Mafia Buzz Issue 3
Mafia Buzz Consolidated 2004
Talking in Alphabets
AASB = Auditing and Assurance Standards Board
AIM = Alternative Investment Market
APB = Accounting practices board
ASB = Accounting Standards Board of the UK
BEE = Black Economic Empowerment
CIPRO = Companies & Intellectual Property Registration
Office
DTI = Department of Trade and Industries
ED = Exposure Draft
EU = European Union
FAIS = Financial Advisory and Intermediary Services Act
FASB = Financial Accounting Standards Board (US)
FICA = Financial Intelligence Centre Act
FRC = Financial Reporting Council
FSB = Financial Services Board in RSA
GAAP = Statements of Generally Accepted Accounting
Practice
Gaap = Generally accepted accounting practice (Small gaap)
IAASB = International Auditing and Assurance Standards Board
IAS = International Accounting Standards
IASB = International Accounting Standards Board
ICAEW = Institute of CAs of England and Wales
IFRIC = International Financial Reporting Interpretation Com.
IFRS = International Financial Reporting Standards
ISA = International Auditing Standards
IVSC = International Valuations Standing Committee
MANEO = No idea!
OFR = Operating and Financial Review
PAAB = Public Accountants and Auditors Board
RAF = Retirement Annuity Fund
SAAS = South African Auditing Standards
SAICA = South African Institute of Chartered Accountants
SARS = South African Revenue Services
SME = Small and Medium Enterprise
SMP = Small and Medium Accounting Practice
SOX = Sarbanes-Oxley Act
SEC = Securities Exchange Commission of the US
January 2004 (30 Minutes)
Accountancy
The new UK Companies Bill provides for unlimited fines for directors who refuse to supply information to or deliberately mislead their auditors. In addition, whistleblowers will have legal protection for the first time [but will they have physical protection?]. And Inland Revenue investigators will also be able to pass on to the panel any suspicious information that they uncover. [But will they? SARS has this right in RSA but due to all the red tape involved does not use it.] (Page 9)
The UK’s APB has communicated its concern to auditors that shareholders may be mislead by the manner in which pro forma financial information is included in unaudited interim and annual results emphasising the need for auditors to consider how such pro forma information is used in preliminary announcements. [Question: if the information is not audited, what can the auditors do about it?] (Page 12)
If the IASB develops GAAP for SMEs, most national standard-setters will support the publication. [One wonders what the IASB knows about our tax laws at the tip of Africa! I am predicting that SAICA will abandon its attempt at trying to develop something for us if the IASB does so.] (Page 12)
Mandatory quarterly reporting is off the agenda for the foreseeable future in the EU. [And may it stay so.] (Page 19)
Venture capitalists in Europe believe that they should not be forced to consolidate subsidiaries. [I agree. They have excluded such entities from equity accounting if seen as a trading investment. It makes sense to take the logical next step up.] (Page 20)
With the increase in the audit threshold in the UK moving from £1m to £5,6m [one has to wonder why not £5,5 or £6] companies will no longer be limited to choosing their accountants from the firms that do the company’s audits. Firms will have to make themselves more attractive by marketing themselves better and offering value for money. This could end up in a price war situation. [The weaklings will fail and the strong will come through.] (Page 26)
David Mason points out that Mr. S Claus is actually Juoni Heinenonnen, who farms reindeer in the north of Finland so IAS41 is applicable and not IAS16 to his reindeer [see the debate in Mafia Buzz issue 14]. (Page 26)
Nicholas Dunhill is of the opinion that the retrospective correction of material errors is a step backwards for financial reporting. [I agree with him. We should ban all prior period adjustments.] (Page 28)
The history section on the website of MyTravel tells a story of one acquisition after another. Then the story changes to one sale after another. And then a black hole of £56 million appears. The CEO admits that poor management information systems impacted on the company’s ability to make reliable forecasts and take appropriate action. Chris Quick comments that no wonder they could not turn a profit if they did not have a clue as to what was going on in their business! [I bet that the auditors are going to be held accountable.] (Page 30)
The Americans have had quarterly reporting for decades and they are largely agreed that it is a pestilence they wish they had avoided. (Page 32)
The special report this month was on money laundering. The main message the articles communicate is that if accountants do not comply with the money laundering legislation they could very well do jail time. They tell a horror story of an attorney who innocently got involved with a client who was laundering money. Before he knew what hit him, he lost his practice and landed in jail. [I believe that this is now a legal requirement in RSA so you had better get yourself jacked up. I wonder if I could land up in jail if someone pays my fee in laundered cash? This is another reason why I will not accept cash.] (Page 36)
With only 12 months to go, companies have not yet started thinking about the change over to IFRS. The average IFRS conversion cost has been worked out at €8,7m. There will be a massive shortage of resources to handle this changeover so companies need to get their act together soon. The first step is to get educated so that the problem can be defined. [So far, IAS16 has turned out to be the major problem from a recognition and measurement point of view. But IAS39 could hold some horrors for companies.] (Page 55)
David Tweedie (DT) says that accounting is the bedrock of the capitalist society because if you can’t trust the numbers, you won’t invest. Every country that adopts IASs gives up its right to deal with accounting and hands it over to the IASB. However, the procedures of the IASB have been called into question, concern being expressed that it has become an ivory tower. [If you are privy to the Observer Notes, you will have come to this conclusion a long time ago.] The EC is claiming that the IASB is ignoring their concerns and economic reality. DT says that the IASB is willing to listen but does not have to agree with its detractors. He does admit that rushing to get 18 standards out by end March 2004 is not the ideal way of setting standards. He says that by 2005, 91 countries will either allow or require IASs, which means that they have to start applying IASs effectively from the beginning of 2004 to get comparable results for the 2005 deadline. (Page 56)
Hazel Powling says that there is a three-step approach to the adoption of the new IASB standards:
1. The diagnosis phase, i.e. the high level impact analysis. The first step is to become familiar with the standards and then to understand how it will impact on the entity. A conversion plan will be drawn up dealing with this changeover.
2. The development phase, i.e. taking the conversion plan and drilling down into the detail. Staff training, staff resources, system changes, impacts on the way the business operates, agreements entered into, how the results will be impacted, how this will affect staff compensation, etc. will have to be considered.
3. The conversion phase, i.e. dry running systems, rolling out educational programmes, renegotiating contracts, etc.
It is essential that investors and analysts will need to be kept in the loop so that there are no shocks when the 2005 or 2006 results are published. The devil is in the detail and the detail will have to be addressed soon. (Page 60)
Sherron Watkins, the person who blew the whistle at Enron and who is now unemployable, says that every company has to have a value system and that ethics should be at the top of the list of priorities. She says that if someone violates the value system at a company and is not dismissed, do not stay with this company as another Enron could be around the corner. She says that power and money corrupt people, greed breeds more greed and good people can get sucked into this kind of thing and go along with it. (Page 64)
A case to watch in the future will be the one between Equitable Life and its auditors E&Y and its non-executive directors. E&Y are being sued for £2,6bn. [And then it was the big four, and then the big three, and then…?] A big four partner says that it is worrying that auditors could be held responsible in future for things they couldn’t possibly be expected to have known. This could threaten the role of the auditor and deter people from accepted non-executive directorships. Taking such a position in a company could seriously damage your wealth. (Page 73)
Moria Hindson points out that directors and senior managers, regardless of their area of responsibility, are not protected from personal exposure to executive liability. In one case the former directors and employees of a company were sued because some buyers were entering into concealed transactions with suppliers. All were eventually acquitted but only after years of stress and a year long trial. She says that one should take precautions against such actions by:
1. Recording all key decisions and reasons behind them.
2. Reading all representations made to auditors carefully before signing them.
3. Taking out appropriate insurance.
4. Being aware of one’s fiduciary responsibilities.
[And you can add to this list: Always doing the right thing – maintaining a high level of ethics.] (Page 76)
The ICAEW’s new proposed Continuing Professional Development (CPD) system has been unveiled. Under the system all members will have to make an effort to think through what CPD they should be doing for their role or roles, carry it out and record it. The Institute will monitor members where there is a high public interest. If members refuse to comply, their membership will be terminated. The focus will be on professional responsibility and not on how much time is spent on an activity. This means that members will only have to focus on what is appropriate to their role. [I think that they are on the right track – let’s drop the points system and “you have to do this or that course”, which could be totally irrelevant to your job situation.] (Page 79)
The Auditing Practices Board in the UK has issued new draft proposals on ethical standards. The question being asked is: “Can one legislate to stop people from breaking rules if they are clearly bent on doing so?” A concern is that they will be looking for a sacrificial lamb to show that they mean business. [Sound like our own GAAP Monitoring Panel?] (Page 82)
Some ideas for improving your practice’s efficiency:
1. Make time for strategic planning by breaking the fire-fighting work pattern around you.
2. Delegate less important activities.
3. Break bad habits such as poor communication and delegation.
4. Get priorities sorted out.
5. Focus on what you do well – drop low value activities.
6. Deliver value to your clients. (Page 96)
The increase in the audit threshold in the UK has forced firms to move their focus from protecting their own business to creating services that are of value to their clients. (Page 98)
One of the co-sponsors to the Sarbanes-Oxley Act has acknowledged that the law was hastily compiled and some aspects of it are counterproductive. The Patriot Act, enacted to stop the supply of funds to terrorist organisations, is costing banks, brokers and similar organisations $11bn to install systems to improve internal monitoring. This has not stopped illegal money from circulating in the US. (Page 113)
Venture capital companies are arguing that it makes no sense to consolidate in their situation as it results in adding apples to pears and deprives users of vital information about the individual investments. (Page 115)
The treasurers of the world are up in arms about the new standards on derivatives because they do not reflect the way business is conducted. The treasurers say that IAS39 denies comprehensive hedge accounting treatment to actions that are prudently intended to minimise risk through hedging. Treasury management often centralises currency risk within a group and neutralises those risks by putting together flows that can be treated as equal (in currency and timing) and opposite. The remaining net risk is laid off in the market. This practice of net hedging is economically efficient and reduces operational and financial risk. IAS 39 results in unnecessary and meaningless volatility in financial statements where hedge accounting treatment is denied. The only way out of this problem is going to be the creation of SPEs, which does not reflect well on the cause of IASs. (Page 117)
The IASB has decided to add accounting for SMEs to its agenda. They say that an ED will be available in the second half of 2004. They have decided that there will be no compromise on recognition and measurement. [What, in heavens name, does the IASB know about a little private company operating at the tip of Africa? They should stick to what they were formed to do, i.e. prepare standards for general purpose financial statements!] (Page 118)
An example is given of a company that estimates its provision for bad debts on a basis other than using IFRS. The change over to the IFRS measure is treated as a prior period adjustment. [Local auditors have been forcing companies to treat these changes in accounting policy as changes in estimates, thereby distorting current earnings figures.] (Page 121)
Lending institutions seek confirmation of creditworthiness from accountants so as to look for a scapegoat when things go wrong. A borrower’s ability to service a loan over the next 25 years is a question for the lender to answer, and not the borrower’s accountant. Lenders seem to have lost this skill and are now relying on the security of the accountant’s PI policy, as long as the sucker fills in the form. (Page 123)
The recently issued auditing EDs on risk and fraud exposure will result in more rigorous and in-depth risk analysis by auditors. Auditors will have to understand the links between risks identified and how this will impact on their audit procedures. (Page 125)
The UK has published amendments to the standards on revenue recognition. [It is strange that this is done now when the IASB and FASB are in the process of developing new standards on revenue recognition. But hey, there is lots of lovely lolly to be made by forcing clients to keep changing their accounting policies! (Page 128)
Accountancy SA
Every CA in RSA should read the article “Fraudulent financial reporting, power and financial governance”! Mike van Wyk makes some important points in this article, e.g.:
1. He maintains that a lack of GAAP knowledge has to do with poor corporate governance. It is management’s responsibility to see that people with adequate GAAP knowledge sit on audit committees.
