Liz Barclay is Co-founder of Business 111, Special Adviser on Small Business & Entrepreneurship at the Institute of Directors and campaigner for tighter rules on late payments. She gives her views on the Government’s recently announced plans.
Finally, with demand growing for AI assurance, what does good actually look like? Expert and Senior Programme Manager in Digital Ethics & AI at TechUK, Tess Buckley, fills us in.
Host
Philippa Lamb
Guests
- Tom Pugh, Chief Economist, RSM UK
- Liz Barclay, Co-Founder of Business 111, Special Adviser Institute of Directors
- Tess Buckley, Programme Manager, Digital Ethics and AI, TechUK
Producer
Natalie Chisholm
Series Lead
Mark Rowland
Transcript
Philippa Lamb: Welcome back. Today, we're starting with the economic impacts of the war in the Middle East. We've already seen immediate spikes and fluctuations in the oil price and the wider financial and commodities markets. But how will the UK economy be affected in the months to come, and how heavy a price will British business end up paying? RSM, Chief Economist Tom Pugh will share his thoughts.
Staying with business. Liz Barclay is here. She's co-founder of Business111, and special adviser on Small Business and Entrepreneurship at the IoD. She's campaigned for tighter rules on late payments for years with the government's recently announced plans, do we finally have them?
And finally, AI assurance. With demand growing, what does good assurance actually look like? Expert and Senior Program Manager in digital ethics and AI at Tech UK, Tess Buckley will fill us in.
A quick reminder for all the accountants listening, everything we're covering today counts towards your annual CPD, so check out the show notes. You'll find a quick link in there to log your listen on the ICAEW website.
So let's start with the conflict in the Mid East. We're recording this in late March. It's not yet clear how events are going to play out, but what we do know is that the war will have a long economic tail. RSM, Chief Economist Tom Pugh is joining us remotely. Tom, should we take a look at the oil price first? Every day is different, isn't it? But what we do know is production is radically down.
Tom Pugh: I don't think it's particularly useful to try and speculate on the short term timings, or you know when this might end, or anything like that. But there are some positive things or some things with a bit of certainty that we can say now, one is that even if there's a resolution to the conflict very swiftly, it will still take several months for energy supplies to return to normal. There will still be probably quite a significant risk premium in in energy prices for some time to come, and it will take a long time for energy supplies to properly normalize because of the damage that's been done to energy infrastructure around the world. So even in a best case scenario, we are going to be living with a an energy price shock for realistically, the rest of this year?
PL: Yeah. Because really about refining capability in the Mid East, I mean, that's years of repairs, as I understand it.
TP: Yeah, precisely. Those LNG plants; they said three-to-five years, billions of dollars. The after effects of this shock are going to be with us for a long time to come. So if we think about the impact on the UK, the primary mechanism is through inflation. So we get rising oil prices, rising energy bills, that will feed through to inflation. We were expecting inflation to be kind of down at that 2%-ish pretty soon, and then to stay there for the rest of the year. I think we're now looking at inflation at probably 4%-ish by the end of the year, and it really wouldn't take much more for inflation to be above 5% by the end of the year.
PL: As we record this, we've just heard the OECD's new predictions, and they've substantially downgraded the UK, haven't they?
TP: Yeah, well, actually, the UK was one of the biggest hit in that report, and that's for a couple of reasons. One is that we are simply vulnerable to wholesale prices on the global markets, because we import a lot of our energy and we don't have very much storage, so we kind of are directly impacted by those fluctuations. And gas is still the primary price setting mechanism for electricity, which is not the case in a lot of other countries. So what we see is that those movements in wholesale natural gas prices flow through very directly into energy prices in the UK and into inflation. That has a bigger impact here, and then it has a bigger impact on growth as well,
PL: Because the OECD, I think, are projecting inflation at 4% for this year. Aren't they now up from two and a half and far, far higher than other major European countries. So why exactly is that?
TP: Well, it's partly that our starting point is worse. So if you're in Europe, for example, inflation is now below 2%. We were coming into this with inflation already at 3%, and then you factor in the fact that we are just more exposed to imported energy. We're more exposed to natural gas, in particular, and the role that it plays in setting our whole energy price complex. So natural gas and electricity, and that goes a long way to explaining why we are much more impacted by this than other countries.
