A decade of low interest rates has come to an end and companies are facing a much-altered lending landscape. David Martin offers his advice on negotiating with banks and alternative lenders in the current economy The Irish economy has faced many headwinds over the past year, but three key developments have had the most impact, namely: rising interest rates; rising inflation; and fluctuating energy prices. Together, these challenges have made life considerably harder for borrowers tasked with balancing existing debt and new debt requirements with banks and alternative lenders.  Up until recently, the world since 2010 had seen very low interest rates. This allowed some companies to borrow money at very cheap rates and use debt as a mechanism to finance business growth. While we are still seeing a healthy appetite from both domestic and international lenders for funding new debt requirements and refinancing, lenders now face tighter credit conditions, delayed decision-making, and a notable shift in sentiment.  Borrowers are also facing difficult trading conditions, resulting in cases of: actual or potential breached covenants;  issues in meeting debt obligations and therefore potential default; funding deficits against their business plan; and  refinance risk. Debt plan for discussions with lenders For borrowers, there are several factors to consider when putting together a debt plan. Working with a professional adviser, companies should factor the following points into their plan. Present data early Presenting “self-help” data (evidence to prove that the organisation has considered all options) to the lender at an early stage is crucial for both traditional and real estate companies, regardless of whether they are looking for new debt, refinancing, or dealing with covenant breaches. By presenting a critically assessed recast set of numbers with robust assumptions, lenders are more likely to provide covenant waivers or recast covenants. This plan should be put together after you consider the following “self-help” measures: Enhancing revenue and portfolio optimisation: identify and remove loss-making products and services; Price: understand and demonstrate what costs can be passed on to the end user; Improving margins: demonstrate to the lender how  margins have been improved and mitigated against rising costs; Productivity and efficiency improvements: ensure costs are controlled; Labour cost management: deliver an employer value proposition to manage wages and retain talent; Policy optimisation: reduce cost base through regulatory and government supports. By presenting a critically assessed recast set of numbers with robust assumptions, lenders are more likely to provide covenant waivers or recast covenants. Be proactive with stakeholders In addition to presenting early to lenders, commence discussions with Revenue and other creditors/stakeholders in a timely manner to set out appropriate plans. Engaging with customers is also essential to fully understanding the receivables timelines. Forecasts, covenants and debt requirements It is important to demonstrate the impact of any self-help measures the company has taken to bolster forecasts for the business and how they might impact financial covenants (for existing borrowers) or projected covenants (for a new borrower). The self-help measures and the financial model outlining forecasts should result in a comprehensive understanding of the organisation’s funding requirement, which in turn helps to identify what the debt ask from the lender is. Further, organisations should access their facility agreements to ensure full understanding of: terms and conditions of lending documents including all covenants;  what the covenant headroom is; and  all events of default that are in the lending documents. Once funding requirements have been established, being able to demonstrate to a lender how they are getting repaid is a key part of the negotiation.  While banks and most debt funds will usually expect repayment to come from the free cashflow of the business, some debt funds and special situation funds will look at repayment from other sources, including the sale of assets, partial disposals and other liquidity events. Additional sources of capital  Some companies carry a high net debt to earnings before interest, taxes, depreciation and amortisation (EBITDA), high loan to value, and low interest coverage ratio.  A review of the capital structure of the company and these key leverage ratios, as well as the ability to service principal and interest, will be a key determinant in understanding if other sources of capital might be needed to meet funding objectives in the short-, medium- and long-term.  Consider too if there are other sources of capital from existing debt providers or other debt and equity providers. Regular review  Ensure that cashflow and revised strategy is kept under regular review and the requirement for additional sources of capital is reviewed on a continuous basis. It is key to stay up to date with government supports available for organisations. Examine your hedging policy against best practice and make sure to regularly review it. Recovery  Crucially, at the presentation with a lender, you must demonstrate—through restatement of cashflows and plans (where applicable) for additional sources of capital—that the organisation is on the path to recovery and the lender will get full repayment. Debt solutions When negotiating with your lenders, it is worth considering the range of options from overseas, which may be helpful.  Despite the previously outlined headwinds, there are numerous international lenders that view Ireland as an attractive destination for debt transactions.   Previously, many companies saw their debt solution as a ‘bank v alternative lender’ solution.  However, there are several companies whose banks work alongside alternative lenders, working capital specialists, private placement and bond issuers, thereby demonstrating that different debt solutions can co-exist for companies.  The growing pool of lenders results in a more competitive landscape and choice for the borrower, increasing their debt options.  And while having a mix of lenders attracts different terms and conditions for different funding needs, it can result in the diversification of refinance risk—an important criterion in any debt negotiation. Some of the types of debt companies should consider include: Growth finance, e.g. expansion; Acquisition finance, e.g. buying another business; Real estate specialist lenders, e.g. development and/or acquisition; Refinance, e.g. amending or extending existing debt; Recapitalisation, e.g. capital structure optimisation; Special situation, e.g. liquidity funding; Private placement, e.g. long-term debt. The economic headwinds we are currently facing are likely to continue as the year progresses. Indeed, the lack of certainty with respect to inflation and ongoing geopolitical events has led commentators to predict further interest rate hikes in the Eurozone in 2023.  Whether or not your business is over-leveraged, a well thought out debt plan could help you to access the numerous debt structures and lending options available to Irish companies in the market.  David Martin is Partner and Head of Debt Advisory at EY Ireland

A mainstay of Ireland’s financial services landscape for over 60 years, our credit unions are entering an exciting phase with recent developments presenting new opportunities to adapt and change Credit unions are an important part of the financial services landscape. With offices a common feature of cities, towns and villages throughout Ireland, they play a key role in the day-to-day finances of many Irish people and communities. There are more than 3.6 million credit union members on the island of Ireland.  A history of credit unions Credit unions were first established in Ireland in the late 1950s and quickly became a repository for savings and a source of loans for many people. The total value of loans extended by credit unions in the Republic of Ireland is currently around €5 billion, with total savings coming to about €16 billion.  Average sector total reserves, as a percentage of total assets, is approximately 16 percent, which serves to underpin the confidence of their members, particularly in times of uncertainty and disruptive change. These institutions are not-for-profit financial co-operatives. They are owned and controlled by their members and therefore have a different business model to retail banks. Each credit union is independent, with its own board of directors, charged with overall responsibility for running the credit union.  Because they are part of the financial services sector, credit unions are governed by legislation in Ireland, principally the Credit Union Act 1997, as amended, and regulated by the Central Bank.  Significant amendments to the 1997 Act were introduced by the Credit Union and Co-operation with Overseas Regulators Act 2012, and this is the legislative regime under which credit unions currently operate. The credit union sector has been relatively stable in terms of any legislative or government policy changes. However, two recent developments, the Credit Union (Amendment) Bill 2022 and the Retail Banking Review (November 2022), present new opportunities for credit unions to adapt and change their business models and enhance their product and service offerings to members. The Credit Union (Amendment) Bill 2022 The first major legislative change for credit unions since the 2012 Act, the Credit Union (Amendment) Bill 2022 (the Bill) was published on 30 November 2022 following over two years of stakeholder engagement, with over 100 proposals considered. Highly technical and not an easy read, the Bill is currently before the Dáil, where proposals for amendments will be considered.  There is no fixed timeline for enactment and, post-enactment, commencement of sections may occur in phases, with the Central Bank of Ireland having to amend regulations to accommodate the new provisions.  The main provisions of the Bill involve: the establishment of ‘corporate credit unions’; amending the requirements and qualifications for membership of credit unions; altering the scope of permitted investments by credit unions; changes to the governance of credit unions; maximum interest rates on loans by credit unions; provision of services by credit unions to members of other credit unions; and participation by credit unions in loans to members of other credit unions. Collaboration between credit unions The introduction of ‘corporate credit unions’ should support greater collaboration between credit unions, facilitating a pooling of resources and greater access to funding.  A new form of regulated entity, their membership would be restricted to other credit unions, with lending allowed only to those members. Further collaboration is envisaged with a provision in the Bill allowing all credit unions to refer members to other credit unions to avail of a service that the original credit union does not provide.  While such referral is not mandatory, it is a new option for making additional services available to members—for example, a current account facility where the original credit union may be reluctant to provide this service to all members based on cost or other reasons.  Another provision enabling collaboration allows a credit union to participate in a loan to a member of another credit union. This will facilitate risk sharing associated with the loan and will make it easier for an individual credit union to offer larger loans to its members.  Regarding lending to businesses, and other organisations or associations, there is a further key provision in the Bill for “bodies” (incorporated or unincorporated) to be allowed join a credit union with the same rights and obligations as a “natural person” (member).  This is, however, subject to conditions that a majority of the members of the body would be eligible to join the credit union and the body meets the common bond requirement. Ultimately, this will make it easier for credit unions to lend to such bodies and is principally focused on SMEs. While none of these changes are mandatory, they do provide new options and opportunities for credit unions. Governance changes Regarding changes in governance, two provisions stand out: the option to appoint the manager (chief executive officer) of the credit union to the board; and  reduction of the minimum number of board meetings per year to six, down from the current 10.   The extent to which these changes will be adopted remains to be seen, as many credit union boards may be content with the existing practice.   Where a credit union decides to include its manager as a board member, the Bill proposes that this will be done by their direct appointment to the board and not by election at a general meeting of members.  The term can be for any length but cannot extend beyond the individual’s term as manager.  One restriction on the manager as a board member is that they cannot sit on the nomination committee of the credit union, the membership of which is restricted to board members who have been co-opted or elected at general meetings.  Similarly, regarding the frequency of board meetings, the board may be reluctant to change the current practice of having at least one meeting per month, concluding that it cannot adequately carry out its responsibilities with only six board meetings.  Because of the voluntary ethos of credit unions, the historically close involvement of board members with the credit union, and the relatively onerous responsibilities of boards, it may take some time before six board meetings is considered the norm. Other governance changes proposed by the 2022 Bill include reducing the number of board oversight committee meetings, removing the requirement for the board oversight committee to sign the audited annual accounts, and extending from annually to every three years the review of specific policies by the board. The Credit Union (Amendment) Bill 2022 includes substantive policy change in the areas of collaboration, members’ services, and governance. It seeks to give more power to credit unions to determine strategy and, when enacted, will require consequential changes to Central Bank regulations.  To fully exploit the options and opportunities enabled by its provisions will require significant work by the sector. The Retail Banking Review 2022 In November 2022, following its approval by Government, Minister for Finance, Paschal Donohoe, and Minister of State for Financial Services, Credit Unions and Insurance, Sean Fleming, published the report of the Retail Banking Review (the Review).  Driven by the departure of two major banks, Ulster Bank and KBC, this is a broad-ranging review of the retail banking sector in Ireland, including the credit union sector.  In relation to credit unions, the Review states: “Credit unions have a strong and trusted brand, they are present in communities throughout the country, and have been developing their product offering. The credit unions are already a significant player in consumer credit, and they are making inroads in the current account, mortgages and SME segments of the market. These developments, coupled with their collectively strong levels of capital and deposit bases, leads the Review Team to believe that credit unions could play a greater role in the provision of retail banking products and services in the coming years.” Referencing the Credit Union (Amendment) Bill 2022, the Review recommends that the credit union sector develop a strategic plan to deliver business model changes that would enable it to sustainably provide a universal product offering to all credit union members. Provided directly or on a referral basis, this would continue to be community-based. The Review suggests that such a strategic plan should show how credit unions can: viably scale their business model in key product areas such as mortgages and SME lending; invest in expertise, systems, controls, and processes to deliver standard products and services across all credit unions, while managing any risks arising and continuing to protect members’ savings; provide the option of in-branch services for members of all credit unions. Both the Bill and the Review point to new opportunities for credit unions and demonstrate confidence in their future as part of the Irish financial services sector. For these opportunities to be successfully managed, however, credit unions must continue to maintain high levels of governance so that legislators, the Central Bank, their members, and the wider community can have confidence in the sector.  Credit unions have done much for many people in Ireland for more than 60 years. These developments in legislation and government policy point to their continued and increasing relevance in the years ahead. Gene Boyd, FCA, is a risk management consultant and author of The Governance of Credit Unions in Ireland

The roadmap for the EU Commission’s milestone Corporate Sustainability Reporting Directive is taking shape and now is the time to start preparing for a brave new era in non-financial reporting, writes Conor Holland With the Corporate Sustainability Reporting Directive (CSRD) now approved by the European Council, entities in the EU must begin to invest significant time and resources in preparing for the advent of a new era in non-financial reporting, which places the public disclosure of environmental, social affairs and governance matters (ESG) matters on a par with financial information. Under the CSRD, entities will have to disclose much more sustainability-related information about their business models, strategy and supply chains than they have to date. They will also need to report ESG information in a standardised format that can be assured by an independent third party. For those charged with governance, the CSRD will bring further augmented requirements. Audit committees will need to oversee new reporting processes and monitor the effectiveness of systems and controls setup. They will also have enhanced responsibilities. Along with monitoring an entity’s ESG reporting process, and evaluating the integrity of the sustainability information reported by that entity, audit committees will need to: Monitor the effectiveness of the entity’s internal quality control and risk management systems and internal audit functions; Monitor the assurance of annual and consolidated sustainability reporting; Inform the entity’s administrative or supervisory body of the outcome of the assurance of sustainability reporting; and Review and monitor the independence of the assurance provider. The CSRD stipulates the requirement for limited assurance over the reported information. However, it also includes the option for assurance requirements to evolve to reasonable assurance at a later stage. The EU estimates that 49,000 companies across the EU will fall under the requirements of the new CSRD Directive, compared to the 11,600 companies that currently have reporting obligations. The EU has confirmed that the implementation of the CSRD will take place in three stages: 1 January 2024 for companies already subject to the non-financial reporting directive (reporting in 2025 for the financial year 2024); 1 January 2025 for large companies that are not presently subject to the non-financial reporting directive (reporting in 2026 for the financial year 2025); 1 January 2026 for listed SMEs, small and non-complex credit institutions, and captive insurance undertakings (reporting in 2027 for the financial year 2026). A large undertaking is defined as an entity that exceeds at least two of the following criteria: A net turnover of €40 million A balance sheet total of €20 million 250 employees on average over the financial year The final text of the CSRD has also set timelines for when the Commission should adopt further delegated acts on reporting standards, with 30 June 2023 set as the date by which the Commission should adopt delegated acts specifying the information that undertakings will be required to report. European Financial Reporting Advisory Group In tandem, the European Financial Reporting Advisory Group (EFRAG) is working on a first set of draft sustainability reporting standards (ESRS). These draft standards will be ready for consideration by the Commission once the Parliament and Council have agreed a legislative text. The current draft standards provide an outline as to the depth and breadth of what entities will be required to report. Significantly, the ESRS should be considered as analogous to accountancy standards—with detailed disclosure requirements (qualitative and quantitative), a conceptual framework and associated application guidance. Readers should take note—the ESRS are much more than a handful of metrics supplementary to the financial statements. They represent a step change in what corporate reporting entails, moving non-financial information toward an equilibrium with financial information. Moreover, the reporting boundaries would be based on financial statements but expanded significantly for the upstream and downstream value chain, meaning an entity would need to capture material sustainability matters that are connected to the entity by its direct or indirect business relationships, regardless of its level of control over them. While the standards and associated requirements are now largely finalised, in early November 2022, EFRAG published a revised iteration to the draft ESRS, introducing certain changes to the original draft standards. While the broad requirements and content remain largely the same, some notable changes include: Structure of the reporting areas has been aligned with TCFD (Task Force on Climate-Related Financial Disclosures) and ISSB (International Sustainability Standards Board) standards – specifically, the ESRS will be tailored around “governance”, “strategy”, “management of impacts, risks and opportunities”, and “metrics and targets”. Definition of financial materiality is now more closely aligned to ISSB standards. Impact materiality is more commensurate with the GRI (Global Reporting Initiative) definition of impact materiality. Time horizons are now just a recommendation; entities may deviate and would disclose their entity-specific time horizons used. Incorporation of one governance standard into the cross-cutting standard requirements on the reporting area of governance. Slight reduction in the number of data points required within the disclosure requirements. ESRS and international standards By adopting double materiality principles, the proposed ESRS consider a wider range of stakeholders than IFRS® Sustainability Disclosure Standards or the US Securities and Exchange Commission (SEC) published proposal. Instead, they aim to meet public policy objectives as well as meeting the needs of capital markets. It is the ISSB’s aim to create a global baseline for sustainability reporting standards that allows local standard setters to add additional requirements (building blocks), rather than face a coexistence of multiple separate frameworks. The CSRD requires EFRAG to take account of global standard-setting initiatives to the greatest extent possible. In this regard, EFRAG has published a comparison with the ISSB’s proposals and committed to joining an ISSB working group to drive global alignment. However, in the short term, entities and investors may potentially have to deal with three sets of sustainability reporting standards in setting up their reporting processes, controls, and governance. Key differences The proposed ESRS list detailed disclosure requirements for all ESG topics. The proposed IFRS Sustainability Disclosure Standards would also require disclosure in relation to all relevant ESG topics, but the ISSB has to date only prepared a detailed exposure draft on climate, asking preparers to consider general requirements and other sources of information to report on other sustainability topics. The SEC focused on climate in its recent proposal. The proposed ESRS are more prescriptive, and the number of disclosure requirements significantly exceeds those in the proposed IFRS Sustainability Disclosure Standards. Whereas the proposed IFRS Sustainability Disclosure Standards are intended to focus on the information needs of capital markets, ESRS also aim to address the policy objectives of the EU by addressing wider stakeholder needs. Given the significance of the directive—and the remaining time to get ready for it—entities should now start preparing for its implementation. It is important that entities develop plans to understand the full extent of the CSRD requirements, and the implications for their reporting infrastructure. As such, they should take some immediate steps to prepare, and consider: Performing a gap analysis—i.e. what the entity reports today, contrasted with what will be required under the CSRD. This is a useful exercise to inform entities on where resources should be directed, including how management identify sustainability-related information, and what KPIs they will be required to report on. Undertaking a ‘double materiality’ analysis to identify what topics would be considered material from an impact and financial perspective—as required under the CSRD. Get ‘assurance ready’—entities will need to be comfortable that processes and controls exist to support ESG information, and that the information can ultimately be assured. The Corporate Sustainability Reporting Directive represents a fundamental change in the nature of corporate reporting—the time to act is now and the first deadline is closing in.

