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Business Law
(?)

A spotlight on beneficial ownership

Dee Moran and Lilian Halpin explain entities’ existing obligations regarding beneficial ownership and look ahead to future developments, focusing on trusts in particular. Most entities have a legitimate role to play in the global economy, but they also have the potential for criminals to use the structure for money laundering, terrorist financing and other financial misconduct. To identify and increase the transparency of those that seek to hide their ownership and control of these entities, many countries have introduced a register of beneficial ownership. Having a register ensures that the ultimate owners/controllers are identified, and that accurate and up-to-date information on a beneficial owner is readily accessible to authorised officers and other competent authorities that are entitled to the information under money laundering legislation. In Ireland, entities must maintain a register to comply with obligations under the 4th EU Anti-Money Laundering Directive (4AMLD), which was passed in May 2015 and subsequently amended by the 5th EU Anti-Money Laundering Directive (5AMLD), which was passed in May 2018. Who is a beneficial owner? A beneficial owner is defined in the directives and Irish legislation by reference to the entity type (e.g. trust, corporate entity, investment limited partnership). The different pieces of legislation should be consulted depending on the entity. Common threads in the definitions are ownership and control, whether direct or indirect, and a holding of more than 25% of the entity. Are there two registers? There are two separate registers in Ireland. While companies were required since 2016 to gather information and maintain an internal register of beneficial ownership, the 2019 beneficial ownership of corporate entities regulations (one of two sets of regulations passed in 2019 relevant to beneficial ownership) required relevant entities to file information in a central register. The Central Register of Beneficial Ownership of Companies and Industrial and Provident Societies, which falls under the remit of the registrar of the Companies Registration Office, was opened for filings in July 2019. Any companies/societies in existence on 22 June 2019 had until 22 November 2019 to file their beneficial ownership details, and the five-month timeline to register relevant entities remains. Similarly, certain other financial vehicles described below must maintain an internal beneficial ownership register. There are also legislative requirements to file information on the central register, the Beneficial Ownership Register for Certain Financial Vehicles. Under specific legislation, the Central Bank of Ireland is designated as the registrar responsible for maintaining this central register. Under EU anti-money laundering (AML) regulations that came into effect in 2020, Irish Collective Asset Management Vehicles (ICAVs), unit trusts and credit unions that were in existence when the AML regulations came into force were required to register by 25 December 2020. Under the Investment Limited Partnerships (Amendment) Act 2020, which was commenced recently, existing investment limited partnerships (ILPs) and common contractual funds (CCFs) have until 1 September 2021 to register. Under both pieces of legislation, new financial vehicles that come into existence following the legislation’s implementation have six months from the date of coming into existence to register. What details must be registered? The information that must be delivered to each registrar concerning each beneficial owner includes name, date of birth, nationality, residential address, and a statement of the nature and extent of the interest held or control exercised by each beneficial owner. For Central Bank registration, it must be stated if the person is currently a pre-approval controlled function (PCF) holder in the entity or at any other regulated financial services provider. For companies and industrial and provident societies, the 2019 regulations require a PPS number to be furnished for verification purposes. The 2020 Act also requires PPS numbers to verify the information delivered in the case of ILPs and CCFs. In the case of both registers, the registrar is not permitted to disclose PPS numbers and must store them securely. Relevant entities must keep the beneficial ownership register up-to-date, and this information must align with the information filed on the Central Register. Where change(s) occur, the entity has 14 days to deliver the information so that the relevant amendments are made to the Central Register. Who is entitled to access the information in the Central Register? There are two tiers of access to data in the Central Register: Unrestricted access to the information in the Central Register will be afforded to authorised officers within specific organisations (i.e. An Garda Síochána, the Financial Intelligence Unit of An Garda Síochána, the Revenue Commissioners, the Criminal Assets Bureau, the Central Bank of Ireland, and other Irish competent authorities engaged in the prevention, detection, or investigation of possible money laundering or terrorist financing. Restricted access to information in the Central Register will be made available to the general public and designated persons (e.g. a bank carrying out customer due diligence, save where the beneficial owner is a minor). Those with restricted access will be able to access the name, month and year of birth, nationality, country of residence, and the statement about the nature and extent of the beneficial interest held. The beneficial owner’s date of birth and address will not be available to those with restricted access. Data protection law Any information exchange and sharing mandated by the legislation must comply with data protection law. Personal data is defined in Section 69 of the Data Protection Act 2018, and information to be collected and held on the central registers can include personal data. The data protection obligations are expressly recognised in the 2019 Regulations and 2020 Act, both of which provide that the Data Protection Act 2018 shall apply to the access the registrar affords to a designated person and any member of the public in respect of the information in the central register. Sanctions Sanctions include a fine of up to €5,000 for a trustee and a fine not exceeding €500,000 or up to 12 months imprisonment in respect of corporate entities. Future developments It is expected that a separate central register in respect of the beneficial ownership of trusts will be implemented in due course, as required under the Directives. This is expected to materialise sooner rather than later – trust regulations published in 2019 already impose obligations on trustees to seek and obtain information from beneficial owners of trusts and establish internal registers of beneficial ownership. The Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2020 was signed into Irish law recently, and contains provisions in relation to trusts. It defines a “beneficial owner” and lists certain trusts that would be excluded from a future requirement to register. These provisions are being introduced in anticipation of the Minister for Finance introducing further regulation in the area and to address part of the overall transposition of 5AMLD into Irish law. In Dáil discussions on the provisions, the Minister made specific reference to the requirements in 5AMLD that all member states establish a central register of beneficial ownership of express trusts. On the international front, the Financial Action Task Force (FATF), an intergovernmental organisation that promotes policies to combat money laundering and terrorist financing and of which Ireland is a member, announced in February that it would review the global rules around beneficial ownership. The European Commission recently stated that it would closely monitor the setting up of the central bank account mechanisms and the beneficial ownership registers by member states to ensure that they are populated with high-quality data. The Directives require interconnection of member state registers, and work to interconnect the beneficial ownership registers has already started. The interconnection will be operational in 2021. Meanwhile, related EU regulation dealing with the EU Central Register’s technical specifications is expected to come into force soon. The requirement to keep and maintain a register for beneficial ownership is here to stay, and a central register for trusts will soon be a legal requirement. An understanding of the requirements is important if sanctions are to be avoided. An EU central register is imminent. This will put further pressure on individual countries to maintain registers with high-quality information, so expect the spotlight to continue to shine brightly when this comes into existence. Dee Moran is Professional Accountancy Leader at Chartered Accountants Ireland. Lilian Halpin is a Consultant at Chartered Accountants Ireland.

Mar 26, 2021
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Business Law
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Could your organisation benefit from a simplified corporate structure?

Taking the time to carry out a corporate simplification project during COVID-19 could help sustain your business while safeguarding employees’ motivation and focus, writes Claire Lord.The effects of COVID-19 are severely impacting the global economy. To ensure long-term protection and sustainability, organisations are likely considering ways to reduce costs and improve business efficiencies. Simplifying your corporate structure by removing dormant or unnecessary companies is one way to achieve both objectives.It is not uncommon for organisations to have complicated corporate structures. While many companies within these structures serve a particular purpose that brings value to the business, other companies may be inactive and costing the organisation money to maintain. A lack of time and resources often results in organisations putting off any review of the efficacy of their corporate structures.Perhaps now, a time when employee capacity could be higher and long-term sustainability is a crucial focus, is time for your organisation to examine whether your current structure meets the changing needs of your business? The sooner the steps in a corporate simplification project are taken, the sooner your organisation can enjoy the many benefits.Cost savingsThe cost of maintaining a dormant or inactive company is usually understated. The actual cost can exceed €8,000 per year when compliance and audit costs are taken into account. This does not include the hidden costs of administration and employees’ and management’s time spent coordinating this compliance.Employee productivityMany employees are worried about job security as a result of COVID-19. A project demonstrating that your business is focused on long-term sustainability may help improve employee motivation and focus, consequently enhancing productivity and alleviating fears of job security. Workloads may also be lighter due to the impact of COVID-19 on the economy, and utilising employee time to assist with a simplification project can ensure that their time is spent productively to help sustain the business.Business efficiencyManagement, legal and compliance teams must focus their time, now more than ever, on the core companies required to sustain and grow a business. Eliminating unnecessary companies allows these teams the time to do that. A less complicated structure can also simplify the repatriation of cash from trading subsidiaries and other intra-group financing arrangements.Mitigate riskThe existence of a company can expose a business to risk, including error, fraud, or a failure to meet regulatory or compliance requirements. These risks arguably increase with dormant and inactive companies, given the likely reduction in monitoring as management focuses on the core companies required to run the business. There is also the risk that, over time, corporate memory will disappear, making it more difficult to assess whether a company needs to be retained.Governance standards and transparencyWith ever-changing legal and corporate governance requirements for companies, including new anti-bribery and data protection laws, ensuring that companies meet the required standards is a constant challenge. It is easier to maintain these standards with a less complicated structure. Improved transparency through a simplified structure is likely to be welcomed by investors, finance providers, and other stakeholders.Tax benefitsComplicated structures can sometimes lead to tax inefficiencies, such as tax leakage or additional tax compliance burdens when repatriating cash through the business. Simplifying the complexity of a structure may resolve these inefficiencies and allow for improved tax planning for the business.ConclusionAt a time when organisations must reduce costs and increase business efficiencies to ensure long-term sustainability, considering a corporate simplification project may be a simple step that delivers meaningful results.Claire Lord is a Corporate Partner and Head of Governance and Compliance at Mason Hayes & Curran.

Sep 30, 2020
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Business Law
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The Apple ruling

The General Court of the European Union’s ruling in the Apple tax case affirms Ireland’s reputation as a suitable location for global establishment, argues Claire Lord.In 2016, the EU Commission decided that two tax rulings issued by the Revenue Commissioners in 1991 and 2007 in favour of Apple Sales International (ASI) and Apple Operations Europe (AOE) constituted unlawful state aid under EU law.ASI and AOE were companies incorporated in Ireland, but not tax-resident in Ireland. The contested tax rulings endorsed the methods used by ASI and AOE to determine the taxable profits in Ireland attributable to the trading activity of their respective Irish branches. The Commission calculated that, through these tax rulings, Ireland had granted Apple €13 billion in unlawful tax benefits, which therefore constituted unlawful state aid.The decision of the Commission was appealed to the General Court of the European Union by both Apple and Ireland.General Court’s decisionThe General Court annulled the Commission’s decision on the basis that the Commission did not succeed in proving that ASI and AOE had been granted a selective economic advantage and, by extension, unlawful state aid.The General Court agreed with the Commission’s approach on some fundamental legal issues such as how the principles of advantage and selectivity are to be assessed, the reference framework of Irish tax law and, in broad terms, the application of the ‘arm’s length’ principle. However, it also held against the Commission on several points of law and fact. In particular, it rejected the Commission’s primary argument that the Revenue Commissioners had granted ASI and AOE an advantage by not allocating the Apple group’s intellectual property licences held by ASI and AOE, and the associated sales income, to the Irish branches of ASI and AOE.The Commission had made this argument by effectively contending that such an allocation must be the case because ASI and AOE had no employees anywhere else, despite their boards conducting business outside of Ireland. The General Court found that approach to be wrong in law and fact. It held that as a matter of law, the Commission had to show that, in fact, the Irish branches of AOE and ASI carried out the taxable activity; it was not enough to contend that the Commission had not found such activity elsewhere.In addition, the General Court held that the evidence given by ASI and AOE demonstrated that the relevant taxable activities were not in fact carried out by the Irish branches.The General Court also held that the Commission did not demonstrate that methodological errors (which the Court accepted had occurred in the contested tax rulings) resulted in an advantage for AOE and ASI. While the General Court regretted the incomplete and sometimes inconsistent nature of the contested Irish tax rulings, those infirmities did not, in themselves, prove the existence of a selective advantage. Therefore, such errors did not constitute unlawful state aid.Lastly, the Court also found that the Commission did not prove that the contested tax rulings were the result of discretion exercised by the Revenue Commissioners, which had granted a selective advantage to ASI and AOE. Instead, it found that the correct analysis of 11 other rulings by the Revenue Commissioners was that the approach depended on the facts and this was not objectionable.The Commission may appeal the decision to the EU’s Court of Justice before 26 September. However, an appeal is only on points of law and not on findings of fact.The impact of the decisionThe General Court’s decision is a victory for the position argued by Apple and Ireland. Because it holds against the Commission on several points of law and fact, it will be a difficult decision to appeal successfully should the Commission decide to do so. Also, the points won by the Commission are points of law. They, therefore, may themselves be challenged in any cross-appeal and an adverse decision on any of those points could have systemic effects, which the Commission would not welcome.The decision is obviously newsworthy because of the parties involved, the value at stake and the current global focus on international tax, particularly in relation to multinationals and the digital economy. However, it is noteworthy that many of the points at issue are no longer of relevance for companies doing business in Ireland as the structures and approaches at the heart of the case have not been widely used here in recent years.It does, however, clarify that Ireland did not apply any selective treatment to Apple. It underscores Ireland’s reputation as a straightforward and rules-based jurisdiction which remains an eminently suitable location for global companies to establish significant operations.Claire Lord is a Corporate Partner and Head of Governance and Compliance at Mason Hayes & Curran.

Jul 30, 2020
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Business Law
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UK insolvency law shake-up to prevent corporate COVID-19 casualties

The UK Government has recently made urgent and radical changes to insolvency laws, which may help companies survive the COVID-19 crisis, write Michael Drumm and Sean Cavanagh.The Corporate Insolvency and Governance Act 2020 represents the most significant reform of insolvency legislation in over 20 years. It was fast-tracked through Parliament and became law on 26 June. The laws apply to the whole of the UK, and specific clauses relating to Northern Ireland have been included.Some of the new changes are permanent, and some are temporary. The permanent changes focus on reforms in three key areas:A moratorium;A ban on termination provisions; andA new restructuring plan.The temporary measures relate to the suspension of the wrongful trading regime, the suspension of statutory demands and winding-up petitions where financial difficulties arise directly from the effects of the COVID-19 pandemic, and some temporary extensions concerning company filing requirements.This article is necessarily high-level, and readers are encouraged to speak to their advisors to explore the detail.Permanent changesA new ‘free-standing’ moratoriumThis mechanism differs from existing moratoria in that it is a standalone procedure and does not necessarily need to be a gateway to any formal insolvency process.The application In most cases, the moratorium can be initiated by merely filing the application with the court (a court order is not required). The application must contain:• a statement by the directors that, in their view, the company is, or is likely to become, unable to pay its debts; and• a statement from the proposed monitor (who must be an insolvency practitioner) that the company is an ‘eligible’ company and that, in their view, the moratorium would likely result in the rescue of the company as a going concern.Length of the moratoriumIt will last for an initial period of 20 business days, which can be extended to 40 business days by the directors (no creditor approval required). This 40-day period can be extended for up to one year, but only with creditor or court approval. A further extension beyond one year is also possible by applying to the court.Each application for an extension must be accompanied by a statement from the directors and the monitor.Effect of the moratoriumIt will prevent the enforcement of security, the crystallisation of a floating charge, the commencement of insolvency proceedings or forfeiture of a lease.The company will not be obliged to pay most pre-moratorium debts during the moratorium, but there are some exceptions (e.g. wages and salaries, finance loans and leases). However, debts falling due during the moratorium must be paid so access to cash or funding will be vital.The monitorDuring the moratorium, the directors remain in control of the business and a monitor oversees the process. The monitor is an officer of the court and as part of their role, they must protect creditors’ interests while also ensuring compliance with the conditions of the moratorium.For the period of the COVID-19 crisis (at present, up to 30 September 2020), the monitor can disregard any worsening of the company’s financial position that is attributable to the pandemic, providing a going concern rescue is still likely.How will it end?The moratorium can come to an end via:an agreement/restructuring with its creditors, possibly via a company voluntary arrangement (CVA);a scheme of arrangement;a court order;termination by the monitor if he/she determines that the conditions have not been fulfilled; orautomatically, on expiry of the time limit.The hope is that the company will emerge from the moratorium having achieved a rescue, but if this is not the case, a winding up or administration might happen. Where this insolvency procedure happens within 12 weeks of the end of the moratorium, certain unpaid debts in the moratorium and certain other debts have ‘super priority’ for payment ahead of other debts.A new restructuring planThis new procedure will closely resemble the existing scheme of arrangement, which is a statutory legal process that allows a company to restructure its debt. It is not an insolvency procedure but must be approved by the court.The restructuring plan will require two court hearings, is likely to be technically complex, and will be expensive as a result. Thus, it may not turn out to be a practical solution for smaller SMEs in distressed scenarios.The principal advantage of the new restructuring plan is that it will offer the ability to cramdown one or more classes of dissenting creditors or shareholders. In effect, this means that even if a class of creditor does not vote for the plan, the court may still sanction a cramdown provided certain conditions are met, including that no creditor is worse off than the relevant alternative.The procedure is more likely to be used in more complex and larger distressed company scenarios, particularly with bond-holder involvement, meaning it is unlikely to be used regularly in Northern Ireland.Suspension of termination clauses for suppliers of goods and servicesWhen a company enters an insolvency or restructuring procedure, suppliers will often stop or attempt to stop supplies by virtue of the terms of its supply contract.This new Act prohibits the termination of any contract for the supply of goods and services to a company by reason of the company entering into an insolvency procedure. This will include the new moratorium procedure outlined above, administration, CVA, liquidation or a restructuring plan. However, this prohibition does not apply to schemes of arrangementAlso, a supplier company cannot insist on any disadvantageous amended terms (e.g. significant price increases). There are some exceptions to this suspension, however, such as contracts for the supply of services from insurers and banks.A temporary exemption (available during the COVID-19 period) to this supply restriction will be available to ‘small’ businesses. This may be of importance to Northern Ireland supplier companies, as many of them will qualify as ‘small’ for this purpose.A company can also apply to the court to terminate supply where it can prove ‘hardship’. ‘Hardship’ is unfortunately not defined as yet.Temporary changesThese temporary changes only apply during the period of the COVID-19 crisis.Suspension of the offence of wrongful tradingThis new Act directs the courts to assume that a director is not responsible for the worsening of the financial position of the company that occurs during this period (currently to 30 September).This reduces, but critically, does not remove, the threat of personal liability on company directors arising from ‘wrongful trading’. This temporary suspension only applies to ‘wrongful’ trading – it does not exempt directors from possible personal liability arising from ‘fraudulent trading’.Temporary suspension of statutory demands and winding petitionsThe Act temporarily removes the threat of statutory demands and winding-up proceedings, but only where COVID-19 has had a worsening effect on the company. In these circumstances, statutory demands will be void if served on a company during this period. However, a company will not be protected from the making of a winding-up order where the financial difficulties of the company would have arisen regardless of the effects of COVID-19.AnalysisThese new measures will be welcomed as they have the potential to help many viable companies that have been directly impacted by the effects of this unprecedented crisis.The intention of the new moratorium is that it will be a ‘debtor-in-possession’ process whereby the monitor acts in a limited capacity as overseer. This follows recent trends in some administrations (e.g. Debenhams) where administrators have provided consent to directors to make certain decisions via a ‘consent protocol agreement’ in what many are calling ‘light touch’ administrations.Only time will tell whether this new moratorium procedure is preferred over the traditional administration process, but recent developments certainly indicate a move towards a more rescue-orientated restructuring culture, which will surely be required to save viable businesses and address the unique nature of the upcoming economic environment.Michael Drumm is a licensed insolvency practitioner and an advisory partner at CavanaghKelly.Sean Cavanagh is a Founding Partner of CavanaghKelly, a licensed insolvency practitioner and Chair of the Insolvency Technical Committee at Chartered Accountants Ireland.

Jul 29, 2020
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Financial Reporting
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The EU Omnibus package and next steps for CSRD reporting

Dee Moran, FCA, explores the potential impact of the European Commission’s much-anticipated Omnibus package on the Corporate Sustainability Reporting Directive  26 February 2025 felt like doomsday for many immersed in sustainability. After weeks of rumours, the European Commission published its first Omnibus package of simplification measures for sustainability reporting and regulation. If approved, these measures will substantially water down the Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive, Carbon Border Adjustment Mechanism and EU taxonomy for sustainable activities.   In publishing the proposals, the European Commission noted that they would enable businesses “to grow and create quality jobs, attract investments, get the necessary funds for their transition towards a more sustainable economy and help the EU meet the Green Deal’s ambitious objectives”. Many in the profession were dismayed by the introduction of the new CSRD simplification proposals, however, particularly those that had just published their 2024 annual reports with the required environmental, social and governance (ESG) information included for the first time.  Their companies have invested heavily in sustainability reporting and, depending on their size, could now potentially fall out of scope of the CSRD under the new proposals.   Their less prepared counterparts, meanwhile, will have felt some relief that their own tardiness in starting their sustainability journey and preparing for CSRD reporting has been rewarded. So, where does the Omnibus package leave the future of CSRD reporting? Some of the proposed amendments are outlined here, with a short analysis for each. Timeline: two-year delay The Omnibus measures propose delaying the deadline for CSRD reporting by two years—to 2027 for wave two companies, and 2028 for wave three. The two-year ‘stop the clock’ proposal has generally been welcomed as it would give companies more time to prepare for CSRD reporting.  There are concerns among some, however, that the two-year delay is too long, with some maintaining that a 12-month lag would have been more effective in maintaining momentum. Budgets are already approved for next year, but securing the budget for a second year might be more challenging.   Overall, however, the proposed delay is being viewed as a welcome means to provide a much-needed breather for companies.  Threshold: employee numbers The European Commission’s Omnibus package proposes raising the threshold for numbers employed by companies in scope of the CSRD from 250 to 1,000 (and either a turnover greater than €50 million or balance sheet total exceeding €25 million). This proposal would reduce the number of companies in scope of the CSRD across Europe by about 80 percent—from 50,000 companies down to about 7,000.  The 7,000 figure is also substantially lower than the 11,000 companies obliged to report under the Non-Financial Reporting Directive.  The higher employee threshold proposal has met with varying reactions in the profession, with many expressing that 1,000 goes too far, and that 500 employees and above would be more proportionate. This will no doubt be debated at length in the months ahead.  It is worth pointing out, however, that companies that would not fall in-scope of the CSRD under the new proposed threshold may still opt to voluntarily adopt the proposed standard. Voluntary SME standard The Commission has proposed that it will adopt, by way of a delegated act, a voluntary sustainability reporting standard (VSME) to facilitate reporting of sustainability information by companies that are not in-scope for the CSRD.  This will be based on the revised voluntary sustainability reporting standard for non-listed micro, small and medium enterprises (VSME) submitted by the European Financial Reporting Advisory Group (EFRAG) to the European Commission in December 2024. Value chain cap The Omnibus measures propose the introduction of a ‘value chain cap’. This move would serve to limit the information CSRD reporters can request from non-CSRD reporters in their value chain with fewer than 1,000 employees. They would not be permitted to request any information exceeding that specified in the revised VSME. While this proposal could potentially diminish the comprehensiveness of sustainability reports, it would also reduce the sustainability reporting burden on smaller companies and—provided that the revised VSME standard is comprehensive—should still provide companies in-scope of the CSRD with the value chain information they need. Reasonable assurance standards The requirement to have assurance on a sustainability report is a fundamental part of the CSRD, with limited assurance in the first instance and the potential to move to reasonable assurance following a review.  The Omnibus package seeks to remove the requirement for reasonable assurance as a means to streamline the reporting process, while also maintaining some oversight.  This proposal has been largely welcomed as it would reduce the cost of compliance for CSRD reporters and would also be less burdensome.  Some stakeholders have, however, voiced concerns that removing the need for reasonable assurance over the longer term may compromise the trustworthiness and reliability of data.  Investors, in particular, have been vocal about their need for accurate data to reduce the risk of greenwashing. Reasonable assurance would provide an additional level of comfort. European Sustainability Reporting Standards The Omnibus package commits to simplifying the European Sustainability Reporting Standards (ESRS), including a reduction in the number of data points, clarification of provisions deemed unclear and an improvement in consistency with other pieces of legislation. With in excess of 1,100 data points, the volume and complexity of the ESRS has raised many concerns, and Chartered Accountants Ireland was critical of the high number of ESRS data points in our response to the initial public consultation on the draft ESRS.  The Omnibus proposes to simplify the ESRS by reducing the number of data points and focusing on qualitative over quantitative information.  The Commission has asked EFRAG to commence the work of simplifying the ESRS and to provide their technical advice by 31 October 2025. It is important, however, that sufficient time is allowed for proper consultation with stakeholders. Sector-specific standards The Omnibus proposal reverses the existing plan for sector-specific standards to be developed and adopted by the European Commission, a move that would have increased the number of data points required for CSRD reporting.  Again, there are varying views on this proposal in the profession. Some maintain that sector-specific standards would lead to more relevant and meaningful disclosures in specific industries while also providing for more effective comparability.  Others cite increased cost and complexity as a potential negative, particularly for companies operating across multiple sectors.  Double materiality assessment The Omnibus proposal does not change the CSRD’s double materiality perspective, meaning that companies remaining in scope will have to report on how sustainability risks affect their business and their own impact on people and the environment. The retention of the double materiality assessment (DMA) is not surprising given that it is a key requirement under the CSRD.  While cost and the availability of data have been cited by some as barriers to completing the DMA, the recommended reduction in ESRS data points and proposed two-year reporting delay should assist reporters in meeting this requirement.      What happens next? It is important to remember that these Omnibus simplification measures are just proposals. The next step will see these proposals reviewed by both the European Parliament and the Council of the European Union.  A staggered approach to the proposed amendments would see the ‘stop the clock’ proposals be approved in the first instance to give companies clarity on their reporting requirements for 2025.  The European Council and the European Parliament have already approved this amendment.  The proposal now needs to be approved formally by the Council and signed by the Presidents of both Institutions. It will then be published in the Official Journal, which is expected by the end of June. Member States have until 31 December 2025 to transpose into their national laws. We have been advocating for speedy transposition of the Directive to the Department of Enterprise, Tourism and Employment , which has committed to prioritising this.  Once the ‘stop the clock’ proposal has been approved, this will allow time for the other proposals to be debated, and for EFRAG to develop and present to the European Commission a revised set of ESRS and a new set of voluntary standards based on the VSME.  The revised ESRS are expected to be adopted as soon as is practicable, but no later than six months after the entry into force of a revised CSRD.  Our professional accounting team at Chartered Accountants Ireland will continue to review these proposals, engage with members, other professional bodies and relevant stakeholders, and respond to European Commission and EFRAG consultations on your behalf. Our priority, as always, will be to represent our members in lending our voice to continued progress in the sustainability agenda that is also proportionate and cost-effective for companies.  While the initial reaction to the Omnibus package of proposals was mixed, it has been encouraging to hear from many in the profession that a reduced scope would allow them to better focus on material matters and on gathering quality data, while the delayed timeline would also give them greater scope to prepare thoroughly for CSRD reporting.  Dee Moran, FCA, is Professional Accountancy Lead at Chartered Accountants Ireland