2. He says that fraudulent reporting has got much to do with excessive power. There is often a conflict between getting the right answer and getting the answer that the bosses want.
3. He says if profits are understated, existing shareholders lose and if overstated, new shareholders lose.
[What I do not agree with is his suggestion to get re-tested every five years. I know the man personally. He has an incredible knowledge about GAAP. He did not get this knowledge by attending a university. He was not motivated to get this knowledge because he was to be tested. He got this knowledge because he is self-motivated. It is people like him that we need on audit committees, not people that strive to get an additional piece of paper. True knowledge comes from quiet self-study, debates with others and experience. I do, however, love his swipe that to become a CA you only need 50% of the knowledge anyway! I have been saying this for years. The example I give is: “How would you like to fly in an aeroplane knowing that the pilot only had to score 50% to get his or her licence?”] (Page 2)
Malcolm Dunn sets out an excellent checklist of matters a director of a company should consider in carrying out his or her duties. The message he conveys is that the decision to accept a directorship should not be taken lightly. Should such an appointment be accepted the person should become intimately familiar with the duties to be carried out. [There is no way that I would consider such a position – outside directors are at the mercy of the insiders and there is little they can do to ensure that they get sufficient and reliable information on which to base decisions.] (Page 8)
Jan Dijkman addresses an independence problem where a quid pro quo is entered into in order to secure an appointment. He quotes Peter Scotese, who says: “Integrity is not a ninety percent thing, not a ninety-five percent thing. Either you have it or you don’t.” (Page 11)
Gillian Lumb and Emma Kingdon consider the legality of intercepting emails and other communications. They recommend that, due to the heavy fines that could be imposed (R2m or 10 years) companies should look at their policies and see that they are not contravening the Act. (Page 15)
If this article by Linda de Beer was meant to placate the critics of AC133, it did not achieve its objective. In fact, I have had some nasty comments on it. It does not address the issues the banks have with the statement and that is the volatility that arises in profits because the accounting results are not reflecting economic reality. Possibly, the reason it did not address this issue is because the standard is not capable of being defended. (Page 17)
The last in the series of Graeme Tosen’s articles covers performance measurement risk in the financial sector. The point he makes is that one should not only focus on the returns achieved but should also focus on the risks one exposed oneself to in achieving these returns. He deals with various risk measures two of which are the famous Sharpe ratio and Treynor measure. The Sharpe ratio is calculated by taking the actual return less the risk free rate and dividing the difference by the standard deviation. The Treynor measure is very similar only the divisor is beta. One thing Graeme omits to tell us is whether the risk free rate is pre-tax or post-tax. I know he reads these comments so expect him to enlighten us. (Page 24)
My article was on the stupid answers one gets when applying AC133. The new version may go a long way to solving some of these problems. (Page 30)
CFA Magazine
Annual money laundering is estimated to be between $590bn and $2,6 trillion. Legislation to try to control this is costing companies and upsetting the relationships between companies and their clients. One of the results of this legislation is that companies are leaving the US in droves and establishing themselves in friendlier counties. (Page 18)
Those who prefer US GAAP say that IFRS is not rigorous enough. Those who support IFRS say US GAAP is too costly to implement and has too many loopholes. (Page 19)
FASB and IASB are currently working on standards on revenue recognition and business combinations. Short-term convergence is expected to take place on the easier standards soon. Within five years the two bodies should be extremely close. The FASB is committed to convergence. (Page 20)
A recent survey has shown that 90% of European, Middle East and African countries have done nothing toward IFRS compliance although this new system is upon us. (Page 20)
The two main SOX proposals are that the CEO and the CFO must personally certify that the financial statements are accurate and that audit committees must have only independent financially literate directors, who must take responsibility for the financial statements and the auditors. [Anyone want to sit on an audit committee? You must be really hard up to accept such an appointment!] (Page 23)
Globally the unfunded liabilities for public pensions is $35 trillion If health care is included, one can double this figure. These are for benefits promised but not saved. Most of the developed world is heading for a fiscal and economic crisis the likes of which have never been seen before. There will have to be either huge tax increases or massive cuts in benefits. (Page 32)
Business Day
The auditors are under the whip again – the head of the firm that audited Parmalat stated: “If anything, we are the ones who have been the victims of serious fraud.” John Gapper says that this comment is like saying that the police are the victims of burglaries. [I do not know the details of this scandal but believe that until auditors learn how to verify cash at bank, we will get more and more of these things happening. Would any clear thinking auditor accept a bank certificate of balance as the only evidence of the existence, ownership and value of a €7bn asset called cash at bank? I would visit the bank, call for evidence from them as to what they have done with my client’s money, evaluate the financial strength of the bank to assess the recoverability of the amount and examine a loan agreement between the bank and the client (obtained from the bank manager while sitting in his or her office). If this approach had been used in the audits of Barings Bank and Parmalat, the frauds would have been blown wide open. The auditor of Barings Bank accepted a certificate faxed from the home of Nick and Lisa Leeson as evidence of a massive cash at bank balance! If auditors do not use common sense when auditing assets of the magnitude of €7bn they deserve to be taken to the cleaners!] (31 December 2003)
Finance Week
Hermann Barnard of Durbanville writes to the editor that he came across a lifetime annuity costing R295 000 and paying out R2 470 per month for ten years. The total sum paid out is R296 400, or a return of 0,9% p.a. [What he forgot to tell us is that the R2 470 p.a. is fully taxed! So, in fact, there is a negative return on the investment.] (14th, page 7)
The latest estimate of the Parmalat fraud is €10bn over a ten-year period. (14th, page 8)
Lego made a $237 million pre-tax loss due to a 25% decline in global sales. [TV games are killing creativity?] (14th, page 8)
Linda de Beer defends the concept of headline earnings. [The concept is fine but when you force companies to show capital gains and losses on equity investments in headline earnings but ban capital gains and losses on property investments, this measure becomes a joke.] (28th, page 6)
The Katz Commission noted that the minimum number of returns to be submitted by any small enterprise totalled 46 (three for income tax, 13 for PAYE, six for VAT, 12 for RSC levies and 12 for UIF). [What about 12 for skills levies, which cannot be banked together with PAYE anymore. And this year I had one for STC, i.e. one short of 60 returns!] (28th, page 38)
Financial Mail
The Helen Suzman Foundation feels that the ANC government is loath to leave decisions to the individual or civil society. The ANC has not exorcised the spectre of state control that it imbibed with communism. The rise of the nanny-state is part of a bigger problem – government’s appetite for control – such as deciding where doctors practise. The article is in response to the Government’s intention to ban advertising of baby foods and dummies to promote breast-feeding. [It is not only the government that has this urge to control other people’s lives. Whenever someone is given power, they start trying to control the lives of others. Want some examples? Try the JSE, the FSB, the PAAB, SAICA, husbands, wives, fathers, mothers, etc.] (23rd, page 22)
Charles Booth says that RMB Asset Managers use a dividend discount model, which has introduced a lot of discipline and has made it different from others. They use the model to determine whether a share is over or under valued. [You cannot believe how I have been abused over my lifetime trying to promote such simple common sense!] (23rd, page 54)
Parmalat says its net debt is more than €14bn in September, almost eight times the figure previously reported. (30th, page 8)
Joan Krok, the widow of McDonald’s founder Ray, who died last October, has left $1,5bn to the Salvation Army. [There is a rumour doing the rounds that, as a result, they are thinking of starting a Salvation Airforce!] (30th, page 8)
Fortune
The US Department of Agriculture says that from now on the food supply chain will contain only brains and eyes from cows less than 30 months old. [Makes you want to become a vegetarian!] (26th, page 18)
The Italians have decided to go the US’s Chapter 11 route to afford Parmalat protection to try to salvage what they can. [Should we in RSA not consider this approach instead of throwing companies like Saambou to the vultures?] (26th, page 20)
Techtalk
1. Issue 3 of appendix 2 to the circular on headline earnings has been issued. It deals with the look through approach to equity accounted income.
2. The IAASB has issued new standards on understanding the entity and its environment and assessing the risks of material misstatement (ISA315), the auditor’s procedures in response to assessed risks (ISA330) and audit evidence (ISA500).
3. Conforming changes have been made to ISA200, objective and general principles governing an audit of financial statements.
