Spotlight

The Institute’s regulatory and disciplinary function is central to maintaining trust and integrity in who we are and what we do. The regulatory landscape faced by the profession has changed beyond recognition over the last two decades. For Chartered Accountants Ireland, this landscape is made even more complex by the fact that we have regulatory obligations in two jurisdictions, and it is likely that one of those will soon be outside the European Union (EU).  While much of the discourse around regulation of the profession in recent years has focused on implementation in Ireland and the UK of the EU audit reform package, remember also that the Institute’s regulatory functions extend beyond statutory audit to insolvency, investment business, anti-money laundering supervision and ATOL licensing (UK travel agents) – all of which is supervised by a variety of State agencies. And this is all underpinned by various regulations of our own, compliance with which goes hand-in-hand with being a Chartered Accountant. Our regulatory stakeholders in Ireland include the Irish Auditing and Accounting Supervisory Authority (IAASA), the Department of Justice, Equality and Reform, and the Central Bank. In the UK, the Financial Reporting Council (FRC), Financial Conduct Authority, the Insolvency Services (one in Great Britain and one in Northern Ireland) and HM Treasury – all providing State oversight or supervision of the Institute’s exercise of its regulatory obligations. More recently, the role accountants in practice can play in the prevention of money laundering has come under particular scrutiny with EU legislation imposing specific requirements for external accountants/auditors to have in place appropriate measures (client due diligence and so on) to mitigate money-laundering risks. In Ireland and the UK, legislation requires the professional bodies to supervise compliance with this regime. Indeed, in the UK there is likely to be established shortly a State agency – the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) – whose role will be to oversee how the accountancy and other professional bodies supervise their members’ AML compliance. The regulatory field is truly a crowded place. All such regulators have similar but different supervisory requirements and needs; all requiring to some extent regulatory plans, periodic reporting, appropriate processes and procedures. It is not surprising, therefore, that over the last quarter of a century, Institute members and practitioners have witnessed the evolution of a suite of bye-laws and regulations necessary to allow the Institute to carry out these regulatory functions. To say that Chartered Accountants work with a complex regulatory framework is an understatement. Why do this at all? A look back at Institute’s Royal Charter provides an insight into the thinking behind what it means to be a Chartered Accountant. This states that the Institute exists to ensure that there are professional accountants with the integrity, skills, expertise and judgement necessary to support the economy and society. It describes the tasks of the then “public accountant” as “difficult” and “important”, requiring observance of “strict rules” of conduct as a condition of membership. The various rules and regulations now applicable to Institute members are of course unrecognisable when compared to what existed some 128 years ago. Nevertheless, the essence of the message these rules conveyed is equally relevant to today’s Chartered Accountant. Our new president, Shauna Greely, recently captured this succinctly: “Integrity and ethics are right at the core of what it means to be Chartered Accountants”. Maintaining trust and confidence in our profession and having regard to the public interest remain key components of the Institute’s mission. Strategy 2020 reaffirmed our commitment in this regard, stating that a key element of the Institute’s aim is to maintain our role as regulator of all Chartered Accountants, so public confidence in the profession is maintained and enhanced. Our commitment to maintain the regulation of our members as Chartered Accountants holds true in the context of the transfer of the regulation of PIE (Public Interest Entities) auditors to IAASA. It is a principle that in the first instance, regulation should be supportive of members in their day-to-day professional lives, backed with stringent but appropriate discipline. In practical terms, the Institute’s regulation and disciplinary functions are central to providing assurance to members and other stakeholders equally that the Institute takes this seriously. The frameworks governing how these functions are delivered, however, have changed significantly over the years. We are no longer a self-regulating body which supervises the performance of many of the core activities traditionally performed by Chartered Accountants such as statutory audit work, investment business services or UK insolvency work. The Institute’s own regulatory obligations in these areas is overseen by the above-referenced State agencies with significant powers to review, instruct, investigate and sanction professional accountancy bodies. In practical terms, this means that the Institute is regularly reviewed/inspected by such agencies; reports of findings are issued; and recommendations made are followed up to ensure implementation – in many respects, such a process will be familiar to many practitioners. A key difference is that the Institute could possibly be subjected to a number of different reviews/inspections, findings and closing meetings annually. Such change in the regulatory landscape governing our profession is an essential element in maintaining confidence in what we do; the Institute has long acknowledged this. For example, the recent transfer of responsibility to IAASA for the supervision and inspection of audits of so-called public interest entities (PIEs) has been long supported by the Institute as a critical element in reaffirming confidence in statutory audit. To answer the “Why do it?” question above, I do believe that the Institute continues to be well-placed to play an important role in the delivery of regulation and discipline. Current arrangements allow members in practice, in particular, to carry on a range of activities (those regulated by statute) that would otherwise require them to be regulated/supervised separately by a number of different State regulators whereas, at present, in this regard the Institute provides a single point of reference and regulation. Change and challenge Undoubtedly, the most significant change to the Institute’s regulatory framework has resulted from the transposition in Ireland and the UK of the EU’s statutory audit reform package, which took effect from the middle of last year, with Ireland due to complete certain aspects of the transposition later this year via a Companies (Statutory Audits) Act. In transposing this legislation, the UK and Ireland could have put the professional bodies out of the audit regulation business, full stop! Instead, both jurisdictions have opted to avail of a “delegation approach” which permits State competent authorities (IAASA and the FRC) to delegate certain audit regulatory activities back to the