PL: And thinking about inflation, I mean, there's the direct consequences, as you say, at higher energy costs, but then issues like jet fuel being such a big issue so soon, and that flows through to a whole bunch of other stuff, doesn't it? Not just freight, but consumer travel, all sorts of things, and all of it inflationary, isn't it?
TP: I guess a basic timeline, I think, would be helpful as to how these things tend to flow through. So oil prices tend to flow through to fuel prices very quickly – so four to six weeks, for example. You know, if you filled your car up, you will have noticed the price ticking up essentially every day.
PL: Yeah, they're talking about diesel shortages already, aren't they?
TP: Yeah, well, exactly. It's exactly the same with jet fuel and diesel, and there is picking up on the point you mentioned a couple of minutes ago. Different fuels will be hit differently, and that's because when we talk about oil, we tend to just lump everything together, you know: oil, petrol, diesel jet fuel. It's all kind of the same stuff that we burn.
But actually, what we have is quite big strategic stocks of crude oil – that basic kind of stuff – but what we don't have is big stocks of the refined products, because they tend to go off quite quickly. So a lot of that refining capacity for stuff like diesel and jet fuel is also in the Middle East. So not only have we lost access to 20% of the world's crude, so that basic manufactured, basic input, we've lost a big chunk of the refining capacity for things like heating oil, jet fuel, diesel. So that's why you're seeing much bigger increases in some types of fuel.
So jet fuel prices are up over 100%. Heating oil prices are up over 100%. So what you will see is oil prices flow through very quickly to those fuel prices. We're already seeing the impact of that. Then with a bit of a lag, you'll see the impact of natural gas and electricity prices, and that's because of the way our utility prices are set, with that kind of three-month off gem price cap. Luckily, that was just set, so it means we're kind of insulated until July.
Many businesses now are either on fixed term contracts or hedged after the experience of the 2022 Ukraine crisis. So we are probably okay for the next three months or so, but if we're still in this situation, if energy prices haven't come down by the time we get into the summer – as we said at the top, kind of that looks quite unlikely, now – we're going to see a ramping up in our energy bills from there, and that will only continue through the rest of the year.
And then the final piece of the puzzle, and this is the kind of bit I think that gets less attention, is that we will start to get indirect effects further on as we go towards the end of the year. So that becomes when things like food prices start to rise. Because if you think about food production, the biggest inputs are oil or diesel and fertiliser. The Middle East is a massive producer of fertiliser. So if your diesel prices have gone up 20%, 30% your fertiliser costs have gone up 40% it means that the cost of food is going to go up quite significantly.
PL: It plays into packaging costs as well, doesn't it, Oil?
TP: Well, exactly. And this is the other point. The Middle East is a massive producer of plastics. So these contracts are not as widely traded as oil contracts, but your basic plastics contracts are up by 40% now. And if you're a supermarket, for example, the cost of packaging in a loaf of bread is more than the cost of the wheat that goes into that bread. So you are potentially looking at another round of inflation coming back in at the end of year as those agricultural commodity and food prices hit, as those packaging prices hit, as the initial hit in those fuel prices works its way through the supply chain system. So I think what we're looking at here is a series of inflationary shocks that will gradually get worse, and it will mean that inflation then stays high, realistically into the first half of 2027 at least.
PL: Because, as you say, we already had high food inflation. So we're coming from a bad place.
TP: Exactly.
PL: You mentioned fuel and energy contracts there. And that brings me to a point that I've seen popping up in the press lately, which is force majeure clauses being brought into play. And it did make me wonder: what price contracts for all sorts of things now, because those contracts can be quite widely drawn, can't they? So do you see that turning into a problem for business in all sorts of areas?
TP: I see it is certainly…it's certainly a risk. There are two risks here. One is a price risk, so effectively, how do you manage if your fuel costs go up by 20-30%, your energy bills go by 20-30% etc, etc. All of your input costs go up. How do you manage that? Do you need to try and pass that cost on, etc, etc? That's the most obvious one.
