Host
Philippa Lamb
Guests
- Liam Conway
- Ian Pay
- Fahad Asgar
Producer
Natalie Chisholm
Transcript
Philippa Lamb: Welcome back. Everyone is talking about energy costs; we're no exception. Greenfields Energy Group's co-founder, Liam Conway, is going to be walking you through the best ways for businesses to protect themselves from global energy shocks. More on AI after that, with new guidance from the FRC about managing the AI risk, specifically in audit—what's in it, what's missing, and what should firms be doing? ICAEW's head of data analytics, Ian Pay, is here to tell us. Last up an update on corporate reporting, Fahad Asgar, Corporate Reporting Technical Manager at ICAEW; he'll be laying out the big questions for smaller entities when it comes to changes to UK GAAP. A quick reminder for all the accountants listening—this podcast counts towards your annual CPD, log your listen on the ICAEW website by simply clicking through from the show notes for this episode, it is that simple. So, energy prices—the Iran conflict is already driving up fuel prices. Energy prices will inevitably rise too in the coming months. It's an unexpected headache for all business, but potentially very serious indeed for energy intensive sectors. Liam Conway joins me now. Hi, Liam.
Liam Conway: Morning.
PL: Shall we start with a bit of context, because we don't actually get most of our energy from the Middle East, do we? So why is this such an issue for us?
LC: It's a conversation I have frequently with our clients, people querying why we are so impacted by global markets. And it is simply that although we aren't reliant on them for 100% of our generation, we operate in a global market, and as a result, we compete in a global market particularly prevalent for LNG, so gas. That's what's driven the prices up and left us fairly exposed.
PL: So even though only about a fifth of LNG actually comes through the Strait, it's still a big problem for us.
LC: It is and it doesn't cost any more for the sun to shine or the wind to blow, but we do operate in a global market, and that is why we are left exposed and to some degree, as a net importer, more exposed than a number of other countries around the world.
PL: Obviously, this is a very fluid situation. No one is entirely sure when it's going to resolve. There has been a huge amount of press coverage about possible shortages in all sorts of areas. Do you think we actually will see them?
LC: I mean, that's a real crystal ball timer, I suspect, but I wouldn't expect to see shortages or rationing, but that doesn't impact or help businesses now, particularly gas and electricity intensive businesses—they are faced with the increases right now as we speak. Although some of the headlines that we are seeing in the press are probably making it slightly worse than it actually is, the reality is that the increases that the majority of businesses are facing aren't quite as bad as some of the headlines might allude to.
PL: Do you want to give us a bit more detail on that? Because, as you say, there has been a lot of talk in the press about that.
LC: So let's focus on gas primarily—so gas has been hit harder than electricity. If I look over the last three months or so, I would say broadly, gas markets have increased by around 40%. However, what is very evident is that short term contracts have been impacted in a far more prevalent way than longer dated contracts. So for example, if you had a contract due in April 2026, and you hadn't made arrangements for those contracts, then you are going to be far more exposed than a business who, say, has a contract due in April 2028 because you are just more exposed given timing to market. And that's a really key thing that we talk to clients around in terms of being proactive with their strategy. Interestingly, actually, for electricity, whilst gas and electricity are linked and there's quite a bit of noise in the press about trying to decouple the relationship between those two things, electricity has been less impacted, predominantly because broadly only 35% of your final delivered electricity costs are actually attributed to the wholesale market. So therefore the proportion of increase is just a lower weighted average of that.
PL: It's interesting you say about planning ahead, because this is not the first geopolitical event to affect prices in the UK. We had the second invasion of Ukraine, we saw what happened then. Did you see a lot of businesses come forward at that point and think, 'we actually want to insulate ourselves against things like this in future'? Or have businesses not really learnt that lesson yet?
LC: I would say it was a real mixed bag. I think the smart, forward thinking businesses did. They started looking at on site generation. They started looking at solar. For example, we work with an awful lot of manufacturers who, by nature, have got big untapped roof space which they can utilise. To not only potentially reduce their cost, but reduce their reliance on the grid, so therefore, when shocks come into the market, they are less exposed. I think one of the big things that businesses learned was that they can't just leave their energy strategy and their procurement decisions to a post it note on the wall to deal with it two months before renewal. That strategy just doesn't cut the mustard now, and for us, typically, our clients are broadly spending between £100,000 and £5 million a year on energy. So it should be, and now probably is top three boardroom discussion once again, which actually, to some degree, is a good thing. It's good that it's at the forefront of people's mind, although being in slightly unforeseen circumstances.
