Ethics and Governance

At a recent event entitled, ‘Navigating a Successful Career as a Non-Executive Director’, an expert panel of experienced NEDs and corporate governance advisors answered questions such as: What role do NEDs play in organisations today? How can Chartered Accountants prepare to become a NED and how do interested Chartered Accountants find non-executive directorships?  Launching the event, David W. Duffy, author of A Practical Guide for Company Directors, warned the 200+ audience that “no board is risk-free”. Emphasising the need to carry out due diligence before accepting a non-executive directorship, he advised the audience to consider what ratio of risk to reward they would be prepared to take. Listing important questions to ask before becoming a NED, David recommended that prospective directors should query the organisation’s structure and budgeting practices in particular.  Sean Casey, NED and Risk Committee Chair at Allianz Ireland, advised attendees on how to find a directorship that best suits them, and recommended that they update their professional profiles with relevant experience, skills and governance qualifications, such as a diploma in corporate governance. Urging the audience to build a strong network of people whom they have assisted and supported in the past, he reminded them that they will “get repaid many times over if you have a good network”. Marie O’Connor, former PwC audit partner and experienced NED, explained that boards are looking for people with genuine interest in their business and who think strategically. NEDs should have good, sound judgement and some previous board expertise. Energy, curiosity and confidence are also important to becoming a NED, Marie said. Finally, Anne McFarland, corporate governance advisor, stressed the need for, and importance of, independent NEDs on boards to improve the accountability of organisations, despite recent negative press. NEDs, Anne advised, should look at the strategy of an organisation, and should make sure that appropriate goals have been set for management and that the board is being properly evaluated. It is imperative for NEDs to understand the financials of the company, to assess all risks, and to consider whether the remuneration of the executive and management is proportionate and appropriate. “I do not believe the time is up for non-executive directors,” Anne added. 

