What’s on the horizon for 2022?

Resonant with the Institute’s position paper, The Next Financial Year, Michael Diviney surveys some of the issues and changes expected in 2022 and beyond.

Changes at the core

After years of relative stability, disciplines associated with Chartered Accountancy are about to undergo significant change, a key source of which will be legal and regulatory initiatives from the European Union. In 2022, the focus and effects of this change will be seen in:

• Environmental, social and governance (ESG) reporting: A new Corporate Sustainability Reporting Directive (CSRD) is due. In tandem with this, the European Financial Regulatory Advisory Group has been asked to develop ESG reporting standards by mid-2022 to be applied in EU member states.
• Reform of the audit market: An EU Commission consultation on the ‘three pillars’ of corporate reporting, corporate governance, and audit and supervision with a response deadline of 4 February 2022 will undoubtedly lead to attempts to revise EU legislation and regulation next year.
• International tax reform: At least three draft EU tax directives are due to be published. The first will give legal expression to the 15% minimum effective corporation tax rate for larger multinationals. The second will concern public disclosure of minimum effective tax rates in the EU by companies that fall under the OECD agreement’s scope. The third concerns allocating limited taxing rights to the countries where a corporate entity’s market is located.
• Anti-money laundering legislation: As part of its action plan to prevent money laundering and terrorism financing, the European Commission has published a set of legislative proposals. These include a sixth Anti-Money Laundering Directive and the establishment of a pan-European monitoring authority to coordinate anti-money laundering activities.

What is driving this change?

• The impact of the pandemic: Many businesses in developed economies are receiving government supports to assist them through the COVID-19 pandemic, which has created a need for additional accountability and reporting. In 2022, government will be bigger.
• Climate change: There is an emerging consensus on the need for robust sustainability reporting standards to be more widely applied in geography and business scope.
• High-profile audit failure: Recent business failures have brought the audit market, conduct, and regulation into sharp political focus.
• International crime: There is increasing recognition that organised crime across national boundaries needs to be tackled with anti-money laundering techniques and more traditional policing and enforcement.
• Tax: There is now a global consensus that large multinationals should be taxed at an effective minimum rate of 15%. The largest corporate entities should also make corporation tax contributions by reference to the location of their markets and where they are established.

Governance

Increasing focus on sustainability, corporate failures, and technological advances impacting business are driving corporate governance reforms. For example, the European Commission’s sustainable corporate governance initiative will enhance the EU regulatory framework on company law and corporate governance. As a result, we are likely to see increased responsibilities for directors and more requirements for internal controls and supply-chain management in organisations of a certain size.

In the UK, we await the Government’s next steps following consultation on restoring trust in audit and corporate governance. In Ireland, the Government is progressing legislation on individual accountability for certain senior management positions in financial institutions.

Gender balance on boards

The Irish Corporate Governance (Gender Balance) Bill 2021 proposes that 33% of a company’s board must be female after the first year of its enactment, rising to 40% after three years. If enacted, it would apply to limited and unlimited companies, charities, and all state-sponsored bodies. There would be a few exceptions, such as partnerships and companies with fewer than 20 employees.

Gender pay gap reporting

New to Ireland in 2022 will be the mandatory reporting of gender pay gap (GPG) information, initially for organisations with 250 employees or more. GPG is the difference between the total average hourly wages of men and women in an organisation regardless of their roles or seniority. It is different from equal pay, which measures if men and women are paid the same for performing work of equal value. GPG is an indicator of whether men and women are represented evenly in an organisation. Regulations will set out details of the reporting and publication processes.

Leading on purpose

November saw the launch of Evaluating Trust in the Accountancy Profession, a report by Edelman for Chartered Accountants Worldwide, of which the Institute is a member. Based on a survey of 1,450 financial decision-makers, 80% of whom are non-accountants, the report reveals an opportunity, if not an expectation, that Chartered Accountants take the lead on purpose-led initiatives such
as driving action on sustainability and diversity, equity
and inclusion.