PL: Yeah, I mean, before we talk about what you might do if you're planning ahead now, if you've made no plan, if you've taken no steps at this stage, is there anything you can do right now to insulate yourself from the current situation?
LC: Not really, I think, is the unfortunate answer to that. So April and October are the two most common contract start dates in the UK market. So it's the start of the summer and winter season. So let's assume you have a contract due in October of this year. Unfortunately, you are now at the mercy of the market if you haven't made any arrangements, and it's sort of 'backs against the wall' time. There's no clever strategy or magic one that can be waived. Now it's about trying to decide how long you might fix a contract for, whether you might do a fixed or a flexible contract, and in doing so, you just need sound advice around what's happening in the market, and giving you a well rounded view of that, because the tactics that worked five years ago might not be the tactics that necessarily work now.
PL: This is an individual decision for every business, but are there some broad pointers you can give us on how to work your way through that decision process?
LC: If I talk again, typically about our clients, we talk about operational costs a lot with clients. So the analogy I use with businesses is, let's say you spend half a million pounds a year on energy. For argument's sake, it's not necessarily about trying to nick £10,000 to get that to £490 it's about trying to protect yourself from paying £550, £600, £650, and working to an operational cost and budget which works for you as a business, that should be your primary concern. And we're very often looking at that two years in advance for clients, because if their budget is hit and they can secure a contract 2/ 3/ 4 years in advance, and it hits their number, then our starting point is: why would you not be doing that? And then we work backwards from that.
PL: People are presumably concerned about fixing for that long, because it is such a fluid landscape, isn't it? As you say, if the upside is there, great, but it might cut the other way, and then we'll wish we hadn't done it.
LC: Lots of our clients have energy surcharges in their contracts with their customers, which does give them the ability to open up contracts. But again, if we look at probably more so for electricity, if we look at the spread of prices, in terms of prices over time, we're still fairly towards the bottom of that spread. So there is far more, or certainly, in our view, there's certainly far more upside risk than downside opportunity. But again, it comes back to individual businesses' appetite for risk, and different businesses will have different assessments of that—it's important to take a balanced view of contract length, contract duration, suppliers and contract structures so that businesses have got... they think of it as a due diligence exercise... they've got all of the information to hand to make a well informed decision.
PL: And as you mentioned earlier, some of your clients are actually putting plants in place.
LC: Yes, I mean, solar is probably the biggest thing that we're seeing with clients. One of the challenges of that, there's probably two challenges, one is potentially the cost of that from a CapEx perspective, particularly if you don't have a very stable or solar worthy roof. That might boost the investment further, and there are some challenges around getting that export into the grid itself. But as a starting point, certainly, anybody who owns their site should be looking at solar as a viable option, definitely.
PL: What sort of payback period do they look at when they do that? Because presumably the capital outlay is pretty substantial.
LC: It can be, I would say—this again will vary, as a general rule of thumb, probably between four and seven years as a ROI payback for it. I think people have to, like most things, enter some of the feasibility studies with a bit of a pinch of salt with some of the figures that are put to them. But in short, yeah, if you own your site and you have a good roof, there's every chance it really should have solar on it to reduce your reliability on the grid and reduce overall costs.
PL: What sort of common mistakes do companies make around this?
LC: I think the biggest mistake is leaving it too late. Lots of people are wearing lots of hats and spinning lots of places on a list of things to do and energy might fall down that list. So I think the biggest mistake is just leaving it until a couple of months before, because you really are just then at the mercy of the market. I think there's also historically been a misconception that energy is cheaper in summer. Well, traditionally, yes, but when you're looking at a contract a year or two years in advance, what's happening in this summer doesn't have any bearing on that really, in reality anyway. I think the other biggest mistake I think I see people make is not partnering with somebody, maybe in the same way that they would with an accountant or a solicitor. This is a big cost for businesses. They should be working with their professional partner. This industry is littered with call centres and anyone who's listening to this, if they have the position of dealing with energy contracts within their business, they will have no end of unsolicited calls and emails. I see no end of smart businesses sign energy contracts that have basically just been flocked to them by a kid in a call centre. And I always sit there and think, "oh, come on, you've got to have been smarter than this to have fallen foul to this". So I would encourage people to really think very sensibly about who they partner and take advice from.