Companies preparing for the commencement of the Protected Disclosures (Amendment) Act 2022 in the New Year will need to overhaul whistleblowing policies and processes, but the effort will bring clear benefits, writes Gráinne Madden Encouraging people in an organisation to speak up about their concerns should be a no-brainer. Why would an organisation not want to know about a potential risk? Why would an organisation want an employee to feel the need to go to an external body, such as a regulator or the media, to highlight internal problems? International research repeatedly reinforces that there are two main reasons why people fail to speak up about their suspicions of wrongdoing. First, there is the fear of retaliation. Current Irish and UK law is seeking to address this by offering protection. The second reason people fail to speak up about their suspicions of wrongdoing in an organisation is fear of futility. This is the fear that nothing will be done, even if they do speak up—and this is why having clear policies and processes in place is so important.  The absence of a whistleblowing policy and process in an organisation will certainly send the message that the organisation does not really want to hear about any problematic issues that may exist or arise.  As it stands, in Ireland and the UK, workers are entitled to legal protection against dismissal, or other reprisal from their employer or colleagues, when disclosing concerns about certain issues. Until now, however—except in certain sector-specific areas—most organisations have not been required to put a whistleblowing policy or procedures in place, or to follow up on such disclosures.  The EU Whistleblowing Directive will, however, bring major changes to which organisations operating in EU jurisdictions must now respond. In Ireland, the Protected Disclosures (Amendment) Act 2022 will commence on 1 January 2023, giving effect to the EU Directive. New requirements for organisations There are several key additional requirements that will apply to organisations under the new Act, which are considered below. Employee thresholds For workplaces with more than 50 employees, there will be a requirement to have formal channels and procedures for receiving and, crucially, following up on disclosures. Workplaces with between 50 and 249 employees have until December 2023 to comply, and 250-plus employee workplaces must comply at commencement.  However, all organisations operating in certain sectors will be required to comply at commencement, even those employing fewer than 50 people. This includes:  public bodies; companies subject to EU laws in the areas of financial services, prevention of money-laundering and terrorist financing; transport safety; and protection of the environment (offshore oil and gas installations and operations only). The 2022 Act states that the Minister for Public Expenditure and Reform may, by order, reduce the threshold of 50 employees for specified classes of employers, subject to a risk assessment and public consultation.  Change of definitions and burden of proof Under the new Act, the scope of protected persons will be extended to include non-executive members, shareholders, volunteers, and ‘pre-contractual’ employees, such as candidates applying for a job during the recruitment process before the work-based relationship even begins. Further, retaliation will be more broadly defined. In respect of alleged detriment (be it an act or omission) caused to a person because of the making of a protected disclosure, the employer will have to prove that the detriment complained of was not in retaliation for, or because of, the person having made a protected disclosure.  Administration and staff Confidentiality regarding whistleblowing must be respected by all reporting systems and access to data by non-authorised staff prevented. For staff who are authorised, appropriate training must be given in respect of the handling of reports. Finally, records must be kept of all reports, as well as ensuring follow-up and feedback regarding these reports within certain timeframes.  Blending culture with policy The required process management will mean that many organisations will need to implement issue management systems. Simply having a policy and process in place isn’t, however, going to be an encouragement for nervous employees. Creating a culture in which people feel safe in speaking up—and feel that their concerns are welcomed—is far more important.  So, in addition to having a sound policy and process in place, what other steps should employers consider? Here are seven recommendations: Train managers and team leads to recognise when an issue could be a protected disclosure and, most importantly, to receive reports of potential issues in a calm and welcoming way. Word can spread very quickly about managers not being open to bad news. Think about how whistleblowing is discussed in the organisation and consider whether it is healthy or whether the narrative needs to be changed. Any pejorative language in connection with whistleblowing or speaking up needs to be identified and stamped out. The focus must be on recognising that people who bring risks to our attention are doing the organisation a great favour. It is worth highlighting that research demonstrates that the people who blow the whistle tend to be the most loyal employees who care greatly about the organisation. Ensure that the confidentiality regime is well- communicated and respected so that employees can be confident their identity will not become known if they disclose an issue. Do not become complacent if the whistleblowing policy is not used—rather than indicating a spotless organisation, it could be signalling a poor work culture where people either fear speaking up or just don’t care enough to bother. Remove any ‘good faith’ requirement from policies. The focus should be on the issue reported, not the motivation of the person reporting. Furthermore, there is no ‘good faith’ obligation under Irish or UK law or the directive. Make sure that penalisation is not tolerated. State this clearly in the whistleblowing and speaking-up policy, making sure there are clearly defined processes for reporting claims of penalisation and for following up on claims of penalisation. Provide feedback to a discloser on any action taken in response to their disclosure. The ability to do this will depend on the nature of the issue and the rights to confidentiality of other parties. At the very least, a discloser should be reassured that their concerns have been dealt with appropriately. It is likely that most organisations will need to overhaul their whistleblowing policies and processes in response to the Protected Disclosures (Amendment) Act 2022. The requirements may seem daunting, but help and advice on good practice is available. The benefits are clear, not just in terms of risk management and protection of brand and reputation, but also for the common good.

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

With the Protected Disclosures (Amendment) Act 2022 now signed into law, companies must ensure they are up to speed with new requirements, writes Ita Gibney As we emerge from the pandemic, we have entered a phase of overwhelming change. We are heading into inflationary times, the Ukrainian–Russian war looks set to be prolonged, a recession is imminent, and a new world of work is emerging, as companies consider their cost base and margin pressure—whether it’s office space, employee numbers or energy costs. Such adversity creates increased risk and additional scope for negative news, making it imperative for companies to manage their communications with even greater skill and care. Accountants, as close advisors, are often called upon for advice in this area, which is not always their field of expertise. Liquidators and receivers, in particular, will be under pressure as they work through the fall-out of corporate challenges in the period ahead. Against this backdrop, businesses are also trying to be socially conscious and to run responsible, sustainable ventures. Purpose is now seen as being every bit as important as profit. Stakeholder capitalism is part of the valuation equation. Good governance, ethical behaviour and sustainability are now on a par with risk management and legal compliance. And, recent whistleblowing cases concerning both Uber and Twitter demonstrate just how fast reputations can sink when a corporate entity finds itself in the glare of negative publicity. Updates to Ireland’s whistleblower regime In Ireland, the Protected Disclosures (Amendment) Act 2022 has brought significant change to our whistleblower regime, including greater risks for companies, especially those engaged in unethical practices or breaches of law. The updates build on the protections offered in 2014 under the Protected Disclosures Act. Now, a wider scope of categories of worker will be protected, including volunteers, board members, shareholders, and job applicants. Further, the definition of penalisation has been expanded to cover more covert acts, including negative performance appraisals or withholding promotions. Most notably, the amendments put the burden of proof firmly with the employer. For corporate entities of 50 employees or more, the Act requires that they establish, maintain and operate internal reporting channels and procedures for the making of protected disclosures. The importance of having policies and processes for protected disclosures provides an avenue for the whistleblower to go through prior to reaching out to external sources. Entities will need to be aware of, and know how to, manage their risks prior to a disclosure. Prevention is better than a cure Under the new legislation, there is now a greater risk of a whistleblower going public. Whistleblower procedures, then, must be part of wider corporate reputation strategies, recognising that crisis prevention is the key to corporate health. There is a renewed drive towards unionisation of workers, and a backlash against the gig economy and poor workplace cultures, especially for new market entrants. Work cultures, if found to be negative, are quickly trending on social media, affecting recruitment as well as reputation. Companies need to be quick, consistent and authentic when it comes to protecting their brand against public scrutiny. All the experts in the world will advise that it is wiser to prevent a crisis than to handle one. A good CEO will manage the risks hands-on, test the crisis communication plans, have good independent counsel to plan for any potential bad that may arise in the future. Companies will forge great reputations, not just because they have great products and services, but also because they take full account, in advance, of the public impact of their corporate footprint. CEOs and boards must take heed—never has corporate reputation and maintaining the trust of stakeholders been such a critical factor in preserving business value. Ita Gibney is Chair of Gibney Communications

Prosecutions against charities that do not file their annual report with the Charities Regulator will be ‘the next step’ in the regulation of the sector, writes Colin Kerr The Charities Regulator is calling on non-profit organisations to prioritise compliance and transparency to support public trust at a time of rising regulation in the sector. Published in late July, the Charities Regulator 2021 Annual Report revealed that just 64 percent of registered charities in Ireland had filed their annual reports on time. Commenting on the finding, Helen Martin, Chief Executive of the Charities Regulator, said there had been a decline in the number of charities filing their annual reports within the required timeframe, a trend she called ‘disappointing.’ “Our registration and compliance units are assessing why some charities are failing to meet this statutory requirement,” Martin said. Providing an overview of a charity’s finances and activities on the Public Register of Charities, these annual reports are an “important means” for registered charities to provide basic information to the public, Martin added. “The question for charities is whether they can afford not to comply with the requirement to file annual reports. Funding is the number one concern for charities we surveyed last year, and as inflation brings an increased cost of living, it will remain so,” she said. “There is a strong link between greater transparency and accountability and public trust in the sector, making their annual report to the Charities Regulator an important means for registered charities to provide basic information to the public on their finances and activities in the previous year.” Under the Charities Act 2009, every charity must submit its annual report to the Charities Regulator ten months after its financial year ends. “In 2021, we noticed a drop-off in the rate of compliance with this requirement,” said Tom Mulholland, Director of Compliance and Enforcement with the Charities Regulator. “The Charities Regulator came into existence in 2014 and, every year prior to 2021, the rate of compliance was increasing year-on-year. “We are concerned with the reduction of the number of charities filing their annual reports on time, as this is a legal requirement.” Mulholland pointed out that filing an annual report to the Charities Regulator was not an onerous process. “The report is filed online, and it is a straightforward form, which requires basic figures including income, expenditure, assets, and liabilities. It is an opportunity for charities to give details of the work they carry out,” he said. “There is a free text section on the form, which allows the charity to detail their activities, which means that if someone is looking up a charity on the Register of Charities website (charitiesregulator.ie), they can see from the most recent annual report what the charity itself is saying about its activities.” Those charities that file their annual reports to the regulator were also demonstrating to the public that they were compliant with their obligations. Mulholland said: “This should be a comfort to someone who decides to donate to a charity, and it also allows the donor to get information about the charity in terms of its income, expenditure and activities.” While the Charities Regulator had always been ‘proportionate’ in its interaction with charities, Mulholland said that, in the interest of fairness and due diligence, it had to consider those charities which were making the effort to be compliant when dealing with non-compliant parties. “We are considering our options when dealing with those charities that do not file their annual reports to the Charities Regulator,” he said. “It is possible to remove a charity from the Register of Charities. This has serious consequences–an entity that is not on the register is not permitted to call itself a charity or conduct any charitable work under the Charities Act. “It is also an offence under the Charities Act not to file an annual report with the Charities Regulator and we are actively contemplating acting against those charities that are not compliant,” he said. Mulholland said that the Charities Regulator could opt to prosecute a charity in the District Court. Prosecutions have been taken against entities acting as charities, which are not on the Register of Charities. To date, however, no prosecution has been taken against charities that do not file their annual reports. “The Charities Regulator is evolving and we have been in business since 2014. We take a proportionate response in relation to our interactions with charities and we tend to interact with charities rather than dictate actions to be taken,” Mulholland said. “Having said that, prosecutions against charities, which do not file their annual report with the Charities Regulator, will be the next step in the development of regulation of the sector.” Under the Charities Governance Code, Chartered Accountants looking after the accounts of a charity should have access to the minutes of the meetings of the charity’s trustees. “Accountants working with charities should be able to see these minutes, which should show that the trustees are taking an active part in the running of the charity and that the decisions they make are clear from the minutes,” said Mulholland. “There is also legislation before the Oireachtas, the Charities (Amendment) Bill 2022, which provides for the introduction of accounting regulations in relation to charities, which will supply a format for the preparation of financial statements in relation to charities. The Bill will also herald the introduction of Charities’ Statement of Recommended Practice (SORP) requirements for charities with an income of more than €250,000.” Already in force in Britain, SORP is not yet a requirement in the Republic of Ireland. The Charities Regulator is also continuing to promote the Charities Governance Code, which sets out minimum standards for managing and controlling Irish charities. The code was established to help charity trustees implement processes that meet their legal duties under charity legislation. “The code was rolled out in 2021 and we are pleased with the uptake, which is around 69 percent,” said Mulholland. “One of the aims of the code is to encourage transparency in Irish charities. One of the ways charities can show transparency is through the clarity of their financial statements. “We would also urge charities filing their accounts with the Companies Registration Office to file their full financial statements rather than their abridged statements.” In conclusion, Charities Regulator Chief Executive Helen Martin said that compliance with the Charities Governance Code, and with the requirements of the Charities Regulator, could only benefit individual charities directly. “It is public money that is being spent here,” Martin said, “and everybody from the donors to the Regulator to the charities themselves want to make sure that these funds are spent in a transparent and accountable manner.”