I think given the scale of the disruption that we are potentially looking at, there is also a risk here that we get into real shortages. So it's not only, what do I do if I have to pay more for my inputs? But also, what do I do if I can't get my inputs, or I can only get a certain proportion of my inputs? And this might sound like stating the obvious, but the longer this goes on for, the worse this will get, because so far, what we've had is a disruption to the source of supply, but not really a massive disruption at the end user.
So essentially, what I mean is, all of the transport ships that left the Middle East before this crisis are now kind of coming into dock. So if you're in the UK, if you're a refiner in the UK or elsewhere, you probably haven't seen much disruption yet; those ships will dry up from April, really. So that's when we really will start to get into the risk of more of those force majeures and more of this kind of potentially rationing behavior.
PL: So that's commodities inflation right there, in all sorts of areas.
TP: Yeah.
PL: I mean, obviously all this is very bad news for business. It makes it incredibly hard to plan, doesn't it, they're planning in a vacuum. They can sit there and scenario plan for a whole range of things, but it's very hard to know, as you say, whether the inputs they need will be available to them, and at what price. I mean, what's this going to do? Is this going to create more stasis, just at a time when more watch and wait from business, just the time when the government was hoping for growth?
TP: I think there's a very clear risk of that in certain industries, if you are involved in deal making, for example, I think we're likely to see that go on pause, quite frankly, because, well, how do you how would you price a deal if you don't know if your energy costs are going to be double your financing costs, which we haven't talked about yet? But you know, the interest rate curve has shifted from expecting two cuts with a risk of a third to now pricing in two hikes with a risk of a third. So we're potentially 150 basis point swing there.
That makes it very difficult to price those kinds of deals. So I suspect we will see those on hold. For many other businesses, though, you don't have that option to just kind of wait and see. And I think one of the the ironies of the recent things, it certainly feels like we've had crisis after crisis after crisis. You know, we've probably had eight major crises in the last 10 years or so. So businesses feel like at least they've got used to this. Management are used to operating in a volatile environment and kind of dealing with what comes. So I think we've clearly seen a hit to business sentiment. We've clearly seen a hit to consumer confidence. But maybe that kind of stasis that we've experienced before is a bit less this time.
PL: What does business need from government? Do you think, I mean, there has been talk about regulating price gouging, which, you know, you wouldn't be surprised we see more of that. I guess, the possibilities, there, to cut green energy levies, to just try and temper those energy bills a bit. What do you think would be most useful? What do you think we'll see?
TP: I mean, we've seen a lot of this kind of stuff around, yeah, price gouging, profiteering, and all the rest of it.
PL: Hard to regulate, isn't it?
TP: It's very hard to regulate. It's very hard, actually, to prove because, well, we've seen enormous increases in commodity prices, so you would expect to see very large increases in the prices that everybody else is paying.
PL: And it's very granular, isn't it, for each industry?
TP: And it's not profiteering. I don't know, I'm sure it probably does exist in some parts, but I'm not sure about the widespread profiteering. I think this comes to a fundamental problem, is that there is perhaps a willful misunderstanding, certainly in some areas of Westminster, around what prices are. They're not just numbers picked out of thin air in order to maximise profits for greedy businesses. Prices send us a signal about, essentially, the scarcity of a product.
So if prices have soared as they have recently, it's because supply has been curtailed. That encourages everybody to reduce the amount they use, and it encourages other producers to produce more. So if you come in and you cap energy prices, or you end up subsidising this kind of thing, you blunt that price signal, and then you end up running the risk of real shortages, because if you're not going to ration a good where there's been a supply shortage through the price mechanism, you're just going to have to ration it some other way, and that's much less economically efficient.
So I think there is a risk here that we end up down the wrong road. But the announcement from Rachel Reeves the other day, that support will be targeted to those that most need it, I think is the right thing to do, moving away from those kind of blanket government support that we saw in 2022 and ‘23 to really directed support for those households, those low income households, that will be hit the hardest, and perhaps some of those smaller energy intensive businesses that will be hit very hard by this.
PL: Yeah, there seems to be quite a lot of consensus on that.
TP: Yeah.
PL: So much to talk about. Tom I'm just going to wrap this up by asking you – putting on the spot – and asking you for your base rate prediction for the end of the year. I think OECD is saying four and a quarter. What do you think, does that sound about right?