Apr 10, 2025
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Demystifying the double materiality assessment

The experiences of the first wave of entities preparing CSRD sustainability statements hold important lessons on the complexities of the double materiality assessment.  Gareth Martin, Jennie Kealey  and Luke Bisson delve into the details Some of the largest entities in Ireland are in the process of issuing their first mandatory sustainability statement under the EU’s Corporate Sustainability Reporting Directive (CSRD). They are part of the first wave of reporters following transposition of the CSRD into Irish law for accounting periods beginning on or after 1 January 2024.  To identify sustainability information for disclosure, an entity is first required to complete a double materiality assessment (DMA) to determine material impacts, risks and opportunities (IROs) in relation to environmental, social and governance (ESG) matters.   Double materiality is a new concept aimed at enhancing the existing understanding of financial materiality already familiar to accountants. It extends financial materiality considerations to encompass an understanding of both the entity’s impact on the environment and society, and the impact of sustainability matters on its own prospects, performance and position—i.e. double materiality considers both inside-out and outside-in perspectives.  The DMA process must comply with the requirements of the European Sustainability Reporting Standards (ESRS), as this is one of the components of a CSRD limited assurance report under International Standard on Assurance Engagements (Ireland) 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information - Assurance of Sustainability Reporting in Ireland (ISAE (Ireland) 3000). ISAE (Ireland) 3000 is the assurance standard that has been adopted in Ireland for sustainability statements prepared under the CSRD. An entity’s CSRD reporting is dependent on a robust DMA output. This is the foundation of the sustainability statement. Here, we offer some practical insights into completing an effective DMA, drawn from our experience supporting clients in this area. Overview of the DMA process  The ESRS do not mandate how to conduct a DMA and, accordingly, each entity should apply judgement to design a DMA process that complies with the ESRS. Figure 1. shows one potential approach to the DMA process. The DMA is comprised of the two interconnected assessments of impact materiality (ESRS 1 3.4) and financial materiality (ESRS 1 3.5). Figure 2 illustrates the double materiality concept. DMA: illustrative examples Some high-level illustrative examples of sustainability IROs are as follows: Impact (positive): Actual positive impact on the environment through adaptation of manufacturing facilities to use renewable energy sources. Impact (negative): Potential negative impact on the working conditions of workers in the value chain through contracting of suppliers in geographies with sub-standard labour laws. Risk: Risk of increased costs in the form of fines from non-compliance with wastewater disposal regulations. Opportunity: Opportunity to increase revenues from sustainability conscious customers through development of biodegradable products. Key practical DMA considerations Some practical considerations should be factored into the DMA process as required by the ESRS. 1. Disaggregation of the assessment The appropriate level of disaggregation must be determined before beginning the DMA process.  The assessment may be disaggregated by business division, country of operation, subsidiary, significant site or significant asset (depending on the nature of the entity) in order to effectively identify IROs at the correct level of granularity and assess their materiality.  For example, groups must consider whether the DMA should be performed centrally at the group level, or at a disaggregated level. 2. Stakeholder engagement approach Stakeholders include key actors in the value chain, such as suppliers, employees and customers, but can further comprise groups such as indigenous communities and silent stakeholders, such as nature. Therefore, while conventional methods of engagement like surveys, interviews and workshops are commonly used, it is also important to consider alternative approaches. This might include analyses of ecological, pollutant or geographical data. Engagement may also be indirect, through stakeholder representatives or subject matter experts. Stakeholders should only be engaged in the assessment of topics where they have the appropriate experience and/or expertise required to provide accurate and reliable input. They may be mapped to specific IROs on the longlist to facilitate the provision of IRO inputs, where appropriate, to their position in the value chain. 3. Value chain boundary When performing the value chain analysis step of the DMA process, management should determine the point or “boundary” in the value chain up to which information should be collected. If this boundary is not effectively defined during the DMA, there is a risk that IROs related to components of the value chain will not be identified. Consequently, value chain information may not be presented completely in the sustainability disclosures.  For example, if only first-tier suppliers are considered as part of the value chain, the impacts of second- or third-tier suppliers connected with the entity’s operations may be overlooked in the DMA, even though they are within the scope of impact materiality. 4. Material financial effects Sustainability risks and opportunities are often drafted without properly considering their material effects on financial position, financial performance, cash flows, access to finance or cost of capital—or evaluating their consistency with the information disclosed in the financial statements. Likewise, it is common for management to only consider and score the likelihood and magnitude of a risk or opportunity, even though ESRS 1 stipulates that it is the likelihood and magnitude of the financial effects that should be assessed. 5. Dependencies on natural, human and social resources Risks and opportunities derive not only from impacts, but also from an entity’s dependencies on natural, human and social resources. It is therefore important for management to consider dependencies as potential sources of risks and opportunities when assessing the financial effects triggered by sustainability matters. For example, a manufacturing entity should consider its dependencies on energy, raw materials, customer relationships and healthy and skilled workers, among others, when drafting and assessing the materiality of IROs on the longlist. Dependencies on biodiversity and ecosystems should also be identified and assessed under the ESRS 2 IRO-1 requirements of ESRS E4. This includes an assessment of sites located in or near biodiversity-sensitive areas.  6. IRO scoring approach The ESRS do not define an IRO scoring approach. However, the factors for scoring are outlined in ESRS 1 and elaborated on in European Financial Reporting Advisory Group Implementation Guidance 1 (EFRAG IG 1) Material Assessment. Scoring should also align with the entity’s existing risk management framework where possible. ESRS 1 does prescribe the use of an appropriate quantitative and/or qualitative threshold to determine which IROs are material.  EFRAG IG 1 provides graphical representations of such materiality thresholds in both columnar and matrix formats. It is important to note that this guidance is purely illustrative. Management should document the rationale supporting their choice of scoring scales and thresholds—and ensure that these decisions have undergone robust review and validation. 7. Entity-specific disclosures When an entity concludes that an IRO is either not covered or not covered with sufficient granularity by an ESRS—yet is material due to its specific facts and circumstances—additional entity-specific disclosures must be provided to enable users to understand the sustainability-related IROs. Given that sector-specific standards have not yet been incorporated into the ESRS, it is paramount that management implements robust processes to assess potential IROs to identify any that are not aligned to the ESRS topical standards. For such topics, entity-specific disclosures should be drafted which adhere to the general disclosure requirements set out in ESRS 2 and meet the qualitative characteristics of information in accordance with ESRS 1. DMA: useful insights Here are eight insights that can be applied to support the DMA process: 1. The DMA process requires detailed step-by-step planning. Often, input is needed from across the organisation, particularly where a materiality assessment of sustainability information is being carried out for the first time. 2. Before beginning the DMA, an entity’s organisational structure should be appropriate for management to effectively lead and oversee the DMA process, and sufficient training should be provided. Identifying key internal stakeholders, such as members of the sustainability, environmental and financial reporting functions, will facilitate an effective assessment, as will forming a working group to co-ordinate day-to-day aspects of the DMA. 3. Validation roles for key decisions at each stage of the DMA should be clearly defined and documented. A board level steering committee could be formed for the purpose of reviewing and validating key decisions before the working group proceeds to the next stage of the process. 4. Documentation of the DMA process should begin at the inception of the assessment. This documentation should be clear, specific and detailed enough to enable assurance practitioners to understand and assess each stage of the DMA process. A centralised change log should be maintained to provide a clear and traceable trail of amendments and judgements, including their supporting rationale, over the course of the DMA. 5. Methods of engagement likely to garner the most effective coverage of views across all affected stakeholder groups should be considered. These might include surveys, interviews and workshops. A first step here might involve mapping affected stakeholder categories to sustainability matters, and prioritising different categories for engagement purposes. 6. Management should gain an understanding of the ESRS disclosure requirements, datapoints and transitional reliefs early on in the DMA process so they can effectively map material IROs to disclosure requirements and implement interconnectivity between the DMA process and disclosures. 7. When drafting the longlist of IROs and determining material sustainability matters, it is important to benchmark against disclosures prepared by peers and early reporters. This is especially pertinent in the first year of reporting, in order to effectively compare the information that is being disclosed within sectors and industries. 8. A plan for the refresh of the DMA should be agreed on from the outset. Management should implement an annual review of the DMA, comprising procedures such as a landscape review and revalidation of the DMA results. The circumstances requiring a full refresh of the DMA should be defined in accordance with the requirements of ESRS 1 and EFRAG IG 1. The frequency at which a full refresh should be performed regardless of change events must also be considered. Planning for quality and efficiency The DMA is a complex exercise, and each organisation will encounter its own challenges when preparing for the first year of CSRD reporting.  Despite this, there are learning points that can be applied broadly to the DMA in order to improve the quality and efficiency of the process.  Planning each step of the DMA and establishing a process compliant with the requirements of the ESRS will allow entities to develop and perform a robust DMA. Gareth Martin is a Managing Director in  Deloitte’s Sustainability Reporting and Assurance team Jennie Kealey is a Manager in Deloitte’s Sustainability Reporting and Assurance team Luke Bisson is a Senior in Deloitte’s Sustainability Reporting and Assurance team  

Feb 10, 2025
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The impact of sustainability reporting on the SME supply chain

Accountants will play a critical role in helping SMEs manage the impact of new sustainability reporting requirements on their supply chains. Niamh Brennan, Louise Gorman and Seán O’Reilly explain why The EU’s Corporate Sustainability Reporting Directive (CSRD) was transposed into Irish law in July 2024. Those in management and accounting functions in some of Ireland’s large companies have struggled to interpret the Directive’s requirements.  The legislation will require reports under European Sustainability Reporting Standards (ESRS) from 1 January 2025 for the 2024 financial reporting year.  In recent years, many large companies have voluntarily reported sustainability information under the Global Reporting Initiative (GRI) and the Taskforce for Climate-related Financial Disclosures (TCFD) frameworks.  Moreover, the environmental topics covered by the ESRS are derived from the EU Green Taxonomy, with which large entities in certain sectors have already reported alignment. This alignment prepares them for the CSRD requirements to some extent.  Listed SMEs will not come within the scope of the CSRD until 2027 (for the 2026 financial year), with an opt-out for two further years to 2029 (for the 2028 financial year).  Nonetheless, many SMEs, both listed and unlisted, will experience the effects of sustainability reporting requirements before these dates. Significance of the value chain The ESRS require disclosures on material environmental, social and governance topics. Such disclosures must detail the undertakings’ own operations as well as those throughout their value chain.  The value chain refers to the full range of activities, resources and relationships related to the undertakings’ business model and the external environment in which they operate.  In Ireland, many large companies’ activities, resources and relationships involve SMEs. Examples include financial services institutions with SME customers, and food and beverage producers with SME suppliers.  The implication of such relationships, in ESRS terms, is that large companies must gather sustainability information from SME value chain partners. Reporting challenges for SMEs  We have conducted two research studies on sustainability reporting for Irish SMEs. Our first study employed the GRI framework, and our second used the EU Green Taxonomy, to assess SMEs’ reporting preparedness.  Mindful of SMEs’ strong reliance on their Chartered Accountants for reporting and advisory needs, we engaged with professional Irish accounting practitioners to gain insights into the challenges they face.  Both studies were conducted in 2022 in anticipation of the publication of the ESRS by the European Financial Reporting Advisory Group (EFRAG). Our findings are highly relevant now that sustainability reporting is legally mandated. The findings of both studies indicate that cost is the greatest barrier encountered by SMEs.  In particular, set-up costs, ongoing data management expenses and potential operational changes, are likely to prevent the average SME from collecting and reporting accurate and reliable sustainability data.  Resources, particularly human resources and associated training costs, also pose a substantial impediment to implementing a sustainability reporting system. Related to this, both studies identify a significant sustainability knowledge gap within SMEs.  While an implicit understanding of the importance of environmental and social sustainability exists, many SME managers and employees have not received education on the necessary topics or metrics which must be disclosed, many of which are scientific or highly specialist in nature.   Finally, access to the necessary technology to manage and report sustainability information is limited. Appropriate data management and reporting systems have only recently become available, at a price point that typically only large companies can currently afford.  With these issues in mind, future problems are envisaged as large undertakings request sustainability data from SME customers and suppliers for ESRS reporting. Supports for SMEs Supports could help to alleviate the challenges facing SMEs over the coming years. Our research found that national or EU governmental grants, tax incentives or carbon credits may assist SMEs in overcoming cost-related challenges.  The accounting practitioners in our studies also recognised that education and training in sustainability reporting for SME management and relevant employees may need to be subsidised.  Beyond financial supports, participants in our study indicated that simplified disclosure requirements would be appropriate for SMEs.  Since we reported these opinions from our study, EFRAG has published an exposure draft of Voluntary SME (VSME) sustainability reporting standards for small non-listed enterprises.  The exposure draft presents a modular approach that SMEs can adopt on a phased basis.  Alongside simplified reporting requirements, another non-financial support deemed suitable by our respondents was the establishment of a state-sponsored or equivalent body to provide SMEs with consultancy, resources and tools for sustainability reporting.  The Department of Enterprise Trade and Employment’s recently established National Enterprise Hub represents a valuable opportunity to aid Irish SMEs in meeting sustainability data demands from larger companies. The path ahead for SMEs In the immediate term, large undertakings collecting sustainability data from smaller value chain parties can avail of transitional provisions when data is not available in the first two to three years of reporting.  Nonetheless, such reliefs are limited amidst a strong impetus across Europe to set and achieve Greenhouse Gas emissions’ reduction targets in line with the Paris Agreement.  Without data from value chain parties, measures of Scope 3 emissions reported by large undertakings under the climate change standard, ESRS E1 Climate Change, will be inaccurate and misleading.  At a time when greenwashing is considered almost akin to financial fraud by the general public, large undertakings may impose pressures on small enterprises to produce relevant measurements, even if regulators do not.  Failure to do so may cost SMEs valuable business relationships. Disclosures required under ESRS E4 Biodiversity and Ecosystems will also impact Irish SMEs in value chains in sectors such as agri-food. With the Circular Economy Act signed into Irish law in 2022, reporting on the circular economy under ESRS E5 Resource Use and Circular Economy may be deemed a material topic for many companies.  ESRS E5 requires extensive discloses on product lifecycles and may well also necessitate data collection from SME suppliers as well as from SME consumers.  In fact, it is important not to consider SMEs solely from a supplier perspective. In terms of social sustainability, ESRS S4 Consumers and End-Users sets out reporting requirements on consumers’ use of goods and services, with a particular emphasis on health and safety.  SMEs intermediating between large companies and end-consumers will also be required to report upstream to larger companies in value chains.  Additionally, ESRS S2 Workers in the Value Chain requires large undertakings to report on the composition of suppliers’ and customers’ workforces, as well as their working conditions. Sources of support Our research findings, coupled with an analysis of the ESRS requirements, clearly indicate that support for SMEs is vital to ensure they retain strong positions within value chains in Ireland and across the EU.  Prompt development of the VSME standards is essential. Without standardisation, SMEs face requests from multiple supply chain stakeholders to provide various types of data in different formats.  The introduction of the VSME standards in a manner that encompasses guidance to larger firms on best practice in data collection from smaller value chain partners may ease the reporting challenges for undertakings of all sizes.  The role the accounting profession will play is integral, as smaller entities will need sustainability reporting alongside traditional accounting services.  Chartered Accountants Ireland offers advice, education and representation for members in the area of sustainability reporting.  As these requirements becomes a priority for SMEs, the Institute will continue to provide support to Chartered Accountants navigating the nuances of this major development in accounting and reporting. Niamh Brennan is Michael MacCormac Professor of Management at University College Dublin Louise Gorman is Assistant Professor at Trinity College Dublin  Seán O’Reilly is Assistant Professor at University College Dublin

Oct 09, 2024
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The CSRD – more than just compliance?

Companies complying with the Corporate Sustainability Reporting Directive could see real business benefits, but the right mindset is crucial, write David Connolly and Alba Boshnjaku At its core the Corporate Sustainability Reporting Directive (CSRD) is a reporting requirement, but it should not be viewed merely as a compliance exercise.  Companies within the scope of the Directive will be reporting in a standardised way. This means that sustainability statements could become a powerful tool for communicating more effectively with their stakeholders.  The CSRD could potentially enable these companies to build trust, enhance their reputation and strengthen their accountability.  This scenario is not dissimilar to existing accounting standards, whereby the requirement for companies to report financial information to investors, lenders and other stakeholders, has facilitated better and more transparent comparability between businesses operating in the same industry. Ignoring sustainability is no longer an option. Companies must be aware of, and report on, the impacts they have on people and the environment, as well as the sustainability-related risks and opportunities they face in the short, medium and long term.  Therefore, the CSRD gives companies an opportunity to understand what matters to them and their stakeholders. It allows them to re-evaluate their business to gain a competitive edge and potentially attract new customers, talent and capital, thereby strengthening their strategic resilience.   C-suite executives should recognise the potential the CSRD has to help steer their organisation towards a future that balances profitability with environmental and social responsibility governed by robust control frameworks.  Before exploring the potential benefits, however, let’s first revisit some of the key concepts of the CSRD. Europe: leading the way in sustainability reporting  An estimated 40,000 companies based in the European Union will be brought within scope of the CSRD on a phased basis, starting this year and continuing through 2028. Reporting obligations apply to all large and listed companies, including small and medium sized entities (SMEs), except for listed micro-enterprises. The size category into which an undertaking or group falls is defined by establishing thresholds in relation to net turnover, gross value and average number of employees during the financial year.  A large undertaking or a large group will, for example, exceed at least two of the three following criteria: balance sheet totalling €25 million; net turnover of €50 million; an average of 250 employees.  These criteria, including the ones for SMEs, are established in the Accounting Directive at EU level and transposed in national legislation, which companies must consult to determine whether they are captured within the scope of the CSRD. Certain non-EU companies with listed subsidiaries or significant operations in the EU market are also required to report. Non-EU companies that fall under the scope of the CSRD need to have: Net turnover of more than €150 million in the EU for each of the last two consecutive financial years;  A large or listed EU subsidiary, or EU branch, generating over €40 million in the EU. The requirement for certain non-EU companies to report will impact some companies established in Northern Ireland where they meet the relevant threshold criteria.  Ireland transposed the CSRD in the Companies Act in July 2024. Companies should carefully consider the relevant provisions to determine whether they fall within scope. The first wave of companies (large, listed companies with over 500 employees) have already mobilised their teams to get disclosure ready as they will be publishing their sustainability statements in the first quarter of 2025 for the current financial year.  Companies within the scope of the Directive must prepare their sustainability statements in line with the European Sustainability Reporting Standards (ESRS). The first set of twelve sector-agnostic standards have been adopted by the European Commission and are directly applicable to all EU member states.  Sector-specific standards are under development and proportionate standards for listed small and medium-sized entities are also expected.  Two of the standards – ESRS 1 and ESRS 2 – are cross-cutting and mandatory for all. The remainder, structured under Environmental, Social and Governance (ESG) pillars, are subject to the outcome of the materiality assessment. Companies will need to undertake a double materiality assessment to decide what they will need to report on.  They will have to identify and assess the impacts of their business on people and the environment (impact materiality) and the risks and opportunities the outside world poses to their business (financial materiality).  As part of this process, companies will need to understand the business and regulatory environment in which they operate and map their value chain. The value chain is defined as the full range of activities, resources and relationships related to the undertaking’s business model and the external environment in which it operates.  The value chain encompasses the activities, resources and relationships the undertaking uses and relies on to create its products or services from conception to delivery, consumption and end-of-life.  As part of their double materiality risk assessment, companies will also need to identify material- and sustainability-related impacts, risks or opportunities relating to their value chain across time horizons.  Once they have identified their material matters, they will then need to identify the material disclosures and data points to be reported in the sustainability statement.  The sustainability statement will be subject to limited assurance, with added responsibilities for audit board committees. Companies will need to implement robust control frameworks that ensure high quality, reliable and comparable sustainability information. The CSRD: a competitive edge  The CSRD offers an opportunity for companies to gain a competitive edge, because it requires that they report, not only on the material impacts they have on people and the environment, but also on the potential risks and opportunities they face.  For example, supply chain disruptions caused by climate change or dependencies on scarce natural resources could lead to operational risks for companies, which could then take the form of credit risks for financial institutions. Similarly, negative impacts on employees or affected communities could lead to litigation and reputational damage. On the flipside, investment in green technology or innovation could generate profit and add shareholder value.  By treating double materiality assessments as a box-ticking exercise, companies will miss the opportunity to better understand their business and make more informed strategic decisions.  A thorough, data-driven assessment should take into consideration value chain relationships, sector and geographical exposures. Supported by stakeholder insights, this approach can help a company to identify the existing and anticipated effects of sustainability on its business model and strategy, including risks or opportunities related to its financial position, cash flow and access to capital.  The double materiality assessment is dynamic and requires companies to think and assess what is material, not only this year, but in the medium to long term – and how this will impact its wider business plans and strategy.  For C-Suite executives, the results of the double materiality assessment could yield insights that enhance efficiency, improve performance and help them set realistic targets, all while demonstrating their company’s commitment to transparency. Opportunity for increased internal accountability  Under the CSRD, companies will need to report on the processes they have in place to identify and manage material sustainability matters. The preparation process will trigger important internal questions that require owners and demand accountability.  Are our policies and actions effective? How are we tracking the effectiveness of our targets? Is our data accurate? How robust is our internal control framework? Is sustainability integrated into our risk management process? What is the role of the Board in sustainability reporting?  These are only a small fraction of the questions companies will need to ask themselves to ensure that their reports are CSRD-compliant. These are also questions that could help companies become efficient and foster a transparent and risk-focused culture.  Further, reported sustainability information, such as financial reporting, will need to be reliable, accurate and comparable. What gets measured gets done.  By having to define baselines and measure progress from year to year, companies must ensure that time and resources are adequately allocated to set the business up for success.  Communicating what matters to stay ahead  Companies will have to report on what is material and relevant to stakeholders and, with stakeholder expectations evolving, ongoing engagement will be key.  Investors, employees, customers, suppliers and the public at large are becoming more aware of the sustainability impacts of companies, so they can make informed, ethical decisions.  Some stakeholders will be more interested in the sustainability credentials of companies than others. While customers and employees will take account of sustainability when deciding where they spend their money or where they work, funders and regulators will have more than a passing interest.  In 2023, according to the latest World Investment Report, the value of sustainable investment products, both bond and equity, reached more than $7 trillion, up 20 per cent on the previous year. Both investors and lenders rely on accurate and transparent information to make informed decisions, meet their own reporting requirements, and mitigate greenwashing risks. C-suite executives should be prepared to answer their questions. Regulatory requirements are becoming increasingly onerous across industries and regulatory bodies worldwide are pushing for uniformity and transparency in sustainability reporting.  While climate change has dominated the regulatory agenda in recent years, other environmental and social issues are also coming into focus, including human rights and labour practices within supply chains.  As new requirements are introduced globally – for example, IFRS sustainability disclosures –businesses operating across jurisdictions will need to think about interoperability to ensure consistent messaging and compliance.  By understanding who the users of the sustainability information are, and what they need to know, companies have scope to build trustworthy relationships that could benefit their market position, value and access to capital, while also ensuring compliance. Cultivating a winning mindset With the right mindset, companies complying with the CSRD could see real business benefits. The CSRD is a function of the European Union’s wider Green Deal, designed to revitalise and transform the European economy by decoupling economic growth from resource use to ensure long-term sustainability.  This will require a focus on innovation, new technology, sustainable products and services, responsible and sustainable business practices, employment and supply chains.  So, while companies prepare for their first year of CSRD reporting, C-suite executives should be thinking about potential opportunities and risks, emerging material sustainability issues, and how they can use sustainability reporting to improve their strategic resilience and business value.  David Connolly, FCA, is a Director in EY Financial Services Climate Change and Sustainability Services (CCaSS) Alba Boshnjaku is a Manager in EY Financial Services CCaSS, specialising in ESG reporting