The Corporate Enforcement Authority Act 2021 overhauled the legislative framework for businesses in Ireland, impacting company directors, corporate restructuring, share premiums, and the distribution of profits. Dee Moran and Lilian Halpin dig into the details Although most of the provisions of the Companies (Corporate Enforcement Authority) Act 2021 (CEA Act) came into effect in July of this year, the focus thus far has centred primarily on the Corporate Enforcement Authority, the successor to the Office of the Director of Corporate Enforcement. There is far more to this Act, however, including a number of interesting updates the Companies Act 2014 (CA 2014). The introduction of the CA 2014, followed the wide-ranging overhaul, modernisation and streamlining of company law in Ireland. It was inevitable, however, that there would be some gaps and omissions in the new regime. The CEA Act introduces provisions aimed at remedying some of these anomalies. While further remediative legislation is expected in the future as the legislature continues to review and refine existing law, in this article, our focus will be the amendments included by the CEA Act impacting company directors, company re-organisation, share premiums, and the distribution of profits. Requirement for directors to provide PPSN details Section 35 of the CEA Act introduces the requirement for directors of Irish registered companies to provide details of their Personal Public Service Number (PPSN) to the Companies Registration Office (CRO) when completing certain documents. While this section of the CEA Act has not at time of writing commenced, it is intended to help protect against identity theft, specifically concerning the set-up of new companies that have used bogus director details and addresses or individual names without permission. The UK’s register of businesses and their directors is famously so weak on information verification that both “Donald Duck” and “Adolf Tooth Fairy Hitler” have been listed as directors of companies. Other difficulties faced prior to this amendment included obtaining a list of directorships for an individual from the CRO as individual director filings may use different versions of the person’s name, such as ‘Eddie’ and ‘Edward’, or the person may have changed address. The introduction of the requirement to file the PPSN as a unique identifier should, therefore, make this process easier. It is important to note that there will be an alternative procedure in place for those directors who do not have a PPSN. The CRO is currently reconfiguring its online portal to accommodate this new requirement and it is expected that Section 35 will commence in the first quarter of 2023. Its implementation will not be without challenge and the CRO has set up a working group to identify issues and try to resolve them to ensure a smoother transition. The CRO is also reviewing the technical challenges that arose after the commencement in 2019 of the Registry of Beneficial Ownership (RBO). The RBO is “the central repository of statutory information required to be held by relevant entities (corporate or legal entities incorporated in the State) in respect of the natural persons who are their beneficial owners/controllers, including details of the beneficial interests held by them.” It is hoped that the CRO will take the learnings from this review and incorporate them into the new system. It is important that potential technical challenges in relation to PPSNs are resolved before section 35 of the CEA Act commences. If they are not properly considered, there is the potential for delays in the filing of changes to directors or to the filing of annual returns, and the possibility of late filing fees or the loss of audit exemption. Therefore, companies and practitioners alike need to be aware of these changes and to begin to make plans to ensure that the appropriate information is understood and updated. Three party share-for-undertaking transactions The provision for three party share-for-undertaking transactions within corporate reorganisations was introduced in section 91 of CA 2014. This section recognised that it is not uncommon for companies to enter into a transaction where an undertaking, part of an undertaking, or a subsidiary, is transferred to a new company, which then issues shares as consideration to the shareholders, rather than to the transferring company. Subsection 91(4) of CA 2014 has, however, been interpreted by certain practitioners to mean that such a transaction could only be validated by either a summary approval procedure or a special resolution confirmed by court—even where the company has adequate distributable reserves to underpin the transaction. The CEA Act has added subsection 91(4)(c) to clarify that such a transaction can take place without the summary approval procedure, or court approval, in circumstances where the company has distributable reserves that are at least equal to the value of the undertaking transferred. The use of a company’s share premium account Under the Companies Act 1963, a company’s share premium account could be applied for several purposes, such as application by the company in writing off preliminary expenses, or in writing off the expenses of, or the commission paid or discount allowed on, any issue of the shares or debentures of the company. Equivalent provisions were not included in CA 2014 in what was assumed to be an unintended omission by the drafters. This reduced the flexibility of companies in relation to the use of share premiums, causing difficulties. A company wishing to effect a transaction which had been permissible under the Companies Act 1963 was now, for example, obliged to carry out a formal reduction of company capital by the summary approval procedure in CA 2014. This meant that the company might have incurred additional expense, such as obtaining a statutory auditors’ report, or that it might have had to make a court application in circumstances where such a move would not previously have been required. In addition, because the summary approval procedure is not available for the reduction of company capital in the case of public limited companies, such a company had to apply to the High Court in order to reduce its company capital so it could write off such costs and expenses. To remedy this, section 14 of the CEA Act inserts a new subsection 71(5A) into the CA 2014. This subsection restores the status quo that had existed prior to the introduction of the CA 2014, with the exception of permitting its use for the issue of shares at a discount. Restoration of exceptions to “distribution” definition In the since repealed Companies (Amendment) Act 1983, company legislation provided for two exceptions to the rule that a company should not make a distribution except out of profits available for this purpose. They were: a reduction of share capital by paying off paid up share capital; and extinguishing or reducing all or part of a member’s liability on shares that are not fully paid up. These exceptions were not included in CA 2014 and it is worth noting that these omissions were considered and not unintentional. Both exceptions were included in draft legislation but were subsequently removed before CA 2014 was enacted. The effect of the omission of the exceptions meant that a company had to find distributable profits to be able to lawfully reduce or extinguish the liability of members in respect of any unpaid shares, or to pay off paid-up capital. The explanatory memorandum to CA 2014 refers to the omission of the exceptions as providing consistency in the legislation. However, in 2017, the Company Law Review Group—a statutory advisory expert body that advises the Minister on the review and development of Irish company law—was of the opinion that the omission of the two exceptions in the CA 2014 did not take into account the new and detailed regime in that legislation for the reduction of share capital, i.e. requiring either a court order, or to be effected under the summary approval procedure with contingent director liability. It recommended that the two exceptions which had been omitted from CA 2014 be reinstated. Section 19 of the CEA Act has now amended section 123 of CA 2014 to reinstate these exceptions. Planning for the changes ahead It is encouraging that improvements and clarifications continue to be made to legislation, particularly in company law where omissions or inadvertent changes from older legislation have resulted in difficulties in practice. Chartered Accountants Ireland continues to work with its technical committees to identify areas where further clarity on aspects of company law would be beneficial and to make representations to the relevant department outlining those areas so that they might be considered for future legislation. Dee Moran is Professional Accountancy Lead at Chartered Accountants Ireland and Lilian Halpin is Technical Manager at Chartered Accountants Ireland

We are at the dawn of a new era in sustainability reporting and better ways of doing business for people and planet. Derarca Dennis and Nicola Ruane give their advice and insights on the road ahead for companies and accountants  There has been a significant shift from voluntary to mandatory sustainability or environmental, social and governance (ESG) reporting in recent years.  The European Commission’s Action Plan for Financing Sustainable Growth directly targets ‘Strengthening sustainability disclosures and accounting for rule-making,’ as one of 10 key areas of focus. This has resulted in the enactment of the Corporate Sustainability Reporting Directive (CSRD). In tandem with the trend towards mandatory ESG reporting, more and more companies are choosing to voluntarily disclose ESG information to satisfy stakeholder demands.  So, why is all of this so significant for the accounting profession? There are numerous reasons, all of them important, and outlined below:   Climate risk tops priorities One of the key purposes of the CSRD is to curb ‘greenwashing,’ which is an attempt by a company or organisation to mislead the public about its level of positive ESG impact.  Mandating standardised reporting provides for increased comparability in the public domain. This means that organisations can be held accountable by their stakeholders.   Assessing the impact of climate change and broader ESG impacts on a company’s bottom line has become the remit of the International Financial Reporting Standards (IFRS) Foundation under its recently launched International Sustainability Standards Board (ISSB).  With the oversight of the IFRS Foundation, the relevant ESG reporting standards and frameworks are converging under the ISSB.  One specific issue the accounting profession should examine, in the first instance, is climate change and, specifically, climate-related financial risks.  This is particularly important right now because of the adoption of the Task Force on Climate-related Financial Disclosures (TCFD) across nations, with many opting to make it mandatory for companies to report how their operations are being impacted by our changing climate.  The TCFD requires four key areas to be addressed in relation to climate risk: strategy; risk management; governance; and metrics/targets.  Although this is not yet mandatory in Ireland, leading organisations are starting to actively manage and report both physical and transitional risks.  With climate risks and disclosures moving swiftly up the business agenda, it is becoming a part of everyone’s job in an organisation to integrate the relevant considerations into their function, be it procurement, marketing or finance.   There is a lot to think about, so where is the best place to start? When it comes to playing your part in tackling climate change, we recommend that you first ask these three questions—of yourself, your team, and the wider organisation: Have we identified the climate change risks that may affect our revenue, P&L and balance sheet?   Do we have a strategy in place to manage and measure climate risks?  Do we need to report to investors or other stakeholder groups?   Climate change and financial statements With the advent of the ISSB, we can expect the robustness of financial accounting standards developed over decades to become applicable to the measurement and disclosure of climate change risks.  One question our clients are asking is: ‘Should we be disclosing the extent to which climate change affects our financial statements under IFRS?’ Although there is, as yet, no single explicit standard on climate-related matters under IFRS, climate issues may impact several areas of accounting.  The immediate impact to financial statements may not at first appear significant from a quantitative point-of-view. However, there is growing expectation among stakeholders that entities preparing financial statements must explain how climate-related matters are considered. This expectation is such that climate-related matters can be viewed as material from a qualitative perspective. Significant effort and judgement will be required to assess them and we recommend that you read EY Global’s Applying IFRS — Accounting for Climate Change (Updated May 2022) for further guidance found at ey.com. CSRD: what it means for your organisation Some 49,000 companies will now be in scope for the  mCSRD, up from the 11,600 that had been in scope under its predecessor, the Non-Financial Reporting Directive (NFRD).  One key shift worth noting from the NFRD regime to the CSRD concerns assurance. ESG reports must be certified by an auditor or independent certified assurance provider to ensure compliance with the framework. The timelines laid down are:  large corporates, currently subject to NFRD, to report in 2025 for 2024 data;  large corporates, not subject to NFRD, to report in 2026 for 2025 data.  For SMEs, requirements under the CSRD will not come into effect until 2026. There is an opt-out option to 2028. This is only applicable to listed SMEs across regulated European markets, however.  The Commission will make simplified reporting standards available to small companies in due course.  SMEs and reporting requirements While there is strong consideration that SMEs are not subjected to adverse reporting requirements, a step change is needed to ensure that this community is supported adequately through the process of reporting on sustainability impacts.  Given the critical role SMEs play in bolstering the Irish economy and in helping to reach targets laid out in the National Climate Action Plan, it is important that ESG impact is considered and embedded throughout their operations without the requirement for undue or excess reporting.  Separate standards may be developed for non-listed SMEs. This option is currently under discussion and, if introduced, would be voluntary in nature, as per the current proposal.    For all SMEs, the guidance is to start small. Select a limited number of material metrics — say, three to five — to measure and report.  Our recommendation would be to span these metrics across different pillars of focus aligned to the World Economic Forum (WEF) Framework. Example metrics under each pillar include:  Prosperity: employment, economic contribution, tax paid;  People: diversity and inclusion, pay equity, training provided;  Planet: GHG emissions, climate risk (TCFD), water consumption; and    Governance: board composition, setting purpose, anti-corruption.  This framework will in time become the leading framework globally for measuring non-financial impact.  Pressures beyond regulation   Whilst the regulatory agenda is driving the need for greater transparency and focus on an organisation’s ESG impact, other drivers may emerge even sooner and from other sources. So, beyond regulation, what are the biggest drivers of ESG reporting?   The supply chain: customers and clients want to know what a company’s impacts are and whether it is building this into tenders with a view to including the relevant data in its own reporting. One example here is the Scope 3 Greenhouse Gas (GHG) emissions.   Talent: millennials and Generation Z candidates are more aware of ESG than previous generations and increasingly keen to work for, and buy from, companies that actively manage their climate impact.  The board: more and more ESG-competent boards are challenging management to produce non-financial data.  Capital providers: keen to meet green lending targets, capital providers are more likely to require suitable disclosures from their customers’ borrowing funds. One reason for this is so that they can aggregate this data, where applicable, into their own ESG reporting.    Four key steps in ESG reporting   Reporting is not just a data collection exercise, and it is vital to bear this in mind. Our experience with clients has shown us that there are four key components to consider.  While we might start with the end goal in mind — the ESG report — here are the steps needed to get there:   Research and select an appropriate framework, ensuring that due diligence discovers all mandatory disclosures;  Build an ESG strategy; Measure performance and collect data;  Publish a transparent report combining qualitative with quantitative data and communicate with stakeholders. To comply with the CSRD, companies will need to submit data digitally through a single access point. This is to deliver on the objective of the CSRD to standardise the data, enable comparability across companies and avoid ‘greenwashing.’ A true differentiator in business ESG reporting can be viewed as a true differentiator for winning business. We expect publicly communicating ESG impact to become par for the course for businesses in the years ahead.  Another advantage is that it can support a company’s brand reputation as a leader. An organisation that is seen to be at the forefront of sustainability will be regarded as one that takes responsibility for minimising its negative impact, and actively fosters positive impact.  In summary, the accountancy profession is ideally placed to contribute to building a more holistic picture of an organisation’s performance and future potential.  Past performance is not a measure of future success, but, by marrying financial and non-financial performance, you will get a more accurate picture of an organisation’s potential future success.  The challenge for many businesses now is the transition they will need to make from the sustainability data processes and frameworks currently in use, to the higher and more rigorous standards the accountancy profession already adheres to for the reporting of financial data.  Accountants are crucial in the development of detailed sustainability reporting and the fight against greenwashing. As accountants, you can play a vital role in future-proofing your business through ESG reporting.     Derarca Dennis is Partner, Climate Change and Sustainability Services at EY Ireland Nicola Ruane is a senior manager in EY Ireland’s Climate Change and Sustainability practice

The Russian invasion of Ukraine has given rise to potentially complex financial reporting considerations for Irish companies with a presence in one or both territories. David Drought delves into the details of two areas of concern. The ongoing conflict in Ukraine, and resulting sanctions and counter sanctions imposed globally on and by Russia, have impacted certain companies.  Although the conflict is first and foremost an immense human tragedy for those involved, companies whose operations have been affected will need to consider the financial reporting implications.  Here, we consider two potential issues—the first being whether control of subsidiaries located in Russia has been lost, and the second being whether impairment tests of non-financial assets in the affected territories should be carried out. Do you continue to control your subsidiary?  Under IFRS 10 Consolidated Financial Statements, a company (investor) controls a subsidiary (investee) when it has power over the subsidiary, is exposed to variable returns from its involvement with the subsidiary, and can also affect those returns by exercising its power. Control requires power, exposure to the variability of returns, and a linkage between the two. Continuous control assessment  Suppose the facts and circumstances indicate that there are changes to one or more of the elements of the control model. In this scenario, an investor must reassess whether it continues to have control over the investee.  Here, companies will need to consider whether the consequences of the ongoing conflict lead to changes in investors’ relationships with investees in Russia. As a result of the effects of the ongoing conflict, for example, foreign investors may: face difficulties in repatriating funds from investees; exit or cease operations in these markets, either by choice or by being forced to do so because of sanctions imposed; or be impacted by potential new restrictions imposed on foreign owners – e.g. nationalisation of local operations. The hurdle for losing control of an existing subsidiary is generally high, but the loss of control of subsidiaries in the conflict-affected countries or regions should not be immediately presumed.  There is, for example, no exclusion from consolidation due to difficulties alone in repatriating funds from the subsidiary to the parent or the lack of exchangeability of currencies.  In considering the impact of these ongoing conflicts, management must consider these two critical elements of control: power and returns. Power When assessing power over the investee, an investor considers only substantive rights relating to an investee – i.e. rights that it has the practical ability to exercise.  Determining whether rights are substantive requires judgement. Whether there are any barriers due to the consequences of the ongoing conflict preventing the holder from exercising these rights should be considered (e.g. due to current sanctions a company may no longer be able to exercise rights previously available to it.) Returns When assessing returns, an investor evaluates if they are exposed to variable returns from involvement with an investee. The sources of these returns may be very broad and may include both positive and negative returns.  Sources might include dividend or other economic benefits, for example, remuneration for services provided to the investee, tax benefits or certain residual interests.  Management should consider whether the company’s exposure to the variability of returns has been impacted and needs to be reassessed. IFRS 10 does not establish a minimum level of exposure to returns to have control.  Where there has not been a loss of control, there may be other impacts to consider. These might include: possible impairment of the investment in the subsidiary; presentation of the subsidiary as held-for-sale or as a discontinued operation; or  possible impairment of the assets held by the subsidiary. Do I need to test my non-financial assets for impairment? Control in relation to other assets  Before considering impairment for companies with assets on the ground in Russia or Ukraine, it is necessary to assess whether they have, in substance, lost control of those assets.  Control in the context of assets generally means the practical ability to control the use of the underlying asset. If control has been lost, the asset is derecognised in its entirety, and no impairment is carried out. IAS 36 Impairment of assets  The standard requires management to assess whether there is any indication of impairment at the end of each reporting period.  Irrespective of any indicator of impairment, the standard requires goodwill, and intangible assets with indefinite useful lives (and those not yet available for use) to be tested for impairment at least annually. An annual test is required alongside any impairment tests performed as a result of a triggering event. Triggering events  The likelihood that a triggering event has occurred for non-current assets has increased significantly for companies that: have significant assets or operations in Russia or Ukraine; are significantly affected by the sanctions imposed and/or Russia’s counter-measures; are adversely affected by increases in the price of commodities; and/or are significantly affected by supply chain disruption. Impairment indicators  Indicators of impairment may come from internal or external sources, but the likelihood of some impairment indicators existing has increased for companies impacted by the Russia-Ukraine war. Some indicators that may arise include: the obsolescence or physical damage of an asset. For example, plants and operations in Ukraine may be subject to physical damage; significant changes in the extent or manner in which an asset is (or is expected to be) used which has (or will have) an adverse effect on the entity.  a significant and unexpected decline in market value; significant adverse effects in the technological, market, economic or legal environment, including the impact of sanctions on the entity’s ability to operate in a market; a rise in market interest rates, which will increase the discount rate used to determine an asset’s value in use; and the carrying amount of the net assets of an entity exceeding its market capitalisation. Falling stock prices may result in an entity’s net assets being greater than its market capitalisation. Abandonment or idle assets  Companies may have abandoned—or have considered a plan to abandon—certain operations or properties in Russia or Ukraine.  Some companies may have been forced to abandon owned or leased facilities in Ukraine as a result of the war, for example. In such cases, the company needs to accelerate or impair the depreciation of the property based on the revised anticipated usage or residual value. Assets lefts temporarily idle are not regarded as abandoned—for example, when a company temporarily shuts a manufacturing facility but intends to resume operations after military activities in the area abate.  Although temporarily idling a facility may trigger an impairment of that item (or the CGU to which it belongs), a company does not stop depreciating the item while it is idle—unless it is fully depreciated or is classified as held-for-sale. Companies should, however, consider the most appropriate depreciation method in this situation.  Disclosures When reporting in uncertain times, it is essential to provide the users of financial statements with appropriate insight into the key assumptions and judgements made by the company when preparing financial information. Depending on an entity’s specific circumstances, each area above may be a source of material judgement and uncertainty requiring disclosure. David Drought is a director in the Accounting Advisory team at KPMG in Ireland