4. IAPS 1005, the special considerations in the audit of small entities, has been released.
5. A booklet has been developed by SAICA to provide guidance on the audit of attorneys’ trust accounts.
6. A guide has been prepared by SAICA on audit committees for medical schemes.
Time
Part of Martha Stewart’s defence strategy is to find a jury that will be made up of people who, before blindly obeying a rule, ask themselves how important that rule is. [Martha Stewart is being charged with insider trading in the US. This summarises my philosophy perfectly. How important is it to comply with AC135 for a little private property company whose financial statements are prepared purely for tax purposes? Until they wake up and withdraw this statement for private companies, I am advising preparers to be seen to be complying!] (19th, page 10)
February 2004 (30 Minutes)
Accountancy
PwC has revealed that Parmalat owned €14,3bn, seven times greater than it admitted in its 30 September 2003 financials. It is the largest scandal to hit Europe, comparable in size and scope to Enron. The former financial director threw himself off a highway bridge, successfully achieving his objective. Deloitte. and Grant Thornton are in the firing line. (Page 5)
The creditors of BCCI are suing the Bank of England because it knowingly or recklessly failed to supervise the company and wrongfully granted it a licence. (Page 6)
The SEC is pushing to exclude Grant Thornton from public company auditing in the US because it failed to take appropriate action on related party transactions that were not disclosed. (Page 9)
The Portuguese government is abolishing municipal property tax, property transfer tax and gift and inheritance taxes between family members. [We should be so lucky!] (Page 13)
PwC has found a black hole of between $3,8bn and $4,6bn in the accounts of HealthSouth, including incorrect accounting for goodwill and other take-over transactions. (Page 16)
Questions are being asked about European accounting standards after the Parmalat affair. The self-satisfied stance after the Enron debacle cannot be maintained now. The old-world can be just as devious, duplicitous and criminal as the new one. It was revealed that the document certifying the existence of €3,9 by the Bank of America was forged. Although Grant Thornton is a global name, the firm operates as a network of independent firms so the demise of their Italian firm should not impact on their firms around the rest of the world. (Page 27)
Implicit in harmonisation is compromise and something worthwhile is always lost. Harmonisation is a euphemism. Try “control”. For control means power, always a dangerous drug. (Page 85)
IAS17’s convoluted gymnastics on lease classifications will drive you to buy the freehold just to save your sanity. (Page 85)
Accountancy SA
Ignatius Sehoole takes a look at the report of the ministerial panel for the review of the draft accountancy professional bill, which was released late in 2003. He is generally in support of it. One thing he does not like is the recommendations on the examination process. [I am afraid that I agree with the panel. To break the examination in two like it is at present is a major mistake. But then accountants hate to admit that they made a mistake.] (Page 4)
Marc Scheepbouwer discusses the complexity of trying to run a business in RSA. He seems a bit put out that executive managers now are being held accountable for business performance and governance. [Why? No responsibility, no pay!] He also makes the point that in future executive managers will need to know the status of their business at anytime so as to be in a position to make decisions. [Why in future? Apparently Mr Summers of Pick ‘n Pay is able to call up the sales, GP%, operating costs, etc. of any branch of Pick ‘n Pay within a day after performance. This is why the company is so well run. I would have thought that this was a given in any business?] (Page 11)
Dr Franso van Zyl gives an excellent summary of the responsibilities that auditors have under the Financial Advisory and Intermediary Services Act in respect of financial services providers. He makes a comparison between auditors reporting under section 19(4) and acting under section 17(4) as compliance officer. He also compares this Act’s requirements with section 20(5) of the PAA Act’s reporting requirements. (Page 12)
Gary Vogelman sets out some of the problems facing the hedge fund industry in RSA. (Page 15)
Glynnis Carthy looks at the requirement of state-controlled entities to disclose related party information. She also looks at the disclosures required of key management personnel compensation. She missed the real issue in this standard – see a future article by me. (Page 16)
Rob Ross has written an excellent article on how SMPs are conducting their practices and what they could do to improve their compensation for the effort that they put into their practices. If you run a SMP, study this article. (Page 24)
My article was on AC133 and economic reality (part 2) (Page 26)
John Kennedy’s letter to the editor is excellent. He questions whether accounting practices should be seen as businesses. [I agree with his sentiment – one of the biggest problems in our profession is greed. We need to reclaim our professionalism.] (Page 33)
Finance Week
The company secretary and financial manager of Macmed have been found liable for Macmed’s R647m debts. (11th, page 10)
Financial Mail
A direct quote from an article by Stafford Thomas and Stephen Cranston: “Bonds enjoy capital gains when interest rates decline. When a yield falls from 10% to 5%, for instance, it means that the bond has doubled in value. Similarly, if the yield rises from 10% to 20%, the bond’s value halves.” [And I pay good money to buy this journal and waste my time reading it!] (6th, page 68)
Dave Eliot of Imara Asset Management says that private client portfolio management is the cheapest and most transparent method of asset management or investment. The only problem is trying to find a broker who will deal with you if you have less than R100 000 to invest. (13th, page 70)
Techtalk
1. Circular 5/2003 states that IFRS and SA GAAP are now aligned. [The comment in this circular that there are very few differences between Statements of GAAP and IFRS prompted one auditing firm to cancel this year’s GAAP workshop with me because “there is hardly any difference between SA GAAP and IFRS anymore”! What they do not realise is that there is a whole set of new SA GAAP/IFRSs out there – the past GAAP is very different to the new GAAP. But they believe the written word in the circular. They will wake up when they get disciplined for non-compliance.]
2. The AC500 series will address local GAAP issues.
3. AC501 has been issued – it covers accounting for STC.
4. A whole series of exposure drafts on auditing has been issued by the IAASB – rearranging the chairs on the Titanic?
5. IFAC has issued its first batch of standards on education. Let’s hope that they are practical like the UK’s proposals.
Sunday Times
A 36 year-old male, with no other investments to his name, was talked into buying a retirement annuity policy. An investigation into this policy revealed:
1. For six years the only correspondence received was notification that premiums had gone up by 15% p.a.
2. No details were given as to how this money was invested.
3. No information was given as to the costs of this policy.
When asked for explanations, the investment-company avoided giving answers. Further investigation discovered that the policyholder had paid premiums of R28 127 and was left with investments totalling R20 498. [I, in a moment of weakness, took out a policy such as this about 20 years ago. The company disappeared with my investment. I now control my own investments.]
March 2004 (30 Minutes)
Accountancy
The US is not forcing companies to expense stock options, despite the tough stance taken by the IASB. (Page 10)
First year compliance with SOX is costing companies on average $2m, $1,3m in outside consulting and 35 000 hours. (Page 10)
The UK has exempted SMEs from compliance with IFRS 2, share based payments. [Wonderful to have an Institute that can take these decisions so fast! Our SMEs are going to be stuck with this standard. Do you know how to value an option?] (Page 12)
Letter to editor: “Here we go again. ‘Parmalat puts profession back on probation’ screams the headlines. Wrong. It puts large firms back on probation. After 22 years of practice as a sole practitioner without so much as a compliant let alone a PI claim, I am sick and tired of being tarred with the same brush as these error prone organisations. I am aware that there are thousands of other sole and small practitioners out there with equally unblemished records who also deserve to be disassociated with the antics of these large firms.” (Shortened) (Page 21)
The profession in the UK is lobbying for a change to the law on auditor’s liability. They believe that if an institution goes bust, the auditor should be liable for only that for which the auditor is responsible. E&Y are facing a £3,5bn suit from the policyholders of Equity Life. If successful, this claim could wipe out another large practice leaving us with three. [I am sure that we all support the efforts of our UK colleagues.] (Page 50)
SEC has stated that it plans to recognise IAS and that at some point it is intended to eliminate the reconciliation. [I will believe it when I see it.] (Page 86)
60% of world trade is undertaken on an inter-group basis and is not reflected in the financial statements of the companies due to the elimination of inter-company transactions. A suggestion has been made to require companies to disclose the turnover and taxes in each territory (including tax havens!) in which they operate to achieve transparency. (Page 92)
Valuing a share is not a mathematical exercise. A six-step approach is given to arrive at a valuation:
1. Record the basic facts.
2. Describe the nature of the company’s business.
3. Obtain the financial results for the past five years.
4. Make the adjustments a purchaser would make.
5. Assess the availability and willingness of purchasers in the market for this shareholding.
6. Conclude.
[How pathetic can you get?] (Page 111)
Accounting SA
Tersia Booyzen sets out the background and principles of the United Nations Global Compact, i.e. the global ethical standards the UN is encouraging corporations to comply with. She makes the veiled threat that if corporations do not comply, legislation will force them to do so. [I think that this decade will go down in history as the decade in which authorities try to control every aspect of human life. The pendulum must swing back again one day. On Alec Hogg’s show the other evening an analyst was asked what she thought about the Global Reporting Initiative and triple bottom-line reporting. After a pregnant pause she said: “All we want is for companies to improve their earnings per share!” The bottom line is that you cannot legislate against unethical behaviour.] (Page 4)
Paul Sulcas writes on the subject of strategic planning. He defines the objective as being to improve, or at least maintain, the competitive positioning of the organisation. He sets out an excellent list of strategic questions one should ask when performing the analysis stage of the plan. (Page 8)
Barry Saxton explains what cost savings can be made in the logistics function of a business. He says that logistics costs in businesses typically account for between 10% and 15% of the total cost structure of businesses and any savings in these costs can have a huge impact on a company’s bottom line. (Page 12)
Dirk Steyn has written a superb article on how to assess engagement-risk. He analyses engagement-risk into (1) the auditor’s own professional-risk [he calls it business-risk, which I do not agree with], (2) the client’s business-risk and (3) audit-risk. He defines professional-risk as the risk of litigation, sanctions and lessening of reputation. He defines the client’s business-risk as the risk that the company may not survive or remain profitable. And he uses the AR = IR x DR x CR model for audit-risk but feels that we should add FR (fraud risk [totally agree]). He then gives some excellent checklists of things to take into account when assessing engagement-risk. Make this checklist part of your system of assessing engagement-risk. ((Page 18)
My article was on economic reality and AC133 part 3. (Page 32)
“In dealing with the Revenue Authorities we must, like Caesar’s wife, be above reproach at all times. It is surprising how many taxpayers miss this simple truth.” (Penelope Webb) [I would like to suggest that this principle should not be restricted to dealings with the Revenue Authorities.] (Page 34)
Business Day
“It is a capital mistake to theorise before one has data. Insensibly one begins to twist facts to suit theories, instead of the theories to suit facts.” Arthur Conan Doyle (Business Day, 4th)
The editor of Bottom Line apologised for getting Metair’s dividend for the year wrong in a previous article. [This probably happened because companies confuse us by publishing the previous year’s dividend per share under the current earnings per share in the income statement. They should learn to communicate better!] (24th)
Financial Mail
Banks have got until 30 June 2004 to verify the identity and residential addresses of all individual clients and to determine the true owners and beneficiaries of clients that are legal entities such as close corporations, companies and trusts in terms of the money laundering legislation. There are 9 million individual clients and 2,5 million legal entity clients to cope with. (5th, page 44)
Californian scientists say they have found a 10th planet the size of Pluto orbiting 13bn km from the sun. [Name?] (26th, page 8)
Ian Wilson, co-author of the book on Strategic Management Response to the Challenge of Global Change, says that we can’t escape from the dilemma that all our knowledge is about the past and all our decisions are about the future. He says that scenarios help us face up to this dilemma. (26th, page 45)
Finance Week
“One thing you learn in the US is how fast US businesses execute plans based on the decisions made” (Brett Dawson of Didata, 10th, page 10)
Ernest Mazansky of Werksmans predicts that the Income Tax Act will soon treat:
1. Interest on compulsory convertible debentures as dividends.
2. Interest on perpetual debt as dividends.
3. Dividends on redeemable preference shares as interest.
He suggests that large shareholders’ loans with no fixed terms of repayment in private companies could, in future, be treated as equity. (10th, page 37)
Steven Braudo says that members and trustees of post-retirement defined contribution funds should have clear investment objectives and a long-term strategy and should stick with it and not react to short-term market conditions. He says that this will stop ill-considered portfolio changes during what have proved to be temporary market aberrations, which have caused a lot of damage to returns over recent years. (10th, page 38)
Fortune
A graph is depicted showing mutual fund inflows against the S&P index. The higher the index, the more funds flow in. The conclusion arrived at is: “Investors are dumb – they buy high and sell low!” [Could one not interpret the graph to be telling us that the higher the demand for the shares, the higher goes the index?] (15th, page 17)
Americans are spending between 98% and 99% of their earnings and then are shocked to find that they cannot pay for their retirement! The question the US is trying to answer is: “How do we encourage savings?” The answer is that in the modern culture people only see the here and now. They cannot see into the long term. Maybe, when the next generation sees the results of this attitude, they may go back to the old fashioned habit of saving for a rainy day. (8th, page 29)
The world’s ten most admired companies are Wal-Mart Stores (1), General Electric (2), Microsoft (3), Johnson & Johnson (4), Berkshire Hathaway (5), Dell (6), IBM (7), Toyota Motor (8), Procter & Gamble (9) and FedEx (10). Coca-Cola just missed the cut. (8th, page 30)
A study by the Hay Group found that what separates the great companies from the good companies is execution. Having a winning strategy is useless unless it is translated into a clear action plan with clear accountability and implementation. (8th, page 42)
Techtalk
1. The 13 revised standards in the IASB’s improvements project can be downloaded from SAICA’s website. [I hope that you have a sturdy printer (it cost me R2 000 in repairs to mine), lots of paper and spare cartridges. The cost to the country of every accountant downloading these standards in trees and imports will be enormous. For just over R4 000 p.a. you can get them in print directly from the IASB. In the good old days you would get them for “free”, i.e. part of your membership fee, from SAICA.]