professional accountancy bodies, but subject to specific terms and conditions. This regime is now live in the UK between the FRC and the recognised bodies and is currently being discussed in Ireland between IAASA and the recognised accountancy bodies (RABs). In Ireland, while the general consensus may have been that these new regimes will actually mean a certain degree of ‘de-risking’ by the accountancy bodies, given that IAASA has now assumed responsibility for supervision of PIE audits, there are aspects of the current legislative proposals, particularly relating to the supervision and investigation of auditors from other EEA states, which will require further scrutiny. It is also proposed that the RABs will retain responsibility for investigating complaints concerning PIE audits which have not arisen as a result of an IAASA inspection (nobody said this was simple!) Ultimately, as with any scenario where the Institute is being asked to assume regulatory responsibilities, whether by statute or otherwise, Council of the Institute decides on whether these delegation terms and conditions are acceptable, taking account of costs, resource needs, risks to the Institute and advantages/disadvantages to members and firms. The Institute has already signed up to a similar delegation structure in the UK. And assuming it does likewise in Ireland (with IAASA), we embark on a new relationship with our two key regulators in terms of the supervision of statutory audit. And while the scope of responsibilities of IAASA and the FRC differ somewhat, the new regimes provide a platform that will also require positive relationships to deliver on a shared agenda of promoting confidence in the profession, albeit acknowledging the need for a certain degree of healthy tension that, by necessity, must exist between all concerned. The Institute, of course, has an ongoing imperative to deliver its regulatory functions in a manner that is efficient and fair. I would add to that ‘proportionate’ and ‘balanced’. An ongoing challenge for regulators, I believe, is to achieve an approach to regulation which, as well as assuring compliance with relevant regulatory and professional requirements, also adds value and encourages and recognises high standards and quality. Practitioners, in particular, already face significant challenges in serving the needs of clients. So where we can provide assistance in addressing the requirements of what often seem difficult and complex professional requirements, we should. Members in business too are obviously subject to the Institute’s range of bye-law and regulatory requirements, particularly with regard to Continuing Professional Development (CPD). Note that while the quantum of CPD is important (whether input or output-based), a popular misconception that exists is that this must be primarily in core areas such as financial reporting. What is important is that CPD undertaken is relevant to the day job, be that marketing, compliance, HR, IT and so on. CPD in so-called softer skills also constitutes relevant CPD. Of course, where there is alleged misconduct, the Institute is obliged to ensure that this is dealt with in accordance with appropriate processes and procedures. Undoubtedly, the adversarial nature of a regulatory or disciplinary process can be difficult for all parties involved – and it is! The only certainty with regard to the regulatory environment in which the profession operates is that it will continue to change. Revised audit exemption thresholds introduced finally by the Companies (Accounting) Act, 2017 in Ireland may well result in more firms deciding that they no longer require an audit licence. Indeed, where firms are not providing services requiring any form of statutory oversight by the Institute, the need for continued membership may be questioned given there continues to be an inequitable regime in Ireland and the UK on the recognition of the term “accountant” or the provision of accountancy services (although there would continue to exist a requirement for supervision under AML legislation). Recognition of the term “accountant” was one issue raised recently at a meeting between the Institute president and Minister Mitchell-O’Connor. In Ireland and the UK, we may see amendments to the investment business licencing regimes as a result of transposition of the EU Insurance Distribution Directive, due for transposition next year. We can also expect further enhancements to AML requirements. So it’s not just about statutory audit. The Institute’s  regulatory/disciplinary function is one component of the Institute’s key strategic priority of promoting and maintaining trust and integrity in who we are and what we do. As identified in Strategy 2020, our underlying challenge is to perform our regulatory responsibilities in a manner that has the confidence of external stakeholders and our members. Anything else? Did someone mention Brexit? Aidan Lambe FCA is Director of Professional Standards at Chartered Accountants Ireland.

Just six months into the role, the Chief Executive of IAASA, Kevin Prendergast, has a lot on his plate. But he plans to get even busier in the years ahead. It has been a “busy” but “enjoyable” first six months for Kevin Prendergast, who assumed the role as Chief Executive of the Irish Auditing & Accounting Supervisory Authority (IAASA) in November 2016. Prendergast came to IAASA from the Office of the Director of Corporate Enforcement (ODCE), where he had spent 11 years – the last three as Head of Enforcement with responsibility for overseeing the office’s civil and criminal judicial enforcement activities. It was time for a change, however. “There’s a comfort in being somewhere for 10 years or more, but everyone needs a new challenge every now and then,” he says. In his time with the ODCE, part of the job had been liaising with IAASA. But the transition has had its surprises nonetheless. “It’s inevitably a learning curve when you get under the hood,” he says. “There’s definitely a different dynamic in that, in my previous role as Head of Enforcement, I always had the big stick. Ultimately, people have to do what you ask them to do,” he says, noting that the background potential for criminal proceedings “gives you power to cut through stuff and get things done”. At IAASA, however, the scope for enforcement is a little less direct with the authority overseeing the various accountancy bodies, which in turn regulate their own members. “Ultimately, it’s a different sort of stick that we have,” he says, adding that he believes in an element of the regulator working with the people it regulates. “We’re all trying to achieve the same thing – the improvement of the quality of the profession. A lot of it is around having good relationships with the people you regulate.” He is content with the model that’s in place, whereby for the most part professional bodies regulate their members and then IAASA regulates the profession. “We’re very happy with that model,” he says. Approach to regulation So, is he a “light touch” or “rules-based” regulator when it comes to dealing with the bodies and their members? For Prendergast, it’s all about a “healthy tension”. “We don’t expect to have the welcome mat rolled out, but I do hope