Aug 01, 2018
Spotlight

SMEs in the Republic of Ireland can access four major tax relief regimes, which is laudable, but there remains room for improvement in each.   Over the past few years, Ireland has introduced, expanded or streamlined many new tax reliefs and regimes with the stated aim of encouraging research and innovation, providing alternative sources of finance and improving the environment for entrepreneurship. While the government of the day will laud these new initiatives as being beneficial to Irish small- and medium-sized enterprise (SME), it is often the case that the initiatives are not taken up in any great numbers or are used primarily by multinationals operating in Ireland. In this article, the author considers why these targeted tax incentives are not achieving the expected take-up among Irish SMEs – and what could be done to rectify this. Is it a question of education, perception or restrictions within the tax incentives themselves? Employment and Investment Incentive Scheme The Employment and Investment Incentive Scheme (EIIS) is an extremely important source of finance for start-up and early-stage SMEs as for many of these businesses, the friends and families of the business owners may be one of the few sources of finance available. The EIIS is a successor to the old Business Expansion Scheme (BES) and while it covers a larger variety of trading activities, it is less generous in the tax relief available. This is because, under the EIIS, the income tax relief is spread over two tranches – 30% relief in the year of investment and 10% after three years of trading. Furthermore, the second tranche of relief is not guaranteed and is dependent on the company increasing employee numbers during the investment period. Compared to BES, lower numbers of companies have availed of the EIIS. This has been attributed to factors such as the spreading of income tax relief over four tax years and the €150,000 annual investment limit applicable to each EIIS investor. Unhelpfully, recent changes to the EIIS have further reduced the attraction of EIIS for SMEs. Finance Act 2015 incorporated the EU General Block Exemption Regulation (GBER) rules into EIIS legislation. Some of the most significant restrictions included in these provisions are: The company must be trading for less than seven years. Where such a company has previously raised EIIS funding and wishes to raise a second round, the second round must have been envisaged in the business plan submitted for the first round – before the GBER rules were in force. To add insult to injury, Revenue has taken a very prescriptive approach in this regard; and If the company has traded for more than seven years, it must be entering a new geographical market with a new product or service, or have previously raised EIIS/BES funding within the first seven years of trading. More recently, Finance Act 2017 introduced new “connected party” rules, which make the tax relief unavailable to any investor and their associates (including relatives, which are broadly defined) who already hold shares in the company before EIIS funding is introduced. Previously, income tax relief was available to EIIS investors who held less than 30% of the company, and even this restriction was relaxed where the total value of the EIIS investment was less than €500,000. These new restrictions may neutralise the EIIS for many SMEs that are badly in need of this alternative source of funding. Research & Development tax credit While the lower and likely diminishing take-up of EIIS by SME companies can be attributed to stifling legislative restrictions, the same cannot be said of the Research & Development (R&D) 25% tax credit. The tax credit regime was significantly simplified with the removal of the “base year” and incremental allowable amounts from 1 January 2015. In addition, Finance Act 2012 introduced the concept of the qualifying company surrendering some or all of the R&D tax credit to a “key employee”. The continuing concern for all companies claiming R&D tax credit (and SMEs in particular, as they have less resources to deal with penalties and interest in the event of getting it wrong) is the uncertainty around what exactly constitutes “qualifying” R&D activity. Some relief for small business on this issue was set out in Revenue’s eBrief 17/17. This stated that, where a small or micro enterprise is in receipt of Enterprise Ireland/IDA grants for its R&D activity and the value of the R&D tax credit claim in an accounting period is less than €50,000, Revenue will accept that the activities are “qualifying” under the relevant tax legislation. There is an acknowledgement that these thresholds are too low and will only give comfort in a small number of cases, but there is no indication that this concession will be expanded. While the idea of the surrender of the R&D tax credit to key employees is a fine one, this aspect of the regime has had little take-up from SMEs. This is perhaps because the key employee must not be a director of, or have a “material interest” in, the company (i.e. hold at least 5% of the company’s shares). As SMEs typically have a small pool of overlapping shareholders, directors and key employees, most will breach this condition. Another issue that limits the incentive for R&D activity are the maximum spending caps in relation to outsourcing: Outsourcing R&D work to third parties is restricted to 15% of the in-house R&D expenditure or €100,000 (whichever is greater); and Outsourcing R&D work to universities is restricted to 5% of the in-house R&D expenditure or €100,000 (whichever is greater). These limits contradict international best practice, which typically encourages collaboration between innovating businesses and/or education. They also disproportionately affect SMEs as, with fewer resources, a collaborative approach may be the only way for an SME to progress. Knowledge Development Box A relatively new incentive introduced in Finance Act 2015, and one that is not yet widely known about, is the Knowledge Development Box (KDB) regime, which complements the R&D tax credit and is the second phase of incentives around research and innovation. The R&D tax credit is available in respect of the spend on “qualifying R&D activities” while the KDB regime applies a reduced 6.25% corporation tax rate on profits arising from the exploitation of a “qualifying asset” derived from these same R&D activities. While this regime is regarded by many as being targeted at multinationals, it is in fact Irish SMEs that may benefit the most from it. The KDB regime is most beneficial to companies that carry out most or all of their underlying R&D activities in Ireland, which of course would apply to Irish SMEs. There are also two aspects to the “qualifying asset” requirement that work for Irish SMEs: Within the mainstream KDB regime, a “qualifying asset” includes inventions that are patented as well as computer programs. Irish tech companies that carry out their R&D activities in Ireland and are entitled to an R&D tax credit may therefore be entitled to the reduced 6.25% corporate tax rate on future profits; and There is an SME-specific KDB regime, which applies to companies and groups with annual turnover not exceeding €50 million and KDB profits not exceeding €7.5 million. The definition of “qualifying asset” for these companies includes computer programs as well as novel or useful inventions that do not have to be patented. Key Employee Engagement Programme Finance Act 2017 saw the introduction of the KEEP scheme, which was presented as a tax-efficient way to incentivise key employees within SME companies. The scheme allows for the tax-free grant of share options to an employee (as long as the options are granted at market value), followed by capital gains tax (CGT) on gains arising on the ultimate sale of the shares by the employee. As the KEEP scheme only commenced at the beginning of this year, there are several excessive legislative restrictions and practical issues. Many commentators and representative bodies have lobbied the Department of Finance and Revenue on these issues to make the new scheme fit-for-purpose. Some of the major issues include: The requirement for a Revenue-agreed share valuation method, given that the scheme relates to shares in private companies often with no external market; The practical issue of creating a market for these shares so that a KEEP employee has a method of selling the shares and realising a gain. Calls have been made to allow the employer company to buy back the KEEP shares and for the KEEP employee to secure CGT treatment on that buy-back by the buy-back being regarded as a “benefit” for the company’s trade; Under the current rules, a “qualifying individual” must not hold more than 15% of the employer company shares. This restricts the usefulness of the KEEP scheme for SMEs which, as we noted earlier, will have a small pool of shareholders and key employees; and Calls have been made to extend CGT entrepreneur relief on disposals of KEEP shares, thereby reducing the CGT on €1 million gains arising to 10%. Conclusion This article has focused on the four major tax regimes available to SMEs in the Republic of Ireland – EIIS, R&D tax credit, KDB regime and KEEP – and we have seen that some of these regimes are specifically targeted at SMEs. While there is always more for practitioners to do in terms of educating clients on the availability of reliefs, many of the legislative changes and/or administrative practices within Revenue in recent years have reduced the effectiveness of these reliefs. It is a case of what the right hand giveth, the left hand taketh away. With Brexit looming, this approach is damaging to Irish SMEs – which are the lifeblood of our economy – and does not sit with the Government’s stated aim of encouraging entrepreneurship in this country. Kerri O'Connell FCA is Principal at Obvio Tax Services and author of Small and Expanding Businesses: Getting the Tax Right.