2. The IASB has withdrawn the standard on inflation accounting (IAS 15).
3. IAS32 and IAS39 (revised) have been issued.
Time
Europe has launched a spacecraft called Rosetta to land on a comet the other side of Jupiter in May 2014 to search for the origins of life. [We really do live in exciting times!] (1st, page 46)
Inflation in the Euro-zone fell to 1,6% p.a. in February compared to 1,9% in January. (24th, page 5)
The top five countries with the highest number of car thefts per capita is, ready for it, Australia [damn, they beat us at everything!], Denmark, Britain, New Zealand and Norway. We are only ranked 18th! (24th, page 5)
As a result of the Parmalat scandal in Italy, the EU Commission has announced plans to introduce tougher auditing laws to tackle corporate fraud. It wants to end self-regulation in the auditing profession and introduce independent bodies to police accountancy firms in each EU member state. (24th, page 5)
Tribute to Ron Paterson
I am really sad to see that Ron Paterson is no longer writing for Accountancy. And what makes me even sadder is that no “thanks Ron for your previous contributions” was forthcoming in the journal. His wisdom and wit will be sorely missed by many readers. Thanks Ron for enlightening and entertaining me over the years. You will be sorely missed.
April 2004 (25 Minutes)
Accountancy
The ICAEW is on a mission to sell the idea to the UK practitioners that Practice Assurance is a good thing. They are gradually wearing their members down to believing that they must vote for this system using the following sales pitches:
1. It’s a good thing.
2. It’s not that bad.
3. Reviewers will be there to point out efficient ways of doing things and best practice.
4. If they do not vote for it, the government will step in (the big threat!).
5. The cost will only be about R1 000 p.a. per practitioner.
[I have been receiving some negative feedback from practitioners in RSA about the attitude of some practice reviewers – some partners of firms are extremely angry. It would be a good idea for the PAAB to do a survey and reconsider who their real customers are. As one example, practitioners are being informed that they must comply with GAAP and not gaap in preparing the financial statements of small private companies when the Companies Act clearly requires gaap. In RSA it is only government entities and listed companies that must comply with GAAP. If a small private company states that they are in compliance with GAAP, it has to comply fully. This includes 100’s of disclosure requirements that are clearly not applicable to the users of such entities. Forcing GAAP on every private company in RSA is a total waste of valuable resources.] (Page 30)
The ICAEW is also on a mission to sell the idea to the UK practitioners that they should submit themselves to continuing professional development (CPD). The CPD system will not be an hours or points based system but will be based on objectives to be achieved. The system will be supportive rather than penal. [That’s what they all say at the beginning of the process!] The objectives could be achieved through reading, mentoring, courses or research. The Institute will monitor the CPD plans on a risk-only basis. An annual declaration will have to be made by all members that they have met the requirements. (Page 40)
The IASB is planning to release a new standard on leases in 2005 that will require all leased assets to appear on the balance sheet, together with the related liabilities. This will require that companies revisit their company car schemes. A company car given to the financial director is not a resource used by the company to generate profits but part of the salary package of management. Capitalising such assets will, therefore, result in distortions in the company’s performance. Companies will have to restructure such arrangements, e.g. give an allowance to staff to acquire their own motor vehicles. [This standard could have a serious negative impact on the motor industry!] (Page 56)
It is estimated that 25% of accounting firms in the UK could disappear because of succession issues. Because of poor retirement planning on the part of partners, many are working far beyond their normal retirement ages. [I am also finding this in RSA.] Another problem is the difficulty in finding new blood to take over the reins. [Many young people see what is happening in our profession and are saying that the risks are far too high for the income they can earn in the profession.] Here are some ways they calculate goodwill in an accounting practice in the UK:
1. 40% of average profits in the past five years
2. 55% of the practice revenue
3. 100% of gross recurring fees
4. 80% of the average of the previous three years’ profits
[It is more scientific to use my service based valuation model but these ideas could be used as reality checks on the answers arrived at. As an aside, few auditing firms in RSA require goodwill payments anymore. Partners are only too relieved to find someone to take over.] (Page 68)
The UK government has announced that as from 1 January 2005 SMEs in the UK can continue to use FRSSE, the UK version of small gaap. [Wouldn’t it be nice if . . . ?] (Page 79)
A move is afoot to restructure the IASB to reduce the influence of the US in the standard setting process. The perception that the Board sits in an ivory tower needs to be redressed. The aim of the process is to develop a transparent accounting system that investors, analysts, regulators and other users of financial statements can understand, allowing companies to raise capital on foreign stock exchanges without the need for costly and time consuming reconciliations having to be made. However, the board must avoid at all costs pandering to one lobby group. (Page 80)
Yet another standard has been issued on the responsibility of auditors to consider fraud in the audit of financial statements. It requires auditors to be more proactive in considering the risk of fraud. [So what is new? When will they realise that it IS the auditor’s responsibility to find fraud – this is what the customer wants so let’s accept that responsibility!] (Page 82)
Stephen Oxley, a partner at KPMG in the UK, looks at the issues that pharmaceutical entities are up against when complying with the standard on intangible assets. The problem with having wishy washy principles is that there are no answers! Just imagine the debates that are going to take place. Here are two of the problems that he highlights:
1. How does one determine the point at which the entity has met the criteria for capitalisation of development costs? Entities will probably end up expensing them.
2. How does one determine the value of an intangible asset acquired as part of a business combination? (Page 86)
Question: How do you account for favourable lease terms entered into by the company you acquired in a business combination? Answer: You treat this additional payment made for the entity as an intangible asset. (Page 89)
The ICAEW is offering a certificate in international accounting standards (focusing on a broad understanding of the issues) and a diploma (focusing on the details). [Think someone stole this idea from me? We are well ahead of the game here in RSA!] (Page 126)
Accountancy SA
Richard Hayes comments on the new standards released in December 2003. [All the points were covered in our workshops.] (Page 2)
Jan Dijkman suggests that members should pledge themselves to the Code of Professional Conduct in front of their peers. [A quaint idea. But will it really make a difference? They should make this a subject at varsity and SAICA should set examinations for the universities to test the understanding of the rules – as they do when studying towards becoming a Chartered Financial Analyst.] (Page 4)
Harvey Wainer sets out examples of contraventions of GAAP picked up by the GAAP Monitoring Panel. Among other contraventions he mentions that companies are not consolidating share investment trusts. One wonders whether the GMP has read AC412.6, which states: “This interpretation does not apply to post-employment benefit plans or equity compensation plans.” It is quite clear that equity compensation plans are excluded from consolidated financial statements. (Page 6)
Greg Bogiages writes on his favourite topic “dynamic budgeting”. He is quite right in pointing out that the old fashioned method of budgeting is a total waste of time. I often come across this old system in practice. Those going through the motions know that it is a waste of time but they say that “we have always done it like this”. I really would recommend that if you are still doing it the old way that you read Greg’s article and, if necessary contact him for guidance. (Page 9)
Michael Rudnicki writes about the tax implications of AC133. He points out that one is not taxed or allowed tax deductions in respect of revaluations (including impairments) of financial instruments or derivatives. However, he warns that deferred tax must not be overlooked. (Page 16)
My article was designed to wake people up to the implementation of IFRS. I got the opening balance sheet date wrong – it should have been 31 December 2003, corrected in a later journal. (Page 26)
Penelope Webb says that they found in the UK that 75% of accountants see money as more important than attractiveness and a sense of humour when dating. She criticises the attitudes of UK accountants. [She has obviously never heard the song that goes: “If you want to be happy for the rest of your life, don’t make a pretty woman your wife, in my personal point of view, get an ugly woman to marry you.” And humour before money? Money can buy humour but humour can’t buy money. Let’s get our priorities right Penelope.] (Page 29)
Citizen
The CEO of General Electric, Jeff Immelt, who took over from Jack Welsh, has listed his ten principles for a great company:
1. Set high standards for financial performance.
2. Make compliance a core operating principle.
3. Ensure exceptional governance standards at board level.
4. Commit to openness and transparency.
5. Create a culture where the company always comes first
6. Create leaders who are provided with the right incentives for performance and values.
7. Commit to people and develop trust.
8. Make a business out of solving the world’s toughest problems.
9. Give back to the community.
10. Teach people to compete by making them confident.
(8th, page 24)
Finance Week
Vic De Klerk had a go at Andre Viljoen of SAA for his argument that the “loss” of R6,1bn was countered by an “embedded derivative” of like amount. He accused him of trying to put a spin on the hedging position. [AC133 has caused irreparable damage in commerce and industry. Had the latest version of AC133 been in issue at the time, there would not have been any loss or an embedded derivative! The standard-setters have caused major embarrassment to our profession and have destroyed careers in the process.] (7th, page 37)
“No amount of swearing allegiance to the King report makes an iota of difference if the core is rotten.” Enron’s board consisted of many high level people (a former dean of Stanford University, a former CEO of an insurance company, a former CEO of a bank, a former head of the US governments Commodity Futures Trading Commission, etc.). [You can’t legislate ethics.] (28th, page 8)
Metropolitan is forced to publish four sets of earnings that vary from R1 064 million to R434 million to enable users of financial statements to understand its performance. [This is an indictment on accounting standards! If the standard setters can’t get headline earnings right they should scrap it!] (28th, page 31)
In the six months since the launch of AltX only two companies have bothered to get a listing. [Do you blame people from staying away with the attitude of the GMP? Rather go to a private bank to raise equity.] (28th, page 32)
736 accountants and related accounting professionals left RSA in 2003. 33 immigrated in that year. (28th, page 43)
Fortune
reported a full year’s profit of $35 million. To achieve this profit, management reclassified its long-term loans to its subsidiaries to temporary loans. This enabled it to take a $36 million profit on conversion of these loans (due to the devaluation of the dollar) to income instead of to foreign currency translation reserve! The company treated its delivery costs as a selling costs and not as part of the cost of sales so as to make its gross profit margin look a lot better than it really is. The share price stands at a PE ratio of 44! (19th, page 82)
Techtalk
SAICA has become a foundation member of EthicSA, a public benefit organisation whose mission is to promote and advance ethical practices in South Africa.
The APC is “concerned” that companies in RSA are abusing the term “operating profit” in the income statement. [Users are not concerned about where the items are placed in AFS. All they want is full disclosure. They will make their own adjustments.]
The following three EDs have been released by IFRIC:
D3: Determining whether an arrangement contains a lease, which gives guidance on determining whether certain arrangements such as some take-or-pay contracts should be accounted for as leases.
D4: Decommissioning, restoration and environmental rehabilitation funds, which addresses how to account where entities contribute to funds used to help meet those costs.
D5: Applying hyperinflationary accounting for the first time. [D5 was actually dealt with in the next Techtalk but it is covered here to keep the numbers in order.]
D6: Exploration for and evaluation of mineral resources, which is the first tentative step taken by the IASB in this area.
