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The Employment and Investment Incentive Scheme (EIIS) remains an excellent source of equity funding for qualifying companies.   The Employment and Investment Incentive Scheme (EIIS) has been a critical source of funding for Irish small- and medium-sized enterprises (SMEs) over the years. The scheme allows Irish taxpayers to claim up to 40% income tax relief on an investment in a qualifying Irish SME. While the scheme has been on the receiving end of some bad press of late, the legislation governing EIIS was updated as part of Finance Act 2018. The new legislation has re-written and re-ordered the previous legislation to make it easier to follow. While there has not been much change to the tax relief or the type of companies that can qualify for EIIS funding, there have been significant changes to the administration of the scheme and to the permitted investment structures, which I believe will have a positive impact. Up to €15 million available for companies The changes to the Finance Act did not materially alter the type of company that can qualify for the relief. The European Union’s (EU) General Block Exemption Regulations (GBER) continue to govern companies that are eligible for EIIS investment. A company must be carrying on a qualifying trade within the State or through a branch in the State, or it must act as the holding company to a qualifying company. An EIIS investment cannot be made directly into a subsidiary, although a subsidiary can benefit, and its tax affairs must be in order. The Finance Act introduced a new definition to the legislation called a ‘RICT Group’. A RICT Group can raise up to €5 million EIIS in any 12-month rolling period and up to €15 million in its lifetime. When looking at a qualifying company, one must also consider its RICT Group, the definition of which aims to identify other companies connected to the qualifying company through common control or ownership. A qualifying company or any company in its RICT Group can raise only one of the following three types of EIIS investment: Initial risk finance: any past or present member of the RICT Group cannot be trading for more than seven years; Expansion risk finance: for a RICT Group trading for more than seven years, the EIIS investment must exceed 50% of the average turnover for the preceding five years, and the company must be entering a new market or launching a new product or service; or Follow-on risk finance: for a second or subsequent EIIS investment, the RICT Group must have foreseen this investment in the original business plan from the time of its initial risk finance. Any companies raising EIIS investment must consider their original business plan and all future needs for EIIS funding. The legislation continues to contain significant anti-avoidance provisions. Qualifying investment A positive change introduced in the Finance Act is the type of shares in which an EIIS investor can invest. Previously, an EIIS investment could only be by way of ordinary shares with no preferential rights. From 1 January 2019, the EIIS investment can be made by way of redeemable preference shares, which is very similar to the investment structure used by Enterprise Ireland. As always, the shares must be newly issued, fully paid up, and the investor’s capital must be at risk (i.e. no guarantees for the four-year minimum holding period). 40% tax relief for investors An EIIS investor must not be connected to the company in which they invest unless they have been granted EIIS or SURE relief on all previous subscriptions into the company. The SURE and SCI schemes were also re-written in the Finance Act, and are aimed at founders, promoters and other connected parties. The scheme is open to all Irish taxpayers who can claim income tax relief of up to 30% in the year of investment and a further 10% three years later subject to the company meeting particular employment or research and development (R&D) expenditure requirements. As you can see from the example in Table 1, investors can earn a good after-tax return if the company merely returns the investment after the four-year minimum holding period. Quicker tax relief claims The process for claiming tax relief is the most significant change contained in the Finance Act. In the past, a company would typically apply to the Revenue Commissioners for outline approval in advance of raising an EIIS investment. Revenue would indicate whether it believed the company would qualify or not. This opinion was not legally binding. Once the investment was completed, the company would again apply to Revenue for tax relief certificates. This process caused the majority of delays and generated negative press for EIIS. Since 1 January 2019, companies can only ask Revenue a limited number of questions before it raises EIIS investment: What is included in the RICT Group? What type of investment is proposed (i.e. initial, expansion or follow-on)? Is the company a firm in difficulty? Once the company has received the investment, it now self-certifies the initial tax relief (up to 30%) to the investor by issuing a ‘Statement of Qualification’ or ‘SQ EII 3’. The certificate can only be issued to the investor once at least 30% of the funds invested have been spent. The SQ EII 3 certificate is required by the investor to make their tax relief claim. The company is also required to file a RICT Form with Revenue to advise that they have issued EIIS tax relief certificates. The company must also include the investment in its corporation tax return for the relevant year of assessment. On meeting the relevant employment or R&D expenditure conditions after three years, the company will follow a similar process to issue further tax relief certificates for the second tranche of tax relief (up to 10%). Market size In the years following the recession, EIIS grew annually. However, the implementation of the full GBER regulations in 2017 caused a significant decrease in tax relief approvals due to the increasing complexity of cases. It also caused Revenue processing delays, which have been well publicised. There is insufficient data available for 2018, but it is likely that tax relief approvals will experience another significant drop. With the improved legislation and self-certification process, EIIS should see resurgence from 2019 onwards and hopefully grow towards the €100 million level again. Funding options There are a large number of EIIS providers in the market, from regulated designated investment funds to various investment brokerages that offer access to their private client base. Companies should continue to seek EIIS funding, as the tax break for investors can facilitate access to significant equity funding. Given the amounts raised in the past, there is plenty of demand from investors at a time when there is a concurrent shortage of growth capital in the Irish market.   Mark Richardson ACA is an investment director with the Goodbody EIIS Funds in association with Baker Tilly.