The crypto slump has highlighted the risks posed by cryptocurrency as a speculative asset, but for professionals in finance, the immediate challenge is working out how best to account for it. Gavin Fitzpatrick and Mike O’Halloran dig into the details. Money, currencies and the methods by which people and businesses earn, store and exchange value have taken numerous forms throughout history.  The evolution of currency dates back many millennia, from the early days of bartering to modern methods, such as coins, notes, loans, bonds and promissory notes. Introduced in 2009 with the launch of Bitcoin, cryptocurrency is the latest evolution in this process. Despite a slow initial uptake, its popularity has risen dramatically in the past decade and, today, there are thousands of different cryptocurrencies in existence.  Views on their usefulness and longevity are somewhat fragmented, however. Investors who have been fortunate enough to acquire cryptocurrency at low prices sing its praises, whereas critics argue against its fundamentals and highlight the volatility of the cryptocurrency market. For companies and the accounting profession, however, the immediate challenge is working out how these assets should be accounted for. Here are some common questions worth bearing in mind. Is there a specific standard that accountants can apply to cryptocurrencies? In short, the answer here is no—nor do cryptocurrencies fit neatly into any existing standard. Accounting for cryptocurrencies at fair value through profit and loss may seem intuitive. However, such an approach is not compatible with IFRS requirements in most circumstances, as cryptocurrencies may not meet the definition of a financial instrument as per IAS 32.  Should cryptocurrencies be treated as another form of cash? IAS 7 Statement of Cash Flows states that cash comprises cash on hand and demand deposits. IAS 32 Financial Instruments Presentation notes that currency (cash) is a financial asset because it represents the medium of exchange. While cryptocurrencies are becoming more prevalent, they cannot be readily exchanged for all goods or services.  IAS 7 also considers cash equivalents—short-term, highly liquid investments that are readily convertible to known cash amounts and subject to an insignificant risk of changes in value. Given the considerable price volatility in cryptocurrencies, entities have not sought to apply policies where they define holdings in crypto assets as cash or cash equivalents. In the absence of a specific standard, what guidance and methodologies can accountants follow when deciding how to account for these assets? In practice, accounting policies defined to deal with cryptocurrencies follow the principles of accounting for intangible assets or, in some cases, accounting for inventory.  Intangible assets IAS 38 Intangible Assets defines an intangible asset as “an identifiable non-monetary asset without physical substance”.  Identifiable – under IAS 38, an asset is identifiable if it “is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged.” Cryptocurrency holdings can be traded and are, therefore, identifiable. Non-monetary – IAS 38 defines monetary assets as “money held and assets to be received in fixed or determinable amounts of money.” The value of a cryptocurrency is subject to major variations arising from supply and demand. As a result, its value is not fixed or determinable. Without physical substance – as a digital currency, cryptocurrencies do not have physical substance. As a result of applying the above logic, many companies classify holdings in cryptocurrencies as intangible assets. In line with IAS 38, companies can use one of two approaches to account for intangible assets: Cost – cryptocurrency asset is carried at cost less accumulated amortisation and impairment. In applying this approach, companies must determine if the asset has a finite or indefinite useful life. Given that cryptocurrencies can act as a store of value over time, they have an indefinite useful life, meaning the asset would not be subject to an annual amortisation charge. Instead, an annual impairment review would be necessary. Revaluation – under IAS 38, intangible assets can be carried at their revalued amount as determined at the end of each reporting period. To adopt this approach, the asset must be capable of reliable measurement. While active markets are often uncommon for intangible assets, where cryptocurrencies are traded on an exchange, it may be possible to apply the revaluation model. In order to present increases and decreases correctly (i.e. determining how much is presented in other comprehensive income versus profit and loss), entities must be able to track movements in sufficient detail across their holdings. Establishing the cost of the crypto asset denominated in a foreign currency According to IAS 21 The Effects of Changes in Foreign Exchange Rates, entities will record holdings in cryptocurrencies using the spot exchange rate between functional currency and the cryptocurrency at the date of acquisition.  As noted earlier, cryptocurrencies are not considered to meet the definition of monetary items. Therefore, holdings in cryptocurrencies measured at historical cost in a foreign currency will be translated using the exchange rate at the initial transaction date. Holdings measured using the revaluation approach shall be translated using the exchange rate applied when the valuation was determined.  Inventory As demonstrated, holdings in cryptocurrencies can meet the definition of intangible assets under IAS 38. However, within the scoping section of IAS 38, it is noted that intangible assets held by an entity for sale in the ordinary course of business are outside the scope of the standard. This conclusion is drawn from the fact that such holdings should be accounted for under IAS 2 Inventories. While the default treatment, under IAS 2, is to account for inventories at the lower cost and net realisable value, the standard also states this treatment does not apply to commodity broker-traders.  Such traders are required, under IAS 2, to account for their inventory at fair value less cost to sell, with changes in value being recognised in profit and loss.  Intuitively, it may seem appropriate for entities holding cryptocurrencies to follow the same accounting applied by broker-traders under a business model that involves active buying and selling.  However, since cryptocurrencies do not have a physical form aligning their accounting to a scope exception for commodity traders, it is a judgment call.  In practice, where there is a business model under which crypto assets are acquired to sell in the short term and generate a profit from changes in price or broker margin, the treatment described here from IAS 2 for broker-dealers has been applied.  Other considerations  So far, we have explored accounting for holdings of cryptocurrencies (IAS 38) and trading in cryptocurrencies (IAS 2). The standards referenced are not new.  To date, the IASB has focused on aligning accounting for cryptocurrencies to existing guidance, and practice has developed accordingly. While there is clear logic to the policies developed from this approach, there are still challenges.  For example, while applying the cost model of IAS 38 is straightforward, the balance stated in the financials may be significantly different to the market value. On the other hand, applying the revaluation model of IAS 38 can be difficult from the point of view of tracking movements in value to determine how much is presented in profit and loss versus other comprehensive income.  What about custodians? As recently as March 2022, the US Securities and Exchange Commission (SEC) released their Staff Accounting Bulletin No. 121.  The bulletin provides guidance for reporting entities operating platforms allowing users to transact in cryptocurrencies, while also engaging in activities for which they have an obligation to safeguard customers’ crypto assets.  Until now, custodians may have concluded that they do not control the asset they safeguard. However, the SEC believes that stakeholders would benefit from the inclusion of a safeguarding liability and a related asset (similar to an indemnification asset), both measured at fair value. This guidance is applicable to reporting entities that apply US GAAP or IFRS in their SEC filings. These entities are expected to comply in their first interim or annual financial statements ending after 15 June 2022. While this requirement applies to SEC filings, it is an essential development to be aware of. Challenges ahead Accounting policies designed to deal with cryptocurrencies have developed, in practice, from existing standards. While these policies are grounded in fundamental accounting principles, there are challenges.  As cryptocurrencies continue to become more prevalent, some of the key assumptions in these policies will be challenged.  For example, if the price of cryptocurrencies becomes less volatile, this would challenge the conclusion that they meet the definition of non-monetary assets under IAS 38. Instead, with less price volatility, it could be argued that they meet the definition of cash equivalents.  Given the current challenges and ongoing development of cryptocurrencies, many are calling for standard-setters to engage in a dedicated project to address these issues.  Gavin Fitzpatrick is a Partner in Financial Accounting and Advisory Services at Grant Thornton.  Mike O’Halloran is Technical Manager in the Advocacy and Voice Department of Chartered Accountants Ireland.

The government’s new auto-enrolment scheme has been described as a ‘once-in-a-generation’ pension policy. Clare O’Sullivan examines how it will change our retirement  landscape. Andrew Glenn was 20 and an undergraduate studying in Adelaide when the Australian government’s Superannuation Guarantee (SG) came into effect in 1992, making it compulsory for employers to pay a percentage of their employees earnings into a retirement fund. In the three decades since, Glenn has become “passionate” about the scheme—dubbed the “Super”—which has, he says, created a positive culture around pension savings in Australia. “I remember when superannuation came in, I had a part-time job at university and, all of a sudden, I had money going into this separate retirement account. It wasn’t coming out of my pay. It was an additional payment, so, straight away, I felt good about it,” says Glenn. The idea behind the SG was that it would provide income in retirement for as many Australians as possible, substituting or supplementing the government pension. “There is definitely a mindset here now where people value their Super. It is pervasive throughout Australian culture and it can add up to quite a significant amount of money over time. If you are a home-owner, your Super would tend to be your second biggest asset, so people care about it,” says Glenn. Although not quite the same as Australia’s SG, the Automatic Enrolment Retirement Savings System announced recently by the Irish government has a similar aim to “build a culture” of saving for retirement, according to Minister for Social Protection, Heather Humphreys. Speaking in March at the announcement of the final design principles for the auto-enrolment regime, Humphreys described it as a “major reform” of the Irish pensions landscape. “It is intended not just to get people saving earlier, but to support them in that saving process by simplifying the pension choices and, importantly, by providing for significant employer and State contributions as well,” Humphreys said. Due to come into effect in 2024, the scheme will see some 750,000 workers enrolled automatically into a new workplace pension scheme with matching employer contributions and a state top-up. For every €3 saved by a worker, a further €4 will be credited to their pension savings account.  According to the Government, this means that, when the scheme is fully established, a worker earning €35,000 per annum will accumulate a fund (excluding investment returns) of €293,000 over their working life. Participation in the new scheme will be voluntary, however. Workers will have the ability to opt-out. Given the success of the Superannuation Guarantee in Australia, and the pension auto-enrolment systems since introduced in other countries, including Britain and New Zealand, the Irish scheme is expected to be a welcome addition to the pension landscape here. Although welcome, the government’s pension auto-enrolment scheme has been a long time coming, however.  “This goes back a long way. Pension policy in Ireland was first reviewed about 20 years ago and, today, we are the only OECD country that doesn’t yet operate an auto-enrolment or similar system as a means of promoting pension savings,” says Munro O’Dwyer, Partner, Pension Services, PwC Ireland. “In countries without such schemes, retirement savings tend to be quite low. In the UK, the introduction of an auto-enrolment system similar to that planned for Ireland doubled the rate of participation in private pension savings. The behavioural change was really quite significant. “If you dig further into the UK figures, you can see an even higher jump in the number of people in low-pay or low-security employment participating in private pension savings.  “We will see the same thing happening in Ireland once our auto-enrolment scheme is introduced, so, I think the benefit to society as a whole is really quite positive.”    Focus so far To date, much of the focus in Ireland has been on reducing future spending in the area of pensions, rather than working on incentives to increase private pension coverage, according to Miriam Donald, Public Policy Manager, Advocacy and Voice, Chartered Accountants Ireland. “This isn’t surprising given that the State Pension is the single biggest cost to the State in terms of benefits,” Donald says. Recent figures show that close to €6 billion was spent on the State Pension in 2020.  “This figure far exceeded the €4.5 billion spent on the COVID-19 Employment Wage Subsidy Scheme in the same year,” Donald says. Cultural shift As a result, the government has faced mounting pressure to change the “culture around pensions savings” in Ireland by introducing measures to encourage private pension coverage. “Recent studies show that life expectancy in Ireland is currently 90 years for men and 92.6 years for women,” says Donald. “This means workers, on average, will be retired for more than a quarter of their lives, with one third of the population depending solely on the State to fund their later years.” Figures released last year by the Central Statistics Office, meanwhile, showed that 34 percent of Irish workers had no pension coverage outside the State Pension. “The existing annual State Pension of some €13,000 might seem reasonable if you have paid off your mortgage, but Ireland’s home ownership rate in 2021 was reported to be 68.7 percent,” says Donald. “This means that many will pay high rents long after their peers own their own home and, with average annual rents lying north of €15,000 according to the Residential Tenancy Board’s 2021 rent index, sole reliance on the State Pension will not be sustainable.” Encouraging retirement savings By introducing auto-enrolment, Donald says the government has taken an important step in encouraging more people to save for their retirement over the course of their working lives. “At the moment, starting a pension requires taking an active decision to do so. The attraction of auto-enrolment is that, if a worker does nothing, a portion of their pay will automatically go into a pension fund,” she says. This means that the new scheme will overcome an existing barrier to pension savings whereby people simply overlook the need to put money aside for retirement over the course of their working lives, according to Donald. “Employees who do opt out after six months of being enrolled will be re-enrolled after two years, meaning private pension coverage could be increased considerably,” she says, “but the scheme also relies on behavioural inertia – i.e. trusting that some people will not get around to opting out of a pension scheme and will simply stay invested.” Challenges ahead Overall, Donald sees the introduction of auto-enrolment as a viable solution to increasing private pension coverage in Ireland. “It incentivises people to save, reduces the risk of people entering poverty in retirement and reduces the reliance on the State pension. Its introduction could even result in long-term savings for the State,” she says. Getting the scheme up-and-running by early 2024 will be challenging, however, according to Cróna Clohisey, Tax and Public Policy Lead at Chartered Accountants Ireland.  “A significant amount of work needs to be done—not just to develop the legislation underpinning the scheme, but also to finalise its design, and to establish the various mechanisms that will be required for it to function,” says Clohisey. As the legislation progresses, the government will need to work closely with businesses to advise and help them prepare for the introduction of automatic enrolment. Payroll providers, in particular, will face an uphill battle preparing for the planned introduction of the new scheme. “We know that this is going to be a considerable challenge for payroll providers to implement,” says Clohisey. “They are telling us that a lead-in time of at least 18 months would be required to properly develop, test, and deploy a fully operational system.  “January 2024 is not far away, and businesses will need time and guidance to get ready for this change. Sustained momentum will be needed to meet this ambitious timeline.” Central processing agency Jerry Moriarty, Chief Executive of the Irish Association of Pensions Funds, agreed that the planned introduction of the new scheme in early 2024 could give rise to significant challenges. “There is a huge amount to be done in a relatively short period of time, including the setting up of a central processing agency to do the job of auto-enrolling people—getting them on board and then dealing with all the administration that goes with making sure the contributions are passed on to the right investment managers,” he says. In the government’s favour is the fact that “we’ve been able to learn a lot from what’s happened with similar schemes in other countries,” Moriarty says. “In the UK, for example, the system focused on auto-enrolling employers rather than employees. That caused a huge problem with payroll systems, so they ended up having to phase in participation, starting with big employers.” Ireland’s new scheme will, by contrast, focus on auto-enrolling individual employees, Moriarty says. “It makes more sense because it means employers won’t have to deal with all of this extra admin and that, when people move from one employer to another, they won’t have to switch pension provider.”