An amendment to the JSE regulations requires auditors to ensure that disclosures required by the JSE can be supported and are accurate (they use double negatives, e.g. are not erroneous!). If a company fails to comply with these disclosures, the auditor should provide them in the audit report.
IFAC has issued a new framework for assurance engagements other than audits or reviews of historical financial information.
May 2004 (25 Minutes)
Accountancy
The new Audit Inspection Unit of the Financial Reporting Council is gearing up to monitor the quality of the audit work carried out by the Big Four auditing firms in the UK. They do not want “to be seen to be” too heavy-handed in their approach and want to keep the costs down. [But they will be want “to be seen to be” doing their job to send a message to others so will be looking for scapegoats!] (Page 5)
The UK is battling with how to account for professional fee income. The major concern is that if they accrue revenue, tax will have to be paid at an earlier date. [This should not be a problem in RSA as “accrue” for tax purposes has a different meaning to “accrue” for accounting purposes – hopefully?] (Page 6)
High profile objections in the EU to IAS39 are delaying the endorsement of IFRS in Europe. The major objection is having to fair value derivatives and financial assets, which they say will cause unnecessary volatility in the results of companies. (Page 10)
The IASB is proposing to limit the fair value option for accounting for financial instruments to avoid it being used inappropriately. It proposes limiting fair value accounting to:
1. Financial assets and financial liabilities that contain embedded derivatives.
2. Financial liabilities whose cash flows are contractually linked to the performance of assets that are measured at fair value.
3. Financial assets and financial liabilities where exposure to the changes in the fair value of other financial assets and financial liabilities are offset, including derivatives.
4. Financial assets other than loans and receivables.
5. Items that other standards allow or require to be designated at fair value through profit or loss.
6. Financial assets and financial liabilities whose fair value is verifiable.
[I thought that we were moving to full fair value accounting? Obviously pressure is being put on the standard setters to make the income statement more meaningful. Will this be at the cost of getting the balance sheet right?] (Page 16)
Government regulations in the UK require all Plcs and their large subsidiaries to state in their annual reports the average length of time taken to pay their bills. [Company law commissioners, take note.] (Page 17)
Robert Bruce says that companies should be more questioning before they shell out on the latest management fad. He says that over the years fads with snappy names have come and gone, have cost companies a fortune in restructuring with only short term benefits, but with large fees earned by the consulting companies. (Page 22)
Chris Swinson says that risk management systems are of no use unless they incorporate independence of thought and the ability to challenge assumptions in a constructive spirit. (Page 26)
Harry Schmid, the outgoing standard setter on the IASB [I had the honour of meeting this incredible gentleman while attending an IASC meeting in Malaysia], says that the French banks are apposing IAS39 because they are afraid of transparency. He says that the Swiss banks have been applying IAS39 since 2001 so if the Swiss can do it, why not the French? (Page 45)
The UK is the only member of the EU that has opted out of the 48-hour working week. Accountants in the UK “suffer” a weekly overtime average of 7,9 hours according to the Trades Union Congress, which is calling for an end to the opt-out. [If I did not put in 85 hours a week, I would not be able to cope with my workload – I am writing this paragraph at 5.30 a.m. on a Sunday. They would put me out of business if they forced me into such a straight-jacket!] (Page 48)
Michael Goddard says that central banks and governments have so far found no effective way to monitor or control the risks posed by derivatives. Derivatives pose a major problem to the user of financial statements who has to rely on the values placed on the derivatives by management. Disclosure of value without a description of the potential risks does not help the analyst, e.g. are the derivatives collateralised, i.e. are the credit risks of the counter parties taken into account in the valuation? [One only has to try to analyse Transnet’s accounts with their embedded derivatives in their transport contracts to realise that values can cause massive volatility in the income statements of companies.] (Page 52)
Liz Loxton says that saying yes to all work in a desperate attempt to win clients and give the impression you are the master of everything is an easy and silly mistake to make. [Did you read that Hattingh?] She quotes from Lindsay Mair’s Corporate Strategy:
1. Before taking on new work, check your existing workload and resources.
2. Remember that if you have said no, do not allow persuasive individuals to talk you round to saying yes. You said no for a good reason.
3. Remember that overloading yourself could damage your service to existing clients, which could ultimately tarnish your reputation, delaying the development of your brand.
[Did you read THAT Hattingh?] (Page 64)
Finance managers will have to evaluate the IFRS requirements within the context of their company, industry and reporting strategy, which will require drilling down to supporting processes and systems to understand how alternative options will impact their business as a whole. In the period of the changeover, it may be necessary to cope with reporting under different GAAP standards (e.g. foreign exchange). Tax and deferred tax issues should not be overlooked. (Page 73)
The IASB has published a paper called “Strengthening the IASB’s Deliberation Process”. [If you have ever read the Observer Notes, you will agree that something has to be done.] (Page 79)
The IASB has announced its intention to set up an international working party to examine the fundamentals of IAS 39 with a view to replacing the standard in due course. [Can you believe it? They will never agree on these principles. Instead of changing all the time we should take a vote, take a stand and then get on with it. Chopping and changing is embarrassing for our profession. But then, I suppose, the additional fee income earned by members of the profession compensates for any embarrassment!] (Page 84)
Emile Woolf says that the corporate governance campaign has proved to be singularly useless in combating successive cycles of misdemeanours and perennially ratcheting up its rigours and its range has made no inroads in deterring rogues. He says that as long as clever lawyers and auditors are paid to sanitise crooked accounting at the behest of a corrupt option-holding management, those accounts will surely be reinvented with a veneer of legitimacy. He says that what is needed, apart from a breed of auditors returned from the nursery slopes with a smattering of what auditing actually means, is a criminal code backed by resources capable of matching punishment to crime with unprecedented swiftness – no community service or open prisons – just a long, painful incarceration and an afterlife stripped of all ill-gotten gains. [Wow! What a thought!] (Page 91)
The ICAEW’s Audit and Assurance Faculty has published new guidelines from members who compile the financial statements of incorporated entities that do not require an audit (due to recent changes in the law, there are now many new companies falling into this category in the UK.) [When CC’s become companies and private companies under certain thresholds do no longer have to be audited in RSA, we should look carefully at these new guidelines.] (Page 93)
Alternative Dispute Resolution should be considered as a more effective and cheaper option than going to court. One of the more well known processes is mediation. [I wonder how often this route is used in RSA? I only know of one person, a qualified attorney, Mr Charles Cohen, who qualified as a mediator and practices as such.] (Page 131)
Accountancy SA
Ian West sets out the rules for avoiding and coping with an investigation into your affairs by SARS. [I have never had to worry about such matters as it is not my policy to increase my wealth by saving tax.] (Page 2)
The title to his article “Why disclose information voluntary” held much promise but then was followed by a detailed discussion on the value added statement! (Page 8)
Glynnis Carthy writes on IFRS 2. [I am not going to summarise these types of articles where the information was covered in my IFRS conversion workshops. However, I will comment if new information is brought to light. There was nothing new here.] [Page 12]
Warrick van Zyl discusses the different versions of GAAP used in RSA and around the world. He makes two incorrect statements, which should be brought to your notice:
1. He says that the SA Companies Act now requires compliance with Statements of GAAP. Unless I have been in a coma over the past year, I have no knowledge that the Companies Act has changed. It does not require companies to comply with GAAP.
2. He says that it remains to be seen if the US will ever adopt IFRS. He clearly has not been following international debates. The US and IFRS are expected to converge – the US will never “adopt” IFRS. (Page 14)
Vuyo Piti talks very generally about corporate governance. Nothing to write home about. (Page 16)
The Wits Business School set out a case study about a small practice in the Western Cape. Rob Ross is leading a project to give small practitioners ideas about how to structure and run their practices. If you fit this profile, read the case study and the follow-up commentaries in later months. It is always a good idea to step off the carousel from time to time and think strategy. [I am taking Thursday of this week off to do just this for my operation – I am presently in the mountains writing MB.] (Page 24)
My article criticised the JSE for forcing companies to consolidate their share investment trusts. Not only is this in contravention of the Companies Act but it also results in overstating the company’s earnings per share and is in contravention of IFRS. (Page 31)
Penelope Webb points out that the right to punish a wrongdoer ceases on his or her death. [Thanks for this Penelope, you have given us a way out of being punished.] (Page 33)
Finance Week
Citigroup agreed to pay $2,65bn to settle a class action suit by investors who bought WorldCom stock on their recommendation. (19th, page 8)
Stephen Mulholland quite rightly complains about KPMG having been made public scapegoats by being arrested in front of the media at their offices on instructions of SARS, who later withdrew charges against them. [It is time that the authorities reclaim their professionalism and work on the basis of innocent until proven guilty. This applies to the GMP as well.] (19th, page 17)
It appears as if Vic de Klerk agrees with me that the true cost of issuing a share option is the dilution in the market value of the share. However, he misquotes me. The correct method of assessing this dilution in value is not to take the dilutionary effect and multiply it by the PE ratio. It is to build the dilutionary effect into the projection of the free cash flow attributable to the shareholders, i.e. in the case of minority shareholders dividends, when valuing the shares using the discounted cash flow approach of valuations. My latest valuation models do this. [A thought: the additional value due to the volatility of the underlying does have value to the holder of an option, but is it a cost to the company? Should one not eliminate the volatility value when calculating the cost to the company?] (19th, page 40)
Rob Newsome says that corporate governance is becoming too regulated and is losing sight of its objectives. He says that substance is more important than form and the emphasis should rather be on responsible management. He feels that management remuneration should be based on audited results and that institutional investors should share in the losses resulting from their decisions and not merely pass such losses onto their clients. [Dream on Rob, my man.] (19th, page 46)
Roy Shough says that the essence of good corporate governance is going about business the right way, ethically and equitably, managing with honesty and integrity and living up to the responsibility to the company’s stakeholders. If a company has a rotten culture of greed and self-interest, it cannot claim to have good corporate governance. He says that it becomes counter productive when boards spend too much time on governance issues and not enough time focusing on the business itself. (19th, page 48)
A lack of an in-depth due diligence is a major reason why mergers and acquisitions fail. A due diligence investigation should not only focus on risks and rewards but should also look into opportunities for the parties. The focus should be on subjects such as unrecorded liabilities, over or understated results, accounting treatment of transactions and events, asset values, forecasts, IT and other systems, management structures, roles and responsibilities, transformation policies, legal contracts, related party transactions and balances, working capital levels, condition and capacity of the plant, off balance sheet resources and liabilities, labour relations, (and the checklist can go on and on). (19th, page 49)
Financial Mail
One of the main aims of early ANC government policy was to make the regulatory environment friendlier to small business. Mr Trevor Manual has announced (10 years later) a big initiative to set up a working group to look at the interaction between SARS and SMEs. [Mr Manual, it is not only SARS that us SMEs have a problem with. You need to look into the PAAB who are trying to force SMEs to comply with IFRS, a total waste of valuable resources.] (14th, page 50)
Fortune
The accounting officer of eBay says that recognising the cost of options in the income statement as a charge is flawed. He says that companies should provide a dilution statement laying out which employees got what and how much it cost the existing shareholders. (31st, page 18)
Techtalk
The APB agreed on a dual numbering system for GAAP statements. [Note that in my notes, written in December 2003, I have the AC number first and the IAS or IFRS number second. SAICA has it the other way around.]