Jun 03, 2019
Financial Reporting

With increased pressure being placed on Irish plcs to improve their human capital reporting practices, Anthony Wall, Martin McCracken, Professor Ronan McIvor and Raymond Treacy look into why Irish companies’ reporting is coming up short compared to the UK.   For many years there have been attempts to place a value on an organisation’s employees, either for financial statements or for internal purposes. Despite a plethora of suggestions, no method has gained universal approval. More recently, though, the focus has switched from placing a value on an organisation’s workforce to understanding and leveraging human capital (HC) effectively. The term ‘human capital’ has been defined by Gary Becker, an American economist Nobel Prize winner, as the knowledge, information, ideas, skills, and health of individuals. In 2016, we developed a framework to ascertain the HC reporting practices of UK companies (see Table 1).  The KSA area includes items that employees need to participate effectively in the workplace, and, therefore, contains elements that an employee either brings with them when they start working for an organisation or that they can subsequently develop.  ‘HRD’ is concerned with how organisations develop and enhance the KSA of their employees.  ‘Employee welfare’ is the notion that the organisation will act as a good citizen, within its environment, and how well it treats its employees.  ‘Organisational justice and equity’ involves organisations treating employees in a fair and equitable way, and offering equal access to opportunities. This framework has been used to investigate the reporting practices of the 53 companies currently quoted on the Irish Stock Exchange (Euronext) by examining their latest annual reports. Any sentence within the annual reports containing the items listed in the HC framework was counted. Subsequently, the sentence count for each element was aggregated for all of the Euronext companies in order to analyse the current standard of HC reporting.  The overall sentence count for each of the four areas can be seen in Table 2 below.   The first thing to note is the relatively low sentence count for HC items. A study of the FTSE 100 companies in 2018 by the Chartered Institute of Personnel and Development (CIPD), ascertained that the total sentence count for UK plcs was 18,162, compared to the Irish 3,142. This works out at an average of 182 items per UK company to the 59 items for each Irish plc, a difference of 68%.  You can see that Irish plcs attach the most importance to HRD, followed by KSA, employee welfare and organisational justice and equity. Three Irish plcs did not report on any HC items, and 15 reported on ten or less. The highest overall sentence count for an Irish plc was 211.  KSA Of all the framework items listed, ‘leadership’ was the most reported item followed by ‘expertise’, with these two items accounting for 80% of all HC elements reported in this category. The remainder of the KSA items had relatively low levels of reporting, ‘flexibility’ in particular. Other related workforce flexibility concepts such as ‘entrepreneurship’ and ‘innovation’ also had low sentence counts. This is an important area in an era of flexible working arrangements. However, a study by the Economic and Social Research Institute  in 2018 found that Ireland lags behind the EU average when it comes to contingent employment (McGuinness et al, 2018). Therefore, it is perhaps not surprising that reporting levels are low.   HRD Table 4 shows that training was the highest reported HRD item, with ‘talent management’ and ‘succession planning’ in second and third place respectively. The high level of references to training is expected, as unemployment has decreased in Ireland to its lowest level in 10 years (Central Statistics Office, 2018). With more people re-entering the workforce, the demand for training programmes will be high. In terms of talent management, key skills gaps in certain areas of Irish business have emerged in recent years. Employee welfare ‘Health and safety’ made up over a third of the employee welfare items in annual reports. However, a reference to ‘ethics’ was fairly low. It was found that while Irish firms tended to report broadly on issues such as employee codes of conduct and whistleblowing policies, disclosures relating to specific ethical issues, such as corruption, bullying and harassment, were quite rare.  ‘CSR’ and ‘employee engagement’ both had reasonable levels of reporting but everything else in this category dipped into the one digits. However, one might have expected more references to employee wellbeing given the prominence of mental health awareness campaigns. Given the recent emphasis on diversity, the levels of reporting of this is not surprising (see Table 6). However, the relatively few referrals to ‘equality’ are unexpected. This low level of reporting may be down to firms’ tendency to report equality issues under the heading of ‘diversity’, as there is invariably some overlap between the two. Nevertheless, as Ireland now requires companies to report on any gender pay gaps, reporting in this area may improve.  ‘Employee rewards’ were also referred to quite frequently, while ‘human rights’ had fairly low levels of reporting even though EU legislation requires more reporting of such issues.     This study shed some light on the HC items that Irish firms value most, while also identifying areas where HC reporting can be improved. Compared to the UK, the disclosure of HC items by Irish plcs is quite low, and there was generally far less information included in the Irish companies’ annual reports. Irish firms could and should disclose more HC information. The lack of information provided suggests that the EU directive may not be enough on its own, and Ireland could benefit from amending its own 2014 Companies Act to encourage more comprehensive and in-depth HC reporting. Anthony Wall is a Senior Lecturer in accounting at Ulster University. Martin McCracken is a Research Director of business and management at Ulster University.  Professor Ronan McIvor is a Professor of operations management at Ulster University.  Raymond Treacy is a Research Consultant at Ulster University. The authors would like to thank the Chartered Accountants Ireland Educational Trust (CAIET) for funding this research.