Oct 09, 2024
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Clarity needed to support compliance with CSRD in Irish law

Daniel O’Donovan considers the urgent need to resolve interpretative questions that have emerged following the transposition of the Corporate Sustainability Reporting Directive into Irish law The European Union (Corporate Sustainability Reporting) Regulations 2024 (the Regulations), also known as S.I. No. 336 of 2024, transposes the Corporate Sustainability Reporting Directive (CSRD) into Irish law.  This legislation marks a significant step in aligning Ireland’s corporate reporting framework with the EU’s broader sustainability goals, as outlined in the European Green Deal and the EU Action Plan for Financing Sustainable Growth. The Regulations were signed into law during the summer and came into effect on 6 July 2024. Their principal objective is to integrate the new corporate sustainability reporting obligations with Ireland’s existing financial reporting framework.  It is estimated that about 1,000 Irish companies will fall into the scope of these Regulations. The Regulations will be phased in over the next few years and will generally apply to public interest entities and companies qualifying as large under section 280H of Companies Act 2014.  Companies regulated by the Central Bank of Ireland qualify as large under this section, for example. It is welcome to see the implementing legislation. Ireland is among the first countries in the European Union to have implemented the CSRD, thus giving businesses in Ireland as much time as possible in the circumstances to assess its impact.   The impacted entities have been assessing the obligations in the legislation since it came into effect.  As with any implementation of such a complex European directive, some interpretative questions in relation to the implementing legislation have emerged. What follows are some of the key interpretative questions that have emerged to date. The definition of “Applicable Company” Several questions arise from the definition of “applicable company” in Section 1586 of the Regulations.  The definition refers to a provision contained in Part 6 of Companies Act 2014 to define its boundaries and, in particular, draws on the definition of a large company in section 280H of the Companies Act 2014.  This appears to have unintended consequences because an ineligible entity is a large company.  For example, certain small and medium entities and micro-entities that fall within the definition of an ineligible entity may be included in year two of reporting pursuant to section 1587(1)(b), reporting on 2025 sustainability information, rather than being in year three of reporting pursuant to section 1587(1)(c), reporting on 2026 sustainability information.  Exemptions for certain subsidiaries Section 1594 of the Regulations provides an exemption for certain subsidiaries. However, the exemption appears to be more restrictive than the equivalent in the CSRD, because it appears to be limited to Irish subsidiaries of Irish holding companies and excludes Irish subsidiaries of EU holding companies. See first table below.  In addition, it appears that all subsidiaries that are themselves large public-interest entities (listed and non-listed entities) are precluded from taking the exemption – whereas the CSRD only excludes large subsidiaries listed on an EU-regulated market. Exemptions for certain holding companies that are subsidiaries Section 1598 of the Regulations provides an exemption for holding companies that are themselves subsidiaries, where: a higher parent undertaking prepares a directors’ report under Part 6; or  a non-EU higher parent provides a group report either in accordance with the sustainability standards or in a manner recognised as equivalent to them.  However, as “third country” in the Regulations is defined to exclude Member States, it appears that there is no exemption for holding companies that are subsidiaries of an EU parent. See second table below.  Further, this exemption appears to be restricted further than the CSRD, because all large public-interest entities are prohibited from availing of the exemption, whereas the CSRD only excludes large public-interest entities that are listed on an EU-regulated market. Transitional provisions for consolidated reporting The Regulations permits, in section 1607, a subsidiarity of a third country undertaking to report on a consolidated basis on behalf of a group until 2030 (artificial consolidation).  However, it appears that this provision only applies to financial years commencing on or after 1 January 2028 by virtue of its placement in Chapter 3 of the Regulations.  As such, companies that wish to avail of this provision may be unable to do so during a significant portion of the transitional period. Supporting sustainability ambitions The EU and Ireland’s shared ambition to lead in sustainability reporting, transitioning to a sustainable economy and economic model, it comes with an ambitious timeline.  For example, the period between the effective date of the Regulations and the end of the first period on which year one companies will report on sustainability, in accordance with the European Sustainability Reporting Standards, is just six months.  We believe that a stable and clear legal framework is essential for businesses to thrive in Ireland.  Ensuring that outstanding CSRD transposition matters are resolved promptly will help maintain Ireland’s strong reputation as an excellent place to do business.  It is in the public interest to provide companies with the clarity they need to comply with new laws effectively. We welcome The European Union (Corporate Sustainability Reporting)(No.2) Regulations 2024 (S.I. No. 498 of 2024) signed into law on 1 October. S.I. 498 of 2024 resolves some of the interpretative questions set out above, aligning: The exemption for subsidiaries that are themselves large public-interest entities with the CSRD, which only excludes large subsidiaries listed on an EU-regulated market from the exemption; The exemption for holding companies that are subsidiaries, with the CSRD, which only excludes large public-interest entities listed on an EU-regulated market from the exemption; and The commencement of the transitional provision regarding artificial consolidation with the CSRD, now available immediately. Significant questions remain to be resolved, however.  Accountants are committed to meeting the new sustainability reporting requirements, but we recognise that implementing the CSRD into Irish law is complex and that the necessary resources and expertise to prepare detailed and complex reports, and to obtain assurance on those reports, are still developing in the Irish market. By working together, we can ensure businesses have the support they need to meet these sustainability ambitions, aligning with the CSRD’s goals for 2024 and beyond. Time is running short. As the clock strikes the 11th hour, companies need to have clarity on the interpretative questions discussed in this article as a matter of urgency. Continued imminent engagement between the legislators and the legislates is critical to resolving these matters and ensuring our sustainability reporting ambitions are successfully achieved. Daniel O’Donovan is a Partner with KPMG and leads the firm’s Audit and Assurance Methodology Team

Oct 09, 2024
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Management
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SMEs: the key to gauging the gender pay gap

Ireland’s true gender pay gap will only emerge when SMEs begin reporting and now is the time for this crucial business cohort to start preparing, writes Padraic Hayes Dr BJ Fogg, a renowned behaviour scientist at Stanford University, postulates in his book Tiny Habits that small but frequent incremental changes are often the safest and most effective approach to delivering extraordinary results. One hopes this hypothesis will ring true for the SME sector when it comes to preparing for gender pay gap reporting.  The first gender pay gap reporting obligation came into force in 2022 for companies with over 250 employees.  This will extend to SMEs with over 150 employees next year and even further in 2025 when companies with over 50 employees will also be obligated to commence reporting their first gender pay gap. These milestones are very significant when you consider that, according to the most recent Central Statistics Office figures, SMEs with fewer than 250 employees make up 99.8 percent of active enterprises in Ireland and employ 68.4 percent of the workforce. Gender pay gap reporting thus far has only covered the other one percent of Irish enterprises. We can therefore infer that we have yet to see Ireland’s true gender pay gap figure.  As a result, SMEs are going to be in the full glare of both industry and the media once their first reports are published in 2024. This could be Ireland’s de-facto ‘silver bullet’ solution to truly move the needle on the gender pay gap.  What is the gender pay gap? There continues to be a lot of confusion surrounding what exactly the gender pay gap is. It is defined as the difference between the average hourly wage of men and women in the workplace.  The gender pay gap is an assessment of the gender representation of men and women at each level of an organisation characterised by the overall difference in their pay.  For example, how many males and females are in the top quartile of an organisation’s earners versus the lowest quartile – i.e. how well-represented are females by comparison to males?  It is important that the gender pay gap is not confused with “equal pay for equal work”, which is already a legal obligation for employers in Ireland.  The gender pay gap can be caused by a variety of factors such as unconscious bias, company policies or the division of caring responsibilities in the home. According to the United Nations, women worldwide earn 77 cents for every dollar earned by men.  This suggests that over their lifetime, women’s earning potential is significantly less, a staggering realisation in the modern age.  In Ireland, the gap stands at 11.3 percent, which is slightly more favourable than the EU average of 13 percent (Eurostat). This still equates to about one month a year when a woman essentially works for free. It is important to point out also that this is not just a ‘female’ issue, but an economic issue that affects us all. The reduced earning potential for females affects the overall household income.  It is common for women to find it more cost-effective to stay at home to offset childcare costs, for example, and this places downward pressure on household income in an escalating cost-of-living crisis, and thus the cycle repeats.  For this reason alone, we should all feel motivated to proactively figure out the root cause of this socio-economic issue and break the chain once and for all.  Who needs to report and when? Currently, the obligation to report remains solely on organisations with over 250 employees. The first gender pay gap reports were published in December 2022 and the second are due in December 2023. Next year, however, the obligation will extend to all employers with more than 150 employees. The employers will pick a ‘snapshot’ date in June 2024 and report their gender pay gap metrics for the previous 12 months.  Crucially, the employer will also be required to provide the underlying reason why the gender pay gap exists and, more importantly, what actions they are planning to take to rectify it.  Furthermore, they will need to publicly publish their report either on their website or on the government portal planned for introduction later this year.  As SMEs look ahead to this new landmark reporting requirement, they will be taking the steps needed to ensure they meet these first-time obligations. Here is my advice on the steps you should take and the pitfalls you will need to avoid. Challenges for SMEs  Data collection from disparate systems The gender pay gap report will require inputs from a range of data sources. It is rare for any organisation, no matter what size, to be in a position to extract the data they need from a single source. Finance, payroll and HR systems are disparate in nature and contain data of differing quality. This challenge is amplified where spreadsheets persist in place of systems as the book of record. It can be time-consuming and challenging for non-technical users to extract, organise combine and compare this data and significant effort may be required to cleanse existing datasets in preparation for reporting.  Resourcing The amount of time and effort required to complete the gender pay gap report will be significant – it should not be underestimated. For SMEs, this could prove especially challenging because they are more likely to need to divert attention away from regular activities in situations where there is no dedicated reporting team. This may be especially challenging for the leadership team, who will be required to input into the report and sign it off. All of this increases the risk of introducing ‘bias’, akin to someone correcting their own homework so to speak, which you should avoid at all costs. Availability of expertise  Smaller organisations are highly unlikely to have access to the broad range of expertise needed to complete the gender pay gap report. To create a detailed report requires independent expert skills from a range of disciplines such as data analytics, visualisation and organisational change specialists.  Navigating legislative nuances The guidance in relation to how to report has evolved since the initial introduction of gender pay gap reporting. While many issues have been ironed out through the FAQs available on the government website (gov.ie), there are still nuances in the preparation of the report. My advice is to carefully study the available guidance to ensure you are compliant.  Comparing results While many organisations will be tempted to compare and contrast how they ‘measure up’ against their peers, it is worth bearing in mind that there is no right or wrong answer per se. The gender pay gap is a broad, multifaceted and pervasive issue that goes far beyond the numbers. Focus instead on assessing and improving the aspects of your own company practices, policies and culture that influence the gender pay gap – and your gender pay gap result will follow.  Best practice recommendations for SMEs Fail to prepare, prepare to fail It is important to be prepared for the questions you may get from your employees once your gender pay gap report is published. It is critical that you communicate the result of the report and ensure they fully understand what the data is saying and, more importantly, what it is not saying. It is very common for people to misunderstand the metrics contained in the gender pay gap report. As they say, good news travels fast, but bad news travels twice as fast – lead the narrative. Action planning In your final report, you need to provide a list of actions that you are going to follow to improve your gender pay gap in the 12 months ahead. Set goals for the next year in your report using the SMART (Specific, Measurable, Attainable, Relevant and Time-Bound) technique. It is worth noting again here the importance of focusing on your company practices, policies and culture – and take advantage of the opportunity for a yearly reset. Remember, “what gets measured gets done”.   Get help early on I cannot overstate this enough: get help early on. The requirements of your gender pay gap report may look straightforward at the outset, but do not be fooled.  Preparing such a report can be a time-consuming and intricate process requiring expertise in both data analytics and visualisation and organisational psychology, which together provide a complete assessment.  Moreover, significant input from departments and teams across the organisation will also be needed – typically human resources, finance and payroll, and senior management.  Final word Numerous organisations have come to us seeking help having realised just how complex preparing a gender pay gap report can be.  The best approach is to view it as an in-depth reporting process akin to an annual audit of your workforce analytics, practices, policies and culture.  Padraic Hayes is an Associate Director on Grant Thornton’s digital transformation advisory team and heads the firm’s gender pay gap service offering

Oct 06, 2023
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Insolvency
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SCARP – a vital lifeline for SMEs in distress

In the face of rising business costs, practitioners must ensure that more SMEs avail of the Small Company Administrative Rescue Process in the months ahead, writes Graham Kenny In 1990, the Iraqi dictator Saddam Hussein led a ground force invasion into Kuwait. This war was to serve as an unlikely catalyst for a radical overhaul of corporate restructuring in Ireland. It set in train a clear evolutionary lineage to the Small Company Administrative Rescue Process (SCARP) recently enacted under the Companies (Rescue Process for Small and Micro Companies) Act 2021. To understand this evolution, it is important to consider what actually happened in 1990. The economic effects of the invasion of Kuwait had immediate and dire consequences for Ireland.  Up to 70 percent of Larry Goodman’s Anglo Irish Beef Group exports were sent to Iraq and its customers went into immediate default.   Faced with the collapse of one of the largest employers in the State, the then Taoiseach Charles J. Haughey hastily recalled the Dáil from its summer recess and passed the Companies (Amendment) Act in August 1990.  This piece of legislation introduced examinership into the Irish statute books and, for the first time, permitted protection from creditors and the subsequent write-off of company debts.  Over the past two decades, I have been involved in many of the seminal cases of examinership across a range of sectors, including the first Supreme Court hearing of an examinership (In Re Gallium Limited [2009] IESC 2009). My experience is that examinership has served as an essential corporate restructuring tool, saving thousands of jobs through schemes of arrangement. Often, however, the costs associated with such restructuring have been cited as a disincentive for smaller companies to use the process. As a result, examinership has notionally remained the preserve of larger companies. The genesis of SCARP In February 2020, COVID-19 reached Ireland and had a devastating effect on many small businesses. In response to the threat of another financial crisis, SCARP came into force in December 2021.  This new Act is based largely on the examinership model, but notably does not require an application to court for its commencement.  Like examinership, the idea behind SCARP was to give companies breathing space from their creditors in order to implement a restructuring plan, which ordinarily included the write-off of a portion of creditors’ debts.  Before discussing the necessary role SCARP will have to play in the coming months, it is important to first undertake a brief overview of the salient features of this new corporate restructuring tool.  Who can apply? The Companies (Rescue Process for Small and Micro Companies) Act 2021 is aimed at protecting ‘small’ and ‘micro’ companies.  Small companies are defined as having an annual turnover of up to €12 million, a balance sheet of up to €6 million and up to 50 employees.  Micro companies are defined as having a turnover of up to €700,000, a balance sheet not exceeding €350,000 and up to 10 employees.  How does a company prepare for SCARP? The first step a company should take in considering the SCARP process is that the directors should prepare a statement of affairs in accordance with section 558B(4) of the Act.  The statement of affairs is accompanied by a statutory declaration that is then given to a Process Advisor. What is a Process Advisor? The Process Advisor is ordinarily an experienced insolvency practitioner who will attempt to restructure the company’s debts. It may be noted that the company’s auditor or accountant cannot act as its Process Advisor.  The Process Advisor will review the company’s statement of affairs and other financial information (as set out in Section 558C(4)) and then outline their determination as to whether the company has a “reasonable prospect of survival”.  It is important to note that a Process Advisor does not take executive powers and that the board of the company maintains full control. The Process Advisor’s fees are subject to super-preferential status over all other creditor claims. How does the rescue process commence? If the Process Advisor determines that the company does have a reasonable prospect of survival, then they will confirm this in writing to the directors of the company.  Section 558D(2) sets out that, within seven days of receipt of such confirmation, the directors shall convene a board meeting to consider whether the appointment of a Process Advisor is appropriate.  Section 558K compels the Process Advisor to notify employees, creditors and the Revenue Commissioners within five days of their appointment.  Section 558O states that creditors must acknowledge receipt of such notice within seven days and further information regarding their claim within 14 days. Can a creditor opt out of the rescue process? Section 558L provides a list of potential excludable debts. This list includes the Revenue Commissioners.  Notably, the holders of such excludable debts have 14 days to notify the Process Advisor of their intention to be excluded from the rescue plan. Such creditors must give reasons for their decision to opt out.  From anecdotal evidence, it appears that the Revenue Commissioners is largely supportive of the process and generally determined to opt in. What is a Rescue Plan? Section 558Q sets out the matters that must be incorporated into any Rescue Plan. These include: a statement of affairs; the likely outcome for creditors on a winding-up or receivership; the effect of the plan on each creditor; the reasons why the plan is fair and equitable; and  details of the Process Advisor’s remuneration. How is the Rescue Plan approved? Section 558T puts the onus on the Process Advisor to call a meeting of members and creditors as soon as is practicable after preparing the Rescue Plan.  Section 558T(4) requires that such meetings shall be fixed for a date no later than 49 days after the date on which the Process Advisor was appointed.  It is important to note that creditors must be give seven days’ notice of such meetings, so in reality the meetings must be convened no later than day 42. Section 558Y(4) sets out that a Rescue Plan shall be deemed to have been accepted by a meeting of members or creditors when 60 percent in number, representing a majority in value of the claims represented at that meeting, have voted in favour. Section 558Y(5) sets out that the Rescue Plan shall be binding on members and creditors where at least one class of impaired creditor accepts the plan and, furthermore, that 21 days have passed from the date of filing of the notice of approval in the relevant court office and no objection is filed in accordance with section 558ZC. Section 558Z requires that creditors are given notice of such approval within 48 hours. It is important to note that under section 558ZB, the Rescue Plan will not become binding on members and creditors until 21 days have elapsed from the filing of the notice of approval. What does it mean for a Process Advisor to “certify” certain liabilities?  Like examinership, the Process Advisor is given the power under section 558ZAA to certify company liabilities.  This certification means that such liabilities are treated as expenses of the Rescue Plan and therefore give such creditors a preferential status.  This provision is often used as an incentive to encourage creditors to continue to trade with the company while a Rescue Plan is formulated.  The future of SCARP Corporate restructuring requires a fine balance between competing corporate interests, employee rights and duties to creditors.  An unfortunate consequence of this complexity is that the rules governing such restructuring, whether under examinership or SCARP, can be convoluted and sometimes confusing.  But this fact alone should not deter practitioners from seeking appropriate advice and permitting struggling companies from reaping the benefits of this multifaceted legislation.  The low number of companies availing of SCARP thus far is bewildering. I would suggest that one of the main reasons for this sluggish start is simply the unfamiliarity of practitioners with the process.  The well-worn path of liquidation is regrettably often proffered by advisors before a full consideration of SCARP (or indeed examinership) is properly undertaken.  I think the main reason SCARP has not taken hold, however, is down to the extensive supports and debt warehousing that has been offered by the State.  In my experience, entrepreneurial directors live in the moment and dream of a brighter future. Directors can be reluctant to focus on the dark clouds on the horizon and are often instead consumed with an arguably unrealistic optimism. A report published by the Revenue Commissioners in March 2023 highlighted that 13,000 businesses have been expelled from the tax warehousing scheme for non-compliance and are now facing a 10 percent penalty charge.  Perhaps more worryingly, the same report shows that about 63,000 businesses still had a combined €2.2 billion tax debt in the warehousing scheme. This report also revealed that such debts owed by businesses in the scheme ranged from 19,000 businesses owing less than €100 to 6,400 owing more than €50,000. Jobs and livelihoods at stake Behind all of these abstract statistics, it is important to remember that these businesses employ 400,000 people who, in turn, have families to support.  In the face of both cost-of-living and housing crises, it appears inevitable that any rise in corporate insolvency rates would have a devastating impact on countless families within the next two years.  In light of these stark numbers, it is incumbent on practitioners across Ireland to seek the appropriate advice from corporate restructuring specialists when consulted by companies in this quagmire of historical debt.  The sooner this advice is sought and considered, the more realistic the company’s chances of survival will be. SCARP offers a vital lifeline to many struggling companies, and in the coming months, it needs to become a standard go-to option for practitioners and  their clients.  Graham Kenny is a Partner in the Dispute Resolution and Litigation Practice Group at Eversheds-Sutherland LLP

