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.

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.

Daniel O’Donovan and Siobhan Orsi summarise the main changes in the Ethical Standard (Ireland) for Auditors, the International Standards on Auditing (Ireland), and the International Standard on Quality Control (Ireland) 1. In November 2020, the Irish Auditing and Accounting Supervisory Authority (IAASA) issued revised ethical and auditing standards in a bid to support the delivery of high-quality audit and strengthen confidence in audit in Ireland. The revisions build on changes made to the standards in 2017, which implemented the requirements of the EU Audit Regulation and Directive. These new amendments, which were the subject of a formal consultation earlier in 2020, are effective for audits of financial statements for periods beginning on or after 15 July 2021, with early adoption permitted. This article summarises the main changes in the Ethical Standard (Ireland) for Auditors, the International Standards on Auditing (Ireland), and the International Standard on Quality Control (Ireland) 1. Revisions to the ethical standard IAASA’s aim in amending the ethical standard was to simplify and restructure the standard to ensure a better understanding of the ethical requirements. It also introduces more prohibitive requirements, including removing the exemption for SME-listed entities that were not subject to many of the prohibitions applied to listed entities. These concessions, offered in the 2017 IAASA Ethical Standard to entities of this nature, have been removed. Other key changes to the ethical standards include, but are not limited to, the following: Third-party test: the new standard sets out a clearer and stronger definition of the “objective reasonable and informed third-party test”, which is a core element of the ethical standard. It requires audit firms to consider whether a proposed action would affect their independence from the perspective of public interest stakeholders rather than another auditor. Additional guidance has been inserted to assist in application. Internal audit services: firms will no longer be able to provide internal audit services to audited entities or their significant affiliates. IAASA’s view was that the provision of internal audit services to audit clients created a risk, both real and perceived, to independence that needed to be addressed. Recruitment and remuneration services: the standard incorporates amendments that now prohibit auditors from providing recruitment and remuneration services or playing any part in management decision-making. Gifts and hospitality: the requirement to establish policies on the nature and value of gifts, favours, and hospitality that may be accepted from and offered to other entities has been extended to apply to those entities that are likely to subsequently become audit clients. Enhancements to the ethics partner’s authority: new provisions incorporated into Section 1 of the ethical standard highlight the increased importance placed on the ethics partner. Enhancements include a requirement for reporting to those charged with governance where an audit firm does not follow the ethics partner’s advice. Partner rotation: the cooling-off period for engagement partners on public interest entity audits has been relaxed and amended from five years to three years, as was the requirement in the EU Audit Regulation in 2014. The change has also been applied to listed entities. Clarification has been added that when the engagement partners rotate off an audit, they cannot have significant or frequent interaction with senior management or those charged with governance during the cooling-off period. A new requirement has been introduced so that, where audits and those providing audits move from one firm to another, any rotation “on periods” for partners and staff include any time before they and the audit changed audit firms. Reporting breaches of the ethical standard The extant Ethical Standard for Auditors (Ireland) 2017 requires auditors to respond to all possible or actual breaches of the standard and keep records of any contraventions. A requirement has been introduced in the new ethical standard for auditors to report breaches of the ethical standard on an annual basis to IAASA, the relevant recognised accountancy body for auditors of public interest entities, and the relevant recognised accountancy body for non-public interest entity auditors. Such reports are to be submitted at least annually. IAASA indicated in its feedback paper on the consultation that it will issue guidance to auditors regarding the format of reports to be submitted. It also stated that any action taken by IAASA or the relevant recognised accountancy body in response to such reports will vary on a case-by-case basis depending on factors such as the nature of the breach, the appropriateness of the firm’s response, and the firm’s regulatory history. The new ethical standard permits firms to complete non-audit service engagements that were previously permissible provided they were entered into before 15 July 2021 and for which the firm has commenced work, while applying appropriate safeguards. IAASA did not introduce prohibitions on contingent fees for non-audit services, loan staff assignments, and tax advocacy services – all of which were proposed in the consultation paper. In addition, IAASA made changes to specific auditing standards: ISQC (Ireland) 1 and ISAs (Ireland) 210, 220, 250, 260, 600, 620, 700, 701 and 720. Hereafter, we will briefly discuss the most significant changes auditors and entities should be aware of for audits of financial statements with periods beginning on or after 15 July 2021. Revisions to ISAs IAASA has revised ISA (Ireland) 700, Forming an Opinion and Reporting on Financial Statements to extend the requirement for auditors of public interest entities to explain the extent to which the audit is capable of detecting irregularities and fraud to audits of listed entities also. There has been a significant expansion of the application guidance to the