Jun 03, 2019
Financial Reporting

IFRS 16, the new international accounting standard on accounting for leases, will change many companies’ balance sheet metrics – but will it change behaviour as well?   When the IASB issued IFRS 16, the new accounting standard on lease accounting, in early 2016, its chair Hans Hoogervorst went to the trouble of asserting that the new standard would not put the leasing industry out of business and that leasing would remain attractive as a flexible form of finance. This was an unusual and, indeed, sympathetic statement for an IASB chair to make. It contrasted with the often-quoted statement by former chair of IASB, Sir David Tweedie, that he wished to fly on an airplane that was on an airline’s balance sheet before he died. Mr Hoogervorst’s statement was also considerably more sympathetic than the IASB’s attitude to concerns expressed some years ago that the revised rules on accounting for defined benefit pension schemes in IAS 19 would threaten the popularity of those schemes. The IASB noted at the time that it was not its problem if changing IAS 19, in the interests of better financial reporting, had such consequences. The IASB was equally unsympathetic to the concern that bringing a pension liability onto the balance sheet would cause difficulties with debt covenants, pointing out that it was up to companies to take action, such as renegotiating covenants, in these circumstances. What is the concern? So why did Mr Hoogervorst feel it necessary to address the question of whether IFRS 16 would affect the attractiveness of leasing as a form of finance? To understand this, let us recall some of the main changes in lease accounting brought about by IFRS 16 as compared to the previous standard, IAS 17. Under IAS 17, leases were classified as either operating leases or finance leases. Finance leases were recognised on the balance sheet as an asset and liability, with depreciation and interest in the income statement. Operating leases were not recognised on the balance sheet, giving rise to their being referred to as off-balance sheet finance, with the lease rental expense being recognised on a straight line basis in the income statement. The distinction between finance and operating hinged on whether substantially all the risks and rewards of ownership of the asset had transferred to the lessee. IFRS 16 represents a fundamental change to this approach. Under IFRS 16, all lease obligations are recognised on the balance sheet as a right-of-use asset and a lease liability (except for low value and very short leases). Depreciation on the asset and interest on the lease liability is recognised in the income statement, as with finance leases under IAS 17. IFRS 16 also sets out rules on how to determine the discount rate to apply to the lease payments when bringing the asset and liability onto the balance sheet, as well as how to determine the length of the lease term and how to deal with variable lease payments. So, how do these accounting changes affect financial metrics that are calculated on the basis of IFRS accounts? The most obvious one is that it will increase the amount of liabilities that are recognised on the balance sheet, as well as the amount of assets. Allied to this is the effect on the key financial metric of gearing because of the change in the relationship between the amount of liabilities recognised on the balance sheet and the amount of balance sheet equity.  In the income statement, while earnings before interest, tax, depreciation and amortisation (EBITDA) will increase, as will operating profit, the interest expense will increase with consequences for debt covenants with interest cover requirements. Where the lease obligation is in a foreign currency, exchange gains and losses will arise on the full amount of the lease liability as exchange rates change. As we will see later, this can be particularly significant in some industries. Compared to the straight line operating lease expense under IAS 17, recognising interest on the lease liability will tend to front-load the total expense, with dramatic effects for companies that are financing their growth through leasing. Although the mandatory commencement of IFRS 16 is for years commencing 1 January 2019, accounting regulators such as IAASA (the Irish Auditing and Accounting Supervisory Authority) have reminded listed companies that IFRS requires this year’s accounts to provide information about the impact that IFRS 16 is expected to have when it is implemented. Indeed, IAASA published a survey in 2016 of Irish listed companies’ operating lease commitments to provide a possible indication of the scale of lease commitments that will be recognised under IFRS 16. Industries affected by IFRS 16 While the IFRS accounts of all lessee companies with operating leases obligations will be affected by IFRS 16, it is generally recognised that the retail, airline and telecoms industries are likely to be particularly affected. This is because of the scale of property leases in retail, aircraft leases among airlines and equipment and network asset leases in telecoms. In each of these industries, leasing offers the key benefit of flexibility in relation to how long and at what cost the lessee wishes to be committed to the use and cost of the property, aircraft or equipment involved. Under IAS 17, there was also the additional perceived benefit that operating leases represented off-balance sheet finance. Under IFRS 16, some lessee companies may consider shortening the duration of their leases so that the amount of the lease liability and asset to be recognised on the balance sheet is reduced. Alternatively, options in leases to extend or renew the lease term that give rise to further liability where they are reasonably certain to be exercised may be renegotiated or eliminated. In the airline industry in particular, where leases are often denominated in US dollars, euro companies are exposed to exchange losses on the whole lease liability under IFRS 16. Lessees may consider seeking to alter the currency of the lease or, more realistically, hedging the accounting exposure by using derivatives. In telecoms, where lease arrangements may include access to an asset together with the receipt of other services from the lessor, the expense for the access to the asset may be separated from the service element in order to restrict the amount to be recognised on the balance sheet to the amount relating to the lease rental for the asset. As IFRS 16 applies where the lessee controls the use of a specific asset for a period, some lessees may be content to leave control over the choice of asset to the lessor in order to avoid being scoped into IFRS 16. Recognising right-of-use assets on the balance sheet under IFRS 16 will expose those assets to the risk of becoming impaired for accounting purposes, with the resulting charge against profit being recognised perhaps earlier than an onerous lease charge would have been recognised before IFRS 16. This is likely to be particularly relevant in industries where technological obsolescence is a feature of the industry. Practical challenges for companies affected by IFRS 16 include the cost and effort of developing systems to capture the detailed data about their operating leases that they need to bring these leases onto the balance sheet, communicating the accounting impact to stakeholders and considering whether compensation arrangements need to be amended in order to accommodate the revised numbers. Under UK and Irish GAAP, operating leases remain off-balance sheet. Some companies that had adopted IFRS may consider whether IFRS continues to be the appropriate accounting framework to use where they believe the negative accounting effects of IFRS 16 are very serious. While some lessee companies may see fit to consider one or more of the avenues referred to above to minimise or reduce the negative accounting effect of IFRS 16, there remains the larger question of whether some companies will conclude that those negative effects would justify a fundamental change in their lease or buy decisions. This may be more likely where the benefits of leasing are marginal and do not outweigh the negative effects of worsened financial metrics. Clearly, a key factor in all of this is whether lenders and investors are likely to change their attitudes to lessee companies solely because of this accounting change. So, the follow-on question is whether this is likely to occur. Conclusion As Mr Hoogervorst noted in a speech on IFRS 16, it is a well-known practice of lenders and investors to adjust the balance sheet borrowing numbers of companies for the effect of off-balance sheet leasing when establishing the real gearing position. Given this well-established practice, together with the degree of publicity that the change in lease accounting under IFRS 16 has received, I think it would be disappointing if lenders and investors were to change their behaviour based on an accounting change that reflects no change in commercial reality. Such a change in behaviour might indicate that lenders and investors had not already been seeking out and utilising the relevant information on companies’ leasing arrangements. Even if the negative effects of IFRS 16 on balance sheet metrics, such as gearing, and on the volatility of profit do alter the behaviour of certain lenders and investors, lessee companies that are convinced that leasing is the right commercial decision may well stick to their guns and maintain their leasing strategy. After all, it would be a pity if the accounting tail were to wag the commercial dog now, wouldn’t it? Terry O'Rourke is Chairperson of the Accounting Committee of Chartered Accountants Ireland.

