundation for everything we do and we must as, professional accountants, comply with the following fundamental principles:  (a) Integrity; (b) Objectivity; (c) Professional competence and due care; (d) Confidentiality; and (e) Professional behaviour. Are the above principles delivered as a practice/process or a value set or a mixture of both? Does it matter? How does technology influence or impact this? To me, three of them definitely are value sets – integrity, objectivity and professional behaviour. And it is these values that can be put under pressure in the fast-paced, digital world in which we work. We must be mindful that these values are maintained and upheld in all aspects of our work, especially when we are challenged to deliver output or answers instantaneously.  Time to slow down As an employer in practice, I can see the pressures that are put on all levels of our organisation, from trainee through to partner. This is often by virtue of a question or request in an email that simply “must” be answered immediately. We have all become so used to living in a fast-paced world where instantaneous information (Google), photos, videos (Instagram) and commentary (Twitter) are the norm, especially for a younger generation where they have never witnessed anything different. I urge other Chartered Accountants to teach our students and younger accountants to know when they must take time to consider, think, confer with others (face-to-face) and reflect. We need to be able to show them that speed is not the fundamental requirement but the consideration of their ethical obligations is, which may mean they should slow down. They need to understand that consultation with peers can be crucial to success.   Sinead Donovan is a Partner in Financial Accounting and Advisory Services at Grant Thornton.

Feb 11, 2019
Comment

With recent equity weakness, investors have to ask themselves if supporting long equities is still a safe bet. Marathon Man is one of my favourite movies. It fits into the genre of 1970s paranoia movies such as The Conversation, Chinatown and Three Days of the Condor. Those movies represented a cultural reaction to America’s unsettling status at home (Watergate) and abroad (Vietnam). The film’s central scene pits Laurence Olivier (as an elderly ex-Nazi war criminal) against Dustin Hoffman, (playing a student whose CIA brother has been hunting Olivier). Olivier kidnaps Hoffman and straps him into a chair to torture him with a dentist’s drill. Olivier asks “is it safe” for him to retrieve money from his illicit bank account. Poor Hoffman doesn’t know what Olivier is talking about.  Today, in early 2019, equity investors are confronted by the same question: is it safe? Over the course of 2018, US equities dropped by 7%. Irish equities dropped by a startling 22%, which was met by indifference from the Irish media and political classes. This dramatic fall in Irish equity values has passed by with little public commentary.  These are the same classes who populated the room on the night of 29 (to 30) September 2008 when the Irish government decided to guarantee the liabilities of Irish banks. That decision was based on the proposition that our banks were merely suffering a funding crisis rather than a solvency crisis (resulting from the market value of banks’ loans falling far below their book value). A cursory glance at the share price chart of the main Irish banks back then would have revealed that they had already lost three quarters of their peak value prior to Lehman Brothers becoming insolvent. Conclusion: markets often know more than supposed experts.  Is it safe? All we can do is examine the possible reasons for recent market weakness and consider the balance of market forces likely to prevail in 2019. There are several factors that may explain recent equity weakness: High equity valuations – on several long-term measures, such as the cyclically adjusted price earnings ratio, equities look richly valued. However, two caveats must be noted. First, while valuation levels offer a good indicator of prospective returns over three years and longer, they are poor indicators of likely returns over shorter periods. Second, equities look reasonably valued based on some valuation metrics, such as prospective price earnings. Tighter monetary conditions – across the globe, central banks are tightening monetary policy whether through withdrawal of quantitative easing or outright interest rate increases. The danger is that central banks will overdo it and tip the global economy into recession. Recent comments from Fed chairman, Jerome Powell, suggest the Fed is alive to this risk. Recession danger – we are already very long into the current global recovery cycle. Several reliable American indicators (the unemployment rate and the yield curve) suggest the next US recession may happen by 2020/2021. But it may come even sooner. Just two months ago, JPMorgan reported a 60% chance of a recession within two years, and stated in early January that “US equity, bond and commodity markets appear to be pricing in on average close to 60% chance of a US recession over the coming year.”  Brexit – as the clock ticks down to 29 March, the prospect of a hard, no-deal Brexit is growing. That scenario could tip an already weak European economy into recession. This factor may be weighing especially (and probably mistakenly) on Irish equities. Is it safe? No, it’s not. But I remain optimistic about the prospects for equities in 2019 for two reasons. One, this is not at all what a stock market top looks like: investors are frightened rather than euphoric. Two, the US economy continues to perform strongly. I sense the next US recession is still some years away. That’s why I’m still long equities.     Cormac Lucey is an economic commentator and lecturer at Chartered Accountants Ireland.