standard in relation to this requirement, which guides auditors to provide more detailed and granular explanations tailored to the entity being audited. IAASA acknowledged in the feedback statement that, in some situations, legislation (e.g. ‘tipping-off legislation’) would prohibit auditors from disclosing certain information in the audit report. ISA (Ireland) 600, Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors) has been revised to clarify that the work of component auditors used for the purpose of a group audit must be evaluated and reviewed by the group engagement team. Application guidance has been added to the standard to assist group engagement teams in determining whether the nature and extent of such evaluations and reviews of component auditor work are appropriate in their professional judgement. ISA (Ireland) 220, Quality Control for an Audit of Financial Statements now requires the engagement quality control reviewer (EQCR) for audits of group financial statements of public interest entities to perform their quality control review over each component for which work has been performed for the purpose of the group audit, and to discuss the results of the review with the relevant key audit partner. This is a significant enhancement of the quality control review required for such entities. ISA (Ireland) 701, Communicating Key Audit Matters in the Independent Auditor’s Report has been revised to require that the auditor’s report specify the threshold for performance materiality and explain the judgements made in determining performance materiality tailored to the circumstances of the audit.  This package of revisions to the standards is designed to enhance audit quality and public confidence in audit in Ireland. However, for group audits of public interest entities in particular, there is likely to be significant incremental associated effort and cost in complying with the new requirements. Chartered Accountants should familiarise themselves with all changes to the standards, which are available on IAASA’s website. Daniel O’Donovan is Principal in the Department of Professional Practice at KPMG Ireland and Chair of the Institute’s Audit & Assurance Committee. Siobhan Orsi is Associate Partner at EY Ireland and a member of the Institute’s Audit & Assurance Committee.

Despite the challenging business environment, Prof. Anne Marie Ward and Nadine O’Kane have identified several competitive advantages that credit unions in Northern Ireland could and should promote as they seek to bolster the sustainability of their business models. There are 146 credit unions (CUs) in Northern Ireland, with 592,171 adult member accounts and 104,906 juvenile deposit accounts, according to the Bank of England’s Q2 2019 Credit Union Quarterly Statistics. In some communities, CUs are large, are open six days a week, and provide a range of sophisticated products and services. In others, CUs are small and offer simple products and services to a small number of members, sometimes opening for only a few hours each week. Irrespective of their size or sophistication, CUs have become increasingly important over the past decade, which has seen the flight of bank branches from small towns, for nurturing sustainable, healthy societies. Financial exclusion is a continuing problem and CUs are a solution. In January 2020, Grant Thornton Northern Ireland and Ulster University hosted a workshop in Grant Thornton’s Belfast office to facilitate the exchange of knowledge between various stakeholders in the CU sector in Northern Ireland. The day focused on the themes of sustainability, corporate governance, diversity and regulation. The first of these themes, the sustainability of the credit union movement, is the focus of this article. The workshop included short presentations by experts, round-table discussions, and question and answer sessions. The experts were: Patrick Darcy and Sinead O’Neill, Grant Thornton; Gordon Smyth, Ulster Federation of Credit Unions; Matthew Howse and Damien McElholm, Eversheds; Martin Fisher and Marianne Cushley, Irish League of Credit Unions (ILCU); and Nadine O’Kane and Prof. Anne Marie Ward, Ulster University. Marianne Cushley from the ILCU’s Communications Department (Northern Ireland) began the workshop with a presentation on sustainability. Marianne works with individual CUs to develop marketing strategies and campaigns to help with their sustainability and growth. She explained how CUs are concerned about ageing memberships, a highly competitive lending market, reduced loan demand, high savings levels but with restricted investment opportunities, increased regulation and compliance, lack of electronic services, low returns on investments, and difficulties in attracting volunteers. In concluding her presentation, Marianne asked attendees to focus on challenges in three areas: accessibility, relevance, and competition. It was clear from the discussions that the challenges were not homogeneous across CUs. Accessibility challenges Loan application processes and policies A major concern of attendees was that their loan application processes and policies needed to be quicker to meet the demands of today’s networked society. While representatives from the larger CUs explained that they have automated lending software systems enabling same-day and next-day lending, several of the smaller CUs do not. Their loan application processes need to be streamlined and made available and easily accessible online. Another stumbling block noted by some CU representatives was the prerequisite 13-week saving period that some smaller CUs still enforce before allowing a new member to borrow. It was generally agreed that loans should be provided based on ability to repay, and not savings records. Finally, some CUs noted that staff were reluctant to authorise loans. Therefore, loan requests had to go to the credit committee, which increased the time between a member making a loan inquiry and receiving the funds. It was advised that loan officers be appointed, trained, and delegated powers to lend money up to a certain threshold. This