Feb 11, 2019
Financial Reporting

Seemingly minor tweaks to the definition of materiality could be more significant than they might appear.   The International Accounting Standards Board (IASB) recently refined its definition of that fundamental concept in financial reporting – materiality. These revisions to the financial reporting standards add to the 2017 practice statement issued by the IASB and concludes their deliberations on this important topic. Given all the changes to financial reporting standards which people are currently dealing with, these seemingly minor tweaks to existing standards seem to have slipped by unnoticed. The IASB has stated that the amendments to the standards are not expected to “change existing requirements substantially”. However, this article explores whether that is actually the case and suggests that the changes are more significant than people may think. Why is materiality important in financial reporting? In my view, materiality is the most important concept in financial reporting. Its application impacts on decisions such as how an entity should recognise, measure and disclose specific transactions and information in the financial statements; whether misstatements require correction; and whether assets and liabilities or items of income or expense should be separately presented. Indeed, most definitions of the fundamental concepts of “true and fair” or “present fairly” revolve around financial information being materially correct. Where information that is required by a financial reporting standard is omitted or misstated and such information is deemed material, those financial statements cannot then be said to achieve a fair presentation or give a true and fair view. So what has changed? The refined definition of material is as follows: “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” The main changes are embodied in the references to “obscuring”, “could reasonably be expected to” and “primary users”. The definition is also now aligned across the various IFRS Standards and the Conceptual Framework. Furthermore, the amendments provide a definition and explanatory paragraphs in one place (IAS 1) and remove the definition of material omissions or misstatements from IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. While some have felt that the IASB is merely playing with words and the IASB itself doesn’t feel that the changes are significant, some of the altered emphasis could lead to changes in practice. Let’s explore this a little further. First, the amendment replaces the term “could influence” with “could reasonably be expected to influence”. This, in my opinion, can only be read as increasing the materiality threshold and encouraging entities not to disclose immaterial information in their financial statements. Second, the concept of “obscuring” information has been added to the requirements against “omitting” and “misstating” information. This can only be seen as an effort to alleviate stakeholder concerns that the previous definition encouraged entities to disclose immaterial information in their financial statements, which could inadvertently obscure information relevant to users. And third, the previous definition of material was also seen to be lacking in explaining why it is unhelpful to include immaterial information. To prevent this, the characteristics of users have also been expanded on, as it is now explained that they are the “primary users of general purpose financial statements”. Previously, the characteristics of users were not explained, which some people felt required an entity to consider all possible users when deciding on what information to disclose. It is worth recalling who the IASB has deemed to be the primary users of general purpose financial statements. In short, they are current and potential providers of finance to the entity (i.e. present and potential investors, lenders and other creditors who use the financial statements to make decisions about buying, selling or holding equity or debt instruments, providing or settling loans or other forms of credit, or exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources). Up to 2010, the definition of users of financial reports was much wider than that and explicitly included suppliers, customers, government and the public. The practical result was that the materiality threshold was much lower at that time, given that information could be deemed to affect the decision-making of a wider user group. Practice statement: making materiality judgements The changes outlined above build on the 2017 practice statement, Making Materiality Judgements, issued by the IASB. As well as offering comprehensive guidance on various principles, the statement outlined a four-step process for entities to follow when making materiality judgements. Step 1 The entity identifies information that has the potential to be material. In doing so, it considers the IFRS requirements applicable to its transactions, other events and conditions, and its primary users’ common information needs. Step 2 The entity then assesses whether the information identified in step one is material. In making this assessment, the entity needs to consider quantitative (size) and qualitative (nature) factors. The practice statement notes that the presence of a qualitative factor lowers the thresholds for the quantitative assessment (i.e. the more significant the qualitative factors, the lower those quantitative thresholds will be). Step 3 The entity organises the information within the draft financial statements in a manner that supports clear and concise communication and the statement provides guidance on this. Step 4 In this, the most important step, the entity steps back to assess the information provided in the draft financial statements as a whole. It needs to consider whether the information is material, both individually and in combination with other information. This final assessment may lead to the introduction of additional information or the removal of information that is now considered immaterial; aggregating, disaggregating or reorganising information; or even beginning the process again from  step two. Evolution of the materiality concept The current iteration of the materiality concept is part of an ever-evolving process in which I have had the dubious honour of being centrally involved. As the then Head of IAASA’s Financial Reporting Supervision Unit, I was responsible for the production of a paper in 2010 entitled IAASA’s Observations on Materiality in Financial Reporting. That paper outlined IAASA’s interaction with issuers at that time as well as specific recommendations as to how companies should be dealing with, and applying, the concept of materiality in their financial reports. Resulting from this IAASA paper, I was asked to chair a group on materiality established by the European Securities and Markets Authority (ESMA). The main output from that group was the hosting of a roundtable with key European stakeholders, the issuance of an ESMA consultation paper entitled Considerations of Materiality in Financial Reporting followed by a feedback statement which provided an overview of the key messages from the responses received. I subsequently engaged with the IASB, which ultimately led to the issue of the IASB practice statement, Making Materiality Judgements, in 2017. The present revision to the standards is the conclusion of this journey and both the practice statement and revised standards will have effect in over 120 countries globally. The amendments to the standards, once endorsed by the European Union (EU), will be effective for annual reporting periods beginning on or after 1 January 2020, but earlier application is permitted. Conclusion The application of the concept of materiality is of critical importance in the context of the preparation of financial statements. It needs to be clearly understood so that preparers can apply it appropriately and users are provided with useful information in the financial statements. The revised definition and accompanying practice statement should go some way to meeting this objective. Michael Kavanagh is a Director in the Department of Professional Practice at KPMG Ireland.