PL: Well, Liam, with a clear instruction not to big up your own firm entirely indeed: how? How would you advise business to select an advisor? What do they need to look for?
LC: I think a good way to answer that perhaps is some red flags. So if you're engaging with someone just via cold outreach, so someone's calling you five times a day and badgering you on email, is that really the kind of business you want to be partnering with? Coming back to that analogy that I gave around, “would you select your accountant or auditor or solicitor or corporate finance partner in the same way?”— no. So why are you doing it on energy? Look for testimonials. Look for referrals. Look for trade bodies or trade associations or chambers that they may partner with, and if they're not local, get on a call. We know it's very easy for us to jump on Teams and Zoom now to try and get a flavour of what they're like as a business. But the biggest red flag is if you feel like you're being pushed and harassed and badgered. Take a breath. Take a pause. Don't engage would be my word of warning.
PL: Just thinking about them right now to wrap this up, what is the first step all businesses listening to this right now, who haven't got this covered off—what should they be doing right now?
LC: They should absolutely, fundamentally know when their contract runs out, and they should make a plan to engage either with a partner or direct with a supplier. Again, talking about our typical clients a year to two years out from that, so they know: if we were to contract now, what are the costs? Are we happy with those costs? Are we okay with those costs? Does that mean that we can stay operational as a business? And if so, my advice, typically, is get it done.
PL: Liam, thanks so much.
LC: Thanks.
PL: Now onto AI adoption in audit. Ian Pay joins us remotely. Hi, Ian.
Ian Pay: Hello.
PL: We discussed some previous FRC guidance on AI in audit on the podcast, I think it was at the end of last year. How does this new guidance relate to that?
IP: What we've seen is the FRC has issued new guidance just at the end of March. It's a little bit more targeted than the previous guidance. So the previous guidance was a little bit more in that initial exploration of the key themes considerations when developing or using AI tools, and that guidance was very much at the tool level. The new guidance that we've seen is a bit more specifically on the use case level. So it's looking more at the risks and the mitigations of those risks relating to the use of particularly generative AI and agentic AI systems.
PL: So this is more about implementation. How has it gone down with the firm?
IP: So far we've seen a fairly mixed response. There's a lot of really, really good stuff in the guidance. It breaks down the risks very nicely, very clearly. It also explores the mitigations in quite a lot of detail. There's also a couple of really, really good illustrative examples in that guidance. But we are seeing some firms, particularly firms who are probably at the smaller end of the market, struggling to engage with this guidance so far, finding it a little bit dense, a little bit hard to understand how it applies to them.
PL: That sounds unfortunate, because obviously, I mean the audit market is very broad in terms of size. But presumably it is the smaller end that really needs this guidance?
IP: It is worth saying there's a lot in the guidance that is really, really useful. So when I talk about the risks that it explores, it breaks down the risks into three main categories: so you've got the risk of deficient output, so the risk that the tool itself doesn't give the right outputs, you've got the risk of the misuse of the output. So that's quite simply, fairly self explanatory, how the output of the tool is then being used by the individuals or the firm. And then you've got the risk of non compliant methodology, and that is essentially to say that the methodology being used by the firm, particularly in relation to the AI tool, maybe just doesn't quite meet the auditing standards. So these are relevant risks for any firm of any size looking to use these sorts of AI tools. And as I say, it actually does go into some of those risks in an awful lot of detail, which is really, really valuable for a lot of firms. But I think what we're seeing is the way that the guidance sort of talks about some of those risks, and particularly some of the mitigations. It talks a lot about teams of technology specialists, teams of methodology specialists. Smaller firms aren't going to have those. They might have identified individuals responsible for these things. They're also going to lean very heavily on third party methodology providers, third party technology providers, and that's maybe where the guidance doesn't quite go into as much detail as we might want to see, particularly that interaction with third parties.
PL: So you're looking for more on that, because obviously, as you say, without in house resources, that's where small firms are going to go. But there's not quite enough guidance on how to go about that?