The IAASB’s new quality management standards represent a fundamental shift in focus for auditors and firms must act now to prepare for the fast-approaching compliance deadline, writes Noreen O’Halloran. The suite of quality management standards released by the International Auditing and Assurance Standards Board (IAASB) will have a major impact on all audit firms, regardless of size, and now is the time to start getting your house in order. Effective from December of this year, these standards include a revised International Standard on Auditing – ISA 220 (revised) Quality Control for an Audit of Financial Statements and two new International Standard on Quality Management. These are ISQM 1 Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements; and ISQM 2 Engagement Quality Reviews.  Practitioners are required by these standards to have necessary systems designed and implemented by 15 December 2022, with the monitoring reviews performed within one year of this date.  Irish standards align The Irish Auditing and Accounting Supervisory Authority (IAASA) has released revised quality management standards aligned with those released by IAASB. By releasing new standards, the IAASB is addressing the need for the audit profession to perform quality engagements consistently.  These standards require audit firms to have in place a strong system of quality management that is robust, proactive, and scalable, enabling the consistent execution of high-quality engagements.  While these standards are welcome, they do impose additional time, effort and ultimately costs on audit firms. ISQM 1: the lowdown ISQM 1, the standard replacing International Standard on Quality Control 1 (ISQC 1), addresses a firm’s requirement to design a system of quality management to manage the calibre of engagements performed by the firm.  This standard applies to all firms performing audits or reviews of financial statements, or other assurance or related services engagements. A firm must now establish quality objectives, identify, and assess quality risks, and design and implement responses to address those risks.  This is a much more forward-looking, proactive approach than that currently required under ISQC 1. The process is expected to be iterative, requiring continuous improvement and revisiting.  ISQM 1 comprises eight components, two of which are process driven. These are the risk assessment process and the monitoring and remediation process.  The remaining six are quality objective components, comprising  governance and leadership, relevant ethical requirements, resources, acceptance and continuance, engagement performance, resources, and information and communication.  Audit firms must apply a risk-based approach in designing, implementing, and operating the components in an interconnected and coordinated manner, tailoring their approach to the specific risks arising for a firm. Risk assessment  Audit firms are required to establish quality objectives for each of the six quality objective components. Certain quality objectives are predetermined in ISQM 1.  Firms must also establish additional quality objectives responsive to the nature and circumstances of the firm or its engagements. Once the quality objectives are established, the firm will then need to identify and assess quality risks, taking into consideration the type of engagements carried out and the extent to which this work may create quality risks in relation to specific quality objectives.  Firms are likely to have some existing policies and procedures in place, which may continue to be relevant in meeting these new requirements.  Existing policies and procedures should not, however, be carried forward without first considering the specific requirements in ISQM 1 and the individual nature and circumstances of a firm and its engagements.  Gap analysis A gap analysis is a must for all firms to help them identify areas where they may need additional or different responses.  Not all risks identified will rise to the level of a quality risk as defined in ISQM 1. Quality risks are those that have a reasonable possibility of occurring and a reasonable possibility of individually, or in combination with other risks, adversely affecting the achievement of one or more quality objectives.  For example, in a small firm, where leadership may be concentrated in a single or a very small number of individuals the firm may identify a quality risk with respect to the Governance and Leadership component as staff may be reluctant to challenge or question the actions or behaviours of leadership, due to fear of reprisal.  After quality risks have been identified, firms must then design and implement a response to those specific risks.  Appropriate response The ISQM 1 identifies several specific responses required by a firm. Responses that are properly designed and implemented will mitigate the possibility that the quality risk will occur, resulting in the firm achieving its quality objective.  Take the previous example of a small firm with a single or very small number of individuals at leadership level, whose behaviours staff may be reluctant to challenge. The quality risk arising here might be addressed by obtaining anonymous periodic feedback from staff at all levels within the firm using focus groups and/or staff surveys.  Firms should keep in mind that the quality objectives for one component may support or overlap with those of another.  When establishing quality objectives, therefore, it can be useful to think of the components as interrelated or interdependent with each other.  Here’s one example. The quality objective in the information and communication component, regarding relevant and reliable information exchange throughout the firm, links with the ethical requirements component, regarding the communication of relevant ethical requirements applying to individuals within the firm.  The nature and circumstances of the quality objectives, the identified risk and the subsequent responses will differ from one firm to the next, depending on their size, network structure (when relevant) and the type of engagements they provide. Monitoring and remediation The monitoring and remediation process can be split into several elements, comprising: the design and performance of monitoring activities; evaluating findings and identifying deficiencies; evaluating identified deficiencies; responding to the identified deficiencies; and  communicating the findings.  Looking back at our earlier quality risk regarding staff reluctant to challenge or question the actions or behaviours of leadership, a potential response was that the firm might facilitate focus groups and/or staff surveys to gather anonymous feedback regarding the actions and behaviours of leadership.  Once sought, such feedback must then be monitored. The firm may collate the feedback and present it to leadership, including details of the actions required to address the feedback and a corresponding timeline for these actions.  The purpose of monitoring the activity here is to determine whether the response to the quality risk is appropriate. If deficiencies are identified as part of this monitoring, firms need to evaluate their severity and determine how pervasive they may be.  This will help firms to focus on the deficiencies giving rise to the most significant risks. They should also evaluate the root cause of these deficiencies. Root cause analysis is not a new concept to practitioners. Many will already be undertaking this process when deficiencies are identified.  However, for those firms not currently doing so, ISQM 1 requires a root cause analysis in respect of identified deficiencies. ISQM 2 and ISA 220 revised While ISQM 2 is a new standard released by the IAASB, many of its elements have been relocated from either ISQC 1 or ISA 220, addressing both the responsibilities of the firm and the engagement quality reviewer.  The engagement quality reviewer is part of the firm’s response, rather than the engagement team’s response to quality management.  The engagement quality reviewer is required to exercise professional scepticism, rather than professional judgement, which is the responsibility of the engagement team when obtaining and evaluating audit evidence.  Revisions have also been made to ISA 220 (revised), which remove the requirement for an engagement quality review (as that is now contained in ISQM 2), and also clarify and strengthen the key elements of quality management at the engagement level, including the responsibility of the engagement partner.  The engagement partner is responsible for managing and achieving quality at the engagement level. These changes include revision to the definition of the engagement team, to include all those who perform audit procedures on the engagement regardless of their location or relationship to the firm. There is also a new stand-back requirement for the engagement partner to determine that they have taken overall responsibility for managing and achieving quality on the audit engagement.  Ensuring compliance The IAASB’s new quality management standards represent a fundamental shift in focus from quality control to quality management, and all firms should act swiftly to prepare for these changes. Here are three steps you can take to help ensure compliance by 15 December 2022: Consider your current position against the new requirements, and identify areas where your firm could start to progress implementation plans, along with the individuals within the firm who need to be involved.  Look at your current resources and – particularly for non-network firms – consider whether additional resources might be needed, and if service providers may be required to fill any gaps.  For network firms, each individual firm is responsible for its own system of quality management, including design, implementation, and operation. Locally you may need to consider how the network requirements might need be adapted or supplemented by the individual firm to be appropriate.  Bear in mind that the new quality management standards provide an excellent opportunity to enhance the quality and consistency of audits.  These standards will drive firms to implement quality management consistently, supporting audits of a higher quality.  A word of warning, though: don’t underestimate the time, resources and investment needed to implement these standards. You will also need appropriate buy-in and a commitment to quality enhancement from those in leadership.  A great deal of change management may be required to effectively implement the new and revised standards. With the implementation date fast approaching, time is of the essence.   Noreen O’Halloran is a Director in the Department of Professional Practice at KPMG Ireland.

Richard Howard and Ryan Mathers share their insights on the cloudy topic of accounting for software-as-a-service costs. Accounting for software costs has traditionally lagged behind technological developments, so it is little wonder that there is some uncertainty around accounting for cloud computing costs. A recent International Financial Reporting Standards Interpretations Committee (IFRIC) agenda decision on cloud computing costs, while employing a sound decision-making framework, gave an answer at odds with the perception of many financial statement preparers. Before IFRS, we had FRSs, and FRS 10 set out that software that made a computer productive was classed as a fixed asset. Software was viewed as an integral part of the hardware. This standard was introduced in 1997, when software was only beginning to become a differentiated product from the computer or server it sat on. Even at this early stage, accounting standards lagged what was happening in practice. We have recently seen the move to cloud computing and software-as-a-service (SaaS). To illustrate the importance of cloud-based expenditure to the global economy, a Gartner survey from October 2021 estimated global IT expenditure of $4.47 trillion. Hardware constituted 18% of this spend, with the remainder spent on software, communications and data centres. Most of that will be spent on implementation and ongoing services for cloud-based software, cloud-hosted data, infrastructure as a service, and platforms. We have seen two recent IFRIC decisions on the topic of SaaS. The first agenda decision, published in March 2019, concludes that SaaS arrangements are likely to be service arrangements rather than intangible or leased assets. This is because the customer typically only has a right to receive future access to the supplier’s software running on the supplier’s cloud infrastructure. Therefore, the supplier controls the intellectual property (IP) of the underlying software code. On its own, many would see this as a logical conclusion. The second agenda decision, published in April 2021, deals with specific circumstances concerning configuration and customisation costs incurred in implementing SaaS. In limited circumstances, certain configuration and customisation activities undertaken in implementing SaaS arrangements may give rise to a separate asset where the customer controls the IP of the underlying software code. For example, the development of bridging modules to existing on-premises systems or bespoke additional software capability. In all other instances, the IFRIC agenda decision is that configuration and customisation costs will be an operating expense. Accordingly, they are generally recognised in profit or loss as the customisation and configuration services are performed or, in certain circumstances, over the SaaS contract term when access to the cloud application software is provided. The March 2019 decision largely endorsed what was general practice. Companies were receiving a service over a period, and companies agreed with the substance of that. The April 2021 decision, however, has been heavily debated. In discussions with many preparers of financial statements, few have agreed with the decision. While CEOs are talking about their digital transformation, this IFRIC decision tells the CFO how to account for the up-front configuration and customisation of that digital transformation, which in most cases is to expense it as incurred. This is at odds with a simple view expressed by many that the benefit of these costs accrue over a period, so why would they not be capitalised? The April 2021 decision, however, is based on various principles that, in aggregate, gives a decision at odds with the view of many CFOs. To understand their decision, it is helpful to summarise the difference between on-premise software and software as a service (see Table 1). In March 2019, IFRIC observed that a right to receive future access to the supplier’s software running on the supplier’s cloud infrastructure does not, in itself, give the customer any decision-making rights about how and for what purpose the software is used. Nor does it, at the contract commencement date, give the customer power to obtain the future economic benefits from the software itself and restrict others’ access to those benefits. Consequently, IFRIC concluded that a contract that conveys to the customer only the right to receive access to the supplier’s application software in the future is neither a software lease nor an intangible software asset, but rather a service the customer receives over the contract term. Some scenarios were set out where the SaaS expenditure may meet the criteria for being an intangible asset, including where the customer is allowed to take ownership of the asset during the contract or where the customer is allowed to run the software on their own hardware (consistent with FRS 10 in 1997!) The April 2021 decision led on from this train of thought, which can be summarised as: “If you incur expenditure connecting your business to a cloud-based solution, you do not own that asset. As it is not your asset, you cannot capitalise costs you incurred in customising or configuring that software.” So, the question arises: are there any scenarios where an entity may capitalise configuration and customisation services? The simple answer is yes, and this occurs when the entity can control the software. For example, this may arise where the customer has the right to keep the software on-premise on their own servers or behind their own firewall. For on-premise software, the activities likely represent the transfer of an asset that the entity controls because it enhances, improves, or customises an existing on-premise software asset of the entity. While IFRIC only discussed configuration and customisation activities of implementing a SaaS arrangement, the full SaaS implementation includes various activities. Table 2 illustrates some examples (not all-inclusive) of typical costs incurred in SaaS arrangements and the likely accounting treatment of each. Practical implications Beyond complying with IFRIC’s meeting agenda decision, there are some considerations for the many companies who have undertaken, or are undertaking, SaaS implementation projects: IAS 8 requires an entity to retrospectively apply an accounting policy change as if the entity had always applied the new policy. Companies may need to determine if they have capitalised costs that IFRIC may suggest should not have been capitalised and if this impacts comparative periods. Budgetary decisions may have been made based on digital transformation projects being largely capital in nature. However, with such costs now being expenses, it may impact performance when reviewed against budget or external forecasts. Some banking covenants contain EBITA or capital expenditure requirements, so the impact on covenant compliance may need to be assessed. Conclusion Interestingly, while the IFRIC Committee agreed with the interpretation from April 2021, out of the 19 comment letters received, only five respondents agreed with the analysis and conclusion. This would suggest that many see an issue with practicality in the decision. Many companies we have spoken to point to the long-term benefit of such costs as the reason they view capitalisation as the appropriate route for configuring and customising software. Others have cited that it is an upgrade on the previously on-premise capitalised costs, hence appropriate to capitalise. As we continue to use assets such as SaaS or other cloud-based solutions, it will be interesting to see how GAAP develops to recognise that software and hardware are no longer interdependent. Other topics such as accounting for open-source software development, open network cooperation, and platform arrangements will be interesting when they become material in the business world. Richard Howard is a Partner in Deloitte’s Technology, Media and Telecommunications industry group. Ryan Mathers is a Manager in Deloitte’s Technology, Media and Telecommunications industry group.