we’re all trying to achieve the same thing,” he says, adding that he’s not afraid of taking the hard line. “If there are tough decisions to be taken, I’ve no issue taking those decisions,” he says, but adds, “To some extent, good regulation is about avoiding getting into positions where you have those tough decisions. “If there are serious systemic issues, there is no option then but to go in and flex regulatory muscles.” The Brexit conundrum Apart from regulation, preparations for the UK’s departure from the European Union are also on Prendergast’s mind. “It’s something that’s at the forefront of my mind and the board of IAASA at the moment,” he says, noting that it is likely to impact in several different ways on the accountancy profession. Indeed, IAASA currently issues auditing standards for Ireland under license from the Financial Reporting Council (FRC) in the UK. But if, post-Brexit, the FRC goes in a “radically different direction in breach of EU guidelines”, what should IAASA do? The option would be to adopt international standards, or to do it themselves. “But it would be a big challenge for Ireland on its own to do that,” he says. “The FRC is much better resourced than IAASA”. Brexit could also mean a dilution of the strong relationship between IAASA and the FRC. “There is an inevitability that Brexit will have an impact on that,” he says. But will the FRC diverge from the EU’s approach? “It’s one of the great imponderables,” he says. “It seems in everyone’s best interest to maintain that parallel with international standards.” Another possible issue is the mutual recognition of auditors across the EU and whether or not some UK auditors may seek an Irish registration – as solicitors have done – to remain accepted across the EU. A growing role Since its establishment in 2005, both the role and the scale of IAASA has changed. From a headcount of just 12 or 13 a year and a half ago, Prendergast is now overseeing a significant expansion of the authority. “Over the year, we’ve moved away from pure oversight into more direct supervision,” says Prendergast. He adds that much of the change has been driven by European requirements and has seen IAASA up its game in terms of looking at auditors of public interest entities, issuing auditing standards and increasing its investigation powers. IAASA is also currently granting exemptions under the new audit rotation rules, which require companies to change auditors after 10 years, or apply to the authority for an extension. To date, the board of IAASA has had about six applications for an extension, and “where appropriate, we have granted extensions,” Prendergast says. However, he notes that in future, the authority may be inclined to look less favourably on extensions, given the amount of time people will have had to prepare for them. Last June, IAASA took on expanded responsibility with regard to the direct inspection of larger audit firms and in general, Prendergast says it has been a positive experience, but “there have been challenges”. “They’re probably a little bit more intrusive than the inspections they would have gotten up until now,” he says. And more change is on the way. The forthcoming Companies (Statutory Audits) Bill, which is likely to be passed into law by the end of the year, will change the relationship between recognised accountancy bodies and IAASA. “We will ultimately have responsibility for key regulatory tasks that those bodies undertake; that relationship will now be built on agreements specifying how they will be carried out and reporting back to IAASA in terms of how they’ve carried out those tasks”. It is, Prendergast concedes, going to be “an enhanced burden” for the profession. “We are discussing how best to minimise the additional burden, but at the same time, we have to recognise that these are legal requirements,” he says. But while it might be an added burden for the profession, it is also one for IAASA and in this respect, Prendergast is keen to scale up the authority. It currently employs 21 people – “historically we always would have been below the staff level we were seeking” – and, as it takes on increased responsibilities, so too must its staffing increase. This means that Prendergast hopes to bring the headcount up to about 43. “It’s important to get the right people in,” he says. “It’s an ongoing challenge.” Indeed, the authority is looking for people with experience of working in audit at a relatively senior level and, where appropriate, calling out where there are issues. “It requires skill and expertise, the right temperament. “We can’t compete on salary, but hopefully what we’re offering is a genuinely interesting job,” he says, adding that the work/life balance can also be more attractive in IAASA than in the private sector. In the public interest In the fight for talent, Prendergast is in a sense selling something that attracted him in the first place to the public sector – the notion of acting in the public interest. His pivot from private to public came after he completed his training at Mazars. While working in financial services, he got a phone call one day from a recruiter, promising him that interesting things were happening in the Revenue Commissioners, which at the time was about to create a large cases division. He took on the role and ended up staying there for six years before moving to the ODCE. “There is always a sense that your work is worthwhile in the public sector,” he says. “Also, you’re acutely aware that what you’re doing has a direct impact on improving the State and the business environment.” His path from ODCE to IAASA is a path that has been travelled before – albeit in the opposite direction. The former chief executive of IAASA, Ian Drennan, is now the Director of Corporate Enforcement at the ODCE. But if he has left the intensity of the ODCE behind, the stress of the job has not disappeared entirely. “It’s my first role as a CEO, and it’s a new challenge. Everything stops with you, it’s a very different role. You realise you’re responsible for everything. Everyone is looking to you for direction and answers to questions they don’t have.” In this respect, having children “is a great leveller”. “It keeps me busy,” Prendergast laughs. Indeed, when not inspecting audits, Prendergast operates a “taxi service” for his three children, running from Gaelic pitches to soccer pitches and dropping them off at swimming lessons. But his focus is nonetheless steadfast on what he wants to achieve in the role over the coming years. “What I hope, by the end of five years, is that our expanded roles are properly bedded in, there is respect both within the profession and the wider public for the role IAASA is doing, and that IAASA will be more visible,” he says. And the profession has a role to play in this, too. “If I had one message to Chartered Accountants, it would be to go back to the point already made: that both IAASA and the bodies and members should all be trying to achieve the same end – a high quality profession. “Hopefully you will see that we’re working with you to ensure higher standards are maintained. Will it be a burden from time-to-time? It’s an inevitability of working with a profession that’s deemed to be of such importance.”