IP: There's definitely room to explore that third party space in a lot more detail. I would say again, there's a lot of really useful things in there. One of the concepts that I think it does cover quite thoroughly is this idea that the different mitigations and approaches to mitigation is a bit like the very classic example of the confidence buckets. When we talk about audit evidence, you sort of fill the buckets until you get the amount of evidence that you need. And they're actually talking about the risk mitigations with using these AI tools in a very similar way, combinations of the design and development of the tool, possibly a certification process, staff training and guidance and support. Then that human in the loop review / oversight type process. You might find different firms using these different four elements to different proportions to ultimately get to the level of comfort that is required. But I think what we're seeing some of the challenges with smaller firms is they're kind of saying that the certification process could be quite cumbersome for them. It could require quite a lot of time. Really it's going to make it a little bit, in some firms, a little bit concerned that actually makes the hurdle of adopting AI just that little bit higher for them.
PL: Is there anything else missing here that you really wanted to see?
IP: As I said already, I think the exploration of that kind of third party piece, I think, is really, really important. We've also heard, when we've been talking to members, the guidance talks about a certification process, but doesn't really explore what that actually means in practical terms. This is where you start cutting in, into the realms of AI assurance. And that obviously is something that the Institute is quite keen to talk about more. We have our AI assurance conference coming up later on in the year. I think the other thing that I found personally when I was reading the guidance is actually the guidance focuses very, very heavily on the first of those three risks. So it really spends a lot of time exploring that deficient output risk, a little bit less time looking at the other two risks around the misuse of the output or the methodology related risks. It's got 28 pages talking about the risk relating to deficient outputs. It's only got two pages each for the other two risks. So there's a little bit of an imbalance there, and that might be because those risks are actually quite familiar to people. It might be that they're some more well established and are consistent with pretty much the use of any technological tool. But that imbalance, it would be nice to see a little bit more of an exploration of the way that AI tools could be misused in terms of their output, and also how it ties into methodology, really working a lot more closely with some of those third party methodology providers, potentially.
PL: Presumably, there will be a lot more from the FRC on this in due course. Do you have any sense when they'll be issuing further guidance, and perhaps fleshing this out a bit more?
IP: In terms of the when, I don't know, I'm afraid. I do know that they are very keen to keep issuing guidance, and we know that the demand is there for more illustrative examples use cases, trying to help firms understand some of the more specific scenarios where AI might be used, and what that means in terms of testing approaches. I know that that's something that is in demand, and I know that the FRC understands that and is going to keep delivering on some of that. But I don't really have a timeframe as to when that might be.
PL: Do you have advice you'd add on top of what's in the guidance right now?
IP: I mean, I would say, if you haven't read the guidance, if you are in an audit firm, if you have some sort of responsibility for technology or for risk in a firm, I would say it's worth reading. It requires a little bit of sitting down. It is very, very dense. It's not something you can dip in and out of, so you do kind of have to put aside a couple of hours to just read through it in detail. It's absolutely worth doing, because it does cover a lot of things in a lot of detail. Actually, the way that it breaks down the risks, the way that it explores the mitigations, is incredibly thorough. So from that perspective, probably not an awful lot that we would add or suggest thinking about. I think the main thing is really making sure that you're keeping on top of the way that AI is evolving, the way that AI is changing. One of the big challenges that a lot of firms face in the audit space, and also outside of the audit space, is the fact that these AI tools are constantly evolving, constantly changing the way that they function. From the point of view of this guidance, that might pose some slight challenges if you're having to constantly reassess the risk, but it is a really important thing to do, to understand, 'okay, what's new? What's changed? How does that impact the output that I get from the tool? And how I might be able to use that output?'. So really, keeping on top of the fact that all these tools are evolving all of the time, and that's not necessarily always within the control of the firm as to when and how those updates sort of land,
PL: Yeah, so what you understood six months ago isn't necessarily what's happening now?
IP: No, and I think it's a really exciting period of time in the profession when we're looking at the adoption of AI. We're seeing a lot more with agentic AI as well, some really, really good opportunities and good use cases that are quite specific and quite tailored, and the tools are getting better at really focusing and honing in on those specific use cases. But it's evolving so much you can't say, "oh, I tried it six months ago and it wasn't very good at this, therefore, it's not very good at this." You have to revisit the tools and check in with them every so often to say, "has it improved? Has it moved on? Is it now capable of doing something that six months ago it wasn't capable of doing?"