Jun 02, 2023
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Management
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Examinership and the Summary Rescue Process

Neil Hughes outlines the survival options for small- and medium-sized businesses as the ‘next normal’ approaches. In general, 2018 and 2019 were good years for Irish business. Many companies entered 2020 with stronger balance sheets, relatively low debt levels, aggressive growth targets, and optimism – particularly in the small- and medium-sized enterprise (SME) sector. By Q2 2020, however, firefighting due to COVID-19 restrictions quickly soaked up all available management time and resources. Growth strategies were shelved, and survival was prioritised. Government supports were immediately made available to companies severely affected by the pandemic. Figures released by Revenue in February 2021 show that the State paid out a total of €9.3 billion in 2020 between the Pandemic Unemployment Payment (€5.1 billion), Temporary Wage Subsidy Scheme (€2.8 billion) and the Employment Wage Subsidy Scheme (€1.4 billion). Seventy thousand companies have availed of the Revenue Commissioners’ Debt Warehousing Scheme, at a total cost of around €1.9 billion. These supports, along with the forbearance provided by financial institutions in Ireland, have helped prevent a tsunami of corporate insolvencies. The concern, however, is if post-pandemic those companies that ultimately need help the most will not reach out and avail of the supports and processes available. Overcoming the stigma It is regrettable that, historically at least, the use of formal corporate insolvency mechanisms to restructure struggling businesses has been viewed quite negatively by the Irish business community. The inference is that such businesses were somehow mismanaged when, in reality, this was often not the case. Companies can fall into financial difficulty for various reasons. Factors outside the control of company directors can necessitate a formal restructure rather than the terminal alternative of liquidation. Now, in the middle of a pandemic, a previously successful business operator, through no fault of their own, can find themselves saddled with an unsustainable level of debt and risk becoming insolvent. While government support measures were necessary to prevent widespread corporate failures and potential social unrest, for many companies, these actions may have simply delayed the inevitable and kicked the can further down the road. In most corporate insolvencies, there is an expected level of pressure for money that the company does not have, which precipitates a formal restructure. This pressure has been temporarily released, but the creditor strain will inevitably build again when trading resumes. ‘Zombie’ companies Low insolvency numbers for 2020 are therefore misleading. There is anecdotal evidence to suggest that several companies have ceased trading, have no intention of reopening and, in some instances, have handed the keys of their premises back to landlords. However, these ‘zombie’ companies are not included in the insolvency statistics, as they continue to avail of government supports and will be wound up whenever the supports end. While helpful, the subsidies and supports do not cover the entire running costs of a business, and many companies continue to rack up debt as their doors remain closed. These debts may seem insurmountable, but there is hope. The Great Recession vs the COVID-19 crisis This current recession is in stark contrast to the ‘Great Recession’ that resulted from the banking crisis of 2008. Back then, there was a systemic lack of liquidity in the market due to the collapse of Ireland’s banking sector, which left SMEs with little or no access to funding. This time, there are several re-capitalisation options with banks (including the new challenger banks) in a position to provide funding, especially through the Strategic Banking Corporation of Ireland (SBCI) Loan Scheme. Many private equity funds are also willing and ready to invest in Irish businesses. After the pandemic All the while, the Government can borrow at negative interest rates to stimulate growth and recovery. With the vaccine roll-out, we are starting to see the light at the end of the tunnel. This begs the question: what will happen when the pandemic is over? There are several key points to note: Consumer behaviour: it is reasonable to assume that a large portion of the population will revert to normal. This could generate a domestic economy similar to the rejuvenation that followed the Spanish Flu pandemic of 1918 and the end of the First World War. There is certainly pent-up demand and savings (deposits held in Irish financial institutions were at an all-time high of €124 billion in late 2020). Unfortunately, a portion of society will change their consumer habits forever due to COVID-19, which will have a detrimental effect on businesses that find themselves on the wrong side of history and unable to survive the recovery. Government action: how the Government reacts will have lasting repercussions. Difficult and unpopular decisions are likely required to pay for the ever-rising cost of the pandemic and its restrictions. Such choices may result in an increase in direct and/or indirect taxes, with less disposable income circulating in the economy. The UK Government has already made moves in this direction with its 2021 budget. The Revenue Commissioners: Revenue’s intended course of action is currently unclear in relation to clawing back the €1.9 billion of tax that has been warehoused or how aggressively it will pursue Irish companies for current tax debt after the pandemic is over. Early indicators are that Revenue will revert to a business-as-usual strategy sooner rather than later. Banks and other financial lenders: the attitude of Irish banks and financial institutions to non-performing loans remains to be seen. Banks have been accommodating to date and worked with, rather than against, borrowers – a criticism levelled against them in the wake of the 2008 banking collapse. Personal guarantees provided by directors to financial institutions to acquire corporate debt, particularly in the SME sector, will have a significant bearing on successful corporate restructuring options. The attitude of landlords: landlords in Ireland are a broad church, ranging from those with small, family-operated single units to large, multi-unit institutional landlords or pension funds. Landlord-tenant collaboration is essential for stable retail and hospitality sectors, and in the main, rent deferrals were a foregone conclusion during the various lockdown stages of the pandemic. However, these rent deferrals still have to be dealt with. The attitude of general trade creditors: in certain instances, smaller trade creditors in terms of value have been the most aggressive in debt collection and putting pressure on businesses to repay debts as soon as their doors reopen. Companies with healthy balance sheets and those that managed their cash flow prudently will be the ones to come out the other side of this pandemic when the government supports subside. Businesses will need time to: Assess the post-pandemic consumer demand for their products and services;  Assess their reasonable future cash flow projections; Agree on payment arrangements for old and new debt; and Make an honest assessment of whether they will be able to trade their way through the recovery phase. For those who have been worst hit, however, all is not lost. Ireland has some of the most robust restructuring mechanisms in the world, with low barriers to entry and very high success rates. The fallout can be mitigated if company directors take appropriate steps. Restructuring options When it comes to successful restructuring, being proactive remains the key advice from insolvency professionals. Too often, businesses sleepwalk into a crisis. Options narrow if there has been a consistent and pronounced erosion of the balance sheet. Those who act fast and engage with experts have the best chance of survival. 1. Examinership There are various restructuring options available, but examinership is currently most suitable for rescuing insolvent SMEs. The overarching purpose of examinership is to save otherwise viable enterprises from closure, thereby saving employees’ jobs. In 2019, liquidations accounted for 70% of the total number of corporate insolvencies in Ireland, and examinership only accounted for 2% of the total. It is plain that a higher portion of those liquidations could have been prevented, jobs saved, and value preserved if an alternative restructuring option like examinership had been taken. There are only two statutory criteria for a company to be suitable for examinership: 1. It must be either balance sheet insolvent or cash flow insolvent. It cannot pay debts as and when they fall due; and It must have a reasonable prospect of survival.  The rationale for examinership in a post-pandemic environment is therefore clear. Companies saddled with debt will likely meet the insolvency requirement, and historically profitable companies that have become insolvent due to the closures associated with the pandemic will pass the ‘reasonable prospect of survival’ test. Once appointed, the examiner must formulate a scheme of arrangement, which is typically facilitated by new investment or fresh borrowings. The scheme will usually lead to creditors being compromised and the company emerging from the process solvent and trading as normal. 2. The Summary Rescue Process One of the main criticisms levelled at examinership is the perceived high level of legal costs required to bring a company successfully through the process. To address this perceived issue, in July 2020, An Tánaiste, Leo Varadkar TD, wrote to the Company Law Review Group (CLRG) requesting that it examine the issue of rescue for small companies and make recommendations as to how such a process might be designed. The CLRG’s reports in October 2020 recommended the ‘Summary Rescue Process’. It would utilise the key aspects of the examinership process and be tailor-made for restructuring small and micro companies (fulfilling two of the following three criteria: annual turnover of up to €12 million, a balance sheet of up to €6 million, and less than 50 employees). Such companies constitute 98% of Ireland’s corporates and employ in the region of 788,000 people. A public consultation process is now underway to finetune the legislation. Here is what we know so far about the Summary Rescue Process: It will be commenced by director resolution rather than court application. It will be shorter than examinership (50-70 days has been suggested). A registered insolvency practitioner will oversee the process. Cross-class cramdown of debts will be possible, which binds creditors to a restructuring plan once it is considered fair and equitable. It will not be necessary to approach the court for approval unless there are specific creditor objections. Safeguards will be put in place to guard against irresponsible and dishonest director behaviour. A proposed rescue plan and scheme will be presented to the company’s creditors, who will vote on the resolutions. A simple majority will be required to approve the scheme. The Summary Rescue Process will be a huge step forward. The process of court liquidation has been systematically removed from the court system in recent years in favour of voluntary liquidations. This new rescue process will bring a similar approach to formal restructuring, allowing SMEs greater access to a low-cost restructuring option akin to a voluntary examinership. It will give more hope to companies adversely affected financially by the pandemic that options exist for their survival. Neil Hughes FCA is Managing Partner at Baker Tilly in Ireland and author of A Practical Guide to Examinership, published by Chartered Accountants Ireland.

Mar 26, 2021
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Accounting
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Financial literacy and the role of accountants

The launch of a consultation on a new national financial literacy strategy for Ireland is welcome and accountants will be key as gatekeepers of financial knowledge, writes John Nolan Making financial decisions and navigating the world of finance is an unavoidable part of life, from setting up your first savings account to planning for your retirement and everything in between.  However, increasing numbers of people in society struggle with such tasks and these difficulties are further exacerbated by the ongoing digitisation of financial services.  ‘Financial literacy’ is the ability to engage with the financial system and to effectively manage your finances. While the concept is hardly new, it has received notable academic and political attention in the years since the onset of the global financial crisis in 2008.  That period was an inflection point that highlighted the financial struggles of many households and small businesses and the implications for the broader economy and society. o Since then, the financial experiences of many during the recent COVID-19 pandemic and the current period of high inflation and interest rates have heightened the focus on this issue at a government policy level. Low levels of financial literacy Research by the Organisation for Economic Co-operation and Development (OECD) has shown that financial literacy levels are worryingly low across the world. In the EU, a 2023 survey found that just 18 percent of respondents have high levels of financial literacy, with Ireland only marginally better at 19 percent.  These findings are a big concern for public policymakers because financial literacy improves our financial resilience and ability to deal with financial shocks, it increases our financial wellbeing and it contributes to the stability of the financial sector overall.  European Commissioner Mairead McGuinness is leading a policy initiative focused on financial literacy and encouraging European Union (EU) member states to develop national strategies aimed at ensuring a coordinated approach to financial education.  This comes on the back of over a decade of work by the OECD International Network on Financial Education (OECD/INFE) in establishing best practice guides for the development of national strategies and the measurement of financial literacy within populations.  A national financial literacy strategy In Ireland, Minister Michael McGrath recently announced plans by the Department of Finance to develop a national financial literacy strategy.  This is a welcome move and one that a variety of stakeholders have been calling for, including the Central Bank of Ireland, Social Justice Ireland and the Competition and Consumer Protection Commission (CCPC).  The new strategy will help to ensure Ireland is compliant with the G20/OECD High-Level Principles on Financial Consumer Protection and the OECD Recommendation on Financial Literacy.  We have been behind the curve in this area, with the Retail Banking Review published in 2022 by the Department of Finance noting that Ireland is one of just four EU member states that does not have a national strategy for financial literacy.  While some important studies and reports have been undertaken in an Irish context – by the National Adult Literacy Agency (NALA) and by the CCPC, for example – there is no coordinated national approach to financial literacy.  There remains a need for an overall framework for financial education initiatives, funding for research to develop baseline measures for financial literacy across the population and to support evidenced-based interventions, and a clear set of objectives to guide stakeholders. The decision to engage with stakeholders to develop a national strategy is perhaps the easiest step to take. The devil will be very much in the detail as we progress to the substance of what such a strategy might entail and where the focus and investment should go.  Three issues illustrate this complexity – and this is by no means an exhaustive list: Where to start? First, one critical decision is which groups in society should be targeted initially to ensure the most effective use of resources and that true value is derived from financial education initiatives.  The G20/INFE High-Level Principles suggest that focusing on specific (or vulnerable) groups for financial literacy interventions makes sense for many countries.  Research by both the OECD and EU has shown that there are some cohorts within populations that tend to have consistently lower financial literacy levels.  The recent launch by Commissioner McGuinness of a joint EU/OECD-INFE financial competence framework for children and young people highlights one relevant group that might be a natural starting point for any national strategy.  A focus on young people’s financial literacy – and embedding this in education systems to facilitate a culture of financial conversation early in life – seems logical.  Research has identified numerous other groups with consistently lower levels of financial literacy, including the elderly, low-income households, migrants and those with low digital literacy, for whom financial literacy interventions would be particularly beneficial.  One additional group is of particular relevance to accountants and it is under-researched in the context of financial literacy – entrepreneurs and small business owners.  The transition from the personal to the entrepreneurial in the context of financial literacy is significant.  The additional scale, responsibilities and complexity of the financial landscape for small businesses can overwhelm their owners.  The absence of financial literacy in the indigenous business sector has the potential to be just as damaging to the economy as a lack of personal finance skills among the general population. Financial literacy as a social practice Financial literacy is a social, rather than just a technical, practice. It is a social and human-centred practice in the sense that it is heavily influenced by peers, family and social institutions.  It is a much more complex issue than a mere ‘skill gap’ to be solved through financial education interventions.  Taboos surrounding personal finances, and discussion on the topic, can have a significant impact on how people view its importance and the need to upskill in the first place.  An appreciation of the complexity of financial literacy and how it fits within the social and cultural fabric of communities will be a serious consideration for any new national strategy. Clear concepts and terminology Discussing financial literacy and developing a strategy is further complicated by how its key concepts and terms have changed over the past two decades.  For example, the UK’s national strategies have evolved from a Financial Capability Strategy for the UK in 2015, which was replaced by the UK Strategy for Financial Wellbeing in 2020.  While traditionally associated solely with knowledge, ‘financial literacy’ has evolved to encapsulate skills, behaviours and attitudes, which is closely aligned to the concept of ‘financial capability’. The terms are now often used interchangeably.  The table below presents some of the key terms currently used in this area, and how they have been defined.  The overarching goal of achieving ‘financial wellbeing’ is itself difficult to define and will mean different things to different people.  Thus, in the context of any new national strategy, it will be important to clearly articulate the objectives and what is meant by the terminology that is used. Finance is a sector whose jargon can overwhelm people, so it will be essential that any new strategy avoids this. Public interest The evolving policy focus on financial literacy should be of interest to accountants. A commitment to the public interest is one of the hallmarks of the profession.  Given the emerging evidence of the impact that poor financial literacy has on wealth inequality, financial exclusion and other adverse financial outcomes, addressing this issue is clearly in the public interest.  Accountants occupy a crucial position in society as gatekeepers of financial knowledge. We have a responsibility to utilise this position for good, both at an individual level in our interactions with clients, colleagues and the community and at a collective level in terms of support for the new national financial literacy strategy.  This is not just a policy for individuals and households; it is also for entrepreneurs and micro, small and medium-sized enterprises. Accountants, as trusted business advisors with financial expertise, have a key role to play in shaping and applying this policy. Financial literacy is about our relationship with money, which is, whether people like it or not, a core part of society. Promoting a culture of positive engagement with the financial sector and discussing finance from an early age is vital for a functioning economy and society.  Individuals and businesses rely heavily on financial services every day; at a minimum they should be confident and capable of accessing and engaging with what they need.  While financial literacy is likely something most accountants take for granted, for many in society it is a significant challenge. This is something we will be hearing a lot more about from a policy perspective in the coming months and years. Dr John Nolan, ACA, is a lecturer in corporate finance and financial reporting at the University of Galway

Dec 06, 2023
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The year ahead for the profession

From education and the next generation, advances in technology and the evolving role of the accountant, to business and the economy, what can we expect in the New Year? As we look ahead to the New Year and the opportunities and challenges it will bring for society and the economy, our District Society Chairs give us their take on what lies ahead for the profession in 2024. Brendan Brophy, Chair of the Young Professionals Committee The accountancy profession is poised for transformative developments in 2024 and young professionals will find themselves at the forefront of this dynamic landscape.  The coming year promises a paradigm shift in the role of accountants in business.  Beyond the traditional domains of financial reporting and compliance, there is a growing emphasis on strategic financial management. Young professionals are expected, not only to interpret financial data, but also leverage their insights to drive business decisions. Our ability to communicate financial information in a clear and compelling manner is becoming as crucial as the technical expertise itself. In Ireland, where the business ecosystem is marked by resilience and innovation, the role of accountants is expanding to encompass a broader spectrum of advisory services.  Accountants are increasingly being called upon to provide strategic insights that guide organisations through economic uncertainties and market fluctuations. The expectation is for accountants to be proactive contributors to organisational growth, acting as trusted advisors who understand the intricacies of both finance and business operations. Advancements in technology continue to reshape the profession and we can expect to see this trend accelerate in the year ahead.  Automation and artificial intelligence are streamlining routine tasks, allowing accountants to focus on higher-value activities such as analysis, interpretation and strategic planning. As a young professional, staying abreast of these technological developments and embracing them as tools for efficiency will be paramount. Morna Canty Ahern, Chair, Chartered Accountants Ireland Midwest Society An accountant will always have a seat at the table and, for some, the shift in the traditional role of accountant is the ghost of Christmas past. Currently, we find ourselves as a profession in high demand but facing a lack of supply.  The many routes to qualify as an accountant – along with the Government’s renewed focus on apprenticeships – means that our sector can now actively address the skill shortage we face and meet the demand for high-quality professionals through education.  Education is the ‘gateway to the future’ in building the Chartered brand, but it does not end with our qualification. Education is a cycle, a continuous process of learning and acquiring knowledge pre- and post-qualification. Chartered Accountants are always seeking opportunities to learn and our education must emphasise and support the reality of our role today, and not the traditional role of the ghost of Christmas past. Through technology, our role now is to provide leadership in business, rather than simply counting costs.  Despite this, fewer young people are choosing a career in accountancy and this is because the role of the modern accountant is not accurately portrayed to students at second and third level.  We welcome the commitment by the Department of Education to review the second-level accounting syllabus.  A focus on promoting the true working life of today’s accountant through educational campaigns by our members will help the next generation to visualise a future in our profession. Becoming an accountant is a commitment to lifelong learning and, as we approach 2024, we need to develop educational access programmes in partnership with third-level institutions so we can engage and encourage younger generations to become accountants.  Our members are natural mentors, often contributing at many levels to their local economy and offering support to their communities.  A renewed focus in 2024 on engagement with the Institute and our District Societies will help to deepen these relationships and strengthen the value attributed to the role of the Chartered Accountant in communities around the country.  As a profession, we are not just ‘about numbers’; our unique ability to strategically shape organisations through trusted advice and guidance contributes far beyond the balance sheet. James Fox, Chair, Chartered Accountants Ireland Cork Society It has been great to see the theme of #NextGen at the forefront of Chartered Accountants Ireland in 2023, building on previous discussions with national policymakers regarding the potential changes required to the Leaving Cert accounting syllabus. I see this process as being a key driver for promoting the profession, keeping up to date with advances in technology and encouraging younger generations to pursue a career in accountancy. The future of accountancy as a career is a hot topic and one I expect to see further discussion on in 2024.  Having spoken to many students and second-level teachers since I became Chair of our Cork Society, I can see that there is still work to be done to change perceptions of what a career in accountancy is really like. In 2024, I will continue to listen to our members, to key stakeholders in second- and third-level education and to the next generation themselves, to see how Chartered Accountants Ireland can remain not just relevant, but at the forefront of shaping the national dialogue and influencing policymakers. It is important that we clearly demonstrate how Chartered Accountants continue to play a crucial role in industry, practice and many other sectors, and in the midst of rapid developments in technology. A career as a Chartered Accountant is varied, interesting and dynamic, and the academic curriculum and internship programmes on offer to the younger generation must reflect this. I would also hope, in 2024, that further light is shone on the supports small-to-medium sized practices need as we move forward. They play a vital role at a local and national level and are at the coalface of our profession, supporting entrepreneurs and training new members. It is vital that these practices get sufficient support to grow and thrive in the future, particularly with regard to technology, and I hope that this is high on the agenda nationally in 2024. Des Gibney, Chair of Chartered Accountants Ireland Leinster Society Despite the economic impact of COVID-19 and the negative impacts of high inflation, soaring energy costs, rising interest rates and over €2 billion in warehoused Revenue debt, business insolvencies in Ireland remain at the same level as 2019, which itself marked a historic low. The sectors bearing the brunt of these economic pressures currently include construction, hospitality and retail. I predict that the commercial property sector in Ireland will also come under significant pressure over the next 12 to 18 months due to a combination of higher interest rates and the prevalence of hybrid working. Between 2012 and 2018, insolvencies averaged 1,000 per annum. Recent figures indicate that we can expect 600 corporate insolvencies this year, so we are not faring too badly, relatively speaking, despite the macro-economic situation worsening since 2018. I believe there is a combination of reasons for the low level of corporate insolvencies we are currently seeing, including uptake of formal restructuring procedures such as the Small Company Administrative Rescue Process (SCARP) and examinership. Generous Government supports made available over the COVID period have helped.   The Government has also played its part by providing struggling SMEs with the SCARP option, which can save a company where it is insolvent but has a viable business. It is a cheaper and faster process than examinership. However, since the legislation was enacted in 2021 there have been approximately 50 SCARP appointments. Thirty companies were approved, nine failed and the balance were restructured outside the process. This level of uptake is disappointing. However, SCARP is still in the early stages and we must remember that uptake of the examinership legislation brought in back in the nineties was also initially very low. Having advised companies on insolvency and restructuring matters for decades, my experience has been that owners and directors tend to put off taking formal action until they are left with no other option. In some regards, particularly in the case of family-owned businesses, I understand this reluctance. The most common source of corporate pressure comes from either a creditor or the prospect of the company imminently running out of cash and being unable to meet their wage bill. Once matters reach this stage, the options available to the company reduce significantly.  To avoid this, my advice to business advisors, directors and shareholders is to understand the statutory responsibilities of directors when the company is approaching insolvency and the implications this may have for their other business interests or employments.  The next step is to explore the options available to the company by seeking advice early from an experienced insolvency practitioner. Marion Prendergast, Chair of Chartered Accountants Ireland Northwest Society The prospects for the Northwest region in 2024 are undeniably positive, drawing on my first hand experience as a member of the Northwest Society and my role in the regional public sector. In the wake of the COVID-19 pandemic, there has been a notable influx of professionals choosing the Northwest for work across diverse industries, setting the stage for robust economic growth. As Chair of the Northwest Society, I’ve had the privilege of connecting with numerous members who have either returned from overseas or opted to move here from bustling urban areas.  The common thread in these decisions is the pursuit of better work-life balance, reduced commuting times and a focus on family support – benefits the Northwest region provides. In my role as Head of Finance at Sligo University Hospital, I’ve witnessed the successful recruitment of highly skilled expatriates choosing to return home. Unlike in the past, when we might have competed with larger city hospitals, the appeal of the Northwest is now a major draw for individuals relocating to the region and contributing to the local economy. Nevertheless, like any region, the Northwest faces challenges that demand attention. Our road and rail networks require substantial investment, with the N17 urgently needing upgrading as the main connection to Ireland West Airport. Additionally, improved road connections to Northern Ireland and faster rail links to the capital are essential for accommodating the needs of remote workers effectively. Addressing the housing shortage, particularly for families, requires increased investment. While these challenges are widely acknowledged and are high on the Government’s agenda, their resolution is crucial for the Northwest to retain its appeal to high-calibre talent. As members of Chartered Accountants Ireland, we are well-equipped to play a pivotal role in finding solutions. Our diverse membership spans various industries and functions, and our local District Societies serve as vital connectors, especially for those engaged in remote work.  The view from London The members of the London Society Committee were pleased to see an increased appetite for in-person events throughout 2023 and we expect this trend to continue, writes Michael Gilmartin, Chair of Chartered Accountants Ireland London Society. In 2024, however, we expect demand for in-person events to be driven not by pent-up demand post-COVID but by a softer labour market in which companies may start to mandate more compulsory days in-office. The UK economy is forecast to grow by a modest one percent in 2024 and there remains much uncertainty globally.  Given the financially challenging times, it is vitally important that we continue to be a force for good within the Irish community in and around London. Our biggest challenge is trying to engage with members who are based in the Greater London Area.  This isn’t unique to the London Society, but with a population in excess of 9.5 million people in Greater London, we will always face intense competition vying for our members’ attention. The interests of our members continue to evolve to reflect those of wider society and we will continue to offer novel, less traditional events in 2024.  Michael Gilmartin is Transformation Director, Dentsu International The view from Northern Ireland There’s a lot to be positive about in Northern Ireland, particularly when it comes to the creativity, innovation, drive and resilience in the business community, writes Paul Millar, Chair of Chartered Accountants Ireland Ulster Society. We have entrepreneurs who have a positive vision for Northern Ireland and who have the drive to realise this vision.  There are significant sectoral strengths in areas such as digital and ICT, life and health science, advanced manufacturing, fintech, agri-food and the creative industries – and we have great renewable energy potential. Twenty-five years on from the Good Friday/Belfast Agreement, there is also a great level of interest from US investors in supporting businesses in Northern Ireland. In recent months, we’ve seen the US Special Envoy to Northern Ireland, Joe Kennedy III, lead a trade mission of 50 US executives to Northern Ireland.  There is a clear message that Northern Ireland has something to offer – growth potential, a skilled workforce and unique dual market access to the UK and EU. We could be on the verge of something special. The US is Northern Ireland’s largest source of foreign direct investment, supplying 45 percent of projects in the last 20 years. One-third of all foreign direct investment and 51 percent of the jobs created have come from the US.  A growing interest in further investment could be a great sign. It could be a catalyst to boost everything else within our society, from health and education to housing and wellbeing. Of course, there are challenges. The cost-of-living crisis, and the cost of doing business, continue to be difficult for everyone. Just about every sector is facing a skills shortage and when we need leadership the most, we continue to face a democratic deficit at Stormont. Public services are in a difficult position. There are substantial pressures on public sector finances and significant budget overspends to deal with. We need a devolved administration back up and running at Stormont to deal with these issues. At the time of writing, there have been positive signs that perhaps the Executive and Assembly suspension could end soon. We urgently need this to be the case. Paul Millar is Chief Executive of Whiterock Finance