Muireann Reedy examines the potential implications of the Central Bank’s powers for those involved in the management of regulated entities.   Regulated entities and those involved in their management need to be aware of the potential consequences of not running a tight ship. Professional advisors to regulated firms, or even to entities related to such undertakings, should also be aware that the Central Bank can also come knocking at their door, using its compulsory information-gathering powers. The Administrative Sanctions Procedure The Central Bank’s enforcement regime, the Administrative Sanctions Procedure (ASP), was introduced in 2004 by amendment to the Central Bank Act 1942. It has evolved since then, most significantly since the introduction of the Central Bank (Supervision and Enforcement) Act 2013, which gave the Central Bank wide-ranging compulsory powers. These powers are frequently used in ASP investigations. Under the ASP, the Central Bank can sanction regulated entities and individuals who are or were involved in the management of these entities where a regulatory breach, described as a “prescribed contravention”, has been or is being committed. The definition of a “prescribed contravention” includes contraventions of over 100 pieces of legislation and any code or direction or condition imposed under them. A person who is or was involved in the management of the regulated firm can only be sanctioned where it is shown that they are “participating” or have “participated” in the breach. The Central Bank can impose sanctions either following a settlement agreement with the relevant entity or individual or at the conclusion of an investigation under the ASP, or after a negative finding is made at inquiry (a formal mechanism used where an inquiry member or members decide if a “prescribed contravention” has occurred). While a settlement can be agreed on any terms, the Central Bank tends to use the sanctions available at inquiry as a benchmark. These include fines of up to €10 million or 10% of turnover (whichever is greater) on a regulated entity and fines of up to €1 million on an individual. An individual can also be disqualified from being involved in the management of a regulated entity for a certain period. Firms need to understand that to date, apart from any financial penalty or fine, the Central Bank has only been willing to conclude a settlement agreement where the firm admits the contravention and agrees to the content of the Central Bank’s publicity statement on the case. Both admission and publicity can have far-reaching implications for a firm, both domestically and further afield. Since 2006, the Central Bank has entered into over 100 settlements with firms and individuals, and imposed fines of over €56.5 million. Fines have generally been increasing – 2016 saw the biggest annual figure to date of €12.05 million. The largest fine on an individual to date is the €200,000 fine imposed on Seán Quinn Senior in 2008 in relation to an ASP concerning Quinn Insurance Limited (now under administration). A total of 11 individuals have also been disqualified from being involved in the management of regulated entities for periods of between one and 10 years. Dealing with the enforcement process can be a significant emotional and financial burden for executives. In terms of the financial burden, checks should be made of directors’ and officers’ insurance cover to see what it provides for in terms of defence costs and fines under a regulatory enforcement regime. Executives also face other knock-on effects, particularly if they are seeking a position in another regulated firm in the future given disclosure obligations in the individual questionnaire. Fitness and Probity Regime The Central Bank Reform Act 2010 introduced the Fitness and Probity Regime. It is applicable to those performing certain senior roles in regulated entities described as controlled functions (CFs) and pre-approval controlled functions (PCFs). Under this regime, regulated entities must seek the prior written approval of the Central Bank before appointing individuals to perform a PCF (these are a subset of the individuals who perform CFs) and in all cases, must carry out their own due diligence. The Central Bank has prescribed 11 functions as CFs and 46 functions as PCFs. Some of the listed PCFs include head of finance, head of internal audit, head of treasury and head of accounting valuations. As part of its gatekeeper role in approving the appointment of individuals to perform PCFs, executives should be aware that the Central Bank may decide to call them in for interview to assist in its decision as to whether they have the requisite fitness and probity. The Central Bank has stated that it will routinely interview applicants for the roles of chairman, CEO, finance director or chief risk officer at any high impact firm as well as applicants for the role of chairman and CEO at any medium-high impact firm. The Central Bank can decide to interview any individual for a PCF role at its discretion, however. Where the Central Bank is minded to refuse the appointment of an individual to perform a PCF, it will usually conduct a “specific interview” with the person. According to the Central Bank, these are very detailed and enforcement-led interviews. In November 2016, the Director of Enforcement at the Central Bank advised that approximately 31 specific interviews to challenge candidates had been conducted with 18 candidates withdrawing before the fitness and probity process reached conclusion. This likely reflects the reluctance of individuals to have a formal negative decision recorded against their name by a national regulator. The Central Bank may also – at any time – investigate the fitness and probity of individuals who are performing CFs, or who it believes are about to be appointed to perform a CF, to determine if they are of appropriate fitness and probity. This can, in a worst case scenario, end with the Central Bank deciding that the individual is not of appropriate fitness and probity, in which case it may issue a prohibition notice prohibiting the individual from performing the relevant CF, part of a CF or any CF for either a defined period or indefinitely, or alternatively from carrying out all or part of the CF without adhering to certain conditions. To date the Central Bank has published details of two prohibition notices, one concerning an individual who was prohibited from performing certain PCFs for a two-year period and another where an individual was prohibited from performing any CF indefinitely. The Central Bank has also advised that a suspension notice has been issued, which prohibits an individual from performing a CF pending the outcome of an investigation, in respect of a former manager at a credit union concerning the alleged misappropriation of funds. This investigation is ongoing. Compulsory information-gathering powers Part 3 of the Central Bank (Supervision and Enforcement) Act 2013 (the 2013 Act) gives the Central Bank extensive information-gathering powers, which can be used on an extremely broad range of entities and individuals including regulated entities, related undertakings of regulated entities and a person who is or was an officer, employee or agent of such entities. Accountants, auditors and financial or other advisors to regulated firms or related undertakings of regulated firms (whether they are presently in that position or whether they previously advised them) are explicitly brought into the net of individuals in respect of whom the Central Bank can use its compulsory powers. The only pre-requisite for the use of these powers by the Central Bank is that it is “necessary to do so for the purpose of the performance of the Bank’s functions under financial services legislation relating to the proper and effective regulation of financial service providers”. Although the Central Bank’s compulsory information-gathering powers can be used in a variety of circumstances, they are frequently exercised in the conduct of investigations under the ASP. Individuals may be surprised to receive a notice from the Central Bank requiring them to provide it with certain information or to attend the Central Bank for interview in their position as a former advisor to a regulated undertaking, or indeed where they are asked in their position as an employee of a regulated entity or a related undertaking of a regulated entity to provide information to the Central Bank. The Central Bank can use its compulsory powers to: Inspect premises and take copies of records found at the premises; Require individuals to answer questions and provide a declaration of truth in relation to the answers to those questions; Compel individuals/entities to provide it with certain information; and Operate computers found at a premises, among other matters. It is a criminal offence not to comply with a requirement imposed under Part 3 “without reasonable excuse”. The 2013 Act does not specify what might constitute a “reasonable excuse” for non-compliance with Part 3 but – given that the 2013 Act makes provision for the Central Bank to apply to the High Court for a determination as to whether documents contain privileged legal material – where access to information is refused, it would appear that non-disclosure on those grounds would amount to a reasonable excuse for non-compliance. What to do? Individuals should ensure that they are aware of the scope of the Central Bank’s powers, and any limitations to them, when providing information or evidence to the Central Bank. For example, can they refuse to give access to particular documents on the basis that they contain privileged legal material? Or can they refuse to answer a question on the basis that it might incriminate them? There are nuances in the breadth of these powers, depending on the legislation in question. Given the implications, legal advice should really be considered. Muireann Reedy is Senior Associate at the Regulatory Investigations Unit at Dillon Eustace.