TP: I would not be surprised if actually, interest rates are still where they are now by the end of the year. And that's really because if we look at where we're coming into this crisis from, the economy is in a very different place to where it was at the start of 2022 base rate at the start of '22 was half a percent. It's now three and three quarters. The unemployment rate was 3.8 it's now over 5% and probably will rise further. We had just been on a big QE kind of binge. We're now doing QT, so quantitative tightening, so the economy looks weaker. Monetary policy is much tighter. The appetite for a widespread fiscal bailout looks a lot lower and looks more unaffordable.
So in those circumstances, the need to really raise interest rates is not as severe as it was in 2022 because you think about it, from the Bank of England's point of view, you can't do anything about the rise in energy prices, you know, the bank can print money, it can't print oil, so there's no point trying to restrain that initial rise in inflation. But what you want to do is prevent second round effects. So you want to, as much as you can, prevent firms from passing on that those big increase in costs to a greater extent, the fact that the economy is weaker, the fact that unemployment rate is higher, the fact that interest rates are already much higher than they were previously, means that the likelihood of firms passing on those costs is much, much lower than it was back in 2022 so you just don't need to respond as aggressively as you would have done previously.
I could certainly be talked into perhaps a rate rise in April, but really as a credibility move, so that the bank can show they're taking this seriously, not because I think it would have any meaningful impact on inflation. So yeah, I think the market's probably got a bit carried away with itself when it was pricing in three or four rate hikes.
PL: Well, let's see. I will have to be back at the end of the year, Tom, and see which way that plays out.
TP: Yeah, well I'll come back if I'm right.
PL: Thank you very much indeed. Really helpful conversation. Thank you.
TP: Thank you.
PL: On to late payments now, and longtime expert and campaigner Liz Barclay is here. Hello Liz.
Liz Barclay: Hello Philippa.
PL: So the government has just outlined plans to address late payment, finally. I wonder how that's going to work, but I thought we might start with a bit of history first, because there has always been a temptation to exploit, particularly smaller suppliers, hasn't there, by paying late.
LB: Using them as a bank.
PL: Yeah, using them as a bank for cash flow.
LB: And this is a decades-long problem. It's not just suddenly sprung up in the last few years, and I do remember doing a programme about 33 years ago where we looked at the impact of late payment on small suppliers.
PL: Do we have numbers on that? Can we quantify the outcomes?
LB: We know that late payments is costing the economy £11bn a year at any one point in time. The average to a small business is about £17,000 pounds in late payments; overdue invoices paid beyond the agreed date. But we've also got a problem with the contract, and if a bigger company imposes a long payment term in the contract to the supplier, it can lead to the supplier not getting paid until 120 days after they've delivered the goods. Somebody even mentioned yesterday 240 days, and I have seen 360 days in the contract.
PL: Wow.
LB: So you're waiting for a year to get paid for something you've delivered a year ago, and that is just not on. Small businesses can't carry that level of debt and risk.
PL: Has it been getting better or worse, in recent years?
LB: It's been getting better because of technology. For instance, micro businesses: about 80% of really small micro business suppliers are using direct debits in order to get paid. If you look at the tech that has developed over the last few decades, you do see that a lot of people are signing up to maybe cloud accounting companies, etc, and they are enabling them to do their invoicing faster and then get paid quicker.
PL: Okay.
LB: So on average, about 15 years ago, late payments were running at something like 82 Days. Now payment times are running about 30, 32 days. They do go up and down a bit. And you've been talking about the economy, and the economy, of course, as the economy worsens, many of those customers pull out their payment terms so that they're offering you longer payment terms on a contract, but they're more likely to pay late, possibly as well, on top of that longer term. So if the economy does worse, I think we'll see late payments getting worse.
PL: So we do need this government plan. What are the headlines?
LB: The headlines are a 60 day maximum payment term, and that is in the contract. But what we don't have, at the moment, is any of the details. So we don't know what 60 days means. When do you start measuring it from when to when?
PL: So not from the invoice date, then?