Feb 11, 2019
Comment

Corporations are being urged to prioritise long-term value over short-term profit, but old ways of thinking must first be tackled. A number of academic papers published out of the University of Chicago in the 1970s and 1980s have had an extraordinary influence on corporate governance. These papers are based on mathematical formulae, which require extremely simplistic assumptions to solve the equations. Company managers are assumed to be motivated solely by self-interest, not by moral obligation (notwithstanding fiduciary duty). It is assumed that it is possible to eliminate self-interest using incentives, so that company managers will look after shareholders’ interests rather than their own self-interest. This perspective only considers two parties: shareholders and managers (otherwise, the mathematics would not work out). This way of thinking led Nobel laureate Milton Friedman to observe that the only responsibility of business is to make a profit. Thus, shareholders and profit maximisation became the imperative of business. Consequently, managers are incentivised to take excessive risks to generate returns at the expense of corporate resilience and long-term sustainable values. The thought police, especially in the US, will not countenance alternative assumptions and ways of thinking. Many top US academic accountancy journals will not publish papers based on alternative theories, with editors of those journals acting as gatekeepers to prevent expression of alternative perspectives. The damage is exacerbated by institutional shareholders, who are not the ultimate beneficiaries of investment returns. Most stock market capital is pensioner monies. Pensioner beneficiaries require long-term sustainable returns. Institutional investors have a short-term focus, exacerbated by end-of-year performance pay incentive systems. Institutional investors cannot be relied on to monitor company management or engage with their investees in a manner that will support long-term value creation. This perspective also ignores the law, specifically the fiduciary duties of directors to look after the company’s (not the shareholders’) interests. These theories have been embraced by regulators. They have therefore impacted corporate governance by requiring separation of chairman and CEO roles; majority independent boards; and acquiescing to incentive systems such as performance pay and stock options, for example. Accounting standards also reflect this perspective, with a heavy focus on providing users with useful information for decision-making purposes. Users are primarily shareholders making buy, hold or sell decisions. However, the tectonic plates are shifting. The Purpose of the Corporation, the Modern Corporation: Corporate Governance for the 21st Century and the Future of the Corporation projects are challenging these embedded notions. These projects argue that corporate governance should align with a socially beneficial corporate purpose. They conclude that corporate entities should aim to create long-term sustainable value for customers and shareholders while also contributing to societal well-being and environmental sustainability – objectives that can be mutually reinforcing. They advocate that company law should require companies to specify their corporate purposes. Companies should adopt structures that ensure they uphold the public good as well as their own private interests. In particular, companies that perform public and social functions such as utilities, banks and companies with significant market power should align their corporate and social purposes. In addition, the regulatory framework should promote an alignment of corporate purposes with social purposes and ensure that companies’ ownership, governance, measurement and incentive systems are appropriate for these objectives. Companies are urged to be more specific about the varied audiences for their corporate governance, customising their reporting for individual stakeholder groups. Methods of engaging stakeholders more effectively in corporate governance are discussed, including through representation and consultation. Alignment of corporate with social purposes will generate increased scrutiny on the social and environmental impact of companies, the design of incentive and control systems and their relationships with corporate strategy, the role of corporate reporting and, finally, the role of investors. These ideas are gaining traction. For example, the British Government recently agreed to introduce laws that will impose on pension schemes a fiduciary duty to protect long-term value by considering the environmental risks of the companies in which they invest. The new rules will push consideration of long-term value and environmental risks down the investment chain to investee firms. Prof. Niamh Brennan is Michael MacCormac Professor of Management at UCD College of Business.