Chartered Accountants and regulatory experts share their views on the current regulatory landscape and their hopes for the future. Dawn Johnston, Director, Audit at Deloitte The volume of new, and changes to existing, financial reporting standards has been modest in the last year, allowing organisations to implement and adapt to the major changes to UK and Irish GAAP introduced by FRS 102 and the suite of related standards.  Nonetheless, instances of accounting irregularities in recent years highlight the need for audit regulation to be championed with continuing rigour and force, and financial reporting improvements around areas such as revenue recognition, lease accounting and the application of the expected loss model to financial instruments have been the focus of updated guidance. However, both internationally and in the UK and Ireland, the standard-setters – IAASB and the Financial Reporting Council – have suggested a more collaborative approach in working with corporates and accounting firms. The raising of audit thresholds and the modifications to FRS 102 contained in FRED 67 indicate a proportionate approach to regulation and the commitment to working with business should result in better quality financial reporting and greater transparency and understanding for all stakeholders. As Chartered Accountants, we must ensure that the impact of new technologies, and changes in how we perform our audits, is aligned to and satisfies the requirements of changing standards and current audit regulation. Dargan FitzGerald, Head of Insurance & Audit, EY Today, regulation is ubiquitous. The degree to which it is intrusive and interventionist varies by country and by industry, but the trend is clear – almost all business activities are regulated and, as finance professionals, Chartered Accountants must keep pace if they are to deliver the value that our brand promises. As professionals, we sometimes struggle to understand the logic of certain types of regulation. We often consider it overly burdensome, costly and disruptive to the conduct of business and we rarely consider it proportionate to the benefit that we imagine can be obtained. However, we can better appreciate the logic of much regulation if we see it from the perspective of the regulators themselves. My own direct experience is of regulation of the auditing profession, on the one hand, and of financial services on the other. I see a number of similar themes emerging from both regulatory regimes: Regulators need documentation: regulation is very evidence-based, so regulators usually err on the side of caution when requiring documentation. Businesses need to be prepared for this when they are subject to inspection; Crises happen: the effect of the financial crisis of nearly 10 years ago is still being felt in the regulatory arena, with the result that rules are often preferred to principles, and there is a reluctance to roll back the increased regulation of the post-crisis era; and Proportionality is in the eye of the beholder: businesspeople often claim that the cost of regulation is disproportionately high. However, it is important to remember that regulators wish to operate in a ‘no failure’ zone and, as a result, do not necessarily see a rationale for scaling down regulation just because of the smaller size of a business. For the future, one would hope that regulation can become more pragmatic, efficient and – ultimately – effective. This can surely only be achieved by excellent communication and understanding between regulators and those businesses whose operations they oversee. Melanie McLaren, Executive Director for Audit at the Financial Reporting Council There needs to be justifiable confidence in audit so that it is seen to provide reliable assurance of company reports and work alongside good governance to facilitate the effective allocation of capital. High quality audit is vital to underpin investment confidence and hence, growth. New legislation in 2016 made the Financial Reporting Council (FRC) the UK’s competent authority for audit with overall responsibility for the oversight of UK statutory audit, and enabled us to continue to develop best practice and evolve the market. Our experience, having introduced audit retendering in the UK in 2012, is that – with the support of investors and audit committees – there is competition on the grounds of quality rather than price, and that stakeholders draw confidence from clearer requirements for auditor independence and from tougher and swifter enforcement in cases of audit failure. The FRC, in liaison with regulators such as IAASA and with professional bodies such as Chartered Accountants Ireland, works internationally as well as in the UK to promote a common objective of continuous improvement to drive audit quality. In doing so, we need to manage the pressures of regulation to ensure that audit thrives as a profession and that we seize the opportunities of technology. Michael Costello, Managing Partner at BDO The recent financial crisis resulted in the end of a very long cycle of deregulation in financial markets right across the globe. The new cycle of increasing regulation is very much in progress and the EU’s move to improve audit regulation and enhance audit quality is just one example. It is inevitable that increasing rules-based regulation will have some negative implications as well as positive.  It is particularly interesting to consider whether the new accounting and audit regulations, designed mainly for systemic public interest entities (PIE), are appropriate for owner-managed businesses and SMEs. The trend towards ever higher audit exemption thresholds is one answer, but it does not address how stakeholders can get the required assurance over the quality of financial statements.  Sections 11 and 12 of FRS 102 are examples where standard-setters have overshot the complexity appropriate to understanding the financial instruments of smaller entities. However, changes to these standards have been signalled in the next cycle. In the area of audit, the Nordic Federation proposal for an audit standard for small entities may be the way to bridge the increasing gap between PIE regulation and SME-appropriate regulation. Globalisation and advancements in technology are transforming the way business is conducted and how businesses are audited. This is all happening in a rapidly changing risk environment where senior executives and board members are struggling to keep pace. It is a huge challenge for regulators and legislators to move at the same pace as the technological environment is changing. We may therefore have to accept that regulation will be continually out of date for the next decade.  One obvious solution is for the auditing profession to utilise technology more effectively. This may take different forms in different firms but it is hard to imagine a future where the two disciplines are not more closely entwined. The largest firms are directly accessing the expertise of technology companies. The question arises whether smaller firms will be able to keep up or whether this will become a barrier to entry to the profession over time.  Governments already work with some of the world’s leading technology companies in the areas of security and intelligence. In the future, regulators and legislators will increasingly need to access technology expertise for effective financial regulation.  Finally, as everything seems to have a Brexit aspect these days, IAASA will need to determine whether our use of the UK’s FRC standards (under licence) is a workable long-term solution post-Brexit. Mary Fulton, Partner, Audit and Financial Services at Deloitte Informed, quality regulation is really important to our industry and I think the overall approach of IAASA to its new role in audit regulation is encouraging. I believe that there is a good alignment with the profession in working to enhance audit quality. There is a new team at the top and in the inspections unit and they are working hard at finding their feet with a packed agenda. It is important that they get their requirement of qualified and experienced people on board to fulfil their mandate. Pushing standards up is hard and I think it’s important that everyone involved stays focused on the bigger picture, which includes public confidence in what we do. IAASA is very involved with the Committee of European Auditing Oversight Bodies (CEAOB), participating in four CEAOB working sub-groups. That involvement is important now and will be crucial as Brexit takes place. The FRC has participated heavily in CEAOB and its predecessor – and to some extent, IAASA – will have to fill that gap when the FRC withdraws. Of necessity, IAASA works very closely with the FRC but I think IAASA will have to look more to Europe and less to the UK in the future. Personally, I would have preferred if IAASA had chosen to base Irish auditing standards on the international standards rather than on the FRC version, as I think that would have been a better basis for moving forward. The landscape moving forward is both daunting and exciting. National auditing regulators have to work within the jurisdictional framework, but have to deal with audit firms that increasingly operate across international boundaries to improve audit quality using, for example, regionally hosted support centres to deliver audit work. In some of the networks, including my own, we have seen the emergence of multi-country firms, and regulators will have to work collaboratively across borders to manage this. Some of the developments occurring in the application of technology and digital tools to auditing are fascinating and likely to be transformative. Deloitte has invested heavily in new tools, which leverage the massive computational power now available. We are really on the cusp of huge change in this regard and these innovations will present challenges to audit regulators. I would encourage IAASA to also consider giving some guidance to audit committees as to how to approach auditor selection, given the rotation rules now operating. There is the potential for audit committees that are inexperienced in auditor selection to view the exercise simply as a price play. While the economics are always important, audit quality should be the preeminent criterion.