Aug 01, 2018
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
Comment

It is a significant development when a major politician resigns, but one’s true motive may not always be apparent. As Oscar Wilde nearly said, to lose one cabinet minister is unfortunate, but to lose two looks like carelessness. The resignation of David Davis and Boris Johnson from the British cabinet last month has a direct impact on the manner in which one of the world’s largest economies leaves one of the world’s most important trading blocs. By the time you read this, there could have been even more resignations and changes. From the outside looking in, you could be forgiven for wondering whether these are principled resignations or merely tactical resignations; a suspension of involvement in the hope of achieving something better later. Another explanation, equally plausible, is that a resignation simply removes people from an uncomfortable position and puts them out of the firing line. Political journalists make a career from such speculation. Project Maven There is always difficulty discerning what is principled from what is pragmatic. One of the earliest exponents of the novel in English, Henry Fielding, focused largely on what he saw as the hypocrisies of contemporary life in his era. His recurring theme is that virtue is most often exercised by those who have no option but to do so. Some 300 years on, he could take a different line: that virtue is most often exercised by those who actually do have a ‘Plan B’. Project Maven may be an example of virtue on the part of those with a ‘Plan B’. Maven was a project undertaken by one of the larger high-tech multinationals on behalf of the US military. It involved using advanced artificial intelligence and recognition technologies to analyse drone footage. It has been widely reported that the company concerned suspended its activities on the contract because of walkouts and threats of walkouts among staff members. The feeling was that involvement in a contract which impacted on people’s privacy to such an extent was unethical. Taken at face value, the behaviour of the employees could be seen as principled and laudable, and I am sure that in many instances it was. Credit is also due to the company for responding to those concerns. However, it also relevant to point out that highly-skilled people in the tech sector can walk out of a job one afternoon and find themselves in a new job the next. Sometimes ethical decisions are not borne from the constraints which Fielding pointed out, but from the capacity of the individual to recover personally from the consequences of their stance. It is noteworthy how many resignations from government or other accountable posts are taken by individuals with plenty of opportunity to recover both financially and socially from their “principled” action. Principles, or options? There is no room for complacency in any profession. Dr Elaine Doyle from the University of Limerick, who trained as a Chartered Accountant, has carried out important research into how professionals take ethical decisions. She has found some evidence to suggest that people are actually better at taking ethical decisions when they are not working within their own professional sphere. This in turn raises questions as to the impact of codes of conduct and professional standards in day-to-day decisions and if they are set at a high enough bar. Perhaps the most compelling reason for questioning the motives behind an apparently principled resignation is to assess whether or not the individual concerned could put matters right more effectively from within, rather than from outside the organisation they are leaving. Taking an ethical position should not be a passive activity; matters should improve from the decision to resign. A resignation from a position of responsibility may signal high principles. But sometimes it merely signals that the person concerned has plenty of options. Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland.