LB: It should be, but we need real clarity around that, and that's one of the things that I would really like to see. When are we actually talking about? Is that 60 days from receipt of contract by the bigger customer. That's what we'd like to see.
PL: So you've seen companies fudging that date?
LB: I've seen companies fudging that date quite often, fudging it to the point where they're paying in 30 or 60 days, as per the terms of the contract, but only once the invoice has been approved, and having an approval process that took 120 days.
PL: Okay, got you.
LB: So we don't want any of that fudging. However, there are some exemptions where businesses don't have to adhere to that 60 days. Large-to-large businesses, for instance, can negotiate their own contracts. The government's not going to intervene in that. This is larger businesses paying small businesses.
PL: Defined how?
LB: Well, a large business has more than 250 employees, and there are turnover thresholds, etc. So all of that detail will have to be set out. That's the main headline. But of course, there are other things, like greater transparency by big firms in their annual reports and by their audit committees, if they have one. There will be greater powers for the small business commissioner in order that the Small Business Commissioner's Office can investigate where they have been told that the rules are being breached, or can adjudicate in disputes, or can actually find persistent long payers – again, we don't know what a persistent long or poor payer might be, that detail will all come out.
PL: You used to be the Small Business Commissioner.
LB: I did.
PL: So I mean, are those the powers you would have wanted if you were still in the job?
LB: Yes.
PL: They are.
LB: Absolutely, I would have wanted that. But we need to be extremely clear in what circumstances they can investigate, in what circumstances they can adjudicate, and what the fines will look like. The government is saying they have to be proportionate, but if they're not big enough to act as a deterrent, then those fines may be absorbed by bigger companies, for instance, that can afford to do that if they feel that economically, it's more advantageous to them to hang onto that money. That's the last thing we want to happen.
PL: I am wondering, even though the Small Business commissioner is going to have these powers, how they'll know who to investigate. Do small companies tend to report their bad payers?
LB: They don't, and that's part of the problem we've had, in that we couldn't investigate unless a small supplier complained about their customer.
PL: And they're not going to do that, are they?
LB: They simply will not do that because they don't want to lose the next piece of work.
PL: So what's the answer to that?
LB: The answer is that the information, the Intel, will come from, perhaps, trade associations, membership bodies, other organisations that think: ‘hang on a minute. This firm that is in our sector is not behaving in the way that we want the sector to be behaving’. But again, we need to see the detail of who that will be. There's another change too, which is really interesting, which is that if you are overdue with your payments, there will be automatic, mandatory interest to be paid and compensation to be paid to the supplier.
PL: And the rate's high, isn't it?
LB: The rate is 8% above base rate, yeah.
PL: So that's punitive.
LB: It can be, if you owe enough in outstanding, overdue payments. But we've got to remember, of course, that these rules only apply to private sector businesses, not to public sector bodies, and there's a lot of issues in the public sector as well. So we're rather hoping that the culture will change with these proposals, so culturally people will understand that it's just simply not acceptable to pay your small suppliers late or long.
PL: Well, do you think, particularly in the public sector, is it a big issue?
LB: It is a big issue in the public sector. Yes, there are rules that mean that suppliers in the public sector should be paid in 30 days, but there are delays by local authorities. There's quite a lot of interest that could be due if a small supplier were to apply to the local authority for it. Local authorities don't want to put themselves in that position. There are all sorts of work arounds to rules.
PL: I mean, it's making me wonder how enforceable all this is going to be in practice.
LB: And that's where we need to see all of the detail. Now, if these proposals are included in the King's speech, which is what everyone wants to see, in mid-May, then it will be all hands to the pump to get the legislation ready to go through the legislative process. And of course, that will [bring out] all of the detail that we want to see. But of course, that's where the changes happen; House of Commons, House of Lords may come and push back, may come back with amendments. Who knows how long this might take to get through the legislative, parliamentary process.
PL: And if it's not in the King's speech this time, there could be a long delay.
LB: If not, it could be yes, there could be a long delay, but also there will have to be an implementation period, because a lot of firms won't be ready to simply switch to a maximum 60 day payment term.
PL: Yes. I mean, how is it going to work in practical terms, will businesses potentially need to re sign contracts?