Feb 11, 2019
Financial Reporting

A shake-up could be on the way for IFRS rules on accounting for goodwill and the presentation of the income statement.   As listed companies and their subsidiaries throughout the European Union (EU) grapple with the International Accounting Standards Board’s (IASB) recent accounting standards on revenue and financial instruments, the IASB itself has turned its attention to other accounting topics. Two of the topics that are currently occupying the IASB are accounting for goodwill and the presentation of the income statement/profit and loss account. It may seem surprising that these topics are on the IASB’s agenda because the existing requirements of IFRS on these areas appear quite settled. However, both topics have given rise to debate and controversy and, consequently, the IASB has been exploring whether and how the existing requirements should be improved to address the criticisms. Goodwill Let’s look at goodwill first. As far back as 2004, IFRS stopped amortising goodwill. This was in line with US GAAP but unlike local GAAP in other jurisdictions, such as Japan and the UK, which continued to amortise goodwill. The IFRS approach reflected the view that the income statement expense for goodwill amortisation had little information value for investors and analysts, who tended to add it back in assessing corporate earnings. Instead, IFRS requires management to make an annual assessment of the value of the business unit to which the goodwill belongs in order to determine if the goodwill needs to be written down/impaired. Preparers of IFRS accounts point out that the annual valuation exercise can be complex and costly, as well as being unnecessary when the valuation shows plenty of headroom over the book value. As the IFRS rules prohibit taking into account the enhanced cash flows from planned restructurings or capital expenditure in assessing the value in use, they are regarded as unrealistic as the full potential of the business unit is not being included. Investors and regulators, too, identify serious flaws in the current rules. It has become apparent that the internally generated goodwill of the business into which the acquired business has been integrated acts as a shield that protects the acquired goodwill from requiring impairment. Indeed, that internally generated goodwill, which is not recognised in the accounts, has to be completely “burned through” before the acquired goodwill needs to be impaired. In addition, management’s assessment of the future cash flows on which the value in use is based can often reflect management’s optimism about its future prospects. Consequently, many commentators have criticised this approach to impairment testing as giving rise to impairment charges that are too little and too late. As acquired goodwill is brought onto the balance sheet but internally generated goodwill is not, there is an inevitable inconsistency between the results achieved by acquisitive groups and those that have grown organically. The balance sheet value of acquisitive groups will tend to be higher while their post-acquisition profits will be reduced where intangible assets recognised on acquisition are being amortised against profit. Some academics suggest that internally generated intangible assets should be capitalised, in the same way as certain development expenditure is capitalised. None of these problems or inconsistencies with goodwill accounting are new, but the vastly increased importance of goodwill and intangible assets on balance sheets throughout the world means it is opportune for the IASB (and the Financial Accounting Standards Board (FASB) in the US) to explore various avenues to address them. For example, if the amount of acquired goodwill should eventually be reduced to zero, rather than continuing to be recognised on the balance sheet at its cost – potentially in perpetuity – would the reintroduction of some form of amortisation be appropriate? Amortisation is, of course, open to the criticism of the arbitrariness of estimating the useful life of goodwill, but some point out that estimating future cash flows in order to assess value in use is subject to similar uncertainty. Alternatively, should the value in use of the business unit be restricted by the internally generated goodwill in order to focus solely on whether the value of the acquired goodwill has been maintained above its book value? These and many other accounting possibilities have been raised at recent IASB meetings. Some of you may recall that goodwill on acquisition was once regarded with such scepticism that it was written off to reserves immediately. I think it’s unlikely that the IASB will revert to such a drastic approach. There is also growing criticism that the current goodwill accounting rules and disclosures provide little information on whether the acquisition has been successful and has fulfilled its promise. This is regarded as a shortcoming in the degree to which the accounts provide a measure of management’s stewardship of their resources. The IASB is therefore also considering how the requirements on disclosure of post-acquisition performance can be enhanced – for example, a table showing the year-on-year change in profits analysed between organic growth and acquisitions. Income statement presentation Having issued its recent standards on key measurement issues including revenue, financial instruments and leases, the IASB sees the need for a period of calm while we all get used to the new standards. Nonetheless, the IASB is conscious that the rules of IFRS on how the income statement should be presented are relatively form-free, with few hard and fast rules on which line items should be presented. The absence of such rules has, of course, led to management exercising its discretion on what to present, including non-IFRS measures of performance and a significant level of diversity in practice. Although the IASB acknowledges the usefulness of management measures of performance as evidenced by their use in the market, it considers that a greater degree of regulation, consistency and comparability is desirable. It is perhaps surprising that it has taken the IASB so long to open up this area for detailed consideration, given how prescriptive IFRS is in many other areas. The lack of IFRS rules in this area contrasts with the very prescriptive formats of the EU Accounting Directives that are followed in UK and Irish GAAP profit and loss accounts. A key item of debate is the term ‘operating profit’, which is presented on many, if not most, IFRS income statements and is regarded as a key metric. IASB is conscious that there is considerable variation in what companies include in operating profit. For example, there is significant diversity in whether the equity-accounted results of associates and joint ventures are part of operating profit. IASB currently appears to be tending to the view that they are more in the nature of an investment return than an operating return, while acknowledging that some associates and joint ventures are integral to the group’s business and thus deserve separate disclosure on the face of the income statement in proximity to operating profit. The extent to which gains and losses on derivatives and other financial instruments are regarded as part of operating profit rather than financing is also subject to inconsistency. The IASB appears to be intent on “owning” the term ‘operating profit’ rather than leaving it to the discretion of management to decide what it should and should not include. Nonetheless, the IASB is also considering permitting or requiring a ‘management performance measure’ to be presented in the accounts together with a reconciliation to an IFRS line item. This would facilitate the familiar practice of providing adjusted profit numbers to exclude once-off, unusual or exceptional items. This approach would also be consistent with the requirements of IFRS 8 Segment Reporting that segmental results should be presented as seen “through the eyes of management”. The IASB is also conscious of the growth of automated investing and the related digital consumption of financial information. Accordingly, it considers it desirable that the sub-totals and line items in the income statement should be defined and regulated, or at least rigorously reconciled to line items that are defined by IFRS standards. Conclusion Given the level of research and debate the IASB has already devoted to these two topics, it seems very unlikely that the status quo will remain unchanged. I think IFRS can be expected to become more demanding and rigorous in terms of what is presented on the income statement and how the performance of acquired businesses is disclosed while, hopefully, simplifying some aspects of goodwill impairment testing. However, there seems to be some way to go before the IASB achieves a consensus on what proposals to make. We can also expect companies, investors and analysts to have strong views about the IASB’s eventual proposals, not to mention contributions from regulators and audit firms on whether those proposals provide enhanced investor protection and are auditable. I think widespread feedback from all classes of stakeholders will be important in ensuring that the standards on these two key areas of financial reporting are taken forward appropriately. Terry O'Rourke is Chairperson of the Accounting Committee at Chartered Accountants Ireland.