Aug 01, 2018
News

This is my first Accountancy Ireland comment piece as President. First of all, I would like to say that I consider it a tremendous honour to be elected President of our Institute. I would like to thank my predecessor, Shauna Greely, for her exceptional leadership throughout a tremendously successful year. Shauna can look back with great pride on her term in office. Caring and people-focused I am confident that in the year ahead, we will do everything in our power to ensure that Chartered Accountants Ireland continues to be a progressive, outward-looking organisation that is engaged with its many constituencies and is driven by a vision not just for itself, but for the community it serves. I believe that a caring approach, combined with talented people and taking time to develop relationships, is the key to business life. Therefore, my overarching theme for my Presidential year will be for our Institute to be caring and people-focused. This means we will be caring for members, staff, trainee students and the community. Our aim will be to encourage positivity and a united, collective team effort to unleash the energy within people. It is an approach which recognises that we must move forward and get things done as we address the three key themes of our strategy – attracting the brightest and best to our profession; being relevant to our membership (through improved connection and engagement with members both at home and the growing diaspora of members overseas); and by being the authoritative public voice of our profession. Delivering innovation We are experiencing challenging global political and economic times, including the continuing uncertainty around Brexit, and changing regulation. It is my belief that leadership in the corporate setting should be centred on the ability to deliver change. Only adaptive organisations endure in today’s rapidly changing business environment. To put it simply, I believe you either innovate or evaporate. Chartered Accountants Ireland is currently in a healthy state, but there is no room for complacency. We don’t have the option of standing still. Indeed, the greatest risk is to take no risk at all and that is why our organisation must continue to demonstrate its commitment to continuous improvement. New education programme The latest example of this approach to innovation is the recent launch of our new student education programme, currently serving 6,665 students across the island of Ireland. The new programme, starting in October, will seek to address current market and employer needs, anticipate future skills requirements and put additional supports in place for our student body. The updated programme will include new final year specialist elective subjects, some for the first time anywhere in the world. Of particular note is a new financial services FAE elective in partnership with the Institute of Banking; a new FAE elective in finance and accounting in the public sector in partnership with CIPFA; a new advisory FAE elective; and new pathways to membership – including more exemptions from the Institute’s professional exams for those who have already passed corresponding exams at university or with other bodies. I believe that this initiative is a significant development in improving our education offering. It is an important measure in attracting new talent to our profession and a strong indicator of our commitment to respond to the needs of our members and wider society in an innovative, flexible way. TEAM Chartered Accountants Ireland Working with colleagues, my style will be to encourage a joined-up family TEAM Chartered Accountants Ireland approach (i.e. working Together Everybody Achieves More), and endeavouring to make every moment count. I believe that TEAM Chartered Accountants Ireland can approach the future with confidence in its ability to exploit opportunities and address any challenges that may arise. Onwards and upwards on our forward journey, with direction. Feargal McCormack President

Aug 01, 2018
Management

Being a people-pleaser and being an effective team player are two very different things.   Does your office have a people-pleaser? The person who just can’t say no? Every office has one and regardless of how often they say yes, they will rarely be appreciated for their efforts. People-pleasers yearn for attention, external validation and the approval of the group. Their self-esteem is tied up with this effort to be seen as worthy of inclusion and living up to the expectations of others. This type of behaviour can get out of hand and before it does, it is important to ask some basic questions about how it started in the first place. How do we become people-pleasers?  More often than not, it’s a characteristic that goes back a long time. We learn over time that being helpful, pleasing, attentive and reliable brings rewards. Our sense of accomplishment and achievement becomes tied to the external validation we receive from others. Being a people-pleaser often makes us the ‘go to’ person. It also means that our colleagues take us for granted and we are viewed as the office doormat. People-pleasers see themselves as only existing in the service of other people. Children learn that they are a good girl or boy at a very early stage in life. Being ‘good’ and ‘bad’ is determined by the emotional effect they have on the adults in their lives. It is an early lesson that small children learn very quickly. They know that they can gain their parents’ attention by being compliant or defiant. Compliance brings better rewards.  To stop being a people-pleaser we have to address the anxiety that pleasing assuages. For many people-pleasers, the idea of stopping being a pleaser raises enormous anxiety. At its core, that anxiety relates to our very sense of self: will I have any function or worth if I am not externally validated? So what can you do to stop pleasing and start progressing? Address the anxiety: put yourself first. Ask ‘why am I doing this?’ There’s nothing wrong with being helpful, but it’s not always appropriate. Practice saying no: imagine a number of scenarios where you would normally jump in to say ‘yes’ and then practice saying ‘no’. Observe how this makes you feel and rather than squashing that feeling down, stick with it and try to understand what it’s telling you. Recognise that your self-worth isn’t tied to other people: it’s perfectly normal to be ambivalent about others and it’s equally normal for them to feel ambivalent about you. It’s not possible to be positive or helpful all the time. You will disappoint: you will disappoint others, and they will disappoint you. If we are not disappointing and disappointed, then we are not having real, mature relationships. The workplace cannot function without real emotion: in the fantasy workplace, everybody is happy. People are kind and helpful, and our colleagues rarely have an ‘off’ day. No workplace is like that (just as no family is like that). Being a people-pleaser robs individuals of their self-esteem and reinforces the idea that being ‘nice’ means being helpful. Sometimes it’s better to say ‘no’ and stop being the office doormat. Try it sometime, you just might like the new feeling! Dr Annette Clancy is an organisational consultant and also researches organisational behaviour, in particular emotion in organisations.

Aug 01, 2018