Michelle Byrne and Sinéad McHugh set out the climate-related areas of focus for preparers of financial statements. It is quickly becoming apparent that climate change is likely to drive some of the most profound and persistent changes to business in our lifetimes. Earlier this year, Ireland signed into law its Climate Action and Low Carbon Development (Amendment) Act 2021, which is a legally binding path to net-zero emissions no later than 2050 and to a 51% reduction in emissions by the end of the decade. We have seen increased discussions as to how climate-related matters will affect a company’s current and future business strategies, operations, and long-term value during the recent Climate Finance Week Ireland 2021 and more recently at the 26th UN Climate Change Conference of the Parties (COP26). Furthermore, from a corporate perspective, investors, regulators and other business stakeholders are increasingly demanding increased disclosures on climate change matters and are challenging companies that are not factoring the effects of climate change into their critical accounting judgements. The SEC, FRC and IAASA all recently issued statements emphasising the importance of considering the impact of climate change when preparing financial statements. They also emphasised the importance of consistency between a company’s targets and assumptions disclosed in the front half, and assumptions and estimates used in preparing the back half of the financial statements. To a greater or lesser extent, the risks and uncertainties arising from climate change are likely to have an impact on the financial statements of all companies. Some areas of focus for all companies in preparing their financial statements are set out below. Impact on the financial statements While asset impairment may potentially be the most obvious area impacted in the financial statements, companies should also consider other areas that may be impacted by climate-related factors (such as useful lives of assets, fair value of assets, and provisions). The paragraphs that follow provide a summary of some of the key areas impacted by climate-related factors. Carrying value of assets Cash flows play an important part in assessing the recoverability of an asset. During the impairment process, consideration must be given as to whether value-in-use (VIU) calculations need to be adjusted for climate-related risks. For example, companies may need to factor the following into their calculations: Changing customer preferences, technology and market trends may need to be reflected in the revenue and growth forecasts; Energy intensive industries will likely need to incorporate higher costs in future cash flows as a result of carbon taxes and general climate-related increases in energy costs; Increasing costs of compliance with new policies or legislation (for example, carbon budgets, stricter environmental controls, or increasing costs of insurance due to climate factors); and Increased capital expenditure to develop or acquire more energy-efficient production assets. The key climate-related assumptions applied in the VIU calculation, together with a description of management’s approach to determining the value assigned to each key assumption, should be disclosed. Increasingly this information is considered to be material for disclosure even if the climate-related impact on VIU assumptions is not significant. Useful economic life of assets To meet emission targets, companies may need to replace some of their asset base with equipment that is more energy efficient or powered from alternative sources. In addition, climate factors may indicate that an asset could become physically unavailable or commercially obsolete earlier than previously expected. As a result, certain assets may have reduced useful economic lives. In some cases, a company may develop a more energy efficient product to substitute a legacy product, resulting in a change in the estimated useful life of the client relationship intangible asset associated with the legacy product. Any change to the useful economic life is recorded in the financial statements prospectively. Disclosure of the change in estimate in the financial statements is required. Even if the amounts are not considered material, companies may wish to include disclosure of the revision to useful lives to demonstrate consideration of climate-related factors in the preparation of the financial statements. Fair valuation of assets Climate change risks or changes to laws and regulations due to climate change actions may impact the measurement of assets measured at fair value. These risks and actions could affect inputs into valuation models in a number of ways. For example, similar to VIU calculations, cash flows may be impacted by changing revenue, growth, and cost assumptions due to climate risks and actions. Alternatively, if cash flows are not adjusted, the discount rate may instead be adjusted for these risks through a relevant risk premium or discount factor. Any changes in assumptions that are critical to the valuation of the asset need to be clearly disclosed and the impact quantified. Changes in expected credit losses Given the short-term nature of trade receivables, the impact on receivables in companies operating in non-financial industries is likely to be less severe. Conversely, the long-term nature of some financial assets held by lending organisations may mean that assets held at the current balance sheet date could be exposed to severe adverse economic conditions. This could be due to exposure to customers in more significantly impacted industries such as oil and gas and mining, or due to climate-related events such as floods and hurricanes. Such events can impact the creditworthiness of borrowers due to business interruption, decline in asset values, and unemployment. Lenders could suffer increased credit losses through exposure to assets that become stranded or uninsurable, as these assets will no longer offer suitable collateral. These risks will need to be incorporated into the expected credit losses (ECL) model. Disclosure of the effect of climate-related matters on the measurement of expected credit losses or on concentrations of credit risk may also be necessary. Provisions, contingencies and onerous contracts The pace and severity of climate change, as well as accompanying government policy and regulatory measures, may impact the recognition, measurement, and disclosure of provisions, contingencies and onerous contracts. For example: New provisions or contingencies may need to be recognised or disclosed due to new obligations (for example, fines levied for failing to meet climate-related targets); The timing of when an asset may need to be decommissioned may change due to regulatory changes or shortened lives, accelerating the required cash outflows for asset retirement obligations; Cash flows and discount rates used in measuring provisions may need to take into account the risks and uncertainties of climate change and accompanying regulations; and Existing contracts may become onerous due to an increase in the costs of fulfilment (for example, due to an increase in the cost of energy or water). Carbon trading schemes There are currently different acceptable approaches to accounting for carbon trading schemes. This is an area that may evolve as such arrangements become more common and they apply to more companies. It will also be necessary to consider whether the acceptable approaches will be equally acceptable for any new schemes when implemented. Conclusion It is becoming increasingly apparent that investors and regulators are expecting more company-specific information on the impact of climate risks on the company’s financial statements. Given this increased focus, there is a high level of expectation that directors, preparers and auditors will have considered how and where climate-related actions may impact on the financial statements. Even if the conclusion reached is that climate-related risks do not have a material impact on a company, there is a growing expectation that the company will disclose how these risks were considered and why they were not considered material for the company. Michelle Byrne is a Director in the Financial Reporting Advisory Team in Audit & Assurance at Deloitte Ireland. Sinéad McHugh is a Partner in Audit & Assurance at Deloitte Ireland.

Maurice Barrett highlights some noteworthy aspects of ESMA’s common enforcement priorities statement for preparers, management and directors. The European Securities and Markets Authority (ESMA) is the Europe-wide body responsible for safeguarding the stability of the EU’s financial system. ESMA achieves this through the protection of investors and promoting stable and orderly financial markets. Co-ordination of accounting enforcement across the EU is part of ESMA’s activity. As part of this accounting enforcement role, ESMA publishes an annual Public Statement setting out the common enforcement priorities (CEPs) for the annual financial reports of listed companies. Together with EU national accounting enforcers – including the Irish Auditing and Accounting Supervisory Authority (IAASA) – ESMA pays particular attention to these CEPs when examining entities’ financial statements. In addition to these Europe-wide CEPs, national accounting enforcers may set additional national priorities. IAASA does this in its annual Observations paper, which is available at www.iaasa.ie. The 2021 ESMA CEPs statement, which is available at www.esma.europa.eu, sets out the enforcement priorities under three headings: Several aspects of the 2021 CEPs statement are noteworthy: The pervasive nature of the impact of COVID-19 across each of the three headings; The identification of climate change as an area of concern for accounting enforcers and the recognition that climate-related matters are something about which investors and other users of financial reports require information; and The focus attached by ESMA – and, therefore, EU national accounting enforcers – to areas other than IFRS financial statements. Of the seven areas included in ESMA’s CEPs statement, only three refer to IFRS financial statements. This is considered significant and is indicative of the direction of travel of corporate reporting and accounting enforcement at the European level. It reflects a trend to consider corporate reporting from a more holistic point of view and a much broader perspective than the more traditional approach of considering only the monetary amounts and disclosures in the IFRS financial statements. Impact of COVID-19 The CEPs statement notes that the impact of COVID-19 has been severe and the path to recovery may be prolonged. The statement repeats the messages included in last year’s CEPs statement regarding the need for a careful assessment of the longer-term impacts of COVID-19 on an entity’s activities, financial performance, financial position and cash flows (such as going concern assumptions, significant judgements, estimation uncertainty, presentation of financial statements, and impairment of assets). Bearing in mind the impact COVID-19 is having on trade and supply chains, the CEPs statement reminds entities to provide transparent disclosures of arrangements that take the form of supply chain financing. The CEPs statement calls for transparency on the criteria and assumptions used in the recognition of deferred tax assets arising from the carry forward of unused tax losses and unused tax credits due to the COVID-19 pandemic. IAS 20 Accounting for Government Grants and Disclosures of Government Assistance requires disclosure of information related to government assistance, including the accounting policy adopted and the methods of presentation adopted in the financial statements. The CEPs statement reminds entities to provide a description of the nature and extent of any significant public support measure received by category (for example, loans, tax relief, and compensation schemes). COVID-19 may impair entities’ ability to meet any pre-determined sustainability-related goals in the short- and medium-term. Accordingly, the CEPs statement recommends that entities provide disclosure as to how the pandemic is affecting their plans to meet such targets and whether any new or adjusted goals have been determined. The ESMA CEPs statement also urges caution if entities adjust APMs used or develop new APMs with the sole objective of depicting the impact that COVID-19 has on financial performance. ESMA contends that, in most instances, the COVID-19 impact should not be presented separately in APMs. Climate-related matters Entities and auditors must consider climate risks when preparing and auditing IFRS financial statements. The identification and assessment of climate-related risks may require a longer-term horizon than that considered for financial risks. Entities should consider climate-related matters by ensuring consistency in the information disclosed across the management report, the non-financial statements, and the financial statements. The CEPs statement reminds entities that, in addition to the information required by individual IFRSs, paragraph 112(c) of IAS 1 Presentation of Financial Statements requires that information on climate-related matters be provided in the notes if not presented elsewhere in the financial statements when such information is relevant. Paragraphs 122 to 124 of IAS 1 require disclosure of the significant judgements management has made in the process of applying an entity’s accounting policies. In this regard, entities need to consider disclosure of management judgements related to climate risks. Entities are also required to disclose information in accordance with paragraphs 125 to 133 of IAS 1 regarding major sources of estimation uncertainty. Entities are expected to disclose in the financial statements how forward-looking assumptions, estimates and judgements applied in preparing the financial statements are consistent with the information included in the management report and the non-financial statement. The CEPs statement notes that ESMA – and, by extension, EU national accounting enforcers – expects entities to consider climate change when assessing whether the expected useful lives of non-current assets and the estimated residual values in IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets should be revised. In addition, under IAS 36 Impairment of Assets, entities should: Assess whether indications exist that non-financial assets are impaired as a result of climate risk or Paris Agreement implementation measures; Use assumptions reflecting climate risks; and Adapt the sensitivity analysis disclosed to consider climate risks and commitments in the assumptions used. Entities should carefully consider the requirements in IAS 37 Provisions, Contingent Liabilities and Contingent Assets regarding, for example, contingent liabilities for potential litigation, regulatory requirements to remediate environmental damage, additional levies or penalties related to environmental requirements, contracts that may become onerous, or restructurings to achieve climate-related targets. Articles 19a and 29a of the Accounting Directive require the management report of certain entities to include a non-financial statement containing information regarding environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters. Such a non-financial statement must include a description of the entity’s business model and the policies pursued in relation to those matters, the outcome of those policies, the principal risks, and non-financial key performance indicators. In addition, the CEPs statement suggests that entities might apply the European Commission’s non-binding guidelines on reporting climate-related information (available at www.ec.europa.eu). It is ESMA’s view that to provide useful information for investors and other stakeholders in assessing the entity’s performance and position in relation to climate-related matters, the disclosures should not be limited to providing backwards-looking information. Instead, this information should be contextualised in the entity’s broader strategic orientation and the related implementation plans, indicating the expected progress to meet pre-defined targets. Expected credit losses disclosures  The CEPs statement sets out ESMA’s expectations on aspects of expected credit losses (ECL) disclosures, including: Management overlays When material adjustments are used in ECL measurement, entities should provide transparency to fulfil the overarching objectives and principles of paragraph 35B of IFRS 7 Financial Instruments: Disclosures. Such adjustments either take the form of ECL model revisions or are applied outside the primary models (“post-model adjustments”). In complying with the requirements of paragraphs 35G, 35D and 35E of IFRS 7, ESMA expects entities to disclose entity-specific information on its impact on the ECL estimate, the rationale, and the methodology applied. Changes in credit risk (stage transfers) ESMA highlights paragraphs 35F and 35G of IFRS 7 and reminds entities to disclose the basis for the inputs and assumptions and the estimation techniques used to determine whether there is a significant increase in credit risk (SICR) of financial instruments since initial recognition, or whether a financial asset is credit-impaired. Forward-looking information When explaining how forward-looking information (FLI) has been incorporated into the determination of ECL as required by paragraph 35G(b) of IFRS 7, ESMA encourages entities to provide specific disclosures on the main judgements and estimations related to uncertainties that have been taken into account when defining the scenarios and their weight. ESMA recommends that entities disclose quantitative information on the macro-economic variables considered. Effect of climate-related risk on the ECL measurement ESMA expects entities to disclose whether material climate-related and environmental risks are taken into account in credit risk management, including information about the significant judgements and estimation uncertainties. Specifically, to meet the objectives of paragraph 35B of IFRS 7, entities should explain how these risks are incorporated in the calculation of ECL, and any credit risk concentrations related to environmental risks and how those risks affect the amounts recognised in the financial statements. Environmentally sustainable activities The ESMA CEPs statement reminds entities of the disclosure obligations set out in Article 8 of the Taxonomy Regulation (available at www.eur-lex.europa.eu). Article 8 requires non-financial undertakings to disclose: The proportion of their turnover derived from products or services associated with economic activities that qualify as environmentally sustainable; and The proportion of their capital expenditure and the proportion of their operating expenditure related to assets or processes associated with economic activities that qualify as environmentally sustainable. The European requirements in this area continue to evolve ESMA encourages entities to plan and prepare for the timely and correct application of the relevant requirements, as the information to be disclosed may require the collection of data that may not be readily available. Conclusion The topics set out in the ESMA CEPs statement, along with those set out in IAASA’s Observations paper, will be used by IAASA as its reviews financial statements in 2022. ESMA and IAASA emphasise the importance of preparers, management, and directors taking these CEPs into account when preparing and approving their 2021 annual reports and financial statements and discussing them with their auditors at the planning, execution, and completion phases. The messages in the ESMA CEPs statement are directed at entities preparing IFRS financial statements and falling under the remit of national accounting enforcement. However, the topics raised could usefully be adopted by a broader population of entities. Maurice Barrett FCA is Senior Financial Reporting Manager at the Irish Auditing & Accounting Supervisory Authority.

A recent global compliance study of 890 senior compliance professionals in 25 countries highlights an increasing emphasis on compliance as a value creator. Mairéad Divilly analyses how compliance professionals are factoring in this shift, the benefits to business, and the challenges ahead. Following a year of economic uncertainty arising from the COVID-19 pandemic, businesses worldwide are considering how to extract more value from their operations. The compliance function is no exception. In the past, companies tended to commoditise global compliance, seeing it purely as an overhead. More recently, there is growing evidence that businesses increasingly appreciate both the tangible and intangible values of good global compliance. Analysis of the global compliance survey results suggests that businesses are now much clearer on the benefits and opportunities of good compliance. According to the survey, 58% of compliance professionals now view global compliance as an opportunity to create value rather than an obligation that results in a net cost, as indicated by 37% of respondents. More specifically, 65% of respondents feel that good compliance increases investor confidence, while 64% say it increases client and customer trust and 61% say it helps build a good reputation. The benefits of good global compliance Recognition that good compliance brings returns in the form of a stronger reputation and greater revenue is increasingly evident, particularly when we consider that compliance failures carry significant repercussions. Compliance leaders know the considerable risks of falling short, with 77% saying their business has faced accounting and tax compliance-related issues somewhere in the world during the last five years. These consequences most commonly include reputational damage, internal disciplinary action, and fines. Pivoting from obligation to opportunity Squeezing extra mileage out of good compliance requires businesses to shift their approach from purely tactical to one that sees compliance as a strategic investment. It requires more engagement by top executives to drive real efficiencies, increase opportunities, and become more competitive. It’s an approach not lost on our survey respondents where compliance is seen as a core function of modern businesses, with C-suites devoting more time and attention to proactively managing it. According to the survey, the executive committees and boards engage with compliance at least once a quarter in 75% of businesses, and 39% engage monthly or more. Compliance as a commercial priority featuring more regularly on the calendars of senior leaders is validated by 44% of respondents who say the main reason decision-makers engage is to explore new insights or business opportunities. Only 28% say their senior people primarily focus on compliance to deal with an urgent issue or crisis. So again, we see compliance emerging as a business imperative that drives opportunities and not something seen as low priority or as a reaction to external developments. Reflecting this shift of top management focus is the continued growth of compliance funding, with three in five businesses having increased funding for global compliance over the last year and 68% planning to increase funding in the next five years. Regarding specific funding projects, 73% of respondents predict investment in developing new skills and capacities within teams, while 34% see monitoring external developments in accounting and tax as significant areas for investment. However, the biggest beneficiary of funding will be new technology to achieve compliance goals and drive future improvements, with over 78% of businesses looking to invest in new accounting and tax compliance technology in the next five years and 42% planning a major new investment, according to the survey. This focus on technology is not surprising as 39% of respondents say effective technology is the biggest factor in meeting their compliance goals today. In addition, 45% say new accounting and tax compliance technology will be the most significant factor in the compliance function’s improved performance in five years. Of those who plan to invest in technology, 49% of compliance leaders say artificial intelligence (AI) and machine learning (ML) are their biggest priorities for investment in the next five years. Robotic process automation (RPA) and blockchain are the top priority for 25% and 24%, respectively. Regarding specific compliance function technology-related investments, 38% state that tax compliance will be their priority, while 28% plan to explore the potential of risk management tools. Navigating the challenges ahead Despite this shift to global compliance being viewed as a strategic investment, companies face significant challenges in developing a strategy that takes them to the next level. While 82% of respondents express a high level of confidence in meeting compliance obligations now and in the near future, there is an acknowledgement that the increased complexity of tax rules, new compliance legislation, and the aftermath of COVID-19 will test abilities and compliance functions to the max. According to the survey, some 38% expect the ongoing impacts of the pandemic and increased complexity of compliance to be the two toughest challenges ahead. Meanwhile, 36% expect new legislation in the countries they already operate in to be one of their biggest challenges and 35% cite expansion into new countries. Political disruptions such as those connected to Brexit are also a factor, but are seen as a less likely disruptor with only 23% of respondents citing it as one of their most pressing challenges. Challenges compliance leaders expect to face In contrast, COVID-19 has raised new global challenges with over 75% of compliance leaders saying it has had an impact. The biggest challenge here is remote working, with 52% of respondents citing moving to home environments for work, particularly when in a different country to their employer’s location, has increased compliance needs, adding more pressure on the tax and accounting compliance functions. There is also an acceptance that new legislation and standards are leading to stricter compliance. Over the last few years, compliance reporting obligations not only doubled and sometimes tripled in size, but changes have been complex and fast-moving. As well as seeking the help of experts, the survey highlights that, as discussed above, businesses are investing in technology to leverage compliance functions and meet the need for real-time reporting obligations. While these are welcome improvements, the rise in cybercrime presents an additional risk that needs to be factored in when introducing any technology. Nor are automated and integrated compliance tools risk-free. Machines and algorithms are only as good as the information they are fed. Lack of knowledge remains a significant challenge in meeting compliance obligations, with 42% of respondents citing the need to develop the knowledge and skills of their compliance teams. The combination of skills shortages and the introduction of new technology can often add a new and unexpected layer of risk to the compliance function. Pockets of success lead the way forward The study does, however, highlight pockets of success in navigating the challenges of global compliance. COVID-19, for example, is seen as having a positive impact on individual employees by giving them more flexibility and forcing compliance leaders to become more vigilant. Additionally, while not a new phenomenon, more companies have begun to surpass legislative requirements on tax transparency. Over two-thirds of organisations (70%) voluntarily publish more than the law requires, 45% choose to publish some extra information, while a quarter publishes extensive, detailed information well above what is required by law. Tax transparency is now seen as a microcosm of the broader compliance story. Over one-third (36%) of compliance leaders cite building trust with tax authorities, politicians, and regulators as a key benefit of publishing extra information about the taxes their business pays. Plus, a third say improving their organisation’s public reputation is a crucial benefit of enhanced tax transparency. A further measure we see implemented by businesses that goes above and beyond is the inclusion of compliance strategies in annual reports. This sends a strong message to regulators and clients that can help improve company reputations. Looking ahead, we can expect tax transparency to evolve and measures like publicly available country-by-country reporting to become the norm. While large multinationals are likely to take the lead, tax transparency appears high on the agenda of all businesses irrespective of size and location, according to the survey. The global findings demonstrate that compliance professionals are also aware of the future direction of travel. Compliance-related demands on businesses will increase, leading to the dedication of more resources to meet compliance goals. At the same time, over half of businesses expect meeting compliance requirements to be more challenging in the future. Next steps In terms of the next steps, businesses should review and refresh their organisational setup and compliance functions to adapt to changing circumstances. This will include focusing on regulation as well as management processes to reduce risk and seize opportunities. Anticipating new laws and having the ability to react is vital. In particular, firms must understand their limitations to mitigate the risks linked to compliance. Nurturing agility will allow leaders to anticipate changes so their teams can keep up with global compliance rather than being hindered by it. The return on compliance investment may often be indirect and hard-won, but it should never be underestimated given its importance to growing businesses. Technology can also help companies with global compliance, but the development of skills and knowledge has to be addressed simultaneously. Using internal and external expertise to find the right balance between humans and technology is essential. With over a third of international respondents citing a more complex global compliance landscape as a significant challenge over the next five years, it’s clear that increased complexity will be a feature for years to come. As a result, businesses planning to expand globally will need to be secure in their ability to comply with employment, taxation, payroll, and company legislation in other jurisdictions. As the study demonstrates, when global compliance is done well, it builds investor confidence, increases client and customer trust, and shapes a positive reputation with the outside world. Shifting compliance from an obligation to an opportunity is something all businesses should now explore. Mairéad Divilly is Lead Partner, Outsourcing and Compliance Services, at Mazars Ireland.