Circular 3/2004 has been issued giving guidance on what to include in operating activities in the income statement.
The ED on the preface to Statements of GAAP has been re-exposed as ED174.
A fourth issue has been added to appendix 2 of the circular on headline earnings. It states that all gains and losses directly attributable to the sale or termination of a business, whether or not it constitutes a discontinuing (discontinued?) operation, are excluded from headline earnings. However, all other restructuring or similar costs related to ongoing operations are included in headline earnings. [This will cause controversy.]
SAICA has issued circular 1/2004, which summarises a report released by IFAC on the background to the causes of loss of credibility in financial reporting and recommendations for rectifying the situation. You can download the full report from .
The following new auditing standards have been released by the IAASB:
ISA 240: The auditor’s responsibility to consider fraud in the audit of financial statements.
ISA 220: Quality control for audits of historical financial information. [I would have thought that this is Noah’s ark stuff.]
ISA 330: The auditor’s procedures in response to assessed risks.
The SAICA guide on derivatives, the G30 recommendations, has been withdrawn. It will not be revised.
The FSB, in conjunction with SAICA and the PAAB has issued guidance for auditors and accountants dealing with FAIS. It can be accessed from SAICA’s website.
SAICA states that the committee on limited purpose financial reporting is making good progress. [I’ll believe it when I see it.]
SAICA has set up a technical query resolution function. Before using it, read the instructions on page 22 of Accountancy SA.
June 2004 (20 Minutes)
Accountancy
The UK has announced that the operating and financial review statement will become compulsory for quoted companies from next year. Some welcome this saying that it will make corporate reporting more relevant by getting directors to explain factors that will have a bearing on likely prospects ahead. Others say that it will simply result in the publication of more meaningless waffle that no one ever reads. Over 60% of listed companies in the UK already present an OFR. (Page 1)
Deloitte, who were the main beneficiary of the demise of Andersen, has nudged PwC for the top spot in fee income globally. (Page 5)
Listed companies in the UK are facing an increase of up to 15% next year in audit fees due to the introduction of the OFR (see above) and the introduction of global auditing standards. (Page 5)
Allister Wilson, ex-Durban boy and chief technical supremo at E&Y, refers to the Statement of Recognised Income and Expenses as the SORIE. He says that it is not an apology from the IASB but should be. [You’ve got to be a South African to understand what SORIE means!] (Page 19)
Some comments on the OFR:
1. It will merely add to the work load of companies when they are busy grappling with IFRS.
2. It will result in meaningless waffle or a box-ticking exercise.
3. It will add to the information needed by analysts.
4. It will force the directors to apply their mind to the results.
5. It will reduce the amount of time the company spends asking questions about their results.
6. It will add to the problem of AFS getting bigger and bigger.
7. It will become a boilerplate set of words.
8. It will impose excessive liability burdens on directors.
9. It will result in additional audit fees.
The dangers of using emails to communicate were illustrated in the Shell fiasco, e.g. from the chairman: “I am becoming sick and tired about lying about the extent of our reserves.” Some ideas for avoiding email hell:
1. Have a policy on emails.
2. Emails should not contain slang or crude language.
3. Avoid defaming anyone.
4. Edit your emails before sending them. Clear ambiguities.
5. Never send sensitive information via email.
6. Do a spell-check.
[I recently sent an email to someone giving my personal views about a sensitive matter. It was meant only for his eyes. He sent it to everyone on his email list! Now, I say “for your eyes only” when information is sensitive.] (Page 45)
The new auditing standards will not result in a fundamental way audits are done but will require new procedures at the planning stage, a more thorough risk assessment than most firms undertake at present and a more thorough approach to fraud. The new standards will require auditors to put themselves in the position of a fraudster and then design audit programmes to ensure that fraud is not missed. [It has taken the profession a long time to meet this user need.] (Page 48)
Accountants and solicitors are being targeted by the National Criminal Service for failing to disclose suspicious transactions. (Page 61)
The IASB has issued an exposure draft to amend IFRS3 to bring combinations involving mutual entities or where separate entities are brought together by contract alone into the scope of the standard. (Page 78)
The IASB has issued an exposure draft proposing that multi-employer plans be treated as defined benefit plans, where possible. (Page 78)
The business aspects of converting to IFRS should be thought through, e.g. the implications of volatility and how this can be avoided, if possible, the effect on dividend policy, the implications for remuneration planning, etc. (Page 79)
Emile Woolf argues that there is a need for a proportional audit liability system in the UK. He feels that it is unfair to allocate the entire financial consequences to a single defendant irrespective of any rational measure of culpability. [The UK government is considering this aspect at present.] (Page 93)
Accountancy SA
The first article in this journal is an excellent one on the changes made to AC123. One of the major concerns in practice is how to change from the old to the new, especially now that residual values are to be restated each year. The main problem will arise with buildings. Do we go back and treat it as a prior year adjustment? One could probably argue that it would be totally impractical to go back over the past 10 or so years to reassess the residual values and depreciation charges and, therefore, resort to prospective application. Maybe Johan and Rieka can research this aspect of the standard? (Page 2)
Mine was the first commentary on Rob Ross’/Wits’ case study. I really did not think that it would be published (blush, blush)!. But you may find something good in the article. I took a typical professional practice and dealt with strategic matters under the headings “mission” (what do you want to achieve), “vision” (where do you see your firm going), “infrastructure” (what resources to you need to achieve it and get there), “brands” (what will make your practice stand head and shoulders above the rest) and “service” (how you can best service the most important people in your practice, i.e. your clients). This strategic system works.
Pieter Buys talks about his experience with the installation of XBRL in the pension fund industry. [This, to my mind, would have massive benefits for analysts. Whether it would work for a diverse number of different companies remains to be seen. But it is really worth a try. I will be doing some work on it in the December break.] (Page 10)
Ilsa French talks about IFRS 4. [A summary of this statement will be sent to IFRS conversion workshop participants in January of next year.] (Page 14)
Modestino Saverio Saladino takes a superficial look at the tax implications of BEE deals. [People who enter into these deals now will get tax shocks later down the line when SARS starts querying, among other things, donations tax.] (Page 18)
My article was about a company having to disclose in its own financial statements the amount of sales between its holding company and its fellow subsidiary. It appears as if members of our profession cannot get proactive and anticipate these types of problems until the time comes. Do not tell me that I did not warn you! (Page 29)
Penelope Webb played a dirty on us. Her article was about the use of commas in law. She gave the following example to punctuate: “Charles the First walked and talked half an hour after his head was cut off.” I spent an age trying to fit commas (not full stops) into this sentence to make sense of it. The answer was: “Charles the First walked and talked. Half an hour after, his head was cut off.”!! (Page 31)
Financial Mail
The Government has published a policy paper suggesting an end to the distinction between close corporations, private companies and public companies. [If there is to be no more distinction, will audits be required of all companies in future? If so, the auditing profession will expand like crazy and the CFA profession will be destroyed. If previous private companies will no longer have to be audited, the CFA profession will expand like crazy and the CA profession will be seriously affected. I hope that they are going to think this one out carefully!] (25th, page 38)
SAICA is of the opinion that the adoption of the standard on share based payments rules out any potential exemptions from the standard for BEE deals. [Standard Bank had an opinion given to them that the standard does not apply to BEE deals!] (25th, page 40]
Only six of the 28 business schools in RSA have been granted full accreditation, i.e. those attached to Wits, Stellenbosch, UCT, Pretoria and Unisa and the Gordon Institute. (28th, page 26)
Fortune
Wall Street needs to re-invent the way it does research if this function is to produce money in the future. Questions are being asked whether research departments add value to the investment process. One research director sent a letter to clients stating that they will no longer be issuing buy, hold or sell decisions but will express their opinions “the old fashioned way, using the full richness of the English language.” They are also going to abolish the quarterly earnings commentaries, which serve no purpose, and will only issue a report when there is something important to say. They will focus on investment ideas and proprietary information flow that is not easily duplicated by competitors. This will stop frenetic buying and selling when any minor item of news becomes available. [I wonder? This is how these guys make money – the more they churn the investments in a portfolio, the more they burn the wealth of the investors.] (14th, page 62)
As a result of Eliot Spitzer uncovering one of the nasty little secrets of the fund business, i.e. diverting a portion of brokerage commissions to fund managers, demands are now being made to identify how much of these commissions is going towards research. In the industry this is called “soft-dollars”. One of the reasons that this system should be exposed is that “if you cannot measure it, you cannot manage it.” For years this commission system has allowed all sorts of pointless research to exist. Moves are afoot to look at the whole research activity in the industry to make it more effective and cheaper for the investors. (14th, page 66)
Eliot Spitzer has set up strict new rules for research departments, e.g. analysts may not attend meetings between investment bankers and clients when negotiating underwriting deals, analysts have to certify that all the opinions in their research reports reflect their personal views, etc., which means that they can no longer be paid for helping to generate banking deals. However, one cannot legislate against immorality and loopholes will probably be found and used. (14th, page 67)
A recent survey by CFO Magazine found that since 2001, 20% of financial executives said that they felt more pressure to use tricky accounting methods to make results appear more favourable and 50% said that they felt the same amount of pressure as there was three years ago. A study from Duke University found that while only 8% of CFOs would willingly use accounting tricks, 80% would decrease discretionary spending and 55% would delay new projects to keep earnings on target. (28th, page 13)
Some points from a delightful article called “A concise history of management hooey”:
• Management will never get this management thing completely figured out. They will constantly suspect that somebody they have just heard about might finally have the answer.
• Some management techniques are so powerful that they have endured to this day: linear programming, statistical theory, precise cost accounting.
• Some management techniques were so stupid that they did not survive the first enthusiastic acceptance: ink blots, conglomerates, T-groups, quality circles.
• The repayment of money borrowed is worth less than the monies borrowed. This only worked in periods of inflation.
• Paying management excessive salaries even if the market does not react to the superb performance of these super humans.
• Try this for size: call meetings at 9:51 and 2:19 to train people to show up precisely on time – work in S.A.??
[Recently an asset manager was asked by a radio announcer: “What do you think of the concept of the triple bottom line? After a pregnant pause she said: All I worry about is the ability of the company to produce earnings!” One day soon we will scrap score cards, EBITDA, reengineering, etc. and get back to basics!] (28th, page 58)
Techtalk
Circulars B.1/191 and B.3/191 have been withdrawn and a new guide on reporting in terms of section 20(5), material irregularities, has been issued. Go to PAAB’s website to access it.
IFAC has issued a new paper on anti-money laundering setting out the role of the profession in detecting money laundering and implementing controls and safeguards against it. It can be downloaded at no cost from store.
SAICA has issued ED 176 called strengthening the IASB’s deliberative processes.
If you are competing with a non-qualified accountant for the audit of a school, read the story on page 26 dealing with the conflict between the PAA Act and the S.A. Schools Act regarding who can do such an audit.