LB: A lot of businesses are actually thinking about this already in resigning contracts and reforming their contracts. There were some firms out there that were already contracting to pay less than the 8%, because the 8% has been the rule for quite a long time, but you could contract out of that, and we have seen contracts with a lot lower percentage interest on the overdue payments. So some of those big firms are now rethinking that, because they're signing up for the fair payment code, and the fair payment code demands that the rules are stuck to.
PL: So that's quite helpful.
LB: Yes, that's helpful. And when you tie all of those things together, we're really hoping that human behaviour will not lean towards trying to work their way around the rules, but will be much more keen to change the culture across the whole of the picture, because that's what we really need. A change in culture where it's just simply not acceptable to pay a small supplier late. Small businesses need that money now. And 60 days is a long time – 30 days great, 15 days would be even better.
PL: But as you say, given the economic macroeconomic picture right now, it's going to be a tool that a lot of companies will reach for if they can, isn't it?
LB: You mean pulling out to 60 days where they're already paying 30? We really do not want to see that, and certainly that's where the fair payment code will come into play, in that it will be helping people to see why they should pay faster.
PL: So the devil really will be in the detail of the legislation.
LB: The devil will be in the detail, we need to see that. We want it in the King's speech in the middle of May. We then want to see the detail and then go through Parliament as quickly as possible.
PL: Thanks very much, Liz.
LB: Thank you.
PL: Now as more and more businesses bring AI solutions into their workflow, the need to be sure that they're being used effectively and appropriately. Grows, so demand for AI assurance services is increasing, and audit firms are being expected to meet that need. Tess Buckley from tech UK, is with me. Hi, Tess.
Tess Buckley: Hello.
PL: So, Tess, shall we start with a definition of AI assurance?
TB: The way that we define it is it's a way to evaluate, measure and communicate risk mitigation. People do this in a multitude of ways, different mechanisms, bias audits, impact assessments, and the way that we're seeing this market grow, and why it's growing is there's a big business case for it. So we can make the best tech in the world, but if people don't trust it, they're not going to adopt it. We're not going to see it scale across our businesses. We're starting to see compliance become a driver as well. So compliance to compliance to what, but we can learn and lean into existing regulation and then also access to capital. So investors and more private equity, but investors and procurement teams are starting to ask about AI assurance or proof of justified trust in their due diligence.
PL: Yeah, because, as you say, it's not mandated yet.
TB: No, it's not, but we're seeing a lot of great work from DSIT come out. So there was a report that kind of quoted this area worth about 1.6 GVA and set to grow six times in the next decade, if market barriers are addressed. It currently employs about 12k folks, and we've got about 524 firms operating in the UK. I think that we're going to see a lot of growth here, especially, a lot of the appetite right now is in public sector and critical national infrastructure, and this makes a lot of sense, specifically with financial services and defense leading the charge, because they have existing fiduciary duties and Hippocratic oath and healthcare as well. This understanding of bioethics, the buy in, isn't so challenging for me when I'm talking to someone that is in a safety critical, low risk appetite and highly regulated space.
PL: Yeah, that must be a highly complicated area. That particular one,
TB: Yes, engaging, though I do enjoy it.
PL: Now, the government's created a roadmap, haven't they, for trusted third party AI assurance. So what do they have in mind?
TB: So we saw the AI opportunity Plan released, and recommendation 29 was dedicated to supporting this ecosystem, growing it. And then in September, I was very grateful to see, as you noted, the trusted third party roadmap come out. And what this actually means is addressing those kind of market barriers. It was welcomed. I know we need to deliver at pace, but essentially this looks like, for auditors, data and information access, a lot around skills and competency framework. So we're all kind of coming into the space from very different backgrounds, and we don't actually have a certification scheme for those professionals.
PL: So there's no assurance for the assurers right now?
TB: Exactly. We need that human infrastructure to be kind of stress tested, and then also a code of ethics for that profession. And then finally, some innovation funding for novel approaches to AI assurance, which is good to see, because it's going to be run through a consortium of practitioners. So DSIT is kind of erecting this space and inviting people that are already doing auditing and assurance. Because, as stated, this is a very robust area, but it's forming, and it's not quite clear who owns what and what the ethics and measurements are.