Diversity and inclusion initiatives have gained a lot of traction throughout Ireland’s corporate landscape. But do they add tangible value for organisations? EY's Olivia McEvoy reports. Although accountants might not be able to bring themselves to agree, it can seem as though there are countless quotations pertaining to, and definitions of, ‘diversity’. Malcolm Forbes describes it as “the art of thinking independently together”, while others draw on an old Muslim saying that “a lot of different flowers make a bouquet”. Despite the overwhelming number of definitions, common ground is reached in the certainty that strength lies in differences. What is diversity and inclusion? The EY definition of diversity and inclusion is: “Diversity is about differences, seen and unseen. Inclusion is about creating an environment in which people are valued, feel valued and are able to achieve and contribute their full potential.” Creating an inclusive environment improves the way we interact with our people, our clients and our communities. Inclusion is also about leveraging our differences to deliver better business results. In both this definition and much of the recent commentary on diversity and inclusion, the focus is very much on inclusion. Indeed, some suggest we have achieved diversity and now need to concentrate our efforts on inclusion. There is no doubt that diversity is now an aspiration for most businesses in Ireland as well as globally, but many of those same businesses still struggle to attract a diverse workforce in terms of gender, sexuality, ability, age and education as well as personality type and thinking style. We tend to view diversity and inclusion as a journey, and it is important to acknowledge that some businesses are in the starting blocks and some are further down the road. Very few have reached ‘Destination D&I’. It is, however, true to suggest that diversity can be the easier element to achieve; the real test begins in earnest when you are trying to build an inclusive environment and leverage diversity to improve business performance. It is equally true to say that, if you are successful in building an inclusive environment, you are much more likely to attract and retain a diverse workforce. The business benefits Although it is almost universally accepted now that diversity and inclusion is a business imperative and a ‘must have’ rather than a rights-based agenda or a ‘nice to have’, there are some who still question whether diversity and inclusion can actually deliver better business results and contribute to competitive advantage. Again, there is a wealth of research and countless statistics that support diversity and inclusion as a key driver in achieving success in new markets, improving market share and ultimately driving revenue generation and profitability. While many of these statistics are global and depend on variables such as company size, there remains much indisputable evidence. A highly regarded McKinsey study in 2015 entitled ‘Diversity Matters’ examined data for 366 public companies across a range of industries in Canada, Latin America, the United Kingdom and the United States. It found that:   Companies in the top quartile for racial and ethnic diversity are 35% more likely to have financial returns above their respective national industry medians; and Companies in the top quartile for gender diversity are 15% more likely to have financial returns above their respective national industry medians. More recently, in 2016, the Peterson Institute for International Economics and EY released a study revealing a significant correlation between women in leadership and company profitability. The report found that companies with at least 30% female leaders had net profit margins up to 6% higher than companies with no women in senior ranks. This report is but one of many to find that gender diversity has a positive impact on profitability. As such, there are few businesses that can choose to ignore what automatically increases revenue and profitability, but the benefits of diversity and inclusion do not stop there. It also delivers:   Continuous innovation achieved by harnessing the power of different experiences, knowledge and skills; Enhanced team performance and stronger collaboration; Increased awareness of biased behaviours and their impact, resulting in better decision-making; Enabled leadership to drive cultural change and build high-performing, diverse teams; Increased motivation for employees resulting in better job satisfaction, reduced stress and reductions in absenteeism; and Enhanced reputation in consumer markets. Despite the compelling nature of all of the above benefits, it is the fact that diversity and inclusion is accepted as a key contributor to talent acquisition and retention that sways many businesses to pursue the agenda. No matter the size of your company, the war for talent is a hard one to wage and win. This is particularly the case in relation to attracting and retaining millennials who are the first generation to grow up in the digital age. There are currently more than 500,000 millennials in Ireland and, in just 10 years, they will comprise nearly 75% of the workforce. This elevates the importance of the diversity and inclusion agenda even more, as millennials absolutely expect diversity as a matter of course. Indeed, millennials fully expect to be celebrated for their differences. And how right they are. Cognitive diversity, which is different thinking styles and personality types, is particularly valued by this cohort as it stimulates dynamic ideas and solutions that can drive innovations in a much more effective way. Indeed, research from the Billie Jean King leadership initiative reports that millennials see the concept of diversity and inclusion through a completely different lens and that there is now a trench between the generational mindsets on the issue. Fundamentally, millennials see diversity and inclusion as a necessary element for innovation. The same report emphasises that companies with high levels of innovation achieve the fastest growth of profits, while radical innovation trumps incremental change by generating 10 times more shareholder value. The impact of a lack of cognitive diversity and inclusion hits hard on engagement and empowerment, as well as the ability of employees to remain true to themselves. If any of us are to be fully engaged, we require supportive leadership and a supportive culture. As reported in the Billy Jean King report: “If you want to build a truly inclusive culture – one that leverages every individual’s passion, commitment and innovation, and elevates employee engagement, empowerment and authenticity – you should be willing to break down the narrow walls that surround diversity and inclusion, and limit their reach. If you don’t know where to start, ask your millennials. Every one of them wants to be heard.” What makes for a good diversity programme? There has been an understandable tendency to adopt a strand-based approach to diversity and inclusion, with the need to address gender equality particularly obvious. The referendum on marriage equality brought increased awareness of, and focus on, the LGBT strand in Ireland. Therefore, at this juncture and where strides have already been made, we need to step back and take a more holistic and strategic view of diversity and inclusion and integrate it into our corporate strategy and core business activity. The following is central to any successful diversity and inclusion programme. Diagnostics and diversity and inclusion data: accountants should not need convincing of the importance of knowing the numbers! And they are spot on; it is absolutely imperative to know your