would allow the credit committee to focus on larger loans and problem accounts. Opening hours and location Most participants in the workshop concurred that the location of CU premises can be a challenge; the ideal scenario is where the CU is located within its community and where footfall is plentiful. In addition, free on-site car parking would improve access and be popular with members. Finally, all agreed that accessibility is improved with flexible opening hours, including Saturdays and evenings, though this may not be possible due to resource implications. Digitalisation It was generally felt that online services are important to each CU’s future sustainability, though cost is an issue. The larger CUs have sophisticated IT support systems and are more concerned with keeping up-to-date with the latest digital technology and applications. The smaller CUs, on the other hand, are concerned about their inability to provide even basic digital services. It was advised that CUs should work with their trade associations, IT providers, or with a neighbouring CU to obtain cost-effective solutions. Several representatives from larger CUs flagged big data and data analytics as a challenge. In particular, they focused on how to use member information and publicly available data to drive strategy, operational activity, and marketing. Readers should note that this workshop took place a few months before the onset of the COVID-19 pandemic, which accentuated the importance of online services and systems to cater for members’ needs when physical access is not possible. Most CUs provided phone support when premises closed due to pandemic restrictions. Relevance challenges Attracting new members As well as increasing accessibility, it was agreed that engaging with online services and providing new services, such as debit cards, will increase the relevance of CUs. However, participants also felt that emphasising the unique characteristics of CUs was the best means of attracting new members. In that context, CUs: Specialise in non-business customers, although some are beginning to explore business lending to corporate members; Have a presence in many towns; Are community-based and provide social benefits for their communities; and Focus on member wellbeing. The promotion of these attributes will differentiate CUs from other financial services providers. Engaging with current members In general, participants agreed that a formally structured survey of members every two or three years would enable the board of the CU to prioritise the development of certain products or services, knowing they are responding to members’ needs. Several CUs had undertaken surveys and argued that it demonstrates a willingness to engage with members, provides evidence for the regulators that the board is responding to members’ needs, and can also inform the business plan. However, it was noted that a survey should only ask about services that the CU can realistically deliver and that it is important to report to members on survey findings as it shows that the CU is listening. Competitive challenges CUs operate in a fiercely competitive lending market where they must compete with high street banks, challenger and online banks, doorstep lenders, and alternative lenders such as supermarkets, as well as each other. Two competitive challenges were discussed at the workshop: reaching non-members with their message, and differentiation from other lenders. Reaching non-members Participants shared their experience of the challenges in communicating the CU message to potential members and the comparative competitive advantage of other lenders with large marketing budgets. Suggestions for extending the reach to non-members included widening the ‘common bond’ (i.e. the range of people eligible for membership) and building on current relationships with primary schools to attract younger members. CUs should also engage with local groups and organisations, communicating the benefits of CUs and what they can do for people. In doing so, they could use several promotional activities and channels. Options include direct marketing, targeted outdoor advertising, social media and digital marketing, visits to local secondary schools and colleges, running personal financial management classes, raising funds for community events, and sponsorship of local initiatives, which would meet social objectives while gaining publicity. Differentiation It was noted that competitors can provide a wider range of products and services. Updating the specific legislation governing CUs would allow them to better compete in the marketplace. Examples of new services suggested to attract members and potential members include: An overdraft with a revolving credit facility; and Increasing loan interest rates to 3% per annum so that CUs can provide differentiated higher-risk, higher-return loans to people with poor credit ratings – for example, students with mobile phone debt (though this suggestion was controversial). Conclusion CUs face many challenges. It was generally agreed that trade associations and the wider CU family should focus more on CUs’ comparative advantages over other financial institutions and not try to label themselves as banks. They should focus on and communicate their unique attributes and offerings. CUs in Northern Ireland currently enjoy strong member loyalty and are seen as trustworthy. They have a skilled workforce and, due to high levels of savings, have readily available funds for lending. CUs focus on the welfare and sustainability of their members and respective communities. For example, capital retentions are used to improve a CU and ensure that it has strong capital and solvency ratios; office supplies and maintenance technicians are sourced locally; and excess surpluses are returned to members. This is a competitive advantage that should be exploited when promoting CU products and services. Prof. Anne Marie Ward is Professor of Accounting at Ulster University, and Nadine O’Kane is a PhD Researcher at the Department of Accountancy, Finance and Economics at Ulster University.