PL: Do you think that's widely understood, just how rapid the pace of change is now?
IP: I think it is understood. I think the big challenge that a lot of people face is that it's a bit scary, the fact that it's moving so quickly. There was a very human reaction to that, which is to put your head in the sand and pretend it's not happening, and that's okay. It is okay to be a little bit scared by the pace of change. I think people do understand it, but the most important thing, really, is to embrace that and say, "yeah, this is crazy. We're all going on this ride together, so that's okay. Let's just keep exploring and keep figuring things out as we go along".
PL: And obviously ICAEW stay on top of it, isn't it there are loads of resources on the website?
IP: Yes, we've got a lot of guidance already around AI. I will say we have quite a lot of guidance around software selection, which is quite relevant to this. We're looking at how we can enhance that through the AI lens and some of the extra considerations that might be applicable when you're selecting software that has AI as a key part of it, as I say. AI assurance is another big thing that we're looking at. So as the FRC starts talking about these concepts of certification of AI tools, that is going to come into play an awful lot more. Of course, when you're talking about skills, we do have the Gen AI accelerator programme, which is a fantastic resource, and the first course on that is completely free for ICAEW members. So really would recommend, if you haven't engaged with that, just as a really foundational kind of understanding of how some of these tools work, is a really good starting point.
PL: Great place to start. Thank you very much, Ian. Thanks a lot.
IP: Thank you.
PL: Finally, UK GAAP, Fahad Asgar joins us on the podcast for the first time. Hi Fahad, thanks for coming in.
Fahad Asgar: Morning.
PL: We recently featured an overview of pretty well everything going on in corporate reporting at the moment, there is a lot, isn't there? Can you just remind us of the main changes to FRS 102 specifically?
FA: The periodic review 2024 amendments are actually the biggest changes we've seen to UK GAAP since the introduction of FRS 102 and FRS 105 and these changes have actually been in effect, so it's effective since the first of January 2026. The headline items to point out then are changes to revenue recognition and lease accounting, and I think in particular for smaller entities, what we need to bear in mind is these changes to UK GAAP are moving UK GAAP to be more closely aligned with International Accounting Standards. And what this means is that we'll have new concepts and new models. For example, the revenue recognition model that entities have not seen before, especially on the smaller end. This means more judgement will be required, and for these entities, maybe a greater level of detail, greater level of complexity that they need to be aware of.
PL: Yes, because, as you say, this is key for smaller entities, isn't it? What's the major change that they need to be thinking about?
FA: If we look at the flagship, if you like, or the headline changes, and we start off with the new five step model, without getting into the nitty gritty of it, but just an overview, it will allow UK GAAP reporters a clearer way to determine how much of their revenue they recognise, and more importantly, when to recognise that. So we're focusing on what is being promised to the customer, what consideration is expected in exchange for the goods and services and when that will be delivered. Now, for a simple business who perhaps trades goods over the counter, there probably will be no change to when revenue is recognised. But for others, there'll be perhaps some significant changes. So if you look at a business that provides service over time, now we're talking about potential change of that revenue being spread, and actually recognise when that service is delivered over that period.
PL: The other big area is releases. What complications are there again, specifically for the small entity?
FA: When we're looking at the small entity, let's not forget the micro entities, which act as a subset of the smaller entities of Section 1A, FRS 102. So FRS 105 preparers, and that's your micro entities, are not affected. So they will continue as they are, but when it comes to everyone else, we will no longer, and in fact, we no longer have that split in recognition of operating leases which are traditionally off the balance sheet as a disclosure note, versus finance leases which are capitalising the assets onto the balance sheet with the corresponding liabilities. So what this means in terms of practical challenges, entities need to actually review their contracts and assess whether an existing lease exists there, and now potentially look to bring that onto the balance sheet. We're pre empting that most significant leases will go onto the balance sheet.
PL: Now those two changes, they're dominating most of the discussion around this. There are other changes, aren't there? Outside revenue and leases, again, for smaller entities to know about.