Dec 03, 2018
Comment

When it comes to meetings, the advice of Sir John Harvey-Jones is worth heeding – particularly if a serious dispute is involved. Sir John Harvey-Jones was a renowned UK businessperson in the 1980s and 1990s. A best-selling management book, Making it Happen – Reflections on Leadership, preceded a successful ‘Troubleshooter’ series on BBC television. He became the executive chairperson of an ailing Imperial Chemical Industries (ICI), then the largest company in the UK and Europe; now long split into different entities. I met with Harvey-Jones on a number of occasions. An interesting comment he made was that not long after he took over at ICI, he was talking to a shop floor worker in an ICI paint factory. The worker made a useful observation. Harvey-Jones followed it up, leading to a curiosity as to how many management layers existed between the worker and the executive chairperson. There was 11. Harvey-Jones rescued ICI by reducing the number of layers to six. Internal company meetings Harvey-Jones’ advices were pragmatic and he was a master of using wit to make things happen. Layers of company management created its own bureaucracy of meetings. It also meant turf battles as to who was responsible for what and created a temptation to push a decision up or down the ladder, rather than make a decision at all. His general mantra was that there were too many meetings and/or too many people at them. One of his witticisms was that if you wanted to know the length of a meeting, allow 20 minutes for every person present; and if the chairperson is a ditherer, make that 30 minutes. In the ordinary way, the purpose of internal company meetings is a mix of disseminating information and, more importantly, making decisions. Stating the obvious, management’s job is to manage and a meeting is only necessary when the matter requires the input and/or approval of others. Management time is expensive and meetings are disruptive. The temptation is to set regular meetings. These often become talking shops and, in many cases, repetitive. For example, there is only so much comment that can be made on a routine set of financial figures of one kind or another. An assessment as to the usefulness or otherwise of regular meetings does not go amiss. The rule of three Meetings that are specific to difficult circumstances are different. Here, Harvey-Jones reminded me of the ‘rule of three’. This relates to managing the trajectory of meetings in strained or confrontational circumstances, such as a serious dispute of some kind, a matter gone badly wrong, strong disagreement on policy direction, and so on. Harvey-Jones said to recognise that it will take three meetings to achieve resolution and one should effectively manage the trajectory on that basis. The first meeting is grief all round from the opposing or factional parties. Position-taking, allegations, half-baked facts, egos out of joint and nobody listening except to themselves. The meeting goes nowhere but, most importantly, a smart operator ensures that a further meeting is scheduled before breaking up. The second meeting will likely be the grief expressed all over again but this time, the participants have largely run their course and the repetition has little impact. There will usually be some prepared rebuttals or clarifications following the first meeting. The validity or otherwise of competing positions will likely be better understood. Some tentative steps or overtures, dressed up as trying to understand a rival position or viewpoint, may emerge as everyone knows that the repetitively expressed grief is going nowhere. Again, a smart operator ensures that a further meeting – the third meeting – is scheduled. The third meeting gets there. The facts and positions are known, strengths and weaknesses exposed, all have had their repeated say. People want out of the room. The meeting makes real progress if at least one of the participants, or maybe a mediator or chairperson, circulates written outline proposals. All at the third meeting, probably with a sense of relief, start looking at the proposals paper as an accepted focus. Disagreement on any aspect therein necessitates putting forward an alternative proposal and possible resolution gathers pace. Maintain momentum Harvey-Jones’ point was that if parties break up in disarray, it takes a long time to assemble everybody all over again. Momentum is lost, the underlying difficulties may worsen and individuals become entrenched. Do not leave a contentious meeting without scheduling another. This too can work in resolving legal-related disputes.   Des Peelo FCA is author of The Valuation of Businesses and Shares, 2nd edition, published by Chartered Accountants Ireland.