Dec 06, 2023
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A post-pandemic roadmap for the professional accountant

As the global accountancy profession began adapting to the COVID-19 pandemic and its consequences, the International Federation of Accountants convened a series of round-table discussions to understand the implications of the pandemic for professional accountants and leaders. Kevin Dancey and Alta Prinsloo outline the findings. Crises inevitably demand that difficult decisions be made. Yet, the preferred conditions for making such decisions – time to deliberate or a clear sense of focus, for example – are in short supply. Countless small business owners, CEOs, government leaders and more confronted this reality in 2020. For many of them, professional accountants were there as trusted advisors when there was no semblance of certainty. Like every profession, accountancy will emerge from COVID-19 changed. We will be accustomed to digital processes we once thought impossible. Our change management abilities will be sharper than ever. How we anticipate the future will be informed by an experience many of us never imagined would happen. Right now, the profession has the opportunity to transform for the benefit of business, government, and society. It is also a critical moment to nurture existing talent and attract new talent. We must achieve this progress collectively, with clear and measurable goals. Through it all, the pandemic highlighted the importance of future-proofed skills that can anticipate challenges and opportunities, and are agile in a new world where professional accountants are established as strategic leaders. A shock to the system In the Netherlands, virtual work has been commonplace for more than a decade. When COVID-19 forced lockdowns, professional accountants were ready. In other regions, the transformations were not as simple. In South Africa, workers embraced change very quickly, but the more remote areas of the country found it difficult to find immediate solutions. In China, meanwhile, the shift to remote work was rapid. In the US and many other countries, new systems took root overnight, but with them came new-found concerns about security and the availability of technology. 94% of the global workforce live in areas where workplaces closed in 2020 due to lockdowns, according to the International Labour Organisation. These challenges impacted governments, businesses, and employees. In our new hybridised workplaces, preserving the tenets of trust and integrity while also embracing opportunities that virtual environments introduce is key. For example, when firms are not bound to a physical office, hiring more diverse talent from different geographies is possible. Educators and students were also disrupted and had to manage through a wide range of trials. On the one hand, universities and professors moved faster than ever to online instruction and, in some jurisdictions, had to overcome legal limitations in administering examinations online. On the other, students had not only to navigate internet bandwidth challenges, but also the mental health toll, personal economic hardships, and more, which the pandemic inflicted. One silver lining of remote learning is that classes not bound to a physical classroom can capitalise on the connective power of technology. In academia, as in the workforce, it has become clear that much of the accountancy profession’s infrastructure needed to transform – not just for the immediate future, but also the long-term. While the core skills of the professional accountant have not drastically changed due to COVID-19, the profession is changing. This crisis cast a spotlight on anticipation and agility, making it clear that the profession must take the opportunity now to rethink our curricula, our business models, and how professional accountants maintain their competency and relevancy so that they are ready for anything. Evolving technology, regulations and standards In early 2020, digital transformation was either in progress or identified as a strategic growth driver across businesses, accounting firms, governments, and beyond. Through the crisis, however, technology and data have been imperative not only to stay operational, but also to inform new and evolving strategies and ways of working. In a Deloitte survey, more than one-third of financial services industry firms in the US said technology upgrades were the top priority emerging from COVID-19. Meanwhile, more than half cited digitising client interactions as the first imperative. Across all industries, according to PwC, more than 60% of global CEOs acknowledge that they need a more digital business model for the future and that working outside of an office is here to stay. The way businesses everywhere operate is altered forever, and that reality has shifted how professional accountants engage with stakeholders. Professional accountants are the custodians of information that drives long-term strategy and, as businesses transform to stay relevant, professional accountants must be at the centre of that transformation. With change comes uncertainty, both for professional accountants and our stakeholders – especially the public. In this moment, the profession must align around clear goals for our members so we can collectively meet the changing demand around us. This is critical as we aim to leverage technology in new ways, and as we continue to champion trust and transparency in businesses and governments worldwide. As a profession, we cannot passively accept change; we must seize the opportunities change creates while also anticipating and mitigating risks. We have the guiding principles to do this and international standards for financial reporting, audit and assurance, ethics, public sector, and, hopefully soon, sustainability, will continue to help the profession evolve. Even regulators are being challenged to adapt to how accountancy work has changed, especially in light of 2020. In round-table sessions, we discussed how accounting firms should consider advocating for a way forward by partnering with regulators on the latest approach to financial reporting and auditing in a digital-first world. This will also serve us well as we align ourselves with a shared vision of the role sustainability reporting, focused on environmental, social, and governance (ESG)-related matters, will play in the future of the accountancy profession and our stakeholders. Accountancy is directly tied to prosperity, and a more holistic view of how people and planet fit into our profession is imperative. According to many stakeholders, sustainability is now an indisputable necessity. A long-term strategy rooted in sustainability helps guarantee any organisation’s place in the future. Indeed, two-thirds of global respondents in a recent BCG study on how the pandemic heightened awareness of environmental challenges agreed that economic recovery plans should prioritise environmental concerns. To that end, we must evolve our mindsets and reporting, and perhaps most importantly, our curricula for future talent. In particular, the students we spoke with were passionate about a much larger focus on ESG in the accountancy profession. As one student from Hong Kong said, “We are not prepared to handle ESG because there are no strict standards to hold us accountable”. For the future of the profession, transparency and accountability concerning ESG and long-term sustainability must be ingrained in high-quality reporting and assurance practices globally. IFAC is committed to advocating for new sustainability standards that would offer a reliable and assurable framework relevant to enterprise value creation, sustainable development, and evolving expectations. This is an opportunity for accountancy to evolve and to offer the next generation of professional accountants, many of whom identify as global citizens and environmental advocates, a strong foundation to make a difference. The important marriage of technical and professional skills Change management and sharp communications: From every region, discipline, and position, one skill was referred to more often than any other in every round-table we convened in the past three months: change management. We were in a rapid state of evolution before COVID-19. At the start of 2020, McKinsey & Co. noted that nine in ten business managers said skills gaps existed in their organisations or soon would. That reality has only become more evident. Accountancy is not a profession operating in a static world, and the skills learned have to reflect an equal measure of agility. There is a clear need for well-rounded skillsets that combine technical skills and professional skills that are rooted in relationship-building and communication. Doing so means placing more emphasis on stronger, trust-based relationships with key partners. This requires a focus on interdisciplinary skills when engaging with colleagues and in our strategic discussions with clients. Stronger communication skills will help professional accountants manage risks and garner buy-in for solutions. Scenario planning and storytelling: Professional accountants are dynamic thinkers with an aptitude for proactive planning. We are trusted partners in times of change and uncertainty, and we must be prepared for that demand to continue. We have to maintain the momentum 2020 created and the renewed trust imparted on our profession. Many round-table discussions spent significant time on the importance of accountants continuing to build in the areas of professional skills and focusing on new techniques for analysing and interpreting data in differing circumstances, and aptitudes for strategising on increasing priorities such as ESG. Our stakeholders agreed that the profession must become better storytellers, able to effectively show how all the pieces fit together and how the finance function bolsters resiliency and growth. The basics of this can be taught in classrooms, but this skill will largely be shaped on the job. Upskilling: How we compete in the learning and development space – with dynamic curricula, more agile credentialing and continuous learning models that are suited to a hybrid world – will be a differentiator moving forward. “Professions that invest [in education] now are going to come out of this with a competitive advantage,” said one academic leader. We have to show aspiring accountants and those who might be upskilling during their career that the profession is anticipating, adapting with agility, and remaining a step ahead. Affirming the need for agile, future-proofed skills, one professional accountancy organisation CEO said, “I’ve worked through three pretty major crises in my career, and the common theme through all of them is that you must use it as an opportunity for change. A crisis gives you license to adapt”. Defining the accountant of the future Professional accountants are, and will continue to be, strategic partners in any setting, be it in the private or public sector. The pandemic tested our capacity as business drivers, and we rose to the occasion. This is a pivotal moment for the accountancy profession, one where we will change old paradigms and embrace new skills for the digital and rapidly evolving world in which we live. How we act in this moment will define the future of the profession, and the opportunity for positive change is immense. Right now, societies and economies around the world are trying to find a way to move forward from a crisis-laden year. Professional accountants are the highly strategic and collaborative problem solvers who will help businesses and governments, large and small, move forward. In the round-tables IFAC conducted in recent months, CEOs, auditors, academics, students and more from around the world shared a clear vision: we, as a profession, must accelerate new ways of working, embrace technology, align our work to new and evolving societal demands and, above all, ensure we are investing in the right balance of skills that will fortify the profession for whatever the future holds.   Kevin Dancey is Chief Executive at IFAC, and Alta Prinsloo is Chief Executive at the  Pan African Federation of Accountants and former Executive Director at IFAC. The research process The International Federation of Accountants (IFAC) spent the past three months engaging with dozens of people associated with the accountancy profession across more than 20 countries with a range of perspectives. They included chief executives of professional accountancy organisations, chief executives in business, chief financial officers, audit committee members, auditors general, accounting firm leaders, academics and students.  By convening these various stakeholders, IFAC set out to understand the implications of the pandemic for professional accountants and leaders, and how their experiences will affect the future of accountancy and, more specifically, accountancy skills. The global COVID-19 pandemic has accelerated change and forced us to reconsider the role of professional accountants. We heard from our stakeholders about the transformation of organisations, the agility of business, and the resilience of professional accountants managing through unanticipated change.

Nov 30, 2020
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The EU Omnibus package and next steps for CSRD reporting

Dee Moran, FCA, explores the potential impact of the European Commission’s much-anticipated Omnibus package on the Corporate Sustainability Reporting Directive  26 February 2025 felt like doomsday for many immersed in sustainability. After weeks of rumours, the European Commission published its first Omnibus package of simplification measures for sustainability reporting and regulation. If approved, these measures will substantially water down the Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive, Carbon Border Adjustment Mechanism and EU taxonomy for sustainable activities.   In publishing the proposals, the European Commission noted that they would enable businesses “to grow and create quality jobs, attract investments, get the necessary funds for their transition towards a more sustainable economy and help the EU meet the Green Deal’s ambitious objectives”. Many in the profession were dismayed by the introduction of the new CSRD simplification proposals, however, particularly those that had just published their 2024 annual reports with the required environmental, social and governance (ESG) information included for the first time.  Their companies have invested heavily in sustainability reporting and, depending on their size, could now potentially fall out of scope of the CSRD under the new proposals.   Their less prepared counterparts, meanwhile, will have felt some relief that their own tardiness in starting their sustainability journey and preparing for CSRD reporting has been rewarded. So, where does the Omnibus package leave the future of CSRD reporting? Some of the proposed amendments are outlined here, with a short analysis for each. Timeline: two-year delay The Omnibus measures propose delaying the deadline for CSRD reporting by two years—to 2027 for wave two companies, and 2028 for wave three. The two-year ‘stop the clock’ proposal has generally been welcomed as it would give companies more time to prepare for CSRD reporting.  There are concerns among some, however, that the two-year delay is too long, with some maintaining that a 12-month lag would have been more effective in maintaining momentum. Budgets are already approved for next year, but securing the budget for a second year might be more challenging.   Overall, however, the proposed delay is being viewed as a welcome means to provide a much-needed breather for companies.  Threshold: employee numbers The European Commission’s Omnibus package proposes raising the threshold for numbers employed by companies in scope of the CSRD from 250 to 1,000 (and either a turnover greater than €50 million or balance sheet total exceeding €25 million). This proposal would reduce the number of companies in scope of the CSRD across Europe by about 80 percent—from 50,000 companies down to about 7,000.  The 7,000 figure is also substantially lower than the 11,000 companies obliged to report under the Non-Financial Reporting Directive.  The higher employee threshold proposal has met with varying reactions in the profession, with many expressing that 1,000 goes too far, and that 500 employees and above would be more proportionate. This will no doubt be debated at length in the months ahead.  It is worth pointing out, however, that companies that would not fall in-scope of the CSRD under the new proposed threshold may still opt to voluntarily adopt the proposed standard. Voluntary SME standard The Commission has proposed that it will adopt, by way of a delegated act, a voluntary sustainability reporting standard (VSME) to facilitate reporting of sustainability information by companies that are not in-scope for the CSRD.  This will be based on the revised voluntary sustainability reporting standard for non-listed micro, small and medium enterprises (VSME) submitted by the European Financial Reporting Advisory Group (EFRAG) to the European Commission in December 2024. Value chain cap The Omnibus measures propose the introduction of a ‘value chain cap’. This move would serve to limit the information CSRD reporters can request from non-CSRD reporters in their value chain with fewer than 1,000 employees. They would not be permitted to request any information exceeding that specified in the revised VSME. While this proposal could potentially diminish the comprehensiveness of sustainability reports, it would also reduce the sustainability reporting burden on smaller companies and—provided that the revised VSME standard is comprehensive—should still provide companies in-scope of the CSRD with the value chain information they need. Reasonable assurance standards The requirement to have assurance on a sustainability report is a fundamental part of the CSRD, with limited assurance in the first instance and the potential to move to reasonable assurance following a review.  The Omnibus package seeks to remove the requirement for reasonable assurance as a means to streamline the reporting process, while also maintaining some oversight.  This proposal has been largely welcomed as it would reduce the cost of compliance for CSRD reporters and would also be less burdensome.  Some stakeholders have, however, voiced concerns that removing the need for reasonable assurance over the longer term may compromise the trustworthiness and reliability of data.  Investors, in particular, have been vocal about their need for accurate data to reduce the risk of greenwashing. Reasonable assurance would provide an additional level of comfort. European Sustainability Reporting Standards The Omnibus package commits to simplifying the European Sustainability Reporting Standards (ESRS), including a reduction in the number of data points, clarification of provisions deemed unclear and an improvement in consistency with other pieces of legislation. With in excess of 1,100 data points, the volume and complexity of the ESRS has raised many concerns, and Chartered Accountants Ireland was critical of the high number of ESRS data points in our response to the initial public consultation on the draft ESRS.  The Omnibus proposes to simplify the ESRS by reducing the number of data points and focusing on qualitative over quantitative information.  The Commission has asked EFRAG to commence the work of simplifying the ESRS and to provide their technical advice by 31 October 2025. It is important, however, that sufficient time is allowed for proper consultation with stakeholders. Sector-specific standards The Omnibus proposal reverses the existing plan for sector-specific standards to be developed and adopted by the European Commission, a move that would have increased the number of data points required for CSRD reporting.  Again, there are varying views on this proposal in the profession. Some maintain that sector-specific standards would lead to more relevant and meaningful disclosures in specific industries while also providing for more effective comparability.  Others cite increased cost and complexity as a potential negative, particularly for companies operating across multiple sectors.  Double materiality assessment The Omnibus proposal does not change the CSRD’s double materiality perspective, meaning that companies remaining in scope will have to report on how sustainability risks affect their business and their own impact on people and the environment. The retention of the double materiality assessment (DMA) is not surprising given that it is a key requirement under the CSRD.  While cost and the availability of data have been cited by some as barriers to completing the DMA, the recommended reduction in ESRS data points and proposed two-year reporting delay should assist reporters in meeting this requirement.      What happens next? It is important to remember that these Omnibus simplification measures are just proposals. The next step will see these proposals reviewed by both the European Parliament and the Council of the European Union.  A staggered approach to the proposed amendments would see the ‘stop the clock’ proposals be approved in the first instance to give companies clarity on their reporting requirements for 2025.  The European Council and the European Parliament have already approved this amendment.  The proposal now needs to be approved formally by the Council and signed by the Presidents of both Institutions. It will then be published in the Official Journal, which is expected by the end of June. Member States have until 31 December 2025 to transpose into their national laws. We have been advocating for speedy transposition of the Directive to the Department of Enterprise, Tourism and Employment , which has committed to prioritising this.  Once the ‘stop the clock’ proposal has been approved, this will allow time for the other proposals to be debated, and for EFRAG to develop and present to the European Commission a revised set of ESRS and a new set of voluntary standards based on the VSME.  The revised ESRS are expected to be adopted as soon as is practicable, but no later than six months after the entry into force of a revised CSRD.  Our professional accounting team at Chartered Accountants Ireland will continue to review these proposals, engage with members, other professional bodies and relevant stakeholders, and respond to European Commission and EFRAG consultations on your behalf. Our priority, as always, will be to represent our members in lending our voice to continued progress in the sustainability agenda that is also proportionate and cost-effective for companies.  While the initial reaction to the Omnibus package of proposals was mixed, it has been encouraging to hear from many in the profession that a reduced scope would allow them to better focus on material matters and on gathering quality data, while the delayed timeline would also give them greater scope to prepare thoroughly for CSRD reporting.  Dee Moran, FCA, is Professional Accountancy Lead at Chartered Accountants Ireland

Apr 10, 2025
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Navigating the FRC’s updated guidance on going concern reporting