organisation. Diversity and inclusion data gives critical insight into organisations. Indeed, even the data we are not able to gather tells its own story. Through diagnostic assessment, data can drive a deeper understanding of the employee experience and where the critical decision points are in order to achieve diversity goals. This might be across any one business component such as talent attraction and retention, performance management and progression or leadership competence and accountability. Detailed data on the likes of recruitment ratios, promotion rates of female employees compared to male employees, or salary-related data allow us to develop tailored action plans to address any specific issue that emerges. As with any other business element, it is vital to ascertain your current state before you can meaningfully set realistic targets and goals and make progress. Once you diagnose the situation, you can establish diversity and inclusion key performance indicator (KPI) frameworks and know how you are going to measure success. One of the challenges for those keen to pursue the diversity and inclusion agenda is that it is sometimes seen as a ‘nice to have’ add-on. Having evidence-based data helps counteract that and allows us to measure progress and resulting growth. Sustainable strategy and good governance: a diversity and inclusion strategy that is incorporated into business strategy and core business activity is central to success. Very simply, diversity and inclusion needs to become an essential component of how we conduct business. Having a strategy really helps align diversity and inclusion with corporate strategy and enables it to become embedded in the overall culture and governance of the organisation. The strategy needs to be goal-orientated, metric-focused and underpin all diversity and inclusion activity. The strategy should also be accessible and include key principles and messages that can be understood by all. Informed, enabled and accountable leadership: any diversity and inclusion strategy or programme needs visible C-suite and executive sponsorship to succeed. Leadership needs to be aware and really understand diversity and inclusion, talking about it with people at all levels, inside and outside the business. As leaders, we also need to live and practise diversity and inclusion in our thinking, recruitment and work practices. In addition to leadership commitment and support, we must also emphasise impact, measurement and accountability. Introducing accountability as part of performance measurement certainly helps to elevate diversity and inclusion from a ‘nice to have’ to a core element of business activity. However, rather than expecting leadership to be automatically familiar with and knowledgeable about diversity and inclusion, we need to enable leaders to drive the agenda. To this end, it is essential to resource inclusive leadership and unconscious bias training that enables leaders to build high-performing teams and facilitate innovation. There are, of course, multiple other tenets of a successful diversity and inclusion programme, including flexible working arrangements that allow for, and support, diversity in the workforce. The visibility of diverse role models should not be underestimated based on the simple premise that ‘you can’t be what you can’t see’. People will naturally seek employment where they see themselves represented in the organisation, particularly at leadership level. Dovetailing recruitment practices with the diversity and inclusion data diagnosis and ensuing metric targets is also a key factor. Diversity and inclusion into the future Diversity and inclusion is a key driver of the future we aspire to, where we equate business in Ireland with risk excellence, sustainable growth and performance as well as cutting-edge innovation. It is also a key tenet of success right now. The first step is to truly value, champion and celebrate diversity, creating spaces where different perspectives are encouraged, from a workforce diverse in ability, age, ethnicity, gender, race and sexual orientation, as well as in thinking style and personality type. With the right strategic approach, leadership support and data analytics, we have the tools to leverage those celebrated differences to build a better working world that is truly diverse and inclusive. It is the right option. It is the business-smart option. It is the only option. Olivia McEvoy is Director of Diversity & Inclusion Advisory Services at EY Ireland.

Michele Connolly looks at the data behind the headlines about the gender pay gap and explains why reporting on such issues will force companies to act. The title of this article is an interesting one; it highlights from the outset that the issues underlying diversity and inclusion in the workplace are multifaceted. Likewise, the solutions are not necessarily always obvious. Take the issue of the gender pay gap. A report published last month indicated that, in 2015, Ireland had a 14.8% difference in median pay between men and women. That figure has declined steadily from 19.7% in 2000. However, statistics show it hit a low of 8.3% in 2012 before rising to 15.2% in 2014. Does this mean that a significant number of companies pay male counterparts more for doing the same job as women? Not necessarily. The statistics reflect an average salary across each gender in an organisation. To get a true picture, you must go behind the headlines and compare the results at different grades of staff, with different working arrangements and across different levels of experience. Take a typical director grade in practice. The reality is that there are still probably more men in that grade who have been in that position longer, who have more experience and therefore – on average – get paid more. There also tends to be a greater proportion of women in support grades in our organisations, which tend to command lower salaries. On an average basis, a higher number of women in lower paying support grades plays against a higher number of men in more senior, higher paid roles. The resulting statistic will show this simply as a pay gap. So yes, there is a pay gap. That is not discrimination; rather it is reflective of the fact that we have not yet succeeded in achieving better gender balance at more senior levels in our organisations. The real focus should be on how to address that issue. Gender pay gap reporting is coming Gender pay will feature in the UK media more and more as it introduces mandatory reporting on the gender pay gap for all companies with over 250 staff from 1 April 2017. The UK is following a growing trend across Europe, with many other countries boasting similar provisions. The resultant statistics are likely to show that, in headline terms, there is a pay gap. But when you adjust for some of the factors referred to above, such as experience, grades and working hours, the gap narrows considerably. One organisation that voluntarily reported its gender pay gap in the UK reduced the pay gap from mid-teens to less than 3% when adjusted for differing levels of experience. Consider the adage: “what gets measured gets managed”. This principle can apply equally to business situations. It can mean that simply examining an activity in turn changes the activity by forcing you to pay attention to it. It can also mean that producing measurements about the activity gives you a handle on it, a way to improve it. Knowing that they might ultimately have to report statistics should therefore cause organisations to examine their data sooner rather than later, analyse the differences and consider what they can do to improve the gender balance in senior leadership levels in the first place. What about the