The year ahead
2019 has confirmed that uncertainty is the new norm in business, finance, and politics and we see little change on the immediate horizon. It is a time when strong leadership, not just management, is sorely needed.
The UK political and economic outlook
We have seen a year of unprecedented political movement, both in the policies of the mainstream political parties and in politicians’ allegiances to their historic parties. Gone is the old order with domestic politics more polarised.
2020 sees one of the uncertainties facing the nation has been removed: a majority government will hopefully manage to break the political deadlock at Westminster. For many businesses and individuals, the decision on Brexit is now passé and we need to move on as a country. We can hopefully start to feel more settled, make plans and move forward. It is what many are hoping for.
Yet our Brexit journey is far from over. Following agreement of the withdrawal bill there is then the equally complex trade deal negotiations. There will naturally be a degree of scepticism that a deal with the EU can be agreed in the 12 months promised, and we hope the new government proves us wrong.
Despite those uncertainties, the UK continues to have historically low interest rates and low unemployment – the signs of a strong economy? But questions still remain.
For those of you that follow economic growth, you will have seen that this has fallen in the last few years. The average forecast for growth in the UK economy next year, according to Consensus Economics, is just 1.1%. Goldman Sachs is a little more optimistic, believing the UK economy will grow by around 2.4%. But there is also a note of warning, with Goldman Sachs believing that there is a 35% chance of a global recession.
Businesses do not thrive on uncertainty. It is vitally important that the new government make the commitments needed to instil confidence, that we are now in a position to turn the economic growth tide going forward into 2020 and beyond.
Being smart in the workplace
Volatility, uncertainty and change is also echoed in the workplace.
Organisations are facing multiple challenges from new technologies, work methodologies, and changing employee expectations. At Kreston Reeves, for example, we now have four generations of people in the workplace all with different needs, demands and expectations.
Guiding an organisation through these changes requires leadership, not just management, with leaders at all levels and regardless of their job title to change their focus from a “fixed” to a “growth” mindset. It requires leaders who believe in developing talents through hard work, good strategies and with input from others. In particular, people need to focus on creativity, innovation, empathy and listening with people at all levels. Persistence will, of course, be vital.
Measured risks will need to be taken knowing that sometimes plans don’t work out. Businesses need to remember to fail fast and reward people for important lessons they have learned. Support across organisational boundaries, rather than competition between people, will be critical. As will providing growth and advancement opportunities for all staff, which will include regular feedback and the bravery and honesty in admitting errors.
Our businesses and jobs will change dramatically over the next decade. Building and having a culture of learning within an organisation will ensure they equip themselves for the uncertain challenges ahead.
Our own industry
2019 has continued to see the collapse of a number of large companies, including BHS, Patisserie Valerie, Thomas Cook, Bathstore, Oddbins, and Links of London, with some of the blame laid at the door of auditors.
There are important questions that need to be answered, and the Business, Energy and Industrial Strategy Select (BEIS) committee remains frustrated by the government’s lack of legislative reform to transform the Financial Reporting Council into a more powerful regulator.
BEIS chair Rachel Reeves MP believes that companies have collapsed because of a series of misjudgements, including the piling up of debt, confused plans, lack of challenge by auditors in the board room, and aggressive accounting practices.
One of the proposed reforms is the introduction of shared audits, already mandatory in some countries including Belgium, South Africa and France. Calls for reform will become louder and will create opportunities for firms like Kreston Reeves to audit subsidiaries of UK group companies and group audits.
The Brydon Report proposes redefining an audit. Auditors will need to be ‘suspicious’ as well as ‘sceptical’, make fraud detection part of their work and extend their audit work to beyond the financial statements. Directors will also need to explain the actions they have taken to prevent material fraud and to report on internal controls.
New audit standards
New audit standards will come into force in December 2020 (periods commencing on or after 15 December 2019) that will require company directors to fully evaluate and document their reasons for estimates in financial statements alongside more robust forecasts for the next 12 months in conjunction with their assessment of going concern. There will be greater work on the part of the auditor to more robustly challenge management’s assumptions and thoroughly test the adequacy of supporting evidence. It is the first step towards ensuring good governance in corporate reporting, requiring auditors to be more inquisitive.
More widely, the greater use of technology will change the relationship clients have with their advisers. Just as retail is now a 24/7 operation, how long will it be before we too have to be available seven days a week and how will this fit in with the work life balance that people value so highly and expect in the workplace?
According to WWF the world’s best scientists tell us that in order to undo the most extreme scenarios of climate change, 2020 must be the year for coordinated, comprehensive climate action. It is now widely acknowledged that we are in a climate emergency and we urge all businesses to review what they can do to help respond to this and meet their commitments. We recommend viewing the ‘Our Planet: Our Business’ video which can be accessed here. It is everyone’s responsibility to continually review what more we can all do to help with this.
Cyber-security – attacks continue to rise
Cyber-security is seen as the main challenge for business in 2020. Phishing attacks by email where an attacker pretends to be someone trusted to trick the recipient into providing their bank details continue to rise.
The first step in tackling cyber threats is ‘tone from the top’ of an organisation. Businesses should ensure that everyone that works for them is aware of the risks and to have good cyber health practices. As a minimum mandatory training for all people should be given as 90% of all issues start with an email.
2020 will, for many, not be a year defined by global politics, our trading relationships, or indeed the accountancy profession! The eyes of Europe will turn to football in June and July for the UEFA European Football Championship, which will be played at venues across 12 countries for the very first time. And for those whose sporting interests lie elsewhere, the Tokyo Olympic Games will follow in July and August. A good performance in both will undoubtedly lift the collective spirit.
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