July 2004 (20 Minutes)
Accountancy
Members of the ICAEW voted 74% in favour of Practice Review [as we know it in RSA] and 77% in favour of continuing professional development. 17% of the members took part in the vote which means that just over 10% agreed to the two proposals. [It is disappointing to see that CAs in the UK also suffer from the sleep syndrome. With the new thresholds for audits in the UK, one can expect many qualified CAs to give up their registration certificates in favour of operating without big daddy watching over their shoulders. Anticipate the same to happen in RSA if they cancel audits for SME companies.] (Page 5)
France has found support from Italy, Spain and Belgium to reject IAS39. Six other EU countries, including Germany, are still undecided but the ever optimistic Sir David Tweedie is confident that the issues will be resolved. (Page 8)
Ken Lever says that the IASB is speaking a different language to managers of business with their excessive emphasis on fair values in the balance sheet to the detriment of the usefulness of the income statement in portraying the performance of companies. [We must start working on de-linking the balance sheet from the income statement. There is no reason why the balance sheet cannot show fair values of assets and liabilities and the income statement cannot fairly present the performance of the entity.] (Page 8)
The US Public Company Accounting Oversight Board will not inspect foreign auditors auditing companies registered with SEC but will rely on the local regulators to do this job. (Page 14)
IFRIC has issued its first Interpretation 1, Changes in existing decommissioning, restoration and similar liabilities. The interpretation deals with three types of changes to the existing liability:
1. A revision of the amount required to settle the obligation: This amount is added to the cost of the asset and depreciated over the remaining useful life of the asset.
2. A revision of the discount rate: This amount is also added to the cost of the asset and depreciated over the remaining useful life of the asset.
3. The unwinding of the discount: This amount is charged to income as a finance cost. (Page 15)
The UK has published its new rules for continuing professional development (CDP). These rules replace the old continuing professional education (CPE) rules that required members to accumulate points by attending courses. The new system, which is more flexible and makes a lot more sense, works as follows:
1. Reflect: Consider the expectations of you in your current role.
2. Take action: Undertake development activities that will allow you to meet what is expected of you. This might be attending a course, reading a book, researching an area that is new to you or some other activity.
3. Consider the impact: Have the activities properly allowed you to meet your expectations or do you need to do something else?
4. Record: Keep a record of your inputs and achievements.
5. Confirm: Make an annual declaration to the Institute.
These rules are similar to those of the CFA Institute. [These Brits sure do have their heads screwed on right.] (Page 44)
Practice Assurance may have won the vote but it remains to be seen whether it will win the hearts and minds of those you are going to be subjected to the new system. Those who opposed it will want to ensure that the Institute keeps to its promise that the scheme will be sensible and supportive. Some CAs are so convinced that this will disrupt their lives that they are prepared to abandon their right to audit and join the ranks of the unregistered CAs. (Page 59)
The new practice assurance objectives in the UK will be focusing on four standards:
1. Laws, regulations and professional standards.
2. Client acceptance and disengagement.
3. Competence.
4. Quality control. (Page 60)
The ICAEW has voted to introduce a new certification programme in IFRS. The programme will be supported by a comprehensive learning package and will provide support and updates. [Hey, stop swiping my ideas!] (Page 73)
The ED on the suggested changes to AC116/IAS19 proposes that an additional alternative for treating actuarial gains and losses will be to take them, in full, directly to the statement of changes in equity and not to recycle them back to income. The IASB does not like this idea but at least the balance sheet will not be compromised by following this approach. [I still cannot understand why they cannot take the full actuarial gain or loss to the income statement each year. The income statement has already been destroyed by fair value adjustments. One may as well do the job properly. One may even find that this will have a portfolio effect on income and reduce the volatility!] (Page 83)
With the audit threshold in the UK now standing at £5,6m, many CAs will think about cancelling their audit registration. This will relieve them of practice review, etc., i.e. switch off the big daddy oversight regulations. [Tempting!] (Page 86)
Risk assessment already lies at the heart of every audit but the new auditing standards deepen and broaden the requirements, i.e. they require thought and the audit file should provide evidence of such thought. [Did auditors not in the past think?] The four-level approach to risk assessment is:
1. Identify risks arising from the entity and its environment, including relevant controls, by considering these factors by reference to classes of transactions, account balances and disclosures in the financial statements.
2. Relate the risks that have been identified to what can go wrong at the assertion level.
3. Consider whether the risks are of magnitude that could result in material misstatement of the financial statements.
4. Consider the likelihood that the risks could result in a material misstatement of the financial statements.
Based on the above thought process, consider specifically the design and implementation of the controls that could reduce those risks. The programme of work is then designed in such a way as to respond to the findings. [I find it scary that this is “new” thinking! I used to teach this audit procedure 10 years ago.] (Page 92)
The trend in the UK is away from casual dress at work to a more formal way of doing business. [Could this be the result of the demise of Arthur Andersen?] (Page 125)
People seem to support environmental issues at home, but not at work. Mike Kelly, KPMG’s director of corporate social responsibility says that taking the stairs rather than using the lift can save enough energy to power a light bulb for 200 days. (Page 125)
Accountancy SA
Zwi Y Sacho writes a brilliant article on BEE and IFRS 2. He takes the reader through different BEE structures and illustrates how the statement would apply to them. A point he makes is that it does not matter whether the company or its share investment trust gives the grant, it is still caught by IFRS 2. He concludes that IFRS 2 has its flaws but is moving in the right direction. (Page 2)
Harvey Wainer gives rather a poor explanation as to why share trusts should be consolidated. His whole argument is based on “it is virtually inconceivable that a listed company could have a share incentive trust that is not controlled by it. [Living in the past: GAAP = Logic! Try AC412 paragraph 6?] (Page 13)
Bernard Agulhas tells us that the AASB of the PAAB has adopted the International Standards on Auditing with effect from 1 January 2005. He says that as we have used their standards in the past, there will not be a major shift in methodology. [However, you had better take time off to check your procedures against those of the IFAC to make sure that you do not get caught out by Practice Review down the line.] (Page 14)
Gerhard Badenhorst reminds us to get our VAT invoices in compliance with the new regulations coming into effect as from 1 March 2005 – the major item being the customer’s VAT number. (Page 20)
My article was a sarcastic reply to the reaction I got to my comments on related party disclosures. It also contains my top 10 hit parade of the stupidest things in GAAP. (Page 32)
Finance Week
Vic De Klerk quotes Warren Buffett’s view that shares should only be bought back by a company if the price is below its “intrinsic value”. Vic interprets this to mean the company’s net tangible asset value. [I do not believe that this is what Mr W.B. means. Recently I had to value a transport company’s assets. The vehicles were in the books at R3 million but the value of the vehicles was in excess of R15 million. When looking at the effect of buy backs, one should look to the “intrinsic value”, i.e. the real value, and not the net asset value per the balance sheet. If cash is sitting in the balance sheet earning 7% p.a. after tax and the company has no use for this cash and the shareholders are looking to a 12% p.a. return on their investment in the company, the “intrinsic value” of the share will increase if the money is returned to the shareholders by way of a share buyback.] (7th, page 11)
“It never ceases to puzzle me as to where these worthies find the brass balls to go on and on ripping off directors’ fees while presiding over disasters of their own making. They appear to have no shame.” (Mr Stehen Mulholland) [Beautifully said, sir.] (21st, page 33)
Financial Mail
Brian Molefe, CEO of the Public Investment Commissioners, is against option deals for BEEs. He says that empowerment must take place now. A promise for it to happen in five years time is not acceptable. He also says that he is against SPE transactions as they have failed. When asked how transaction deals should be financed if not done through options or SPEs, he avoided the question. [If not by options or SPEs, the obvious solution, if there is no funding available, is by donations or expropriations!] (2nd, page 17)
A summary of the types of BEE deals being made at present is:
The giving of options:
Pros: No capital required and shareholders are not too concerned about losing value as the BEE partners have to add value for options to be valuable [And if turns sour, BEE partners walk away unscathed!]
Cons: Requires growth in the share price to be effective and empowerment does not happen immediately [Caught by IFRS 2?]
Equity financing (merger with or takeover of company using own BEE company):
Pros: No funding is needed
Cons: Little BEE equity around and if the deal goes sour, the BEE company loses
Debt financing (various structures available):
Pros: Cheaper option
Cons: Financing for these deals is drying up – becoming difficult to find financiers willing to take these risks. And there is a tax problem if interest bearing debt is raised.
Vendor finance:
Pros: Debt is easier to raise
Cons: Weakens the company’s balance sheet and section 38 is a constraint (financing the acquisition of one’s own equity)
Non-funded deals: (voting deferred shares are created but not owned at first – the shares are transferred as profitability hurdles are met):
Pros: BEE partners can influence and help create value
Cons: Can be delay in giving shares
The estimate of BEE finding is R90b over five years. [And thereafter?] (16th, page 38)
Fortune
Guidance is given on how to find your “number”, i.e. how much you need when you retire. Remember that this is a US scenario. I have translated the amounts into rand using an exchange rate of R6,50, today’s rate. If you are a 45 year-old making R650 000 p.a. and you plan to retire at age 65 your number will depend on your lifestyle in retirement, e.g. if you need x% of your income in retirement your number is:
If x = 60% will need R12,7 million
If x = 80% will need R17,0 million
If x = 100% will need R21,3 million
[These figures are really scary. Do not get too depressed. Remember that there are always ways of making ends meet such as selling your posh house in your home town, investing the proceeds in bonds and buying a home in Pofadder.] (Page 36)
When looking for the next winning company in which to invest, determine whether it:
1. Focuses on the customer needs.
2. Differentiates between its customers.
3. Is accountable to its customers.
4. Is managed to achieve shareholder value.
5. Constantly investigates what the customers want. (Page 55)
Tiger 21 is a fascinating idea! Michael Sonnenfeldt formed a group called The Investment Group for Enhanced Results. They meet periodically to dissect and deconstruct the investment portfolios of the members of the group. They are highly critical of each other, have fun but importantly pool knowledge for enhancing their investments. Some of the ideas that were thrown about when Fortune attended one of the meetings were:
1. Why is your portfolio so complicated? Get rid of the small stuff.
2. Are you trying to be a portfolio equity manager?
3. Why don’t you have any real estate in your portfolio?
4. Why don’t you think about opening your own business?
5. What are you really looking for in life?
This is not an investment club where each person puts in money and watches ten other clowns vote to invest it in rubbish. It is also not handing your investments over to someone who has their own interests at heart, e.g. churn to generate brokerage income. It is a pooling of knowledge to help each other make better investment decisions. [Recognise the CawB team idea here? I thought that my idea was new. No idea is! I will be resurrecting the CawB team idea next year when the IFRS workshops have slowed down.] (Page 58)
Taxgram
Because of the requirement in AC133 to account for derivatives using fair values, reference to GAAP has been deleted from section 24K, which deals with the timing of the incurral and accrual of amounts in respect of interest rate swaps. (Issue No. 6, page 1)
Techtalk
The Financial Intelligence Centre has issued a guidance note pertaining to the identification of clients by accountable institutions, which can be accessed at .za.
SARS has issued a draft interpretation note stating that a deduction will not be allowed where shares are used to settle a consideration.
SAICA will soon be issuing a draft policy document on continuing professional development. [Let’s hope that it follows the UK logical approach.]