promotion question? Confidence is key to leadership and driving forward for advancement. Yet it is something that, on average, women struggle with throughout their careers more than men do. KPMG undertook a study to explore the qualities and experiences that contribute to women’s leadership and advancement in the workplace. The findings revealed that there is no shortage of ambition among the women surveyed. Six out of 10 aspired to be a senior leader of a company or an organisation, yet more than half agreed that they are more cautious in taking steps towards leadership roles. The results reveal a critical disconnect: women want to lead, but something is holding them back. Were the women encouraged to lead as children? Did they have a role model? Were they offered appropriate support and development opportunities in the workplace? Such factors play a possible role in whether a woman moves up the career ladder into a senior leadership role. There is plenty of research on the approach taken by males and females in pushing for promotion or a pay rise. Of the women surveyed by KPMG, over 75% did not feel confident in asking for access to senior leadership, a promotion or pursuing a job opportunity beyond their experience. Their male counterparts are unlikely to be as hesitant. There is an oft-cited example of two people looking at promotion criteria for a new role. The male candidate will look at the 10 items, believe he meets the criteria in three or four and go for the job. The female candidate will do likewise, believe she meets eight to nine criteria and not apply as she doesn’t meet all 10. It is not a case of one approach being better than the other. The average female brain simply works differently and approaches such matters in a different manner. However, the reality is that most performance appraisal or promotion systems are traditionally designed to target more male-dominated traits. It is therefore (unconsciously, in many instances) not a level playing field. Iris Bohnet, a behavioural economist at Harvard University, in research for her book entitled What Works – Gender Equality by Design, has found that “companies that use potential, in addition to performance, as a way to evaluate employees are more likely to be gender-biased. We generally find that leadership is associated with men, and potential has something to do with career advancement and climbing up the career ladder. We don’t necessarily associate career and leadership with women”. What can we do to effect change? Many organisations are starting to tackle these differences by introducing unconscious bias training. This was first put forward as a concept by psychologists at Harvard University, the University of Virginia and the University of Washington who created ‘Project Implicit’ to develop hidden bias tests – also called implicit association tests, or IATs, in the academic world – to measure unconscious bias. IAT measures attitudes and beliefs that people may be unwilling or unable to report, which would indicate that most of us are pre-programmed to associate certain roles and traits as either male or female. For example, you may believe that women and men should be equally associated with science, but your automatic associations could show that you (like many others) associate men with science more than you associate women with science. Unconscious bias training simply seeks to raise participants’ awareness of these inherent biases in our thinking so we can start to challenge ourselves more and apply a gender lens (as opposed to positive discrimination) in how we approach performance appraisal, salary reviews, promotion discussions and job allocations to ensure they are appropriately gender balanced. Another key component in the toolkit for addressing gender diversity is mentoring. Whether you are a man or woman, having someone more senior in the organisation looking out for you, acting as a sounding board and being an advocate for you is invaluable in helping you develop the skills necessary to push for advancement to more senior leadership roles. So how do you get a mentor? The same KPMG study quoted above highlighted that nine in 10 women said they do not feel confident in asking for a sponsor and eight out of 10 lack confidence in seeking mentors. Implementing formal mentoring programmes and leadership development programmes aimed specifically at high-potential women in an organisation is an invaluable step on the road to changing the gender balance of an organisation. Is the gender balance improving? The number of females in management roles and at senior leadership levels in organisations is slowly but steadily increasing. The 30% Club’s recent Women in Management study with Dublin City University found that women now hold 40% of positions at the lowest level of management surveyed (three steps down from CEO) and 17% of CEO positions. The statistics do vary by sector and organisation size, with women more likely to feature in leadership roles in areas such as HR and marketing, and less so in finance, sales, operations or IT. Other recent statistics show that in 2015, Ireland had on average 18% female board representation. That is up from 10% 10 years ago and 16% in 2014. These findings are in line with a 2016 McKinsey study on women in the workplace. In 2011, the EU proposed that it would introduce legislation requiring all publicly quoted companies to have 40% representation of women on their boards by 2020. While the council of ministers has failed to get all member states to agree to enact the legislation, it has had an impact. In 2010, when the European Commission first put the issue of women in leadership positions high on the political agenda, only 11.9% of board members of the largest publicly listed companies in the EU were women. This rose significantly to over 21% in 2015. In the UK, the 2011 Davies review recommended that the FTSE 100 leading companies should have at least 25% female representation on their boards. Some investment managers are now mandating this among their investee companies and publicly saying they will vote against board appointments that do not contribute to meeting this objective. 26% of board positions in FTSE100 firms and 20.4% in FTSE250 firms are held by women. There are now no all-male boards in the FTSE100 firms and just 15 all-male boards in the FTSE250 firms. Like the gender pay reporting, a policy initiative is causing organisations to take notice and act. However, there is still a very long way to go if we are to achieve gender balance. As a profession, what else can we do? We know that work/life balance is an increasingly key factor in career choices – at all levels and for both sexes. Initiatives such as intelligent working arrangements, ramp up and ramp down in career planning, and greater maternity supports all play a key role here. Space is too short to delve properly into this area on this occasion other than to say that most of us now work in a very mobile fashion. Does it matter whether we are sitting at a desk, on a train or in our own homes? Should the measure instead not be the quality of the output rather than the location from which it is delivered? However, it does challenge the status quo of the presenteeism concept that still pervades in many areas. As a country, we have made a lot of progress in the past few years. Yes, there is more to do. But by reporting and commenting on the issues, organisations are starting to put in place positive strategies to effect change. We are realising that not only is it the right thing to do, but it makes good business sense too. Michele Connolly FCA is Head of Corporate Finance at KPMG Ireland and a member of the Institute’s new Diversity Committee.