Dec 03, 2018
Financial Reporting

Given that IPOs are an increasingly popular means of generating capital, this article explores applicants’ assessments of their financial position and prospects.   The use of the Initial Public Offering (IPO) vehicle is gaining momentum as a means of generating capital amongst Irish companies, particularly in the property development sector. Applications to the Main Market of the London Stock Exchange (LSE), (Premium and High Growth Segment listings), the Alternative Investment Market (AIM) of the LSE and the ISDX Growth Market of the LSE require the establishment of procedures that allow the directors to assess the financial position and prospects (FPP) of the applicant and its group on an ongoing basis. Irish companies wishing to pursue a dual listing on Euronext Dublin (formerly the Irish Stock Exchange) and the LSE are therefore subject to FPP requirements. FPP impacts a number of stakeholders in the IPO process and is currently a hot topic with the UK regulator. The Financial Conduct Authority (FCA) issued a technical note in August 2017 (August 2017/UKLA/TN/708.3) setting out the sponsor’s obligations in relation to FPP. Responsibility for the development and maintenance of FPP procedures rests with the applicant directors. This article will explore FPP from a company perspective, focusing in particular on directors’ obligations with regard to FPP requirements, and highlight points for consideration in order to carry out those obligations as efficiently and effectively as possible. FPP roles and responsibilities The Institute of Chartered Accountants in England and Wales (ICAEW) drafted a Guidance on Financial Position and Procedures document (TECH 14/14CFF), which is aimed at: Applicant directors, to explain how they can demonstrate the establishment of FPP procedures to address relevant objectives; and Reporting accountants undertaking an assurance engagement and providing an assurance report in relation to the FPP procedures established by the applicant directors. The directors are responsible for asserting that they have “established procedures that provide a reasonable basis for them to make proper judgements on an ongoing basis as to the FPP of the applicant and its group”. The established procedures will typically be set out within a risk assessment document and the assertion on those procedures will typically be included within a board memorandum. A reporting accountant is engaged by the applicant to provide an assurance opinion on the directors’ assertion to the sponsor, and this assurance opinion will typically be included within a report addressed to the applicant directors and the sponsor. The sponsor’s role is to assess the applicant’s suitability to list. If the directors are unable to demonstrate the robustness of the FPP procedures in place, the reporting accountant may be unable to provide an unqualified opinion to the sponsor. The sponsor may therefore be unable to confirm that the applicant is fit to list. FPP definition Section 8 of Tech 14/14CFF states that “the directors must have established procedures that enable them to be informed on a regular basis as to: The financial position of the applicant and its group, including assets and liabilities, profits and losses; Projected profitability, cash flows and funding requirements based on realistic assumptions about the internal and external factors that might reasonably be expected to have a material impact on the business; and Any changes to the above.” Directors’ responsibilities under FPP Section 28 of Tech 14/14CFF sets out the following key components of the applicant directors’ responsibility under FPP: Accepting responsibility for FPP procedures; Ascertaining whether appropriate FPP procedures have been established at the time of listing; and Obtaining sufficient evidence that the necessary FPP procedures are in place and documenting those procedures. The FPP guidance recommends that the applicant directors carry out a risk assessment of factors that are likely to impact on FPP as a first step. This is an important document as it enables not only the documentation of FPP risks impacting the applicant, but also the FPP procedures (current and prospective) to address those risks. It can also be used to refer to the evidence supporting the documented procedures. Including everything in one document makes it easier for the applicant directors to assess the FPP procedures in place and provides the basis for the development of the board memorandum, in which the applicant directors provide their assertion over the FPP procedures. It will also provide the reporting accountant and relevant advisors with one point of reference in order to carry out their work. The risk assessment The applicant directors, with the aid of the management team, need to identify the FPP procedure objectives to be adopted by the applicant and to document a risk assessment against the achievement of these objectives. Illustrative objectives are set out in Appendix 1 to TECH 14/14CFF under the following headings: Risk assessment of FPP; High-level reporting environment; Forecasting and budgeting; Management reporting framework; Significant transaction complexity, potential financial exposure or risk; Strategic projects and initiatives; Financial accounting and reporting; and IT environment. The generic objectives should be assessed for their appropriateness to the particular applicant’s business model and amended as appropriate. Once the objectives have been identified and documented, specific risks which threaten the achievement of these objectives need to be identified and documented. Certain risks may be common to the vast majority of business models from an FPP perspective – for example, the risk that board members do not possess the necessary qualifications and experience to enable them to fulfil their roles to the required standard for a listed group. Other risks may be more industry-specific. For example, treasury risks are likely to be of greater significance to a bank than a construction company. Once the risks have been identified and agreed, mitigating activities (controls) that reduce the probability and impact of an FPP risk occurring to an acceptable level need to be identified and documented by the applicant. Mitigating activities can be either current or prospective. Current mitigating activities are controls that are in place and operating at the listing date (day one). Prospective mitigating activities are controls that have been designed prior to listing but which will only become operational after day one. This type of mitigating activity may arise if the applicant is a completely new entity with no past history, or where the implementation of certain actions relies upon the completion of the listing process. Following identification of the mitigating activities, supporting evidence must be pinpointed to demonstrate their operation. The location of this evidence should also be documented. The FPP objectives, risks, mitigating activities and details of evidence supporting mitigating activities should all be included within the risk assessment. The board memorandum Upon completion of the risk assessment, directors must evaluate whether the FPP procedures developed meet the FPP objectives and provide a directors’ assertion in relation to those procedures. Paragraph 31 of Tech 14/14 CFF states that “the results of the evaluation are documented in a company document, which may take the form of a board memorandum on FPP procedures, and directors are responsible for ensuring that FPP procedures and the results of their evaluation against FPP objectives are documented”. It is important that the basis for the directors’ assertion either describes the FPP procedures set out in the risk assessment or cross-references the risk assessment. While there is no prescribed form for documenting the basis of the directors’ assertion, Paragraph 50 of Tech 14/14CFF sets out the key elements that might typically be included as follows: A statement of the directors’ responsibilities; Details of the nature of the company and the transaction that may be relevant to FPP procedures; A reference to the directors’ risk assessment and the extent of FPP procedures necessary to respond to the identified risks; A reference to the use of TECH 14/14CFF; A directors’ confirmation that the board memorandum describes fairly the FPP procedures that have been established on a specified date; A directors’ confirmation that where FPP procedures have been planned by the directors but not yet brought into operation, those FPP procedures will be brought into operation and subsequently operated in accordance with the plans; A directors’ assertion that they have established procedures to provide a reasonable basis for proper judgements on an ongoing basis as to the FPP of the company and its group; The name and signature of the director signing on behalf of the board; and The date of approval. Appendix 2 to Tech 14/14CFF provides sample wording for FPP procedure board approval depending on the type of listing sought. Points for consideration Given that the listing process is complex and time-consuming, the applicant directors should ensure that the development and implementation of FPP procedures is given sufficient priority within the process. Senior management will typically support the directors in their obligations by developing the risk assessment, FPP evidence and board memorandum for board discussion and approval. To develop FPP procedures that are appropriate to the applicant and in accordance with the listing timetable agreed, the directors (with the support of senior management) should: Obtain an early understanding of the FPP procedures guidelines (TECH 14/14CFF) in order to understand what is required to develop the risk assessment, the evidence supporting the FPP procedures and the board memorandum; Engage early with the reporting accountant with regards to the FPP deadlines within the overall listing timetable and communicate any changes in these timelines as soon as possible to the relevant parties; Assign appropriate responsibility for the initial FPP procedure development process. The board will typically delegate the development of the risk assessment, evidence supporting the FPP procedures and board memorandum to senior management. Senior management may in turn seek the support of outside advisors in their preparation; Provide the FPP risk assessment, evidence supporting the FPP procedures and the board memorandum to the reporting accountant in accordance with the timelines agreed; Process amendments to the FPP documentation based on comments provided by the reporting accountant and resubmit the documentation in accordance with the timelines agreed. Any wording updates and weaknesses in the design of mitigating activities will generally need to be addressed by day one, depending on the requirements of the reporting accountant and key advisors; Develop a plan to implement prospective mitigating activities and agree this plan with the reporting accountant and key advisors; Approve the risk assessment, evidence supporting the FPP procedures and board memorandum prior to listing; Implement the prospective mitigating activity plan in accordance with the timelines agreed; and Assign responsibility for ongoing maintenance of the FPP process including the maintenance of the risk assessment and the evidence supporting the FPP procedures; liaising with senior management on at least an annual basis regarding any updates to FPP procedures; collation of updated FPP documentation; and submission to the board for their review and approval. Given their role in supporting the board, this responsibility would typically rest with the group secretary. Conclusion The development of FPP procedures is an important element of the listing process for companies. Failure to satisfy the reporting accountant and sponsor as to the robustness of these procedures may result in frustrating listing delays. The risk assessment is critical to this process and its early development is essential in order to assess time and human resource requirements to address gaps. In particular, applicant directors need to assess at an early stage, in consultation with the reporting accountant, the prospective controls that must be in place and operational at the time of listing and those which must be operational shortly thereafter. Applicant directors should therefore ensure that the development of FPP procedures is given sufficient priority within the listing process. Anthony Connolly ACA is a Manager in the Risk Advisory department at Deloitte.