Dec 03, 2018
Comment

Businesses must engage with education providers to ensure that tomorrow’s game changers are equipped with the right skills. Employers in Northern Ireland anticipate a shortage of highly skilled workers over the next three to five years with 76% of firms not confident that there will be sufficient people available to fill skilled roles, according to the November 2018 CBI/Pearson Education & Skills annual report. Other findings in the study include: Aptitude and readiness for work is a high priority for employers when recruiting school, college and university leavers; Employers view the promotion of STEM subjects, awareness of career options, and IT and digital skills as the top three priority areas for action in secondary schools; 92% of employers want to play a greater role in supporting schools and colleges; and 65% of employers are experiencing, or are anticipating, difficulty recruiting individuals for apprenticeships. Gone are the days of safe bet ‘lifers’. No sector will escape the transformation of the workplace environment. Come 2035, the oldest working generation will cease to be the largest and after that, things will change. Millennials have a fresh outlook on life and don’t particularly like outdated corporate cultures. The dominant viewpoint of the workforce is increasingly becoming ‘why should I choose to work for you? What can you offer that is better than your many competitors?’ And because the skilled are in demand, they have the luxury of naming their price. That said, it is up to the employer to ensure that they are fostering a culture and brand that will attract and retain the brightest and best. Given the hiring difficulties that businesses are experiencing, it makes sense for employers to optimise their ability to retain existing team members. Providing positive leadership, a strong brand, a good working environment, a culture of respect, investing in training and development and empowering employees to fulfil their potential all have an important role to play in this regard. Where businesses are losing employees, exit interviews can be a useful way to gain insight into aspects of the organisation and culture that may need to be improved. While performance reviews provide the opportunity to seek formal feedback from employees on how they feel about their current role and how they would like to see their career progressing, regular informal chats and ongoing communication with employees are just as important to ensure that we, as employers, have our finger on the pulse so timely corrective action can be taken. Brand attractors For many millennials, personal development ranks ahead of professional development. Keep in mind that coaching, mentoring, continuing education, career progression and volunteering opportunities are highly valued by millennial workers whereas salary and/or flexibility may be more sought after by other workers. The ability to balance work and home responsibilities allows some individuals to continue working when they might otherwise not be able to. Flexible working was one of the issues highlighted by UK Business Secretary, Greg Clark, recently when he announced a series of new measures as part of the Government’s Industrial Strategy. While many companies are embracing flexible working and the benefits it brings, some employees face barriers in raising this issue with their employers. The Government may create a duty for employers to consider whether a job can be done flexibly, and oblige them to make that clear when advertising. With Brexit-related uncertainties including future trading relations and what shape the UK migration system might take, along with major changes in global technologies (artificial intelligence, robotics etc.), our priorities as employers and business influencers must include working closely with education providers to harness the power of business to ensure that today’s education and skills training equips tomorrow’s game changers.   Teresa Campbell FCA is Director of People & Culture at PKF-FPM Accountants Ltd.

Dec 03, 2018
Comment

As talk of another property bubble abounds, it’s time to assess whether house prices reflect fundamentals or froth. Are Irish property prices overvalued? Since they hit bottom in March 2013, residential property prices have risen by 82.8% to September of this year, according to data from the Central Statistics Office. Since bottoming in February 2012, residential prices have risen by 96.1% in Dublin. According to a recent edition of The Economist, Dublin’s house prices are overvalued by 25%. To gauge whether house prices reflect fundamentals or froth, The Economist compared them with rents and household incomes. It used the average ratio over the past 20 years as “fair value”. But does it make sense to expect house prices to hold a constant relationship to rents and incomes? I don’t think that it does, for such an analysis ignores two key developments that should cause us to expect higher house prices relative to incomes and rents. Interest rates All other things being equal, house prices would rise relative to incomes and rent levels as a result of a fall in interest rates. The very first element in the Capital Asset Pricing Model formula for cost of equity is the risk-free rate of interest. If the risk-free rate falls, we would expect the cost of equity to fall. If the cost of equity and the cost of debt both fall as a result of reduced interest rates, we would expect the cost of capital to fall. If the cost of capital falls, we would expect a given stream of expected cash flows to attract a higher capital value independent of whatever might be happening to income and/or rents levels. Consider the eurozone’s benchmark risk-free rate, the average yield on 10-year German government bonds. Twenty years ago, it was 4.2%. A decade ago, it was 3.9%. Today German 10-year government bonds yield less than 0.4%. Consider also the prospect that this big fall in interest rates is unlikely to be reversed any time soon. Instead, it is likely that we face a lengthy period before we see interest rates back at 2008 or 1998 levels. Population The other big factor influencing residential property prices is our population. At the height of our economic boom, in 2007, the population of Ireland was 4.34 million. Last year, in 2017, our population reached 4.78 million, an increase of around 440,000 compared to a decade earlier. I should say that these are official estimates of our population. When the census was last carried out, in 2016, it was reported that there were 9,575 Chinese nationals staying here on Census night. I reckon that this figure is a very considerable understatement of the actual number of Chinese resident here. I would therefore guess that Ireland’s actual population growth has been even stronger than official statistics indicate. Strong population growth and strong economic growth together with low levels of construction of new dwellings explains why Daft.ie’s latest quarterly report indicates that rent levels are now 30% higher than in 2007.  Discounted cash flow model The best way to get a handle on residential property prices is to analyse them using a discounted cash flow model. This takes into account interest rate variations and changes in rent levels. Such models are subject to very considerable uncertainty because of the difficulty in accurately estimating key input variables. My model of Irish residential house prices does not suggest any significant deviation from fundamental value. That’s not to say that a recession mightn’t cause prices to dip, but it doesn’t support notions that residential property prices have returned to bubble levels – especially not with mortgage credit levels down 40% compared to a decade ago. Cormac Lucey FCA is an economic commentator and lecturer at Chartered Accountants Ireland.

Dec 03, 2018