Drawing on research and global experience, Munro O’Dwyer explains why the creation of a sustainable State pension system is a knotty – but not insurmountable – challenge. The Pensions Commission was established in November 2020 to “examine sustainability and eligibility issues… and outline options for the Government to address issues including qualifying age, contribution rates, total contributions and eligibility requirements”. One of the terms of reference was to examine how private sector employment contracts specifying retirement ages below the State pension age may impact on the State’s finances and pension system. While the report is yet to be published, it is of interest to look at the retirement ages and policies of other countries to put Ireland’s approach into context. Many countries have adopted policies that seek to tap into the social and economic benefits of longer working lives. The United States abolished mandatory retirement in 1986 while, with some exceptions, New Zealand followed in 1999 and Australia in 2004. The UK followed suit in 2011, although a compulsory retirement age remains. This can apply if a job requires certain physical abilities or has an age limit set by law. The PwC Golden Age Index helps to explain the rationale for these policies. The Index is a weighted average of seven indicators, which reflect the labour market impact of workers aged over 55 in OECD countries, including employment, earnings, and training. The most recent report identifies that the OECD could achieve a $3.5 trillion boost to GDP in the long-term if countries raise the employment rates of those aged over 55 to match New Zealand levels (with New Zealand having the greatest level of employment market participation across older workers). For Ireland, the potential gain was estimated to be around 9% of GDP, or roughly €25 billion. The Index identified key drivers of employment for older workers – successful policy measures include increasing the retirement age, supporting flexible working, improving the flexibility of pensions, and further training and support for older workers to become ‘digital adopters’. So, what influences the age to which we work? Many factors influence workforce participation at older ages, from marital status to gender participation gaps and public expenditure on family benefits, among others. It is interesting to step through a few of the factors in more detail in the context of the debate in Ireland. It is reasonably intuitive that life expectancy generally has a positive impact on employment patterns for older workers as the longer people are expected to live, the more likely they are to spend more of their life working. Life expectancy also captures other factors that may influence the employment rate for older workers – the level of health, for example, which could be impacted by healthcare policies, medical advances, and technological developments. Repeated studies have shown that health influences the age at which a worker retires. Greater expenditure on pensions is expected to reduce the incentive for older workers to participate in work, as increases in State pension wealth are associated with a lower retirement age. Interestingly, studies across several countries on the effect of general employment protection laws and age discrimination laws have been mixed. Some studies argue that these laws negatively affect employment among older workers, as employers see older workers as a greater burden if they have greater protection, even though the intended effect is to help improve employment prospects for older workers. This highlights the complexity involved in setting retirement ages and supporting older workers to participate in the workforce. What burden will fall on younger generations? Much has been written about the potential for significant changes in Ireland’s demographics, with the dependency ratio (the number of persons in employment relative to those in receipt of pension benefits) projected to fall over the coming decades. This will potentially create strains around the financing of the system into the future and may create a perceived intergenerational inequity. The Pensions Commission is tasked with identifying measures to review the projected changes in demographics, earnings, and the labour market, and the associated costs of these changes. Aside from potential pension financing cost arguments, will longer working lives limit opportunities for younger workers? The argument is often made that the amount of work in an economy is fixed, so one more job for an older person means one less job for a younger person (the ‘lump of labour’ theory). Research has repeatedly shown that this theory is not observable in practice, and instead identifies that the number of jobs in an economy is elastic – labour markets are dynamic, and economies adapt to labour force changes. Simply put, an economy can and will create more employment opportunities to reflect extra participants entering the labour force. Policies enforcing mandatory retirement ages do not help create jobs for younger members of the workforce. In fact, they reduce the ability of older workers to contribute – both directly and in terms of the experience they bring. What other perspectives exist? In a recent Ibec survey, 67% of respondents believed that abolishing an employer’s right to fix a retirement age would have a negative impact on their business, although 73% of those surveyed also consider retaining staff beyond their fixed retirement age, with most of those surveyed using the option of a post-retirement fixed-term contract. Arguably, these responses are somewhat in conflict with each other, highlighting the complexity of the issues in question. A key concern of employers is that the current legislative framework presents many difficulties, particularly where an employer seeks to facilitate employee requests to work longer. Similar concerns were identified in terms of employers’ ability to conduct effective workforce planning. In contrast, the Citizens’ Assembly has called for an end to mandatory retirement ages. Allied to the introduction of pension auto-enrolment, these were seen as the most appropriate means of responding to the challenges created by the State’s ageing population. An Interdepartmental Group on Fuller Working Lives reported that retirement at the age of 65 was impractical given the potential for a gap to emerge between that age and the State pension age. To the extent that there is common ground, it is arguably around setting the retirement age at a level consistent with the State pension age. This would address the gap that would otherwise emerge for employees leaving the workforce, but who are ineligible for State pension benefits. What model should Ireland adopt? Looking at experience globally, the State pension age is simply a single aspect of a complex system. Contribution and coverage levels across the private pension system, mandatory retirement ages, the role of the State in providing social insurance benefits, employment levels more generally – the range of factors goes on and on. There is greater consensus around what “good” might look like. Where people live longer and healthier lives, the wish is that employees will want to, and will be supported to, remain in the workforce for longer, which in turn enables increases to the State pension age. Increases to the State pension age in turn allow the payment amount to keep pace with the expectations of retirees. This virtuous circle then supports greater sustainability across the social protection system. The Pension Commission report will offer several proposals for consideration. It is to be hoped that decisions made will set the course for a sustainable pension system that appropriately supports generations of retirees into the future. Munro O’Dwyer is a Partner at PwC Ireland.

Each year, the Irish Auditing and Accounting Supervisory Authority (IAASA) publishes a paper outlining areas to which entities should give extra attention when preparing their annual financial statements. Maurice Barrett explains the most recent findings. In September, IAASA published its most recent Observations paper, Observations on Selected Financial Reporting Issues – Years Ending On or After 31 December 2021. While directed primarily at the comparatively small number of issuers falling within IAASA’s accounting enforcement remit, the topics covered in the paper are relevant to a wide population of entities. The Observations paper is written primarily from an IFRS perspective. However, most of the topics covered apply equally to entities applying FRSs. To that extent, IAASA encourages the broadest distribution and application of the topics referenced in the Observations paper. Recurring themes There are recurring themes that appear in the Observations paper year after year, the more common of these being: Tailoring of disclosures to the specific circumstances of the entity and avoiding boilerplate disclosures; and Disclosing the significant judgements and sources of estimation uncertainty and changes in the key assumptions underpinning assets, liabilities, income, expenses and cash flows. The objective of financial statements is to provide financial information about the reporting entity that is useful to users of the reports in deciding to provide resources to the entity. That objective is achieved, at least in part, by ensuring that disclosures are tailored to the specific circumstances applying to the entity in the reporting period. The provision of boilerplate information by, for example, repeating large tracts of IFRSs in the accounting policies section of financial statements is unlikely to be seen by users as useful information. Similarly, devoting time to crafting the disclosures around the significant judgements and sources of estimation uncertainty and changes in the key assumptions should result in user-relevant information being given. Judgements and uncertainty vary from entity to entity and over time, sometimes with speed (the COVID-19 pandemic illustrated just how quickly the economic landscape can change and just how flexible and adaptable business models can be). Financial statement disclosures need to be continually examined and adapted to the business environment as circumstances evolve. The disclosures that were appropriate last year may no longer provide users with decision-useful information this year. COVID-19 COVID-19 and the public health measures put in place to contain its spread had different impacts on different sectors of the economy. Similarly, the speed and duration of any recovery are expected to impact various sectors differently. It is important for issuers to clearly explain in the management report both the impact COVID-19 has had on the development and performance of its business and the position of the issuer, and management’s views as to the path to recovery. Depending on the specific circumstances of the issuer, some of the COVID-19 matters that IAASA expects issuers might disclose in their financial statements are: A discussion of the impact of COVID-19 restrictions on the economies or markets in which the issuer operates; The continued impact of COVID-19 restrictions on the entity’s broader financial performance such as raw material price increases, margin reduction, or supply chain constraints; and How financial performance, financial position, and cash flows will likely be impacted by the pandemic and/or the economic recovery. These disclosures should reflect the impact of the pandemic on the recognition, measurement, presentation and disclosures in the financial statements, including impairments (IAS 36), expected credit losses (IFRS 9), going concern (IAS 1) and provisions (IAS 37). Climate change The IASB published Effects of Climate-Related Matters on Financial Statements, highlighting how IFRS require entities to consider climate-related matters when the impact is material to their financial statements. This educational material complements an article that IASB member, Nick Anderson, wrote on this subject in 2019. The IASB paper and the related educational material are available on the IASB website. The educational material contains a non-exhaustive list of examples of when entities may need to consider climate-related matters in their financial reporting. It aims to support the consistent application of IFRS, but it does not add to or change the requirements in the standards. The list of examples provides guidance on how issuers might consider the effects of climate-related matters when applying IFRS, including IAS 1, IAS 2, IAS 12, IAS 16, IAS 38, IAS 36, IAS 37, IFRS 7, IFRS 9, IFRS 13 and IFRS 17. Entities, recognising that investors are increasingly demanding ESG (environmental, social and governance) information, should consider this educational material when assessing the impacts of climate change and risks in their financial statements. This is particularly relevant in the areas of judgements, provisions and measurement of assets (asset lives and recoverable amounts). Impairment Impairment continues to be an area of focus in IAASA’s financial statement examinations and is a recurring theme in our annual Observations paper. IAASA challenged issuers where no impairment testing was performed, yet impairment indicators in the context of COVID-19 restrictions (travel restrictions, non-essential activities closed) were in place; the decline in certain issuers’ revenues, profits and operational activities; and issuers operating at less than normal capacity. IAASA concluded that these happenings were indicators of impairment, and these issuers should have carried out an impairment review. Accordingly, IAASA required such issuers to perform an impairment review in accordance with IAS 36. Management, directors and audit committees must ensure that impairment reviews are performed when indicators of impairment are identified to ensure that an asset or cash-generating unit (CGU) is carried at not more than its recoverable amount. IAASA will continue to challenge issuers on IAS 36-related topics, including: Whether or not CGUs have been tested for impairment at an appropriate level; The discount rate used to measure the recoverable amount and whether or not that rate has been appropriately set; The determination of the key assumptions used, the long-term growth rates used and the disclosure of sensitivities; and Whether or not all key assumptions are realistic and consistent with other information in the financial statements. While the depth and duration of the impact of COVID-19 restrictions and the trajectory of any recovery remain uncertain, there are signs that restrictions are being eased and the Irish vaccination programme is enabling a re-opening of society. Consequently, relief and supports will be unwound over time and the longer-term impacts on expected credit losses will become apparent. IAASA reminds entities to continue to consider ESMA’s public statement Accounting Implications of the COVID-19 Outbreak on the Calculation of Expected Credit Losses in Accordance with IFRS 9. IAASA expects financial institutions to distinguish between measures and reliefs that impact the credit risk of financial instruments over the expected life of financial assets and those that address the temporary liquidity constraints of borrowers and apply IFRS 9 accordingly in preparing their financial statements. Fair values COVID-19 restrictions continue to pose challenges to fair valuation measurement (including the fair valuation of non-financial assets and liabilities) for many entities. The impacts of the pandemic are likely to result in changes to the valuation methodologies used, as well as to fair valuation assumptions. Entities should continue to consider: Changes in valuation techniques; Independent valuation reports and pre- or post-COVID-19 fair value assumptions and transactions; and COVID-19 expanded fair value disclosures – sensitivity. IAASA has noted certain issuers recognising deferred contingent liabilities arising from past acquisitions. It observes that volatility in the expected future EBITDA, forecast cash flows, and/or risk-adjusted discount rate(s) due to COVID-19, Brexit and economic disruption may result in volatility in the fair value measurement of deferred contingent liabilities. IAASA expects issuers to ensure deferred contingent liabilities are measured in accordance with the requirements of IFRS 13 and disclosed in line with the requirements of IFRS 13.93(d). Alternative performance measures ESMA’s Guidelines on Alternative Performance Measures (APM) have been in force since 2016. These APM guidelines are supplemented by a series of questions and answers, which provide guidance on the practical application of the APM guidelines. IAASA continues to examine issuers’ use of APMs and continues to identify shortcomings in the application of, and non-compliance with, the requirements of the APM guidelines, including instances where issuers: Present APMs with more prominence and emphasis or authority than measures directly stemming from the IFRS-based financial statements; Fail to provide reconciliations for all APMs presented; Use incorrect labels to describe APMs (e.g. the expression ‘EBITDA’ is used rather than ‘Adjusted EBITDA’); Fail to define an APM or fail to set out the basis of the calculation applied, including details of any material hypotheses or assumptions used; Fail to explain the use of APMs; and Fail to present prior period comparative amounts for APMs. Conclusion I believe that, to use a saying of our times, “we’re all in this together” and that preparers, management, audit committees, directors, auditors and regulators all can, and generally do, work together to achieve high-quality financial reports. IAASA’s assessment is that the quality of the financial reports it examines is generally high and compares favourably with European issuers. It is hoped that our Observations paper will in some way contribute to that continued high quality. Maurice Barrett FCA is Senior Financial Reporting Manager at the Irish Auditing & Accounting Supervisory Authority. IAASA’s Observations paper is available at www.iaasa.ie.