Aug 01, 2018

Audit

Audit

With a stream of negative news, the outlook for auditors can appear bleak at times. However, we should never lose sight of the value in the audit process. Accountants and auditors are faced with a bleak outlook. There is a constant narrative telling us that accountants and auditors are not relevant anymore; reports that investors don’t care about the parts of the annual report governed by IFRS and audited by professional experts; reports that all accountants will be unemployed in a short number of years, made redundant by blockchain, which in turn makes the auditor redundant because who needs an auditor when blockchain is verified in real-time? Then there are the articles criticising audits and auditors. When there are large corporate failures, the question inevitably arises: where were the auditors and the audit regulators? The Financial Reporting Council (FRC) recently published its latest inspection reports and noted a decline in audit quality. A recent International Forum of Independent Audit Regulators (IFIAR) survey reported mixed results across countries and stated that firms need to continue their efforts to strengthen their systems of quality control and drive consistent execution of high-quality audits across the world. A record fine of $625 million was imposed on one firm after a judge concluded that it had failed in a number of audits of a failed bank. Other high-profile investigations are ongoing and widely publicised across the globe. So, should all accountants and auditors frantically retrain in another profession? Or, alternatively, should all stakeholders take a moment to consider the value contained in a set of audited financial statements? The expectation gap All auditors know about the expectation gap. While some stakeholders believe that an audit is verification that everything is 100% correct, auditors know that an audit provides reasonable assurance that the financial statements present a true and fair view. An audit is not designed to pick up every fraud. An audit uses the concept of materiality – if an error would not influence an investor’s decision, it is not adjusted typically. In addition, an auditor relies on information presented to him or her by the directors. Clearly, an auditor challenges the information but the directors are the ones who understand their entity best. Technology developments are coming hard and fast. Entities are becoming more complex and are investing in their IT systems to produce vast amounts of information. Their auditors are following suit, developing tools that can analyse this information and improve the efficiency of the audit. These developments are positive, enabling auditors to analyse larger samples, find outliers faster and focus their efforts accordingly. However, with sound bites and headlines now stating that auditors can test 100% of transactions, does this worsen the expectation gap? If an auditor is testing 100% of the data, then surely it is total verification as opposed to reasonable assurance? Relevance of historical information We are told that investors only focus on the unaudited parts of the annual report – the forward-looking information, the viability statement and the corporate social responsibility reports. This makes perfect sense to me. An investor wants to predict how the share price will move in the future in order to help them decide on the best time to sell and make a profit. And often, investors are becoming more socially and ethically conscious and want to know that their money is being put to good use by the companies they invest in. But, all of the predictions are based on the presumption that the current share price is correct. Moreover, that share price is only correct if the underlying financial information is calculated consistently with other companies (as governed by IFRS or the appropriate accounting framework) and is materially correct. Who is really responsible? So, whose role is it to give investors the comfort they need that the underlying financial information is correct and therefore, that their investments properly valued? The directors are ultimately responsible for the running of the company and for the financial information released. It is up to them to make wise choices that keep the company afloat and to present all the information an investor – and indeed, an auditor – might need to reach their conclusions. Audit committees, where they exist, have clear responsibilities to monitor the entity’s financial reporting and internal quality control and internal audit. They are also responsible for recommending an appropriate auditor, ensuring they are independent, monitoring the statutory audit and informing the directors of the outcome. The auditor’s job is to conclude that the financial statements present a true and fair view. There are extensive rules and requirements that guide how they must do this. They must take the information, which has been prepared by the entity, as overseen by the audit committee and directors, and gather third-party evidence to verify that information to the greatest extent possible. Where estimates are used and cannot be verified, the auditor must make sure that the estimates are reasonable. Is there supporting evidence for the assumptions? Is there contradictory evidence? Is it within a reasonable range? Has the entity historically been good at estimating? Is the information used in developing the estimate correct? The audit regulator is next in the chain. He or she is primarily responsible for checking that firms have appropriate policies and controls in place, and that those policies and controls are applied properly and consistently to a sample of audits. Many regulators also use thematic reviews to promote best practice in an anonymised way. So there are several building blocks in the process, all stacked on a foundation of solid financial reporting and auditing standards. If any of those blocks are not solid, however, the tower of comfort will fall. Reputation is everything Investors and other stakeholders need to have confidence in the opinions of an auditor and in the financial statements. Directors need to ensure that the financial statements are properly prepared and give a true and fair view. Auditors need to ensure that high-quality audit services are provided. All stakeholders have a responsibility to continue efforts to close the expectation gap and ensure that an audit opinion is understood correctly. Audit firms survive on their reputation. Reputational damage, which can ultimately cost even more than record financial penalties, can be fatal to the survival of an audit firm. This is a risk to the market as it could result in higher concentration levels. We all recall the collapse of Arthur Andersen in 2002, which served only to reduce the number of large players offering audit services. The phrase ‘Titanic Three’ has already been coined, but it would not be a positive development in the market if it became a reality. Competition Most stakeholders would agree that increased competition in the market would be positive and this was one of the aims of the EU Audit Reform Legislation, which came into effect in 2016. Evidence shows that this has not been achieved to date, however. Indeed, the trend has been to the opposite. The suggestion that the Big Four must become audit-only service providers is an interesting one. European law already largely prevents auditors from carrying out non-audit services for their audit clients, yet there are many benefits to having multidisciplinary firms carry out audits. Audit teams now comprise auditors, often from several offices, and specialists from a range of disciplines including IT, tax, valuation and pensions. These specialisms are critical to an effective audit and often, such specialists spend part of their time providing non-audit services in order to be economically viable. Would reducing the availability of such specialists really result in an improved audit? European law also requires auditors to rotate regularly. We increasingly hear reports from entities that they cannot identify two audit firms who are independent and willing to tender for an audit. We also hear from non-Big Four audit firms that they are not invited to tender or cannot afford to tender, as the demands in a tender are too high. One audit firm in the UK publicly announced a strategic decision not to tender for the largest audits because the costs are too high. This aspect of competition requires investigation. How can audit committees get the information they need to be able to make their recommendations on appointing the auditor without driving the cost of tendering so high that only the largest firms have the capacity to engage in the process? The costs include the final document, which is usually a high-quality and well-designed product, but there is also an extensive time commitment involved in preparing and in getting to know the client in order to prepare. Is change on the horizon? The world of audit and audit regulation is being heavily scrutinised. The Competition & Markets Authority in the UK is reportedly meeting with the large audit firms amid intense pressure to look at the audit market and ways to increase competition. The UK Government has launched an independent review into the FRC. The Public Company Accounting Oversight Board (PCAOB) has a new board and is reviewing how it operates, while record fines are being handed out to audit firms. So what does the future hold? Certainly, the conclusions of the reviews conducted by the FRC and PCAOB will be of interest to stakeholders around the globe – particularly in Ireland, given our close links with both countries. Socrates said that the secret of change is to focus all of your energy not on fighting the old, but on building the new. For many people, the world of accounting and audit has transformed during their careers and is continuing to evolve. Penalising failure is important, of course, but less so than working to ensure that the problems of today are designed out of the system in the future. Lisa Campbell FCA is Head of Statutory Reporting Quality at IAASA.