The Financial Reporting Council’s updated guidance on going concern reporting offers a more comprehensive framework for assessing risk in an era of heightened uncertainty, writes Aisling Treacy In today’s dynamic business environment, economic volatility and market disruptions have heightened the focus on “going concern” in financial reporting.  In the UK, the Financial Reporting Council (FRC) plays a key role in setting standards and regulations. The FRC has updated its guidance on the Going Concern Basis of Accounting and Related Reporting (including Solvency and Liquidity Risks) (the Guidance), replacing the 2016 edition with immediate effect.  This update reflects the evolving business environment and provides a more focused framework for UK companies, building upon the 2016 edition used by directors across many jurisdictions, including Ireland.  The Guidance calls for greater transparency and more detailed risk disclosures, especially around solvency and liquidity challenges.  Directors should adopt a forward-looking approach, assessing current and future risks to ensure companies are prepared for uncertainties, while maintaining trust with investors and stakeholders. Guidance overview The Guidance builds upon the previous 2016 edition, expanding its scope to provide a more comprehensive framework for directors.  It is intended for all UK companies, excluding small and micro-entities, and includes companies adhering to the UK Corporate Governance Code. The Guidance consolidates various UK company law requirements, accounting and auditing standards, listing rules, the UK Corporate Governance Code and other relevant regulations.  It aims to help directors assess their company’s ability to continue as a going concern and ensure that any material uncertainties are appropriately disclosed. Disclosures should be proportional to the company’s risk profile, helping maintain transparency and supporting investor confidence. The following section outlines the key updates to the Guidance.  Key Guidance updates Focus on material uncertainties  The Guidance places greater emphasis on identifying and disclosing material uncertainties that could affect a company’s ability to continue as a going concern.  Directors should assess both immediate and emerging risks and outline strategies to mitigate them.  The Guidance integrates solvency and liquidity risks into material uncertainty disclosures for the first time, reflecting their importance to a company’s viability.  If doubt arises about the going concern assumption, directors must disclose related risks in line with the “true and fair view” requirement. For the first time, the FRC recognises four potential scenarios regarding the going concern basis of accounting. Previously, the Guidance outlined three:  No material uncertainty. Material uncertainty with appropriate disclosure. The going concern basis of accounting is not appropriate.  The updated Guidance introduces a fourth scenario where the going concern assumption is appropriate and there are no material uncertainties, but significant judgement was required to reach this conclusion.  Graphic 2 below outlines the decision-making process, highlighting the fourth scenario.  Broader view on solvency and liquidity  The Guidance broadens the focus on solvency and liquidity risks. Solvency refers to the company’s ability to meet its long-term obligations, focusing on business sustainability and capital maintenance.  In contrast, liquidity concerns the availability of cash and other resources needed to fund day-to-day operations.  Directors are encouraged to assess both aspects to identify potential risks and aim to manage cash flow effectively.  Forward-looking approach A more forward-looking approach is encouraged in assessing a company’s going concern status. This involves developing detailed financial forecasts and testing a range of scenarios, from normal to extreme worst-case conditions.  Techniques such as stress testing, sensitivity analysis and reverse stress testing can help evaluate potential adverse conditions such as economic downturns, inflation, interest rates and geopolitical events.  For example, management may simulate the impact of an economic recession, sudden regulatory change or a disruption to the supply chain, to assess how these events could affect the company’s ability to continue operating.  This proactive approach may help companies prepare for potential challenges and better position themselves to navigate uncertainty.  Revised approaches to materiality and disclosure placement   The Guidance introduces detailed changes to materiality and disclosure placement. Directors are encouraged to clearly explain the assumptions, methodologies and significant judgements in their going concern assessment.  For example, if uncertainty exists over meeting debt obligations due to fluctuating interest rates, directors should outline assumptions about future cash flow projections, liquidity risk assessments and judgements regarding financing.  Disclosures should be proportionate to material uncertainties, particularly those related to financial and liquidity positions. This means focusing on significant uncertainties, such as refinancing debt or sales downturn, while avoiding over-disclosure of less significant risk.  Directors should consider the placement of disclosures to facilitate effective communication. Grouping similar disclosures reduces duplication and highlights linkages. Cross-referencing ensures key information is accessible and demonstrates consistency throughout the annual report.  Broader applicability and group considerations  The Guidance applies to a wider range of companies, including those adhering to the UK Corporate Governance Code.  Directors of subsidiary companies should assess the ability of parent companies or fellow subsidiaries to provide support for the going concern basis, considering group arrangements such as cross-guarantees or cash pooling, which can expose subsidiaries to additional risks.  Subsidiaries should disclose significant judgements about the support they receive from parent companies or fellow subsidiaries and the risks associated with group-wide going concern assessments. Auditors’ responsibilities  The Guidance affects auditors by defining their role in evaluating the going concern assumption.  Auditors must assess whether the directors’ assumptions align with accounting standards and are adequately supported by disclosures.  If material uncertainties are not sufficiently addressed, they should challenge the directors’ judgements and ensure that material uncertainties are disclosed. What these changes mean for management 1. Strategic decision-making  The Guidance calls for a more strategic approach to going concern assessments. Management should integrate short-term liquidity and long-term sustainability assessments into strategic and risk management processes. Directors should consider future risks, including planned investments, economic changes and market conditions. 2. Communication and reporting Clear and transparent communication is a key focus. Companies should now disclose material uncertainties regarding going concern in a more detailed and accessible way. The company’s narrative regarding its financial health and strategic direction should align with the going concern assessment to ensure that investors and other stakeholders have confidence in the company’s prospects. 3. Risk management and scenario planning The Guidance emphasises scenario analysis and stress testing, requiring management to develop flexible risk management strategies. Simulating extreme events, such as recessions or supply chain disruptions, helps companies understand vulnerabilities.  Questions directors may ask of management  The following questions may help guide the navigation of the Guidance. While directors may have asked some of these questions in the past, the expanded Guidance encourages them to consider a wider range of factors.  Is the standard 12-month assessment period appropriate, or do we need a longer assessment period? Have we considered all material risks, including market volatility, regulatory changes and reputational risks? What significant judgements were applied in determining the going concern basis, and how are these disclosed? Have we assessed the impact of potential future disruptions, such as geopolitical risks and supply chain challenges, and incorporated forward-looking scenarios and stress tests to evaluate their effect on viability? Are financial forecasts and plans sufficiently robust to withstand adverse scenarios? Do we have access to sufficient liquidity and financing options in a crisis or downturn? Is the board engaged in the going concern process and actively reviewing the assumptions and conclusions? Have we documented the going concern process in a manner that is transparent? Is the audit committee involved in reviewing the going concern conclusion, ensuring that all material risks have been adequately assessed and disclosed? Are we effectively communicating our going concern assessment and related risks to stakeholders?  A more robust and transparent future The updates signal a shift towards more transparent, forward-looking financial reporting, responding to the changing risk landscape, including geopolitical and economic factors.  With the transition from the 2016 Guidance to the 2025 framework, directors are encouraged to apply this modernised and robust approach to going concern reporting.  The updated Guidance offers a clearer and more comprehensive framework for assessing risk in an era of heightened uncertainty.  Directors are encouraged to take this opportunity to strengthen their strategic approach, ensuring their companies are better prepared to face future challenges and adapt to an evolving risk environment.  Aisling Treacy is a Director with KPMG Ireland 

Apr 10, 2025
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Amendments to FRS 102: are you ready for change?

Amendments to FRS 102: are you ready for change? Aimed at improving financial reporting practices, the latest FRS 102 amendments introduce important changes finance teams must begin preparing for today. Emer Fitzpatrick and Cayetano Bautista III delve into the details. FRS 102 is the predominant accounting standard used by small and medium businesses (SMEs) and private family businesses across the island of Ireland. It was introduced in 2013, applying to accounting periods commencing on or after 1 January 2015, with early adoption permitted. The UK Financial Reporting Council (FRC) is the standard setter for FRS 102 and performs periodic reviews of the accounting standard, at least every five years. The aim of these reviews is to take account of changes in global accounting standards – such as changes to the International Accounting Standards Board (IASB) accounting standards, and to respond to specific issues as they arise, such as regulatory decisions and stakeholder feedback. Amendments are then developed and proposed after feedback has been sought from the relevant stakeholders. The first periodic review of FRS 102 was completed in December 2017, coming into effect on 1 January 2019, and the FRC recently completed another periodic review in March 2024. This most recent review has taken several years to complete due to the need for extensive consultations with stakeholders. The effective date of the amendments arising from this review will be applicable for accounting periods on or after 1 January 2026. (Earlier effective dates apply to new disclosures about supplier finance arrangements, starting from 1 January 2025, with early application permitted). Early application is, however, permitted where all amendments are applied simultaneously. So, what are the key amendments arising from this review, and how can you prepare for these changes? FRS 102 review: key amendments Single lease accounting approach for lessees (Section 20) Under the current model, lessees classify leases as either finance or operating, depending on whether the lease transfers substantially all the risks and rewards of ownership from the lessor to the lessee. This approach is similar to the model used under old Irish Generally Accepted Accounting Principles (GAAP) and IAS 17 – “Leases”. The FRS 102 amendments will largely align Section 20 with IFRS 16 – “Leases”, eliminating the distinction between finance and operating leases for lessees. This will require lessees to recognise right-of-use assets (ROU) and lease liabilities on the Statement of Financial Position (SOFP) for all leases, apart from short-term leases and low-value assets. Subsequently, the ROU is depreciated over the lease term on a straight-line basis, while the lease liabilities are amortised using the effective interest method, which results in a frontloading of the lease expense, reflecting the underlying financing nature of leases. Let’s illustrate this with an example. Lease term   3 years  Annual payment payable at the end of the year  €50,000  Discount rate (annual)  5% SOFP – lease commencement (rounded to the nearest €000)   ROU / lease liability   €136,000*   *The initial ROU/lease liability is for illustrative purposes only. These should be calculated using the following formula: Present value (PV) of lease payments not paid at that date and discounted using the appropriate discount rate. [PV of €50,000 × 3 years at 5%] In most cases, the ROU and lease liability will be equal to each other on the inception of the lease. Statement of Comprehensive Income (SOCI) – Year 1   ROU depreciation (operating profit)  €45,333 [€136,000 ÷ 3]  Interest on lease liability (finance cost)  €6,800 [€136,000 × 5%] SOFP – Year -1    ROU   €90,667 [€136,000 – €45,333]  Lease liability  €92,800 [€136,000 – €50,000 + €6,800] The amendments provide guidance on what constitutes a lease, how to determine the lease term, how to account for modifications and remeasurements and other practical expedients. It is important not to underestimate the complexity of this new lease model. Consideration must be given to several factors, such as whether an arrangement meets the definition of a lease and how to calculate an appropriate discount rate for every lease. Five-step revenue recognition model (Section 23) The FRS 102 amendments also introduce a comprehensive five-step model for revenue recognition aligning Section 23 of FRS 102 with IFRS 15 – “Revenue from contracts with customers.” The five steps are as follows: Identify the contract(s) with a customer. Identify the performance obligations in the contract. Determine the transaction price. Allocate the transaction price to the performance obligations in the contract. Recognise revenue when (or as) the entity satisfies a performance obligation. The core principle is to align revenue recognition with the transfer of control of goods or services to customers which may either be over time or at a point in time. This also aligns revenue recognition with the contractual terms in relation to the enforceable rights and obligations of the customer and supplier. The five-step model aims to address the challenges in accounting for bundled goods and services by introducing the concept of allocating the consideration from the customer to the separate and distinct performance obligations, representing the promised goods or services within the contract. The amendments also provide guidance on several topics, such as combining two or more contracts entered into, at or near the same time with the same customers, contract modifications and some practical expedients. It is important to note that the new five-step revenue recognition model could alter the timing of revenue recognition, especially for complex contracts with bundled goods and variable consideration. Other important amendments to note The amendments to FRS 102 also contain several incremental improvements and clarifications including, but not limited to, the following: IAS 39 option removal: Entities not already applying IAS 39 recognition and measurement principles for financial instruments can no longer adopt such policies under Section 11 and 12 of FRS 102. Supplier financing: Section 7 of FRS 102 will now require additional disclosures about supplier finance arrangements and their impact on SOFP and cash flows. Fair Value measurement: A new Section 2A (Fair Value Measurement) replaces the Appendix to Section 2 of FRS 102, incorporating the principles of IFRS 13 – “Fair value measurement.” Going concern disclosures: Section 3 of FRS 102 has new requirements for management to affirm consideration of future information and to disclose significant judgments on going concerns. Business combinations: Section 19 of FRS 102 has been updated to include guidance on the identification of an acquirer in a business combination similar to the principles of IFRS 3 – “Business combinations.” Share based payments (SBP): Section 26 of FRS 102 includes enhanced guidance on accounting for vesting conditions, fair value determination and SBPs with cash alternatives. Uncertain tax treatments: Section 29 of FRS 102 includes guidance for uncertain tax treatments, which aligns with IFRIC 23 – “Uncertainty over Income Tax Treatments” principles. FRS 102 amendments: next steps We have outlined some practical steps you can take to help prepare for these changes. Assess the impact on your financial statements and business metrics As discussed above, the changes to Leases and Revenue may have a significant impact on financial statements (FS). The new lease accounting model may affect your company’s financial metrics or key performance indicators (KPIs) such as EBITDA, net profit and net debt, to name a few. Not only will the changes to KPIs have an impact on the FS but they may also impact your lending arrangements or covenants. For the new revenue model, consideration must be given to how any potential changes to the timing of revenue recognition may impact both reported and forecasted revenue and profits. You will also need to consider how the other amendments listed above will impact the FS and whether you have the necessary in-house expertise on your finance team to carry out the work required to comply with these amendments. Increased disclosure will be required in the notes to the FS, and this may include some new and previously undisclosed information. Understanding these requirements will help guide your accounting processes and the preparation of the FS. Being well-prepared will ensure compliance and transparency in your financial reporting. Consider whether operational changes are required The new lease accounting and revenue recognition models are closely tied to contractual terms and conditions. This will require additional information and financial modelling from contracts. An early assessment of your current accounting processes, systems and controls is essential to identify the necessary operational changes. Other considerations, such as the number of lease agreements and revenue contracts a company may have, will determine the amount of work involved, especially with regard to preparing an amortisation table and the potential need for external valuation expertise to determine an appropriate discount rate for every lease agreement. Determine the best game plan for the transition It is critical to ensure that your finance team is ready for these changes. Engaging your finance team through training courses, workshops and other methods – before and during the transition phase – will be important in ensuring your team fully understands the upcoming changes. Preparing for change: act now The aim of these FRS 102 amendments is to improve financial reporting by aligning FRS 102 more closely with IFRS. Although most of the amendments will not take effect until 2026, early application is allowed if all amendments are adopted simultaneously. Thus, it is critical that companies put a game plan in place today to determine the optimal timing, scope and method for adopting the FRS 102 amendments. The time to act is now. Emer Fitzpatrick is a Senior Manager in PwC Corporate Reporting Services and a member of the Financial Reporting Technical Committee of Chartered Accountants Ireland. Cayetano Bautista III is a Senior Manager in PwC Capital Markets and Accounting Advisory Services.

Dec 09, 2024
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The Corporate Sustainability Reporting Directive: Getting to grips with double materiality

The implementation of the Corporate Sustainability Reporting Directive will introduce new challenges in business reporting, not least the tricky concept of double materiality, writes Mike O’Halloran In 2024, a new era of corporate reporting has kicked off. The Corporate Sustainability Reporting Directive (CSRD) began to apply to some of the largest entities in Ireland for financial periods commencing on or after 1 January 2024.   The cohort of entities applying the CSRD will increase significantly in the years ahead as the numbers in scope rise in 2025, 2026 and 2028.  Under the European Green Deal, the European Commission aims to transform the EU into a modern, resource-efficient and competitive economy with no net emissions of greenhouse gases by 2050, economic growth decoupled from resource use and no person or place left behind.  In seeking to achieve this goal as part of the deal, the CSRD will not be without its implementation challenges. One of the challenges that preparers will have to navigate is double materiality. The CSRD requires the assessment of the materiality of impacts, risks and opportunities relating to sustainability matters via a double materiality assessment. This will be new to most preparers of sustainability statements and those providing assurance on the information.  Double materiality is a unique concept of reporting under the European Sustainability Reporting Standards (ESRS).  It is the most notable difference between these standards and the International Sustainability Standards Board’s standards (IFRS S1 and IFRS S2), which will be adopted in other jurisdictions outside Europe. This will most likely include the UK where the Department for Business and Trade has indicated that it may be endorsed in 2024 as part of its Sustainability Disclosure Standards. Materiality – two perspectives As the name might suggest, a double materiality assessment is performed from two perspectives – financial and impact. The result forms the basis for what should be disclosed in a sustainability statement.  The use of two perspectives differs significantly from the “traditional” materiality assessments accountants will be familiar with. This is because a double materiality assessment focuses not just on matters that are financially relevant, but also on those that impact stakeholders, both internal and external, and the environment.  Without a double materiality assessment, an entity could simply focus on sustainability matters that are financially relevant to itself and ignore what is important to the wider society it affects. A double materiality assessment involves consideration of the entity’s direct and indirect impact. This means that it covers the entity’s own operations as well as its upstream (e.g. suppliers and pre-production activities) and downstream (e.g. post-production activities and end customers) value chain, when considering its material impacts, risks and opportunities.  The output from a double materiality assessment identifies impacts, risks and opportunities related to sustainability matters that are considered to be material for the entity, its stakeholders and the environment, and therefore must be reported on in its sustainability statement. Financial materiality For a sustainability matter to be material from a financial perspective, it must trigger (or must reasonably be expected to trigger) material financial effects on the undertaking. In assessing this, an entity must consider whether sustainability matters generate risks or opportunities that materially influence its development, financial position, financial performance, cash flows, access to finance or cost of capital over the short-, medium- or long-term. The materiality of risks and opportunities should be assessed based on a combination of the likelihood of occurrence and the magnitude of financial effects. Impact materiality Impact materiality looks at how an entity may have an impact on its stakeholders from an environmental, social and governance (ESG) point of view. For a matter to be material from an impact perspective, it must generate (or have the potential to generate) positive or negative impacts on people or the environment. The relevant person affected is the stakeholder and impact materiality is viewed through the eyes of the stakeholder to identify sustainability impacts. When an entity is considering impact materiality, then, it must consider actual or potential impacts, positive and negative impacts and impacts covering the short-, medium- or long-term. The assessment of the severity of its impacts, and therefore whether they are material, is based on three factors: • Scale – how grave or beneficial the impact is; • Scope – how widespread the impact is; and • Irremediability – whether or not the impact can be mitigated or resolved. Furthermore, if an entity is addressing potential impacts, it is required to consider the likelihood that the issue will occur. Engagement with stakeholders is a key consideration when reviewing impact materiality and it will help to inform the entity about its material sustainability impacts, risks and opportunities.  The ESRS do not set out how an entity should engage with its stakeholders and the engagement process should be determined by the reporting entity.  Some of the stakeholder categories an entity may consider as part of its materiality assessment include employees, suppliers, customers, consumers, end users, regulators, local communities and nature. Double materiality sets the reporting boundary When an entity determines that impacts, risks and opportunities related to a sustainability matter are material because of a double materiality assessment, then it is required to disclose information required by the disclosure requirements related to that sustainability matter in the corresponding topical and sector-specific ESRS.  In addition, it is required to disclose any additional entity-specific information when an ESRS does not sufficiently cover this matter. As a result, a double materiality assessment sets the entity’s sustainability reporting boundary. If a matter is material from a financial perspective, an impact perspective or both, then it must be disclosed in a sustainability statement.  The challenges There are several challenges that entities performing a double materiality assessment may struggle with, particularly in the initial years of implementation. These include: Understanding and applying the concept While preparers will already be familiar with materiality, double materiality introduces some new parameters they will need time to become comfortable with. The ESRS do not specify a process to follow when carrying out a double materiality assessment. The reason for this is that no one process would meet the requirements of all the entities reporting under the standards. Therefore, an entity that performs a materiality assessment must design and apply a process tailored to its circumstances, while remaining within the requirements set out in ESRS 1. While such an approach allows entities to tailor their processes accordingly, the lack of a rules-based system may prove difficult for some entities to adapt to, particularly in the earlier years as practices and precedent are being established. In the absence of a strict rules-based approach, entities will need supplementary material to guide their methodologies. Currently the European Financial Reporting Advisory Group is drafting implementation guidelines to assist with this. The assurance requirement A key requirement of the CSRD is external assurance on an entity’s sustainability statement. This will initially require limited assurance before being upgraded to reasonable assurance at some point in the future. While assurance will help to ensure that the integrity and reliability of sustainability information reported on will be enhanced, it will also bring with it a level of complexity whereby the judgements made by preparers will be assessed by assurance providers. This may introduce differing opinions on what should be deemed as material from an impact or financial perspective. All eyes on the first reporters The number of reporters in the first wave of CSRD adopters in Ireland will be low in number but high in terms of market capitalisation.  All eyes will be on the sustainability statements prepared by these entities in early 2025 as users, preparers and other interested parties will be keen to see how they have approached double materiality.  Despite the low number of reporters for 2024 year-ends, many entities will be indirectly impacted as they will be part of the supply chain of reporters. They will therefore be providing information to entities preparing their sustainability statement.  Furthermore, many entities that will be subject to the requirements of the CSRD in future years will be keen to learn from the challenges encountered by the first adopters. Despite the onerous requirements of the new suite of standards and in particular double materiality, it is important for entities and their stakeholders to remember the reasons for their introduction and the underlying cause they seek to remedy.  The EU’s goals under the European Green Deal are ambitious, but they need the full support and backing of businesses to be successful. Mike O’Halloran is Technical Manager in the Advocacy and Voice Department of Chartered Accountants Ireland Double materiality: brewery example Consider an entity operating a brewery in Ireland. In carrying out a double materiality assessment it may, among other things, consider the following matters to be material, from one or both perspectives: Energy (financial perspective) – due to the energy intensiveness of the production process and the financial risk of increased energy prices; Pollution of water (impact perspective) – due to the large amount of water discharged during the production process and the impact that this may have on water quality locally; Water consumption (financial perspective) – due to the cost involved and the availability of sufficiently clean water; Land-use change as a direct impact driver of biodiversity loss (impact perspective) – due to the large amount of malt, barley and other crops used in the production process; Sustainability matters under the heading of “own workforce” including health and safety of employees (impact perspective) – due to the large workforce an entity has employed in its factory; Resource inflows and outflows (impact and financial perspectives) – given the amount and cost of packaging and storage materials used, particularly in an entity’s downstream activities; Personal safety of consumers and end users (impact and financial perspectives) – given the health implications of a breach of food safety regulations on consumers as well as the financial implications that it would bring; and Responsible marketing practices (impact perspective) – given the addictive and age-restricted nature of the product being produced by the brewery. This example is for illustrative purposes only and is not intended to be a complete list, nor a list of the matters that are mandatorily material for a similar entity. Individual judgment must be applied in each instance.

Feb 09, 2024
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What Irish companies will the Corporate Sustainability Reporting Directive apply to?

First impressions suggest that identifying the Irish companies required to comply with the CSRD will be a straightforward process, but first impressions can be deceptive, writes Fiona Hackett The European Union (EU)’s Corporate Sustainability Reporting Directive (CSRD) was published in its Official Journal in December 2022.   The CSRD replaces the Non-Financial Reporting Directive (NFRD), which in Ireland was applied by companies with more than 500 employees that are public limited companies or regulated by the Central Bank of Ireland. The Irish Government is currently working on the amendments to the Companies Act 2014 that will enact the requirements of the CSRD in Ireland. It is required that these amendments be reflected in Irish law by 6 July 2024. GAAP for sustainability reporting Once enacted in Ireland, the CSRD will require a significant number of Irish companies to prepare a sustainability report subject to assurance by a third party. The sustainability report will need to comply with the suite of 12 European Sustainability Reporting Standards (ESRSs) issued by the European Financial Reporting Advisory Group (EFRAG). These 12 ESRSs have been directly written into EU law and are effectively GAAP for sustainability reporting, covering general sustainability requirements and topical matters under the ‘E’ (Environmental), ‘S’ (Social) and ‘G’ (Governance) pillars.   The ESRSs run to over 350 pages and EFRAG has estimated that there are over 1,000 quantitative and qualitative data points necessary to comply with the more than 80 disclosure requirements of the ESRSs. The CSRD and companies in Ireland The EU has estimated that the number of companies across the EU that will apply CSRD requirements is about 50,000 as opposed to the roughly 11,000 companies that apply NFRD – almost a five-fold increase. However, I would argue that due to the large number of Irish special purposes vehicles, the large population of Irish regulated entities and the popularity of Ireland as the location for intermediate holding companies in large multinational groups, there will be a greater than five-fold increase in the number of companies impacted by the CSRD in Ireland compared with those complying with the NFRD. First impressions of the CSRD suggest that identifying the Irish companies that will be required to prepare a sustainability report and comply with ESRSs is straightforward.   At its simplest, for financial years starting on or after 1 January 2025, large companies, for the purposes of the Companies Act 2014, will be required to prepare a sustainability report that complies with the ESRSs (with some of our large listed companies reporting from 1 January 2024).  We all know that first impressions can often be misleading, however. Identification of what entities will be required to prepare a sustainability report and comply with the ESRSs requires careful consideration and analysis of the type of entity, and – if the entity is a subsidiary company – how the group structure impacts on the preparation of a sustainability report that complies with the ESRSs. Why is type of entity relevant? At present, the Irish enactment of the CSRD is focusing on companies incorporated under the Companies Act 2014.   The Department of Enterprise, Trade and Employment (DETE) indicated in a July webinar that it intends to exempt credit unions and friendly societies from the requirements of CSRD.   Future developments in sustainability reporting and later government policy decisions may see such entities, not subject to the Companies Act 2014, required to prepare sustainability reports that comply with the ESRSs.  The DETE webinar also indicated that not-for-profit companies (often incorporated as companies limited by guarantee) are not in scope of CSRD. They may consider voluntary adoption of the requirements, however.   What should subsidiaries consider? For companies that are subsidiaries, the wider group impact of the CSRD needs to be considered and understood. Whether the subsidiary has a parent in the EU or outside the EU will be crucial in determining the level of sustainability reporting required by the subsidiary. For a large company that is a subsidiary of an EU parent company, it is likely that the EU parent company will be required to prepare a consolidated sustainability report that complies with the ESRSs.   This consolidated sustainability report of the EU parent should include the activities of the Irish subsidiary. It is likely the Irish company will be required to report sustainability information to its parent for inclusion in the consolidated sustainability report.   Such an Irish subsidiary, included in the consolidated sustainability report of an EU parent that complies with the ESRSs, will likely be able to avail of an exemption from preparing its own sustainability report, unless it has debt or equity listed on an EU regulated market. This will be a welcome relief for such companies. On the other hand, in the case of a large company that is a subsidiary of a non-EU parent company, the non-EU parent company is very unlikely to be preparing a consolidated sustainability report that includes the Irish company and complies with the ESRSs.  The large subsidiary company will, therefore, be required to prepare its own sustainability report and comply with the ESRSs in this report.   If this large subsidiary of a non-EU parent company has its own subsidiaries, its sustainability report will be a consolidated report for the group of companies it controls.   It is important to understand that the exemption regime for preparing consolidated financial statements differs from the exemption regime for preparing consolidated sustainability reports.   In Ireland, I expect we will see many intermediate parent companies that have never prepared consolidated financial statements – such as intermediate holding companies that are ultimately subsidiaries of parents in the UK or US – being required to prepare consolidated sustainability reports that comply with the ESRSs when the CSRD becomes effective.   The preparation of a sustainability report that complies with the ESRSs is a significant challenge for a single entity, a bigger challenge for a group of companies and, arguably, an even bigger challenge for an intermediate parent company that has previously never prepared consolidated financial statements, and which does not have an established system or procedures of gathering information for consolidation purposes. Independent exemption regime The exemption regime for companies with respect to preparing a sustainability report that complies with the ESRSs operates independently of the exemption regime for preparing consolidated financial statements.   This appears to be a conscious policy decision made by the EU in developing the CSRD and has been acknowledged in paragraph 26 of the preamble to the CSRD which states: “It should be specified, however, that the exemption regime for consolidated financial statements and consolidated management reports operates independently from the exemption regime for consolidated sustainability reporting. An undertaking can therefore be exempted from consolidated financial reporting requirements but not from consolidated sustainability reporting requirements where its ultimate parent undertaking prepares consolidated financial statements and consolidated management reports in accordance with Union law, or in accordance with equivalent requirements if the undertaking is established in a third country, but does not carry out consolidated sustainability reporting in accordance with Union law, or in accordance with equivalent requirements if the undertaking is established in a third country.” I believe this policy decision demonstrates the importance the EU has placed on sustainability reporting, and both its efforts to be at the forefront of top-quality sustainability reporting and expectation that sustainability reporting will play its part in helping users of annual reports evaluate the sustainability performance of EU companies. The policy decision is also an example of how the CSRD forms part of the European green deal. What action should companies now take? For some Irish companies, there won’t be a lot of complexity involved in understanding whether they are required to prepare a sustainability report that complies with the ESRSs.   We know that an Irish company that has debt or equity listed on the main market of Euronext Dublin and more than 500 employees will have to prepare a sustainability report that complies with the ESRSs for financial years beginning on or after 1 January 2024.   We also know that a large Irish private company that is a standalone company or the ultimate parent company of a large group will be required to prepare a sustainability report that complies with the ESRSs for financial years beginning on or after 1 January 2025.   On the other hand, we also know that a small or medium Irish company will not be required to prepare a sustainability report that complies with the ESRSs while it remains small or medium.  For other Irish companies, the impact of the CSRD is perhaps not as clear-cut. These companies should discuss the requirements of the CSRD with their professional advisors and auditors.   If an Irish company is part of a large multinational group, that company should engage with other parts of the group to understand what work is being done in relation to the adoption of the CSRD and whether there will be exemptions available to the Irish company. Fiona Hackett is Director of Corporate Reporting Services at PwC Ireland and Chair of Chartered Accountants Ireland’s Financial Reporting Technical Committee

