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No investor relations problem
The watershed events of PAC hearings and Ansbacher revelations are an issue for public more than investor relations, as investors are influenced by how a company performs - not by how it behaves, writes Mary Finan
The cathartic effect of the Moriarty Tribunal and the Public Accounts Committee (PAC) hearings on DIRT will endure for a long time. Never before in the history of the State have the major financial institutions had to account for their actions in public and in the full glare of the national media. Such a watershed event must have significant implications for how financial institutions conduct their business in future. However, while it may give rise to serious PR issues which need to be urgently addressed, I believe that the investor relations implications are less damaging.

We must remember that the period under the microscope was a long time ago and far removed from the boom times we are experiencing today. Most of the people involved are either deceased or retired and in their day they had to manage a very different set of problems arising from a troubled economy and a punishing tax regime. Today‚€ôs new breed of money-makers and market-makers have little or no links with that era and cannot closely identify with the problems it posed. It may be hard for the senior members of our business and financial community to believe it, but the bulk of these young managers, while they may be concerned with what is going on, are not fazed by it and are simply getting on with the job.

It would seem unreasonable to attach any blame to existing managements who were not involved in the recent revelations. In any event, that is simply not the way the market works. Investors are influenced by how a company performs - not by how it behaves, unless that behaviour has an impact on earnings and the share price. So far, there has been no discernible impact on the shares of the companies involved in the Moriarty Tribunal or the PAC hearings. Any weakness that did occur was due more to the arrival of Bank of Scotland in the Irish mortgage market and US interest rates. However, in relation to earnings, some institutions may be hit by tax clawbacks although the markets will already have anticipated this and marked share prices accordingly.

In my view, it is more public confidence than investor confidence that will be shaken by current events. There was always a popular view that a small golden circle existed who were able to avoid paying their taxes while those on modest salaries got crucified by the Revenue. Now that belief has been given substance and there is a growing sense of bitterness among the public who see these events as evidence of their unfair treatment. This has huge implications not only for financial institutions and the general business community but also for politicians, the Revenue Commissioners and Irish society.

Up to now, many people tended to regard banks as more or less all the same. There is no doubt, however, that some of them performed better than others during the PAC hearings and people may begin to differentiate between them on that basis. Wise bankers should be increasing their marketing budgets to build a strong brand identity that disassociates them from the kind of allegations being levelled at the banks as a consequence of the PAC hearings. They will also have to devote more resources to ensuring that all transactions are completely transparent and above reproach. As well as upgrading internal checks, this may involve investment in external audits to demonstrate their commitment to openness. Maintaining the trust and confidence of all their stakeholders will be a key issue for financial institutions now and in the future.

This brings me to the accountancy firms and the auditor‚€ôs role. Questions have been raised in the PAC hearings about the independence of auditors and in future it will be incumbent on them to demonstrate their objectivity and sensitivity to the kinds of issues that have arisen. It might also be a good idea to introduce a requirement for external auditors to include a note in their report on the accounts to the effect that the financial institutions have fulfilled their tax liability.

The Revenue Commissioners also need to take action to pre-empt a recurrence of the massive confusion that became evident during the PAC hearings. The existing process seems to be so informal and unregulated that it was hardly surprising to find there were vastly differing interpretations of the Revenue‚€ôs attitude to the tax liabilities of the financial institutions. There is a need now for more formality in the policies and procedures governing the relationship between the Revenue and the banks. This whole issue will have to be dealt with to the satisfaction of the general public if confidence is to be restored in the Revenue and its procedures for
tax collection.

I said at the outset that these hearings were cathartic, and I believe they are, but if their outcome is to result in real change, positive action needs to be taken now by the Minister for Finance. Only he can oversee the introduction of policies and procedures designed to ensure that there is never a repeat of this situation.

It will be a brave finance minister who introduces a tax amnesty in future.

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