FA: That is correct. I'd just like to point out though, when it comes to the leases, there are a couple of exemptions, and they are very key, the first being short term leases. So that's leases that are under 12 months, and then low value assets. Now this area can become a bit complicated, but if we simplify it, the point of clarification here on low value assets is to assess the asset in question in absolute terms, so not based on materiality to the business. An example of that would be an asset that the entity benefits from, but is not interrelated to other assets that they use within their operation. So we're talking about small office furniture, or perhaps small technical sort of equipment, perhaps, but to answer your question about the other areas, when it comes to the smaller entities, those preparing under Section 1A small entities, one thing that we're sort of preempting that may perhaps be a bit of a shock is the expanded related party disclosures, or expanded related party transaction disclosures that will now be required.
PL: Just remind us how that worked up until now?
FA: So up until now, only material, non market transactions were required.
PL: And now?
FA: But now that judgement is being removed, and in fact, all related party transactions will be disclosed. There are very few exceptions. We're talking about, perhaps wholly owned subsidiaries within a group, but generally speaking, we're going to be seeing a lot more within scope of related party transactions.
PL: So how onerous is that going to be, potentially?
FA: I think onerous is perhaps not the word we'd use. I think it's just more a case of small entities being more conscious of the fact that there's greater scope of reporting requirements.
PL: Are there issues for them to think about?
FA: There are other areas that they need to be considerate of, especially when it comes to Section 1A. It's a much broader set of reporting requirements that are coming into play. So the significant aspect here is extra transparency and more record keeping. Now if we look at a couple of areas that perhaps you wouldn't traditionally see in a small entity, accounts share based payment disclosures. It's traditionally been encouraged to present a true and fair view, but when it comes to the changes now, there isn't that judgement of true and fair as an encouragement. It's actually a mandatory requirement. Similarly, dividends previously not required—and you wouldn't traditionally see that whether it's declared or paid during the period, but now you have to, and in addition to this, you've got additional disclosures around provisions, contingent liabilities, taxation, be it current or deferred tax, that are moving the small entity reporting landscape much closer to full FRS 102 reporting.
PL: In terms of steps to take right now, what would be your advice there?
FA: I'd say there's a lot to take in—take a step back and just pause on what your existing practices are and understand that this is not just a few technical tweaks in font and a bit of fine tuning. No, these are real, significant, substantive changes. So get to grips and understand those changes. First dedicate that time and then assess the entity specific changes and how that will impact the certain situations or circumstances entities will face based on their unique operations. All of this summed up means: don't wait till year end. Start looking at the changes now. Understand what that implementation will look like for your individual business, and hopefully you'll be on the right track.
PL: Don't kick that can down the road again. We can link to more resources in the show notes, but ICAEW have got an event in July—what's that going to cover?
FA: We're building on the success of last year's in person conference, which was centred around the changes to UK GAAP. But this time round, we've tailored the programme for the small to medium sized entities, including the micro entities, so the structure will be spread over two days, the first day covering those fundamental changes and really ensuring everyone's clued up on all those details. Day two is that deeper dive into the complex areas, working through those examples and really tackling these changes head on. We've made it virtual this year.
PL: Fully virtual?
FA: Fully virtual. You can access it from wherever you are, and we're hoping that will really resonate with the target audience, and without having to travel to London and to make it a complete full package as an event, we've got a couple of sessions that are not actually directly related to changes to UK GAAP. The first will be delivered by Companies House, and that will be a session discussed in the current reforms and the upcoming reforms, the economic crime act, so getting everyone clued upon changes to UK regulations, and then the next session is the upcoming consultation on modernising corporate report. So a great opportunity for everyone to really get involved and have that complete experience.
PL: Not to be missed by the sound of it. Thank you very much, Fahad, that's great.
FA: Thanks.
PL: That is it for this episode. As always, you will find links relevant to all the subjects we've covered today in the show notes, as well as that quick link to log your listen as CPD, the next episode of Behind the Numbers will be looking at fraud. The government is worried about it—it's produced a strategy to try and rein it in. But where are the risks coming from? And what do you need to know to keep them at bay? If you have feedback or ideas for the podcast team, we would love to hear them. We have an email address for exactly that purpose: podcasts@icaew.com. Meanwhile, please do take a moment to rate the series on your app, it's just one click. We appreciate every single rating. Thanks for being with us.