Oct 06, 2023
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Sustainability
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Laying the groundwork for the ISSB sustainability standards

Following the release of two new standards by the International Sustainability Standards Board, Linda McWeeney outlines what companies can do now to prepare for their application The International Sustainability Standards Board (ISSB) has released two sustainability standards. It will be for jurisdictional authorities to decide whether to mandate use of the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards, consistent with the approach taken for IFRS Accounting Standards issued by the IASB. These will be effective for annual reporting periods on or after 1 January 2024. The main aim of the new ISSB sustainability standards (S1 and S2) is that, initially, companies will provide reasonable and supportive information with regard to sustainability. The ISSB has provided reliefs and guidance. Year one requirements Even though there will be a requirement to provide sustainability reporting information along with the financial statements, companies can hold off on this reporting in year one and align it with their half yearly reporting where necessary.  There will also be no requirement for comparative information in year one. Companies using different methods can continue to use these methods for measuring scopes for the first year and will continue to align methods with the Greenhouse Gas (GHG) Protocol.    S1 and S2 will not be entirely new to many companies as they have been developed and built on the Task Force on Climate-related Financial Disclosures (TCFD) framework and Sustainability Accounting Standards Board (SASB) standards.   Investors and regulators demand and need high-quality, comparable information about risks and opportunities in relation to climate change in particular.   TCFD disclosure recommendations The TCFD sets out disclosure recommendations based upon core elements around which companies operate. These are: Governance Strategy Risk management Metrics and targets The disclosure recommendations are structured around these four elements. This information should help investors understand how the relevant reporting organisations think about and assess climate-related risks and opportunities: Governance Companies need to describe the board’s oversight of climate-related risks and opportunities.   Processes need to be in place to identify climate-related issues and boards need to be kept informed regularly on these issues. Climate needs to be part of the company’s strategy, policies, plans, budgets, goals and targets. Strategy Companies need to be able to describe the climate-related risks and opportunities and their impact on the organisation’s businesses, strategy, and financial planning. Risk management Processes need to be in place for identifying and assessing climate-related risks. How significant climate-related risks are in relation to other risks should be discussed and analysed. Boards should consider regulatory requirements related to climate change and how to mitigate and control material risks. Metrics and targets Metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process should be disclosed.  GHG emissions should be calculated in line with the GHG Protocol methodology to allow for aggregation and comparability across organisations and jurisdictions.  Reporting on emissions Companies are required to report on emissions. Direct emissions are generated from sources owned and controlled by the reporting company – e.g., transport fuels, heating fuels and fugitive gases or emissions of GHG associated with particular manufacturing processes. These emissions are classified as scope 1.   Indirect emissions are also generated as a consequence of the activities of the reporting company—but occur at sources owned or controlled by another company. These include scope 2 and scope 3 emissions.  Scope 2 includes the emissions associated with the purchase of electricity, heat, steam and cooling. Companies can identify these energy uses on the basis of utility bills or metered energy consumption at facilities within the inventory boundary.  The ISSB has agreed that a company disclosing scope 2 emissions would use the locations-based approach, which emphasises the connection between consumer demand for electricity and the emissions resulting from local electricity production.  Within a particular geographic boundary and over a specified time period, electricity output is aggregated and averaged.   Scope 3 emissions include entire value chain emissions. The majority of total corporate emissions fall under this scope from the goods it purchases to the disposal of the products it sells. While Scope 1 and 2 emissions are within the control of the company as they are operational, scope 3 emissions raise business development and strategy questions pertaining to products and services.   Companies using different methods can continue to use these methods for measuring scopes for the first year and will continue to align methods with the GHG Protocol.      Companies can also continue to be guided by the Global Reporting Initiative (GRI) and European Sustainability Reporting Standards (ESRS) to help assess and take responsibility for their impacts and contribute to a more sustainable future using a multi-stakeholder and investor-focused approach. Next steps The standards will be effective for annual reporting periods on or after 1 January 2024 and individual jurisdictions will decide whether and when to adopt the IFRS Sustainability Disclosure Standards. The ISSB has stated that it is working closely with jurisdictional standard setters to maximise interoperability between its standards and incoming mandatory reporting frameworks including the European Commission with their European Sustainability Reporting Standards (ESRS), and the US Securities and Exchange Commission. Linda McWeeney is Non-Executive Director and Senior Lecturer in Accounting and Finance at Technological University Dublin

Aug 28, 2023
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Audit

Audit
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Internal audit: Key themes in 2025

At a time of unceasing change and disruption, internal auditors are under more pressure than ever before to get ahead of potential risks. Colm Laird outlines some of their most pressing priorities for 2025 Internal auditors must remain agile and responsive to change as their organisations contend with fast-evolving challenges.  Having endured unprecedent levels of uncertainty and disruption in recent years, many organisations continue to face threats and challenges posed by prevailing economic and geopolitical conditions, changing stakeholder outlooks, stringent regulatory requirements and heightened digitisation.  Outlined here are some of the key thematic areas and related risks internal auditors should consider in 2025 when assessing their organisation’s risk profile and control environment. Economic and geopolitical uncertainty Despite years of economic and geopolitical instability, global economic growth remained resilient in 2024, with further recovery expected this year. The geopolitical landscape remains unstable, however, with escalating conflicts, trade tensions and political transitions all posing potential risk.  Inflation is falling, leading to lower interest rates in the European Union, Britain and the US, as evidenced by the three rate cuts introduced by the European Central Bank in 2024.  Despite this trend, some sectors remain cautious due to ongoing uncertainties and potential supply chain disruptions.  Organisations should prioritise implementing long-term strategies to navigate these challenges and manage associated risks.  Internal auditors should assess how the first and second lines of defence can effectively mitigate increased risks and impacts, focusing on long-term strategies, third-party supplier vulnerabilities and capital planning and management procedures.  Operational resilience Mounting global interdependency, technology-led transformation and recent service outages all point to increased potential for organisational disruption.  Alongside economic, geopolitical and environmental instability, this trend highlights the need for organisations to: Manage operational risk. Plan for contingencies.  Maintain up-to-date business continuity, disaster recovery and cyber response plans.  Having taken effect in January 2025, the EU’s Digital Operational Resilience Act (DORA) applies to financial entities and their third-party information and communication technology (ICT) providers.  Published by the EU Commission, DORA creates a comprehensive framework designed to help financial firms endure ICT-related disruptions and remain operational.  To support this, internal auditors should assess the effectiveness of operational resilience and crisis management protocols, ensuring key threats are addressed and response plans are adequate.  They should also review business continuity measures to ensure emerging risks are considered.  Third-party relations and supply chain Supply chain risks have been heightened by the fragmented geopolitical landscape dominated by ongoing conflicts in Ukraine and the Middle East, protectionism, policy interventions and shifting consumer expectations.  These factors influence organisations’ supply chain strategies and investments, increasing complexity and cost. Here, the robust risk management of outsourced relationships and supplier diversification is critical.  Organisations must also enhance transparency, ethics and environmental, social and governance (ESG) implications in their supply chains, carrying out risk assessments and due diligence of third parties.  Additionally, automation of supply chains using artificial intelligence (AI), blockchain and machine learning is increasing.  Internal audit must, therefore, assess the maturity and resilience of supply chains and advise on the suitability of the supply chain operating model, ensuring all risks associated with current macroeconomic and geopolitical conditions are considered.  Talent management and retention The recruitment and retention of skilled personnel remains a significant hurdle for many employers who continue to face challenges sourcing talent in a candidate-led recruitment market.  Exacerbating factors include the availability and affordability of housing, salary expectations and flexible working demands.  Many organisations are reverting to pre-pandemic working arrangements, with current trends suggesting we will see more of this in 2025.  Employees are increasingly seeking out more meaning, purpose, fulfilment and flexibility in their work. Those organisations that fail to adapt their value proposition to this shift may struggle to attract and retain the people they need.  Here, internal auditors should appraise their organisation’s workforce planning, talent acquisition and retention strategies, with the aim of understanding and mitigating the impact of staff shortages and turnover.  Management oversight should also be assessed alongside initiatives aimed at enhancing the value proposition for employees with a particular emphasis on soliciting employee input and feedback.  Environmental, social and governance  Beyond mere compliance, many organisations view ESG as a means to enhance value, attract talent, strengthen employee engagement and drive financial performance.  The EU’s Corporate Sustainability Reporting Directive (CSRD) mandates in-scope organisations to be transparent and accountable regarding ESG matters.  In 2025, those companies first in-scope for CSRD will be required to disclose detailed ESG information for 2024, and more organisations are set to fall within scope of the Directive in the years ahead.  Increased non-financial reporting requirements, combined with stakeholder expectations, compel organisations to integrate ESG into their core strategies. They must consider both their own “inside-out” impact on people and the environment and the ESG-related risk and opportunities they face from an “outside-in” perspective.  For their part, internal auditors should review their organisation’s CSRD reporting readiness assessments to ensure that the appropriate processes are in place to support the introduction of ESG metrics.  ESG risks and strategies should be aligned with initiatives such as the United Nations’ Sustainable Development Goals and the European Green Deal.  Fraud and financial crime The prevalence and potency of fraud and financial crime is escalating globally. Sophisticated techniques have intensified the velocity, veracity and volume of fraudulent activity, heightening risks as traditional defences struggle to keep pace.  Advances in technology have given criminals greater scope to exploit organisational vulnerabilities, highlighting the need for robust, adaptive approaches to combat evolving threats.  Fraud and financial crime transcend borders, complicating investigations and prosecutions. Increased global connectivity exacerbates these threats, as instability in one region can impact global markets.  In response to these developments, internal audit should assess the strategies, tools and technologies deployed in their organisation to ensure that risks associated with fraud and financial crime are managed, while also providing advice on governance and control matters. Cyber security As we look to the year ahead, cyber security will continue to be a key focus for organisations.  Cyber-attacks and data breaches rose in 2024, with increasing velocity, volume and sophistication, exacerbating threats to business continuity and heightening the risk of both reputational damage and financial loss.  The ongoing digitisation of business models and processes, and increasingly sophisticated technology available to cyber criminals, necessitates the introduction of robust cyber security measures so that organisations can maintain operations, safeguard stakeholder trust and mitigate future attacks.  Organisations must embed cyber security in core processes and raise workforce awareness to reduce the impacts of inevitable cyber-attacks.  Internal auditors should assess existing controls to mitigate cyber security risks and provide assurance on governance and oversight structures across the three lines of defence. Data privacy and governance In a technology-enabled environment, organisations must prioritise data privacy and protection.  The EU’s General Data Protection Regulation (GDPR) enforces strict regulations protecting personal data, granting individuals control over their information.  Organisations must review their data privacy frameworks to ensure GDPR compliance. Non-compliance amplifies legal and financial risks and exposes organisations to reputational damage.  Global interconnectedness magnifies the importance of complying with international data transfer rules.  The Data Protection Commission Annual Report 2023 highlighted issues regarding the unauthorised access and disclosure of personal data, often due to employees’ lack of understanding of their responsibilities.  Internal auditors should assess their organisation’s data privacy and protection framework, ensuring compliance with regulatory requirements in data collection, retention, disclosure and transfer, as well as ensuring sufficient staff awareness and appropriate training. Reviews should identify third-party processors and monitor their access to organisational data. Digital disruption and emerging technology The emergence of AI has garnered many headlines and much excitement among those convinced of its potentially transformative effects on life and business. In tandem with this potential, however, comes a raft of new AI-enabled risks and concerns regarding appropriate usage.  In response, the European Parliament has approved the EU AI Act, effective from 1 August 2024, with the aim of ensuring a balanced approach to AI adoption and safeguarding against risk.  The Act establishes tiered regulatory requirements for AI applications based on risk levels, with prohibitions on certain AI systems coming into effect in February 2025 and the majority of provisions applying from August 2026.  Here, organisations are advised to adopt an integrated approach across legal, compliance, IT and product delivery functions to navigate AI’s complex regulatory environment while also addressing emerging technology risks.  Internal auditors can advise on governance and control matters, engaging with management to enhance AI governance frameworks and internal controls.  Regulatory-driven risk Organisations face an unprecedented level of regulation in 2025. Regulatory environments continue to evolve, requiring compliance in areas such as ICT, AI, ESG, anti-money laundering and data privacy and security.  This regulatory burden challenges organisations to ensure compliance while remaining agile and adaptable to new obligations. Internal auditors must understand the regulatory landscape so that they may thoroughly assess governance structures and controls for compliance.  Management oversight and control structures should also be evaluated to determine the organisation’s preparedness for future compliance requirements.  Internal auditors should also remember that the Institute of Internal Auditors 2024 Global Internal Audit Standards, the main component of the International Professional Practices Framework, are effective since 9 January 2025. Colm Laird is a Director with KPMG Ireland, specialising in risk, governance and internal audit 

Feb 10, 2025
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Technical
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EU audit reform: 10 years on

Patrick Gorry delves into the findings of the European Commission’s Market Monitoring Report and revisits the broader context and impact of EU audit reform On 5 March 2024, the European Commission published its triennial Market Monitoring Report, analysing Public Interest Entity (PIE) audit data from 2019 to 2021 across 27 Member States as well as Norway.  A decade after the enactment of European Union (EU) audit reform legislation, the report underscores the persistent market dominance of the main firms in PIE audits, resulting in limited choices for auditors. Background and objectives of EU audit reform The introduction of EU audit reform stemmed from several key drivers and broader contextual factors.  Amidst the global financial crisis of 2008, weaknesses in financial reporting and corporate governance practices were exposed, prompting the EU to prioritise enhancing the integrity and transparency of audit processes.  In 2014, the EU adopted two legislative instruments: Directive 2014/56/EU, which amended Directive 2006/43/EC on the statutory audits of annual accounts and consolidated accounts (the Audit Directive), and Regulation No. 537/2014 on specific requirements regarding the statutory audit of PIEs (the Audit Regulation).  The legislation was led by several key EU institutions, including the EU Commission, EU Parliament, EU Council, European Securities and Marketing Authority (ESMA) and national regulatory authorities in EU Member States.  While the overarching goal was to increase the quality of statutory audits, the four primary objectives set out for the reform were to: Reinforce auditor independence; Promote market competition; Enhance transparency for investors; and Strengthen pan-European supervision. Measurement of success  To evaluate the legislation’s effectiveness, we must examine each objective. Reinforcing auditor independence The legislation mandates the rotation of audit firms for PIEs after a specified period to help address familiarity and independence issues, promote fresh perspectives and improve audit objectivity.  It also restricts audit firms from providing certain non-audit services to their audit clients and imposed limits on fees for such services.  These measures aim to promote independence, prevent conflicts of interest and uphold audit integrity. The legislation has strengthened auditor independence by enforcing mandatory rotation for auditors of PIEs. This has reduced conflicts of interest and enhanced audit objectivity.  Stricter rules regarding non-audit service provision have further bolstered auditor independence, ensuring a focus on high-quality audit services. Mandatory rotation has, however, faced criticism for potential unintended consequences, such as increased costs for companies and concerns about the disruption of longstanding audit relationships.  The Market Monitoring Report revealed limited choice in tenders within the EU audit sector: 16 percent of the tenders had just one bid and 59 percent left PIEs with a limited choice of two to three bids.   In the same report, 51 percent of surveyed audit committees that had undergone auditor changes indicated that it was too early to evaluate the impact of auditor rotation or that no assessment had been made at the time the Commission issued the questionnaire.  Furthermore, 22 percent of audit committees rated the impact of auditor rotation as ‘neutral’, while 12 percent rated it ‘positive’. Promoting market competition The legislation aims to promote market competition and diversity in the audit sector by encouraging smaller audit firms to participate in PIE audits. It is meant to drive innovation, enhance audit quality and offer clients a broader selection of service providers. To achieve this, the legislation mandates regular rotation or tendering of audit engagements to stimulate competition.  It also promotes joint audits to facilitate smaller firms’ involvement and enhance market competition.  Additionally, the legislation aims to increase transparency in the audit market by publishing data on audit firm market share and concentration. Despite these efforts, market concentration remains a challenge. Larger firms continue to dominate, limiting the entry of smaller firms and hindering diversity among service providers.  While the largest firms’ dominance in the number of PIE audits has fallen slightly, they still control a significant portion of the market from a fee perspective.  Interestingly, a growing demand for joint audits indicates a potential shift in the market landscape toward increased diversity. The Market Monitoring Report highlighted the continuing imbalance: In terms of total turnover among audit firms, the largest four firms collectively accounted for approximately 80 percent of the market, consistent with previous reports from the European Commission. Despite a decline in their share of PIE audits, these firms still hold a dominant position, capturing 86 percent of revenue from this source.   Joint audits now account for 16 percent of the PIE market, up from nine percent in 2018. This trend is evident across an increasing number of Member States, with five additional countries adopting joint audits since 2018, bringing the total to 13. Among the six Member States with the most diversified PIE audit markets, joint audits are prevalent in five: France, Romania, Bulgaria, Poland and Greece. The findings relating to European market concentration are replicated in the Irish market. The Irish Auditing and Accounting Supervisory Authority’s most recently published Annual Audit Programme and Activity Report put the market share of the four largest firms at 87 percent.  Enhancing transparency for investors The legislation mandates increased audit reporting transparency, requiring additional information disclosure.  This increased transparency aims to improve communication between auditors, clients and stakeholders, providing a more comprehensive view of the audit process. The new rules have significantly improved the informational value of audit reports, which is a key success of the legislation.  The mandates have improved communication between auditors, clients and stakeholders, ensuring investors can access relevant information to make informed decisions.  However, challenges remain in effectively communicating audit findings to investors. Discussions are ongoing concerning further enhancements to meet the investors’ evolving needs.  Strengthening pan-European supervision The reform introduced measures to enhance governance and oversight of audit firms, including establishing regulatory bodies and oversight mechanisms to monitor compliance with audit standards. The objective was to improve the consistency and effectiveness of audit supervision across Europe. The legislation has undoubtedly increased cross-border cooperation and information sharing among national competent authorities.  Harmonising audit standards and practices across Member States has aligned regulatory requirements, fostering a unified framework for audit supervision while improving quality and consistency at the European level. However, one of the main challenges of strengthening pan-European supervision is the divergence in implementation of the audit regulation and oversight practices across Member States. Future audit reform EU audit reform represents progress, but there’s still work ahead. While successes are evident, challenges persist, notably the dominance of major audit firms. The 2022 EU Commission study on the impact of the audit reform highlights improvements in harmonising national frameworks. However, it underscores lingering disparities in the transposition, implementation and enforcement of EU audit legislation across countries. The legislation has profoundly impacted audit firms and the profession by reshaping regulatory requirements and enhancing independence, quality standards and transparency within the EU.  Yet, ongoing evaluation is necessary to ensure continued progress in the improvement audit quality, transparency and governance. Recent high-profile accounting scandals, such as the Wirecard bankruptcy in Germany, underscore the need for further reform, especially amid increasing demand for sustainability reporting and digital audits.  With a new EU Commission and Parliament taking office imminently, however, further legislative developments are unlikely in the near term.  On the other hand, the Market Monitoring Report identifies potential challenges, including inflationary pressures, rising interest rates, geopolitical instability and the growing use of data analysis tools and artificial intelligence, which will require attention sooner or later.  One thing appears certain – what audit will look like in another 10 years will dramatically differ from what it looks like today. Whether an EU Audit Reform 2.0 is one of key change drivers remains to be seen. Patrick Gorry is a Partner in the Audit and Assurance Financial Services Group of Mazars Ireland

Apr 04, 2024
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Audit
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Global audit reform must deliver real improvement