Commenting on the report, Ronan Dunne FCA described it as a call to action for Chartered Accountants “to broaden the base of trust”, building on their ethical reputation and professional standards. CEOs are now expected to have opinions on societal issues. This is an opportunity for Chartered Accountants to be influential in establishing the ‘citizenship’ of corporates, advising industry leaders on the integration of purpose with strategy and planning.

Technology and the accountant

Societal issues are not the only fundamental factors broadening the role and value-add of the accountant. Technology is also a driver of change. Writing in this magazine, Aoife Donnelly FCA and Thady Duggan FCA have argued that, accelerated by the pandemic, and as more traditional finance tasks are automated, the emphasis will be on maximising the impact of digital technology, enabling a shift from a past focus to a future focus.

A future focus involves changes in the accountant’s skillset to include:

• data analysis (at least an understanding of the fundamentals of data analytics to be able to challenge specialists);
• communicating insights from the data;
• data governance and assurance;
• horizon-scanning and innovation;
• collaboration across the organisation, as well as working with multidisciplinary teams on defined fixed-term projects; and
• applying technology to support these contributions.

The rise of the social enterprise

Reflecting the emphasis on purpose and linked to sustainability, 2022 will see the resurgence of the social economy. COVID-19 caused people to pause and reassess their priorities and values, and some entrepreneurs are recycling into social enterprises.
Social entrepreneurs bring momentum to the emerging circular economy. They reflect new ways of thinking about business, focusing on digital innovation, diversity and inclusion, and transparency – a magnet for Gen Y and Gen Z. They also influence the future development of mainstream corporations.

Social enterprises like Food Cloud, connecting retailers with charities to donate food, need appropriate advice and sources of finance that match their broader societal objectives.

Working 3:2

Assuming it is safe to return to the office, ratios like ‘3:2’ will feature as hybrid (or blended) working becomes a reality, at least for those who can work from home. The remote working forced by the pandemic has been a positive experiment in trust. In many sectors, productivity was maintained, even improved. So it makes sense to retain the discovered benefits, including flexibility, which employees now expect to be ‘baked in’.
However, the start-up challenges for hybrid working should not be underestimated. There is little precedent, though we can learn from sectors where staff have not been able to work from home during the pandemic. An experimental, patient approach is required from all.

New ways of working will be designed. They will distinguish between what we need to do in person, where the focus will be on high-impact interaction (innovation, performance conversations, organisational change), and what can be done remotely. The workplace will be physical and digital in equal measure. The purpose of the office will be redefined, reflected in its layout.

New risks include the potential inequalities of a two-tier system of those present in person and those not. Training will be needed for the management of blended teams.

Digitalisation

Not all work can be done remotely, and not all employers can afford the IT for staff to work from home. There is an opportunity for Government to support the digitalisation of businesses to make the hybrid transition and continue the roll-out of work hubs.

Tax and remote working

To adapt to this new reality, tax rules must align with remote working practices and fairly reflect the costs of working from home, allowing a tax deduction for expenditure on equipment used for remote work purposes. In addition, an employee’s ‘normal place of work’ should be based on where they carry out most of their work.

Childcare

The lack of affordable childcare for working parents came to the fore during the pandemic, particularly when schools closed. In an economy crying out for talent, working parents should be encouraged to engage fully in the workforce, or at least have the choice. From September 2022, new funding of €69 million will be available for childcare providers to ensure the sustainability of services. However, it remains to be seen if this first step will have the desired effect of controlling fees.

Talent and the ‘perfect storm’

‘The Great Resignation’ may encompass employees who are resigned to stay in their current roles as well as the millions of people worldwide reported to be changing jobs or who plan to. In any case, for 2022, a ‘perfect storm’ is predicted when increased demand for talent meets the post-COVID phenomenon of career change.
There are tools employers can use in recruiting and retaining talented people:

• offering remote/hybrid working and flexibility;
• budgeting time for regular conversations with individuals about how they feel about their work;
• delivering on the ‘employability contract’ – the expectation to learn new, marketable skills; and
• a strong and empathetic employer brand.

Arguably the best way to recruit and retain the best people is to show leadership with values and purpose.