Prof. Ciaran Connolly FCA and Dr Elaine Stewart draw on their recent research for an Institute report to examine the public sector’s proposed accruals-based accounting framework, which represents a significant shift for the Irish Government. Under the current system of Irish central government financial reporting, budget documents and financial reports are typically prepared on a traditional cash-accounting basis, with their institutional coverage mainly limited to central government. However, Ireland is one of the few remaining OECD countries to account and budget in government on a cash basis. While considered robust and reliable, it is argued that cash accounting alone does not enable the planning and asset management that an accruals-based system allows. Motivated by the 2008 global financial crisis and the OECD’s 2019 recommendations following its evaluation of Ireland’s fiscal reporting, forecasting and budgeting systems, the Irish Government sought to modernise its public sector accounting practices. On 27 May 2021, Michael McGrath TD, Minister for Public Expenditure and Reform launched Chartered Accountants Ireland’s position paper on plans by the Irish Government to reform public sector accounting in Ireland. Researched by the authors of this article and drawing on the views of key stakeholders in the process, The Reform of Ireland’s Public Sector Accounting examines the proposed new accruals-based accounting framework, which represents a significant change to the way the Irish Government accounts. Recommendations to modernise public accounting systems are not confined to Ireland. Over the last 25 years, there has been a global shift towards accrual accounting in the public sector. While several governments (e.g. Australia, Switzerland and the UK) have adopted full accrual accounting, others (e.g. Italy, Philippines, South Africa and Spain) use a modified form. Some, such as Germany, have no immediate plans to do either. Regardless, the use of accruals in the public sector is growing. Of the 165 countries included in the International Public Sector Financial Accountability Index 2021 Status Report, published by IFAC and CIPFA, 49 (30%) use accrual accounting, with approximately half of these applying International Public Sector Accounting Standards (IPSAS) either directly or as a reference point. By 2025, it is estimated that 83 (50%) of the 165 countries will operate accrual accounting, with around 73% using IPSAS to some extent. Governments across the globe, including those in Latin America, the Caribbean, the Middle East and Africa, are instigating IPSAS implementation projects. Meanwhile, in Europe, the European Commission is working with member states to develop European Public Sector Accounting Standards, with IPSAS used as the baseline. Moreover, a small number of countries have implemented consolidated accounts (e.g. Australia, New Zealand and the UK), something that is also included as part of the Irish Government’s proposed reforms (see Figure 1 above). The proposed reforms While acknowledging that cash accounting provides strong control over departmental expenditure, a number of reports, including the OECD’s 2019 report, have advocated significant reform to the current process of financial reporting in Ireland on the basis that: cash-based information alone is insufficient for understanding the public sector financial position; as audited Appropriation Accounts are required to be published within nine months after the period to which they relate, Ireland is among the slowest of OECD countries in making such reports available; and reports from central government, commercial and non-commercial state bodies are not consolidated. This presents difficulties, particularly where reports are prepared for EU bodies such as Eurostat. On 15 October 2019, the Irish Government announced a series of reforms to Ireland’s public sector accounting which, while retaining core elements of the existing cash-based system, include: introducing accrual accounting in central government departments and offices, applying IPSAS as the underlying framework; preparing central government consolidated financial statements; and harmonising accounting practices and standards across the wider public sector to enable the consolidation of all public sector entities into a ‘whole of government’ account. When implemented, it is expected that the reforms will underpin confidence in Ireland’s public finances and unlock value from the State’s assets while realising the benefits of professional financial management, timelier financial reporting, and a general improvement in economic and fiscal performance. Large-scale reforms, like those proposed, are rarely introduced in a single stage but are typically rolled out over many years, often in conjunction with new IT systems. The Department of Public Expenditure and Reform (DPER) is leading the reform process and has developed an action plan to introduce the reforms with a phased approach (see Figure 1). This begins with the application of IPSAS as the underlying framework to introduce accrual accounting in central government departments and offices (Part 1, 2019–2025). Next, the intention is to prepare central government consolidated financial statements (Part 2, 2025–2027), followed by the harmonisation of accounting practices and standards across the wider public sector (Part 3, 2027–2029), and finally, the consolidation of all public sector entities into a ‘whole of government’ account (Part 4, from 2030). The feasibility of this latter part depends on the degree of integration of accounting systems, especially outside central government, where many entities currently use different accounting standards (e.g. FRS 102) and operate separate IT systems. While factors such as the COVID-19 pandemic and complications in developing the Financial Management Shared Services (FMSS) system have impacted the original timelines, progress has accelerated more recently. Purpose, approach and stakeholders’ views Drawing on the experience, progress and lessons learned from other countries and governments that have introduced similar reforms, together with the views of representatives from government departments, agencies and advisory organisations/individuals, the Institute’s position paper examines the driving forces, benefits, challenges and appropriateness of the reforms. The views expressed by interviewees are summarised in Figure 2. The consensus was that the reforms have been mainly driven externally by the OECD, as Ireland is one of the few OECD countries that continue to report on a cash basis. Internal motivations included the potential benefits arising from access to better information on public sector assets and liabilities, including pension obligations. Interviewees highlighted potential staffing, training and IT-related challenges associated with reform implementation, acknowledging that while the process has been slow to start, there is evidence that its pace is growing. However, despite this positivity, it was recognised that the timetable had slipped in a similar manner to that for the FMSS, with the successful introduction of the new system being considered integrally linked with the reform of Ireland’s public sector accounting (e.g. to facilitate the preparation of IPSAS-based departmental and ultimately ‘whole of government’ consolidated accounts). Other anticipated challenges included implementing the necessary legislative changes, with some questioning the logic of introducing accruals-based accounting while maintaining a cash-based budgeting system. While accepting the challenges, the vast majority of interviewees viewed the reforms positively. The consensus was that they could standardise how departments present their financial information, making them more professional and user-friendly. They could also facilitate the closing of accounts in a timelier manner so that the information is more relevant and provides better information for departments’ public representatives. The way forward Experience indicates that political support and leadership at the highest levels is critical if public sector accounting reforms are to succeed. Furthermore, research suggests that their success (however this is defined) is influenced by the extent to which they are shaped by private sector ideas, with the excessive use of private sector consultants often impacting negatively on the receptiveness to change. Thus, while the public sector is entwined with the private sector through outsourcing and privatisation, it remains distinct in terms of its stakeholders, objectives and outcome measures. Therefore, while the reforms have clear implications for departmental accounting functions, their success depends upon input and support from key stakeholders across the public sector so that they fit ‘the Irish public sector context’. Hence, engaging with, for example, departmental managers, statisticians, ministers and public representatives will help to identify the risks, gain political support, and secure buy-in. Relatedly, good project management and governance arrangements are critical to ensure the timely implementation of the accounting reforms (and FMSS) and that the delivery of government services is not unduly disrupted. This might involve piloting aspects of the reforms in some departments or agencies, including having dry-run or dummy years before the changes ‘go live’ to help identify needs and potential pitfalls. For example, training and developing the knowledge of preparers and users of the systems and information is essential. Knowledge transfer is also important to avoid ‘consultant dependency’ while capacity building (e.g. recruitment and training) is critical to project success. As noted above, DPER has developed a plan to implement the reforms in a phased manner over the next decade. Not unexpectedly, a number of issues will need to be considered further, if not resolved, during this period. For example, Ireland’s current constitutional arrangements require the preparation of cash-based Appropriation Accounts. However, there is evidence that ‘full’ accruals-based accounts can be advantageous, including the better management of assets and a greater awareness of obligations, which can facilitate more accurate planning and effective risk management. In addition, although few countries have adopted full accrual budgeting, with many applying a modified version, continuing to operate cash budgeting in tandem with accruals-based notes to the cash-based Appropriation Accounts may cause confusion and limit the potential benefits of the reforms. Although, evidence from the Northern Ireland experience suggests that accrual budgeting creates its own problems. Conclusion Ireland’s planned public sector accounting reforms are ambitious but appropriate and timely. They represent a significant statement of intent by the Irish Government to modernise the State’s public sector accounting practices and must remain a priority. While obstacles and redirections can be expected along the implementation journey, these should be viewed as opportunities to design a system that is fit for purpose and appropriate for the Irish context. For example, while the FMSS system implementation has been delayed, this presents an opportunity to ensure that it will support the preparation of IPSAS-based accounts and assist with the preparation of consolidated accounts, together with the information needed for the EU and Eurostat. Prof. Ciaran Connolly FCA and Dr Elaine Stewart, Queen’s University Belfast, are authors of The Reform of Ireland’s Public Sector Accounting, published by Chartered Accountants Ireland.

In response to requests from charities and their lead bodies, Benefacts produced a special report on Irish charities last May. Patricia Quinn explains the findings. In Ireland’s charity sector, just as across the rest of the economy, the COVID-19 pandemic cast a long shadow. A sector of predominantly small and micro entities, charities experienced the full gamut of disruption to their not-for-profit businesses in 2020, ranging from temporary closure to rapid adaptation to digital working and developing new solutions to meet the needs of vulnerable people in local communities. For some – especially providers of hospital, hospice, residential care, and homelessness charities – the impact for their staff and served communities was a matter of life and death. Other charities – especially in emergency relief, mental health, local development, and social care – experienced increased demand for their services. In some sectors such as the arts, heritage, and museums, charities without the capacity to move to digital working methods could not operate, or only to a minimal degree. They report staff cutbacks and other cost-saving measures, but most have limited reserves and cannot avoid fixed costs. Fundraised income, which is a significant proportion of the revenues of some Irish charities, was expected to take a severe hit. In some sectors that rely predominantly on traditional fundraising, including door-to-door or church gate collections, charity shops, fun runs and other event-based approaches, this has been the case. Where charities were already geared up to appeal to donors and collect gifts digitally, or transitioned successfully to online giving, some reported an increase in income from this source. What do we know about charities? Charities form a subset of all non-profits in Ireland, which number more than 32,000 if you drill down to the level of local clubs, societies, and associations. The 11,405 charities on the Register of Charities today include just under 3,600 primary and secondary schools. For practical purposes, they are regulated elsewhere. The Register also includes about 2,700 unincorporated associations, trusts, and non-incorporated bodies that file accounts to the Charities Regulator which – for various reasons – are not published on the Regulator’s website. Anybody wanting to study the financial and governance profile of the charity sector therefore relies mainly on the CRO (Companies Registration Office) filings of incorporated charities, of which there are about 5,000. These form the basis for a new benchmark report on the charity sector in Ireland released by Benefacts last month. Benchmarking the state of the sector There has never been a time when current, reliable data was more relevant to charities. In boardrooms around the country, trustee directors have been grappling with tough choices. Even the best risk register was unlikely to include a worldwide pandemic involving the near-total shut-down of whole sectors of the economy. And most charities are particularly ill-equipped to cope with financial adversity; by definition, they have no equity, no investors, and limited capacity to trade their way out of financial trouble. Few charities entered 2020 with significant financial reserves. Although the aggregate reported value of reserves in the sectors under review in the Benefacts report was €3.73 billion based on available data for 3,628 incorporated charities, most of these reserves (€2.5 billion) are held by just 80 larger charities – in particular, voluntary hospitals and social housing providers. The remaining €1.2 billion in reserves is distributed across smaller charities, primarily in local development, social housing, health, and services for people with a disability. Moreover, charities’ assets – unlike most commercial organisations – typically cannot readily be liquidated as they are essential for delivering services or may be of a heritage or highly specialised nature. When reserves are converted to the number of weeks of average weekly expenditure (using data from full accounts), our analysis found that more than one-third of charities have fewer than ten weeks’ reserves, with arts charities particularly heavily exposed. Not all bleak In preparing its report, Benefacts reviewed more than a dozen surveys and other reports prepared by sector lead bodies, policy-makers, and regulators. Many positive effects have been reported. These include heightened public awareness of the value of charities’ work, better engagement across geographic divides, cost and time savings, a better quality of life for staff, and the adoption of more diversified fundraising solutions – especially digital ones. In fact, it appears that a small percentage of charities that were already well-geared for digital fundraising will be reporting 2020 as a better year than usual. Philanthropists stepped up in response, especially to pandemic-related causes, and social enterprises were encouraged to bid for new additional funding. The State permitted some charity employees to avail of pandemic unemployment benefits and allocated additional funding to address areas of acute need. Using financial reporting data shared with us in advance of the publication of their own financial statements by the nine State bodies that are the principal funders of charities, we were able to identify a 10.7% year-on-year uplift in funding for charities – mainly in health, social care, arts, and culture. But in 2020, there were nearly ten pandemic-free weeks at the start of the year and lockdowns were partially lifted mid-year. Additional State support will undoubtedly have sustained some charities that might otherwise have gone under. But there’s already a recognition that 2021 – with the exit from full lockdowns only starting in the middle of the second quarter – will be a tougher year, and 2022 probably tougher again. Planning for better The last 30 years have seen considerable professionalisation in the charity sector. The 5,000 charities whose financial statements form the basis for this new report employ more than 101,000 people. Fundraising, a critical discipline in the 273 charities that rely on this as their principal source of income, has become highly specialised. The larger charities now have professional staff to manage their volunteer supporters. Even the voluntary directors of charities themselves are increasingly recruited using the kind of competency framework approach that would have been unheard of in this sector 20 years ago. And perhaps it’s as well, since understanding the drivers of charity business success is a crucial function of charity boards. Contingency planning will surely come to the fore, as well as a searching review of some of the fundamental assumptions about funding. Benefacts has already received queries from charities trying to understand their position relative to their peer organisations in a given sub-sector, anticipating perhaps an even more competitive environment in the future. Audited financial statements are a hugely valuable source of granular data that makes up the picture of any sector and its component entities. Like analysts in commercial sectors, Benefacts relies on charity company disclosures as the bedrock on which we build a profile of the charity sector and its sub-sectors. Common financial reporting standards bring consistency and reliability to the data that can be used to create a picture of the whole sector and track changes year-on-year at the level of individual charities and sectors such as hospice care, addiction support, or animal welfare. Thanks to its database, augmented each year with more than three million new data items harvested from non-profit company disclosures, Benefacts has been able to provide charities, funders, policy-makers and other stakeholders with a powerful knowledge asset to help them navigate uncertain times. The impact of regulation The range of data underpinning our analysis of this multi-billion euro sector suffered a setback with the new Companies Act reform in 2014. For the first time, small non-profit (limited by guarantee) companies could avail of the same exemptions from filing full accounts as commercial companies. While this is only fair and equitable on the face of it, it has diminished the public disclosures of thousands of charities that rely on public donations, state funding, or both to support their operations. Unfortunately, the Charities Act 2009 did not foresee this change and exempts charity companies from filing their accounts to the Charities Regulator to avoid the burden of double regulation. Again, fair and equitable – except for the unintended side effect of making the financial disclosures of thousands of charities less transparent to the very people on whom they rely for income and something more precious – trust. Here are the numbers: of the 3,628 charities that have already filed their 2019 accounts, 36% have filed abridged accounts and 26% have filed unaudited accounts. 106 of these charities receive funding from the State. This means that their unaudited accounts breach the reporting standards for any body receiving State funding set by the Department of Public Expenditure & Reform (Circular 13, 2014). Rules are there to be obeyed, and over time, the compliance authorities will surely iron out these wrinkles in the provisions of the various legal and regulatory frameworks. But charities are not like other small businesses. The principle rather than the letter of the legislation regulating them is one of transparency. To that, I would add informed self-interest. Sector lead bodies preparing a brief for their board or a presentation for an Oireachtas Committee hearing are often disappointed to discover that Benefacts analysis of their members is missing some critical dimension – especially an analysis of their income. That is because so many of the source documents lack an important few pages: the income and expenditure account. This is all the more galling as funders require the full accounts to be provided to them. We therefore experience a double standard – full accounts to go in the State filing cabinet, abridged ones for the rest of us.