Moves underway globally to reform the audit process should reduce the likelihood of corporate collapses and internal fraud, writes Paul Kilduff Whenever there is a sudden company collapse, a shocking fraud or a financial scandal, the details make the front pages of the newspapers and news sites, and the shareholders and the public rightly ask: ‘And where was audit?’ Work is presently underway to address this vital question. In the US, the Public Company Accounting Oversight Board (PCAOB) oversees the audits of public companies in order to protect investors. There are quality control standards in place covering personnel, ethics, engagement performance and client acceptance, but the chair of the PCAOB accepts that these are outdated and do not adequately promote audit quality.  The PCAOB’s plan is to close the gaps by updating the rules for how firms should police their audit work. It recently issued its 2022–2026 Strategic Plan for public comment, so these planned developments will take time. In the UK, the Financial Reporting Council (FRC) develops and maintains auditing and assurance standards. The most recent annual report from the FRC on the quality of audit in the UK found that 33 percent of all audits reviewed needed improvement. This was an unacceptably high number of audits, according to the accounting watchdog. Of the 147 audits inspected by the FRC, 41 required ‘further improvements’ and seven needed ‘significant changes’.  The Institute of Internal Auditors believes the FRC findings underline the need for urgent audit reform and robust measures designed to increase audit quality. One solution is to put the FRC audit regulator on a statutory footing with enough new legal powers to do its job effectively. Sadly, the problem of audit quality remains, and it has impacted the work of the auditor for years. High-profile scandals When Nick Leeson single-handedly destroyed Barings Bank, I was an internal audit manager with HSBC in London. My first reaction was one of relief that the calamitous events had not occurred at our bank. My second reaction was one of concern that the bank’s internal audit team and external auditors in Singapore had not discovered the £869 million trading loss hidden by Leeson. Leeson outfoxed audit. When internal audit arrived from the London head office, he met them on the chaotic trading floor of SIMEX, he told them he was very busy, and he avoided the office and all meetings with the auditors. When external audit from a Big 4 firm asked him for a confirmation for a large bogus option trade, Leeson manufactured the confirmation from a page of headed bank notepaper, using scissors, glue, and a photocopier. The audit team was none the wiser as to his deceit. Wirecard AG, a Munich-based electronic payments provider, once valued at €24 billion, went kaput in 2020. The accounts of this listed company included a bank deposit in Singapore of €1.9 billion, which simply did not exist. The Financial Times reported that, instead of obtaining confirmation of the deposit directly from the bank, the auditors relied on documents and screenshots provided by a third-party trustee and by Wirecard staff.  This audit failure happened not once, but at three successive year-ends from 2016 to 2018. I qualified as an ACA many years ago, but even then, obtaining independent confirmation of bank deposits was covered in day one of audit training. The head of the German financial watchdog BaFin was critical of the audit work performed and said the Wirecard scandal was ‘a complete disaster’, adding: ‘It starts with looking at a complete failure of senior management and it goes on to the scores of auditors who couldn’t dig up the truth.’ In the UK, there are recent examples of previously robust companies, which had been audited by leading UK accounting firms, suddenly failing. The demise of retail chain BHS, travel agency Thomas Cook and construction giant Carillion had a major impact on the UK economy, costing the taxpayer millions. The Institute of Internal Auditors believes that stronger governance and audit can help to prevent such collapses occurring in the future, protecting jobs, pensions, investors and incomes. Necessary reform The necessary improvements to audit must deliver on several fronts. The audit profession must ensure that it attracts capable individuals with strong product knowledge, an inquiring mindset, and a character strong enough to deal with any management obstruction.  The improved audit approach must be documented in revised policies and procedures, which must be ingrained in audit work. Quality Assurance functions must be set up or enhanced in firms to ensure standards are met. The cost of implementing these audit reforms must be reasonable to bear, whether the auditor is in an internal audit function, a Big 4 audit firm or a small audit firm with a more limited budget. There is an expectation that audit reform must use all available technology to improve the quality and scope of audit work. In the past, audit sampling may have been acceptable, but with advanced Computer Assisted Audit Techniques (CAATs), 100 percent auditing is the likely optimal solution. Global audit reform must also consider the changing nature of work, and the associated risks. Few auditors thought three years ago that so many employees would now be working on a hybrid basis, relying on remote systems access for client verification, payments processing and other critical tasks.  When reform does arrive, there should be international convergence, so that the audit quality rules in the US, UK and other jurisdictions are consistent and align with international standards, thereby avoiding unnecessary differences and costly duplication that could weaken audit effectiveness.  In the meantime, accountancy bodies are providing new guidance to members.  New guidance  In the UK, the Institute of Accountants in England and Wales recently reported on the significant resources devoted to fraud-related activities within audit firms. It also acknowledged the public perception that auditors can and should be doing much more to deter and detect fraud and to prevent the unexpected failure of large companies due to fraud. It was Lord Justice Lopes who famously summed up the auditor’s duty in the case of Kingston Cotton Mills Co., where the company directors had fraudulently overstated the value of stock, by proclaiming: ‘An auditor is not bound to be a detective. He is a watchdog, but not a bloodhound.’  Lopes opined that the auditor cannot be liable for any wrongdoings they had no reason to suspect were taking place, but that landmark legal judgement was handed down in 1896. The expectation placed on both internal and external auditors is significantly higher today.  The auditor is not specifically expected to search out any fraud or deception in their audit, but if there are warning signs that all is not well, the auditor must investigate these to reach a satisfactory conclusion regarding the audit opinion.  While writing my latest banking book, I researched the case of Joseph Jett, a former bond trader with Kidder Peabody in New York, who created $350 million of phantom trading profits on the bank’s computer systems.  The subsequent post-mortem report stated that the internal auditors learnt that Jett had booked billions of dollars of unusual transactions, but no auditor followed up on this anomaly. The auditor had to explain his work in court, as audit workpapers were produced with hand-written annotations without evidence of action. This is not a situation any auditor would wish to defend.  I also came across Sir Allen Stanford and his Stanford Financial Group, based in Antigua, which was later revealed to be a giant Ponzi scheme. His bank at the time had a value of $8 billion, but it was audited by a small Antiguan audit firm with just ten staff. This should never have been acceptable. When corporate disaster does strike, it is easy to point the finger at the auditor, but this is often unfair. Every auditor comes to work with the intention of doing a good job. The aim of audit reform is to assist and guide the auditor in their work, rather than to make their work more onerous. The global audit reform process is underway, and it must deliver improvements to reduce the likelihood of further high-profile corporate disasters, which damage the reputation of the auditor. In the meantime, the auditor at large would do well to maintain a healthy sense of scepticism.  Paul Kilduff B.Comm FCA is an author and banker, who has worked with HSBC, Bank of Ireland, Bank of America, Barclays and Citibank. His eighth book, Stupid Bankers: The World’s Worst Banking Disasters Revealed, is available exclusively on Amazon UK in paperback and Kindle format

Dec 02, 2022
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Audit
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Delivering audit value with data analytics

Although the relentless adoption of technology is not without risk, the audit – and the profession as a whole – stand to be net beneficiaries in the long-run, writes Lynn Abbott.The COVID-19 pandemic will undoubtedly usher in a new era for business. There have already been significant changes, with some businesses creating their first online store or introducing contactless payments. Others, however, have realised that they must introduce more sweeping changes, such as offering staff the ability to work remotely. We have yet to see the impact of these changes, but the world will be a different place to the one we knew previously.The Oxford English Dictionary defines a revolution as “a great change in conditions, ways of working, beliefs, etc. that affects large numbers of people”. This accurately describes the transformation that was already underway in audit before the COVID-19 crisis. With advancements in technology, the use of data analytics, artificial intelligence and machine learning are fundamentally changing how business works. Resistance is not only futile but seems to put companies at a competitive disadvantage. The COVID-19 crisis will only serve to accelerate this process, and professional services firms are no exception.Drivers of the revolutionWhen we hear buzzwords like 'data analytics', 'artificial intelligence' and 'machine learning', it can be intimidating. Many people don’t fully understand such concepts, but in truth, you don’t need to. You just need to get comfortable with them. And you probably already are: familiar services like Netflix or Spotify use artificial intelligence to understand your preferences and make subsequent suggestions based on that knowledge. The level of consumers’ expectations is continually increasing, and the successful companies are those that are advancing with technology. The same is true for businesses and their expectations. In audit, the revolution is underway and the sections that follow highlight the key drivers for this change.Improve the audit experienceThe volume of data available to auditors is astounding, but in most cases, this data is simply not being used. If this were happening in any other industry, there would be questions to answer. Data analytics can improve the audit experience in several ways, for both the audit team and for the client.Improve audit qualityDuring the planning phase of the audit, audit teams must shift their focus away from the old mindset of “what could go wrong?” Through analytics, we can turn our attention from what could go wrong to what has gone wrong. Auditors have access to the client’s complete financial data for the period under audit – if they focus on analysing and understanding the data, they could identify an unexpected transaction or trend in the process. During the execution phase, auditors should also build on the knowledge gained in planning to truly understand the business in question and focus their attention on higher risk transactions. Finally, auditors should move away from a ‘random sample’ approach and, instead, focus on the transactions that appear unusual based on their knowledge of the client, business or industry. These are just a few areas where improvements in audit quality can be achieved using data analytics.Improve efficiencyIn the examples above, the use of data analytics in planning will identify what has gone wrong and any associated unusual transactions. In execution, these transactions will be tested as part of the audit sample. It could also cover some requirements under auditing standards concerning journal entry testing, as the journal entries will likely be the data that highlighted what went wrong in the first place. Again, this is just one example of efficiencies gained without even considering the hours saved by automating processes like creation of lead schedules and population of work papers.Post-pandemic worldThe world will be a very different place in years to come. Firms with the ability to perform in-depth analysis using data analytics undoubtedly have a significant advantage over those that do not, given the efficiencies they can gain and the potential reduction of physical evidence required from clients, among other things. Due to the changes we have all had to endure, auditors may also have additional procedures to perform (e.g. roll-back procedures where they were unable to attend stock counts at year-end due to the COVID-19 closures of businesses). Such procedures have the potential to be automated, saving even more time and effort for audit teams.Improve engagementRather than spend time performing mundane tasks such as testing large randomised samples, data analytics allows audit teams to jump into the unusual transactions. This will make the job more interesting to auditors and cultivate a curious and questioning mindset, which will, in turn, lead to improved scepticism and audit quality.Improve client experienceThis might happen in two ways. First, the time saved by the client’s staff (who, in theory, will have fewer samples for which to provide support) and second, through the value the audit adds to the business. As an example, consider an audit team performing data analysis on the payroll for their client. As payroll is a standardised process, the audit team has an expectation around the number of debits and credits they would see posted to the respective payroll accounts each month. As part of their analysis, however, they find an inconsistent pattern. This can be queried as part of the audit and the client will be better able to understand a payroll problem, which they were previously oblivious to.Client expectationsGiven the level of data analysis that occurs daily in the life of anyone using a smartphone, a consistent, high quality is understandably expected in people’s professional lives, too. Audit clients, like all consumers, want more. They want a better and faster audit. They want an audit that requires minimal interference with the day-to-day running of their business, without compromising the quality of the auditor’s work. With troves of data now available to auditors, such expectations are not entirely unreasonable. Audit firms have access to vast amounts of financial and related data – in some instances, millions of lines of information – that, if analysed robustly and adequately, would improve their processes, their clients’ experience, and the quality of their audit files.Aspirations of professionalsAudit professionals can often struggle with work-life balance. Though most firms are getting on top of remote working, the hours in busy season are long. In a time of continuous connectivity, the time frame around ‘busy season’ is also becoming blurred. Through the use of technology, we will one day make auditing a 'nine to five' job. Many will scoff at that idea and, although I do not expect this to happen in the next five years, or even ten years, it is possible. By automating mundane tasks and continuously upskilling our graduates, we can transform how an audit team completes work. There will be more scope to complete work before clients’ financial year-ends, thus moving much of the audit out of the traditional ‘busy season’. Machines can complete specific tasks overnight so that auditors could arrive at their desk, ready to work on a pre-populated work paper that needs to be analysed by a person with the right knowledge. With appropriate engagement by all parties (i.e. audit teams, senior management, and audit clients), we could significantly reduce the hours spent on audit engagements and give this time back to auditors. Along with attracting high-calibre graduates, we will retain high-quality auditors in the industry while also avoiding mental fatigue and burnout, which will again lead to better quality audits.Graduate recruitmentGraduates joining firms in recent years have particular expectations of the working world. They want job satisfaction, flexible hours, remote working, and an engaging role that will challenge them. Professional services firms have to compete for the very best graduates, and no longer just against each other – a host of technology-enabled businesses are attracting talent on an unprecedented scale by meeting the needs listed above. Technology, and data analytics, in particular, can offer the solution to the graduate recruitment challenge – by making the work more efficient and automating mundane and repetitive tasks, graduates can instead focus on analysis. When people find their work challenging and interesting, they will feel more engaged.ChallengesThis move towards technology is not without its risks to the profession. Automating basic tasks removes the opportunity for graduates to form a deep understanding of these sections of the audit file. The onus is therefore on the current cohort of Chartered Accountants to take the reins, both to drive technology advancement forward and also provide practical, on-the-job coaching to ensure that this knowledge is not lost for the generations that follow.Lynn Abbott ACA is an Audit Inspector and Audit Analytics Expert in the Audit Quality Unit at IAASA.

Sep 30, 2020
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New estimates auditing standard

The new auditing standard on estimates will have a significant impact on management as well as auditors. Brian MacSweeney reports.The revisions to ISA (Ireland) 540 (Revised) will have important implications for chief financial officers, financial controllers and management responsible for financial statement preparation and the determination of accounting estimates. Its impact may be felt outside finance functions where others contribute to the calculation of estimates – for example, valuation specialists, taxation teams or pension specialists. It will also give rise to additional considerations for audit committees recommending financial statements for approval.What are the implications?The new standard requires the auditor to perform additional understanding and risk assessment procedures over estimates, along with other new requirements. This means that:more time is needed from management to help the auditor perform these procedures;management will need to articulate their processes and controls around estimates better;there will be more dialogue between auditors, management, and those approving financial statements about the critical aspects of estimates; andthere will be a better and more robust audit approach to auditing accounting estimates in the forthcoming financial reporting cycle.Why was the standard revised?The preparation of financial statements involves many different elements, but the preparation of estimates is perhaps more complex than others. Estimates are monetary amounts (recognised or disclosed), which are a fundamental part of entities’ financial statements. They are subject to estimation uncertainty due to inherent limitations in knowledge or data, and as a result, there may be a wide range of measurement outcomes for any estimate. In forming estimates, management apply methods or models where they make assumptions and use data. They exercise judgement involving complexity and subjectivity when measuring the estimate. Due to the nature of this process, estimation is susceptible to material misstatement, and for the users of financial statements, they are the main focus.Over time, accounting estimates have become more prominent and visible in financial statements, garnering additional scrutiny from readers. This is caused by increasingly complex business environments (now made more complicated due to the COVID-19 pandemic) and the introduction of new accounting standards over the last number of years. The previous version of the ISA 540 standard was written before these changes and they, along with challenging audit inspection findings, meant that a new framework was needed for auditors to robustly audit estimates. In response to these challenges, the Irish Auditing and Accounting Supervisory Authority (IAASA) issued ISA (Ireland) 540 (Revised).What is the aim of the new standard?The new standard aims to:address changes in financial reporting standards and business environments that make estimation more difficult;enhance auditors’ professional scepticism, considering recurring audit inspection findings criticising the quality of audits of accounting estimates; andRealise public interest benefits through better two-way dialogue between the auditor and management concerning estimates.What is new?Enhancements contained in the new standard include:Enhanced risk assessment: the standard requires a robust risk assessment of estimates. The aim is to heighten auditors’ understanding of processes and controls around the identification of estimates and the determination of the related monetary amounts. This risk assessment is performed at a granular level and focuses on the models, assumptions, and data used to determine the estimate. The assessment is made with reference to inherent risk factors, including the complexity of the estimate, its subjectivity, and estimation uncertainty.Scalability of testing approach: the testing approach options in the old ISA 540 are maintained. These include testing management’s calculations of the estimate, developing an independent estimate, or using events after the year-end as audit evidence for the estimate. However, the new standard focuses on aligning the level of procedures performed to the assessed risk. This gives the standard scalability, where the level of audit effort is dictated by the complexity and risk associated with the estimate.Professional scepticism: ISA (Ireland) 540 (Revised) has several provisions designed to enhance the application of professional scepticism. These include:o A requirement to design and perform further audit procedures in a manner that gives more focus to evidence that may be contradictory.o A requirement to evaluate the audit evidence obtained regarding the accounting estimates, including both corroborative and contradictory audit evidence.o Changing the language in the standard to use purposeful words like 'challenge', 'question', and 'reconsider', thus reinforcing the importance of exercising professional scepticism.Disclosures: there are enhanced requirements to assess whether the estimate disclosures are “reasonable”.Communication and representations: there are new requirements to consider when communicating with those charged with governance. There is a requirement to request written representations regarding the reasonableness of methods, significant assumptions, and the data used.What is the impact on management?Table 1 sets out the key changes required by ISA (Ireland) 540 Revised and their impact on auditors and management. This summary was prepared by Chartered Professional Accountants Canada and was adopted by the IAASB (International Auditing and Assurance Standards Board) for its client briefing document dated November 2019.What happens after implementation? The standard-setters intend to undertake a post-implementation review after the effective date of ISA (Ireland) 540 (Revised) to see if the revised standard has achieved its intended objective. They will focus on whether the standard is sufficiently scalable and whether it enhances the exercise of professional scepticism.First impressionsHaving read the new standard and prepared illustrative audit work papers to see it in practice, it is clear that this is a significant change to how auditors will approach the audit of estimates. The key message is that auditors will need to prepare early to perform a detailed understanding and risk assessments procedures. Management will have more to do to help the auditor in their risk assessments, but early communication and engagement between the auditor and management will ensure successful adoption.In addition to the above, due to the COVID-19 pandemic, developing estimates for expected credit losses, going concern analysis, and related disclosures, in particular, is more challenging. A focus on the audit of estimates is therefore paramount. Overall, in a financial reporting environment that is evolving due to changing business environments and accounting frameworks, ISA (Ireland) 540 (Revised) provides audit practitioners with a good basis to audit estimates and to serve the public interest by fostering audit quality.  Brian MacSweeney ACA is a Director at KPMG Ireland.

Sep 30, 2020
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Auditor purpose

Sinead Moore and Paul McGarry share insights from a recent study by Deloitte’s Young Audit Professionals Group on how the next generation of audit leaders perceive their role and purpose.The role of auditors will rightly be in the spotlight during this challenging time for our economy. Auditors are expected to challenge directors and management as they assess the impact of COVID-19 on their business and make key judgements on critical areas, such as going concern and viability, to support shareholders and the capital markets.This vital role will be performed against a backdrop of intense focus on the audit profession in several countries, notably the UK, following high-profile corporate failures. While the debate covers lots of ground including competition, conflicts of interest and the growth of non-audit services by audit firms, a critical element of the debate centres on the fundamental question: what is the purpose of an audit?Consistently defining the purpose of the audit has always been difficult. The profession has often been accused of hiding behind the expectation gap (i.e. while legislation and regulation have a narrow definition of what an audit is, the public has a broader expectation). If you ask a practitioner to define an audit, you will typically get the standard definition: ‘to provide an opinion on whether a set of financial statements present a true and fair view’. In embarking on this study, we therefore approached the question from a different perspective – what do young professionals perceive their role to be? What is their purpose, and how do they see themselves?The responses tell us that practitioners have a more nuanced and more in-depth view of their role as an auditor, in contrast to the narrower definition of an audit. The findings indicate that practitioners have a common view that, in addition to providing assurance over the financial statements, it is their role to:understand the business models of the entities they audit;understand the organisation’s internal controls and provide challenge and insight to improve those controls;provide expertise on financial reporting matters;use technology to increase the assurance the auditor is providing; andlook to the future, understand the risks facing the business, and provide relevant insights.Practitioners believe that they are completing the tasks above in their day-to-day activities, though not necessarily in a consistent fashion. There is a clear appetite to fulfil these roles more comprehensively going forward and in doing so, bridge the expectation gap. But much more importantly in the eyes of the young professionals is ensuring that the role of the auditor is meaningful, valued by stakeholders, and attractive as a career.Internal controlsLet’s explore some of the themes that emerged in more detail – first, internal controls. Young auditors firmly believe that understanding the control environment is a key part of their purpose. Furthermore, they view the provision of insight and opinion on those controls as an essential part of their job and believe that they provide this insight to the management of their audited entities in their current role. However, they perceive an inconsistency in how this role is fulfilled across different types of entities given their size, their industry or their ownership structure.The study also pointed to a perception that the more structured framework for internal control reporting for entities subject to the requirements of the US Sarbanes-Oxley Act is effective. This contrasts with the legislative framework in Ireland, where there is no formal reporting on internal controls. Indeed, participants in the study highlighted the following shortcomings:a lack of detail in audit reports on which procedures were performed to obtain an understanding of the control environment; andthe areas where the auditor was unable to obtain assurance over the internal control environment and therefore conducted substantive, detailed testing.A key conclusion, therefore, is that a formal testing and reporting framework, including the specifics of the procedures performed and results obtained, should be reported not just to management and those charged with governance, but also publicly to the users of the financial statements.TechnologyEven before COVID-19, the use of technology in the audit was increasing. Respondents were unanimous in their view that increased use of technology can improve audit quality, improve the efficiency of the audit process, and enhance the insight auditors offer to management and those charged with governance.However, the study highlighted several challenges. First, obtaining data in a usable format to enable technologies is a fundamental issue in facilitating the more widespread use of tools and technology. Privacy and security concerns have made it difficult to get large datasets or continuous access to entities’ systems and have slowed the adoption of many audit tools.Second, the competencies required to use innovative technologies, including enhanced analytics, are different from the current core skills of many practitioners. To reap the full benefit, auditors therefore need to develop new skills and firms must continue to invest in embedding technology into internal training and methodology. Also, third-level institutions and professional bodies have a responsibility to integrate technology and analytics into course curricula, as Chartered Accountants Ireland has done with the introduction of data analytics, artificial intelligence and emerging technologies as part of the FAE Core syllabus.Business model and future risksArguably the most interesting findings of the study were related to understanding the business model and the future risks faced by the audited entities. At its most basic, this was what defined auditor purpose in the eyes of the young audit professionals – the job of the auditor is to understand the business, the risks it faces, and ensure that the financial statements present that reality. This aspect of the role gave them the most satisfaction: understanding the business, challenging management on their judgements, assumptions and outlook; and ensuring that the disclosure in the annual report reflected this in a fair and balanced way.In their day-to-day work, the young professionals felt that, while the audit process frequently resulted in entities making changes to their reported numbers and improving disclosures in the financial statements, this was mostly unseen by the broader users of financial statements. The participants highlighted that the pass/fail nature of the audit report did not adequately reflect the challenge and output of the audit and that, to date, the expanded audit reports had not improved this significantly.According to the study, the critical barrier to disclosing more tailored information in audit reports was the ingrained concept of a ‘clean’ audit opinion – auditors and preparers alike found it difficult to move to a less binary conclusion. A variety of themes emerged around this, including developing different forms of assurance over elements of the annual report and in particular, how audit reports may evolve to include more detail on audit judgements without creating the risk of a perception of a qualified audit. The young professionals concluded that audit reporting must evolve to accommodate more information for users on judgements.ConclusionOverall, the study provided some powerful perspectives on how our young auditors see themselves. It demonstrated that the next generation of audit leaders are passionate about their profession and are not satisfied to hide behind the expectation gap to defend the role of the auditor. Indeed, they have a strong desire to develop the role of the auditor to meet the expectations of the public and believe that this is achievable.We also concluded that as a profession, we must focus on further developing the theme of ‘auditor purpose’ to curate some simple messages and language that aligns with this deeper purpose and value of audit. In particular, we should encourage a proactive discussion and debate on auditor purpose to ensure the role of audit is understood, continues to have public interest value, and is an attractive profession.Sinead Moore is an Audit Partner in Deloitte and chairs the Young Audit Professionals Group.Paul McGarry is an Audit Senior Manager in Deloitte and a member of the Young Audit Professionals Group.

Jul 29, 2020
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