Aug 01, 2018
Audit

From data analytics to robotic process automation and artificial intelligence, audit has come a long way, and it looks to be going further at a rapid pace. While innovation may have been traditionally associated with the advisory arms of professional services firms, innovation in audit departments has raised the bar in recent years. It is enabling firms to transform their audit practice. The progress made is extraordinary and the pace at which we are now able to implement change is accelerating. Embedding innovation Innovation is at the core of the changing audit quality agenda. It shapes the design and execution of audits, how accountants collaborate with clients and how they can bring value that goes far beyond a true and fair opinion on the financial statements. It’s not just about having smart tools, it’s about creating and sustaining a culture of innovation throughout the practice and making innovation work for clients. In Deloitte, this required a mind-set change from our audit professionals at all levels – getting the correct tone at the top was critical right across our audit leadership.  Equally as important is creating an environment where audit professionals at all levels are encouraged to challenge the status quo, to develop and share ideas in the knowledge that we listen and act wherever possible. Some of our most impactful innovations such as D.Price and D.FX, (pricing and foreign exchange tools) have come from members of our audit teams who identified an opportunity and had the tenacity and support to follow it through. Today, we have a more diverse range of skill sets within our audit practice than ever before. This has not happened by accident – firms are purposefully recruiting and investing in specialists such as data analysts and data scientists.  The power of analytics Advanced data analytics and visualisations are already embedded within our audit processes. Firms are recognising that data analytics represents the single greatest opportunity to transform the audit process by: Enhancing audit quality; Providing greater insight to our clients; Providing accountants with a more rewarding experience; and Driving efficiencies in the audit process. Analytics, appropriately scaled, forms part of Deloitte’s audit strategy for all audit engagements. Our vision for analytics is simple: we want every audit client to benefit from the power of analytics and we want to support every one of our audit practitioners to become a ‘black belt’ in analytics by the time they complete their professional training contract. The deployment of analytics engines, like Deloitte’s Illumia, on audit engagements enable accountants to perform a stronger risk assessment process, which means that audit procedures are focused on the areas of greatest risk. In many cases, accountants will be able to perform tests across 100% of the population in order to identify trends and outliers requiring further investigation.  Analytics is driving changes in terms of when and how often audit procedures are performed. Given that audit routines can be pre-coded, they can be performed more often during the audit cycle. Rather than waiting until the end of the financial year or for the interim audit, audit routines can be performed at agreed intervals (monthly, quarterly) with results being provided to clients on a more frequent basis. The move to a more continuous audit ensures that potential issues are being highlighted to management at the earliest possible time and provides a greater level of flexibility on the timing of audit procedures.  Data acquisition The success of analytics depends on the quality and availability of data. Some existing platforms have the ability to extract data in various ways, including through continuous feeds, enabling data analysis throughout the year. Enhanced data extraction is key to optimising the capability of analytics. For many, this is where the challenge lies; the analytics engine may be strong, but if the auditor is not able to easily extract data – due to unstructured data, a lack of standardisation in data format or the challenge of having many different enterprise resource planning (ERP) systems in existence – performing audit analytics can become a more challenging process.  Emerging technologies There are a number of emerging technologies, such as robotic process automation (RPA) and artificial intelligence (AI), that are already impacting how audits are executed. Many clients have implemented an RPA strategy, particularly in cases where tasks are centralised in a shared service centre, driving significant efficiencies in their back office operations. More and more, auditors are evaluating the impact of processes or controls that would traditionally have been executed by humans which are now being done by machines. Our experience has shown that an RPA strategy can deliver great efficiency for clients and significantly reduce, if not eliminate, processing errors.  However, our experience has also shown that just because a machine is responsible for processing transactions, it does not mean that all transactions will be processed correctly. In essence, a machine will only do what you program it to do and so any design flaw in the process could apply to all transactions processed and lead to errors. Regardless of how small it might be at a transaction level, the error could accumulate over time and become material. RPA does represent a great opportunity to tackle large volume/routine tasks and automate them, and is clearly relevant from an audit efficiency and talent perspective. AI is the theory and development of computer systems that are able to perform tasks that normally require human intelligence. For example, Deloitte’s contract interrogation solution, Argus, uses natural language processing (NLP) and machine-learning technology to analyse large volumes of contracts at amazing speed. This enables the auditor to profile populations based on defined criteria and identify any exceptions requiring investigation. Smart visualisation of results enables better decision making and, ultimately, better outcomes for our clients. Working with technology such as AI provides the opportunity for auditors to work smarter, analyse larger samples or even entire populations and simultaneously deliver higher quality audits and better client insights.  Blockchain is the emerging technology that has the potential to cause the greatest level of disruption for the audit profession. While this potential disruption may be a number of years away, some commentators have suggested that the potential impact on the auditing profession could be as significant as the impact the internet had on industries such as travel or retail.  Blockchain is a distributed general ledger which records all transactions that have happened, when they happened and other key details. While Blockchain is often associated with the cryptocurrency Bitcoin (Blockchain is the general ledger on which Bitcoin transactions are recorded), the potential use cases for Blockchain are far reaching. This is an area where, in three years’ time, we may still be underwhelmed by the impact that Blockchain has had on our profession but, when looking back in 10 years’ time, we may be shocked by the level of disruption that has actually taken place. At Deloitte, we’ll see the progress first-hand at the Deloitte EMEA Blockchain lab based in Dublin. The audit of the future It is clear that the rate of change in our profession is accelerating and I strongly believe that the audit of the future will be very different to the audit of today. I believe that audit will undergo a digital revolution, equivalent to the revolution that took place when laptops replaced pens and paper. I believe that the audit of the future represents an exciting opportunity for our profession, presenting great opportunities for our clients and people. Kevin Sheehan is a Partner of Audit & Assurance at Deloitte.

Dec 01, 2017