PL: Yeah, we're right at the start, aren't we? It's interesting because, I mean, it's a bit of a moving target, isn't it, because AI and the use of AI is evolving at pace. It must be extremely sector specific, a lot of it, as we've just mentioned, with bias.
TB: I mean, so the UK is taking a sector specific approach when it comes to regulation, and like regulation is what is responsible AI and AI assurance is how we actually do that. So I do think that we are seeing as this space matures, sector-specific approaches to assurance, but the ethical principles and the mechanisms might be the same, but the prioritisation of them would be different. Or people, for instance, in financial services, have a risk model, three lines of defence. They turn to that and lean into it because they already understand it.
PL: I'm wondering if we are in a position right now to know what good looks like exactly. I mean when I'm thinking about companies that are just in the foothills of this, where did they start with it?
TB: So we do have best practice, or emerging best practice. And actually in 2023 we released – tech UK and center for Data Innovation ethics – released a really great portfolio of assurance mechanisms that showcases industry best practice, and that kind of gets updated every now and then. But I would also point to some really great work out of Singapore. It's called the Moonshot Validate Project, and it kind of showcased and brought together a bunch of leading assurance firms in a non-competitive way for them to iterate and share what they're doing internally and publish it so that we do have something to reference.
I think that the moving target objection is fair, but assurance is not something that's static, so it is something that is iterative, ongoing. We're going to do continuous monitoring. We're going to do red teaming cycles. And I think aviation, you know, didn't ground all planes until they had all the solutions and understand all the failure modes. So it's kind of about building a culture of trustworthiness from the start, or ethics by design, as we would say. And again, that's kind of incident reporting, design updates, incremental checks,
PL: As I said, audit firms, they're being asked for this. Do they have the skill set? What are the skills they're going to need to develop?
TB: So actually, it was really great, I attended a conference run by ICAEW, which was on assurance. So you guys are starting to look at this. You have your second one on July 6, which I will be definitely attending and in the room. But I guess this question is a bit more about the market entry and capability. I think audit firms are currently well positioned in some ways, you know, because you have the risk methodology, the regulatory relationships, but assurance is kind of a new muscle, and there's a categorical difference here.
So audit is a kind of tool within the belt of assurance. So first, kind of understanding what is being asked by your client, and probably building up a bit more technical capability. So skills, we talked a lot in our mapping, The Responsible AI Practitioner about this set, as well as IPP did one and Ada Lovelace Institute, if people want to do some deeper reading.
But when I think about differences between traditional auditing and this type of auditing, I would say statistical and probabilistic reasoning is one of them, because you guys are kind of trained to find and detect answers that are certain, and this is not a certain space. I would also say system thinking for failure modes, because in traditional accounting, you look at the controls that already exist, but what we're doing is like, how could this fail, anticipating a bit more and then finally, like, knowing when to stop and escalate regardless of what form of assurance you're doing is going to be key.
PL: Well, yeah, that brings me back on a closing thought, which is AI insurance, which is emerging now, yeah, for insurance, for assurance?
TB: Yes. This is something I got very passionate about and have been hyper focused on for last eight months or so. I think organisations face two challenges when it comes to AI. So it's ensuring that AI systems are operating safely and reliably, and that's assurance, and then managing financial risk when they do fail, and that's insurance. And what's really exciting about this space is it's a bit of a feedback loop, because effective assurance decreases premiums for insurance, and then insurance increases incentives to be doing assurance and so that's why I think this is a big part of the discussion. And actually, as we see liability centered as a policy issue in 2026 it's going to just grow.
PL: That's really interesting. Thank you very much, Tess.
TB: Thank you.
PL: That is it for this episode. You'll find links relevant to all the subjects we've covered today in the show notes. The next episode of Behind the numbers airs on April 15, we'll be returning to the subject of accountancy's brain drain, this time, specifically looking at the impacts that AI is already having on training and career progression. Right now, if this podcast has been useful, please do rate and review the series on your app. You might like to subscribe to it while you're there, and if you have feedback or ideas you'd like to share with the podcast team. We would love to hear them. We have an email address for exactly that purpose. Podcasts@icaew.com. Thanks for being with us.