August 2004 (20 Minutes)
Accountancy
The EU is proposing to partially endorse IAS39, i.e. without hedging and derivative rules. This will undermine the original goal of transparent and comparable accounts across Europe and will threaten future convergence with US rules. [I get the impression that non-Europeans do not listen carefully to what the Europeans are saying. The hedging rules in IAS39 ARE stupid, accounting for embedded derivatives in supply contracts IS stupid, going to war in Iraq instead of going after the real culprits of 9/11 WAS, in retrospect, stupid.] (Page 6)
The UK government may very well bring in measures to limit audit liability. (Page 12)
PwC provides a course in the UK designed to advise people how to survive decades doing a high pressure 60-hour-a-week job without having a heart attack, divorce or mental breakdown. One of the exercises asks six questions:
1. Are you trying to control too much?
2. Can you not let go of detail?
3. Are you too enthusiastic for your own good?
4. Are you too available?
5. Do you procrastinate?
6. Do you have hero tendencies?
[Hey, I passed (answered “yes” to) five out of six (failed No. 5)]
They go on to give six ideas for better partitioning between work and private life:
1. Draw a line around the job.
2. Do things you value and shape your week.
3. Don’t take work attitudes home with you.
4. Close your working day.
5. Be here and now – occasionally.
6. Plan non-work activities.
[If I followed these rules my business would fail.] (Page 35)
“What I have learnt is that if you allow your diary to be controlled by people who want to meet with you, you can end up with meetings all day, which would then make you very ineffective in terms of what you’re trying to do so I block out time to allow me to focus on issues at hand.” (Gary Stapleton, page 37)
Karel van Hulle of the EU told the IASB in public that its performance was not good enough. He lost his temper with Sir David Tweedie telling him that he was not running the IASB as an international organisation. Jim Leisenring’s retort was that “you want us to hurry on the things you want, stop on the things you don’t want, and go slow on the things you don’t care about.” [What are people doing in these high positions if they cannot be civil?] (Page 68)
The IASB has decided to have a go at accounting for SMEs. It believes that IFRSs are suitable for all entities, listed, unlisted, large and small. They say that the financial statements of SMEs should be comparable across national boundaries! [What chance do we have of anything coming out of this body that makes sense with these kinds of pronouncements? If RSA forces all CCs to become companies and then forces all companies to comply with IFRSs, they will destroy small business. I, for one, will throw in the towel.] Of the 30 countries that responded, 24 said that recognition and measurement simplifications were needed. [Will they ignore the majority, as they initially did in RSA when we tried to get this project up and going?] (Page 75)
Isobel Sharp, a Deloitte partner, says that one can expect IFRS for SMEs to run into over 500 pages! [There you go you small practitioners with all that spare time at your disposal – a way to full the gap!] (Page 76)
Emile Woolf says that readers of accounts have learned to live with the defensive formulaic cure for insomnia that now passes as an audit report by not reading it but be becoming more adept at finding the bits that matter. (Page 77)
Three EDs propose amendments to IAS39 [will they never stop?]:
The first called “Transition and initial recognition of financial assets and financial liabilities” permits prospective adoption as an alternative transitional provision for initial recognition of the fair values of financial instruments. The reason given is that retrospective application of the new standard would have been expensive and difficult to achieve.
The second called “Cash flow hedge accounting of forecast intra group transactions” proposes to permit the designation of a highly probable forecast external transaction to the group to be a hedged item where the hedged instrument is an intra group transaction where the exposure will have an effect on the profit or loss of the group.
The third called “Financial guarantee contracts and credit insurance” proposes that the requirements to initially measure guarantee contracts at fair value be extended to those guarantee contracts that meet the definition of insurance contracts. (Page 83)
Accountancy SA
Alison White deals with the new IFRS 3. [There is nothing new here – we covered all of the points in our IFRS conversion workshops.]
Jackie Arendse writes a much more in-depth article than the previous one on the tax implications of BEE transactions. If you are involved in this area, read it. (Page 8)
Roger Sinclair is getting over excited about his topic “brand names”. He gives the impression that great strides have been made in accounting for them. He picks up on the fact that intangible assets have now to be identified, recognised, measured and accounted for in a business combination and uses the opportunity to rehash the points he has made over and over again in various publications. (Page 10)
Johan Oberholster and Rieka von Well do a good job in identifying the changes that have been made to AC108 and AC107. All these points were covered in our conversion workshops. However, they missed one important point: it is now going to be compulsory to disclose cost of inventories (sales) during the period. This was optional in the past. They also did not debate the problem with what to disclose in the note regarding write-downs of inventory. If a company takes inventory twice a year, does it have to add the two write-downs or does it only disclose the write-down of inventories at the end of the year. The standard uses the word “in” not “at the end of the period”. (Page 13)
Neil Harvey writes an interesting article on managing a turnaround of an entity. He looks at how turnaround management differs from on-going management, at the causes of business declines (I am amazed that he did not mention the strengthening in the rand as a cause, but that is what happens when you source information from overseas for application to RSA) and at how to do a viability analysis and implement the turnaround strategy. He welcomes a process in RSA similar to the US’s Chapter 11 protective bankruptcy model. He points out, however, that financiers may not be keen to finance turnarounds in RSA due to a lack of experience in these situations. (Page 16)
Linie Engelbrecht argues furiously for not having audit rotation. Although I agree with her sentiments, I find some of her arguments to be illogical. For example, one must wonder what would have happened had Deloitte taken over the full audit of Parmalat. I am sure that the problem would have been picked up sooner. She also quotes statistics in the US that show that audit failures happen three times more often when an auditor was performing his first or second audit as compared to the third and subsequent audits. This makes sense – why do you think the previous auditor dumped the client? Witness a company such as Tigon – I know of at least three major firms that Tigon approached to do their audit and, when they saw what was involved, ran. Possibly under the new money laundering and whistle blowing laws these things will now be discovered without having to rotate auditors. That is, assuming that the auditors adhere strictly to the ethical rules of their Institute and the rules of the law. (Page 21)
Rob Ross gives some excellent ideas for strategically managing a small audit firm. As mentioned earlier, take time off to consider his suggestions. [Two things I do not agree with are attending a time management course (there are excellent tapes one can listen to and/or books one can read on this topic) and attending a speed reading course (the kind of work we do cannot be sped-read – rather develop a sound strategy for reading.)] At the end of this issue of Mafia Buzz, I have given you some ideas about time management and reading strategy.] (Page 27)
Penelope Webb refers to a case in Port Elizabeth where a valuation of a private company was challenged by SARS. The auditor arrived at a value of R190 000 whereas the court and SARS came arrived at R1,6m. The auditor could not justify his value other than to say that he was trying to help his client. Question: Why has the PAAB done nothing to bring this auditor to account? This was a high profile case that clearly brought our profession into disrepute. PAAB’s apparent inactivity in this matter is doing further harm to our profession. (Page 31)
My article was written to give guidance to Namibia to formulate small gaap for their members. It will be interesting to see whether this matter is pursued. (Page 33)
If you are to write part 1 of the Q.E. next year, take time off to study the articles from page 49 to 55: study them carefully and incorporate the ideas into your plan of action.
Business Day
Sanchia “Temkin states that it is envisaged that close corporations will disappear because of the uncertainties that have arisen relating to the interpretation of the Close Corporation Act. [Funny, but I was the 23rd CC to be registered and I have never had cause to look at the CC Act. I think that this is a lame excuse to make life difficult for SMEs.] She goes on to say that this corporate law reform may have unintended consequences. [If people pre-thought out the consequences, they would not be surprised by unintended consequences, e.g. destroy the whole of the CFA profession? Or is this intentional?] She says that having public companies, private companies and close corporations is confusing to the layman. [I am sure that having income tax, value added tax, secondary tax on companies, donations tax, estate duty, etc. is very confusing to the layman. Are they also going to do away with these taxes because of the confusion caused?] She says that disclosure and accurate reporting are paramount to good corporate governance, e.g. compliance with black empowerment and environmental laws. [Lady, what about providing jobs for the unemployed? Overburden SMEs with all this junk and you will put them out of business.] She says that there are 1 000 primary companies, excluding subsidiaries, in RSA. [Lady, get your facts right!] She states that companies in the UK with turnovers of more than £1m do not have to have auditors. [Your information is about 10 years out of date, Sanchia.] (Real Business) [Get real!]
Finance Week
Bristol-Myers Squibb was fined $150 million by SEC for inflating sales, $50 million of which goes to a shareholders’ fund. (11th, page 7)
Mr Strephen Mulholland discovered that he was paying fees of R394 to his financial advisor on income of R957 from an annuity earned from a certain financial institution, i.e. 40% of the income. He says that he has not heard from his financial advisor in years. The investment in question is an equity linked life annuity invested 50/50 in equities and the money market. [I wonder if Mr SM ever did a proper due diligence on this investment before making it. I also wonder what kind of return it is earning after all the hidden fees. If R394 is only the advisor’s fee, what about all the other fees? I wonder?] (11th, page 15)
Commentary on the adoption of IFRS: “One of the basic valuation techniques is the dividend discount model. If dividends become more difficult to forecast because income is more volatile, this model will become redundant. As a result, there’s likely to be increased focus on discounted cash flow and free cash flow valuations. [Question: if income is more volatile making dividend projections difficult, why would cash flows not be difficult to project? Surely companies will not change their dividend policies because of meaningless journal entries that go through income? Surely intelligent analysts will be able to see through the income statement volatility?] (16th, page 14)
Garth Coppin says that the introduction of IFRS could well lead to a new industry that will interpret financial statements for investors. [He must have read my intentions!] (18th, page 14)
With all the new regulations coming into force (e.g. the GAAP Monitoring Panel), the new auditing standards and the introduction of IFRS the auditing professional is having a field day – audit fees are expected to increase by, on average, 40%. With an annual decrease in the number of registered auditors, the hourly costs can be expected to soar. As an example, Nedcor’s audit bill totalled R93 million for 2003! (25th, page 34)
Financial Mail
It now transpires that Transnet executives were in favour of rand financing but national treasury insisted on dollar financing for a large portion of the acquisition of the new fleet because of the need to attract foreign capital to RSA. [I am afraid that I cannot work this one out!] A senior executive said that nothing happens at Transnet without national treasury having a hand in it. When hedges were making money, they did not say that it was reckless. They blew the whistle only when it became apparent that there would be a huge loss. [Someone needs to write a book on this saga.] (27th, page 42)
Fortune
The following letter was published in response to the article entitled “The number” – see above – in a previous Fortune:
“I have always tried to live by the Talmudic precept that states a rich person is one who treasures what he has. I have saved rather than acquired, because it is the way I was brought up and because my self-image is not tied to a bigger house or an upmarket car. When my husband retires next year, I will continue to work, not for financial reasons but because I believe I can still be of value. For those who need more and newer possessions, there may never be enough money – there may never be a number. [So there really are other people like this out there!] (9th, page 9)
Techtalk
SAICA has changed its Code of Professional Conduct by stating that a partner on an audit may not participate at all in an assignment for two years after being rotated off.
New guidance for auditors on the audit of attorneys trust accounts has been issued to replace and update similar guidance previously issued. It can be downloaded from SAICA’s website.
IFRIC 1: Changes in existing decommissioning, restoration and similar liabilities was released in June 2004.
September 2004 (35 Minutes)
Accountancy
It was the single-minded pursuit of growth and profit that caused problems a few years ago for the big accounting firms. Those individuals who cast aside ethics and honesty in their greedy pursuit of these ideals tarnished the reputation of the whole. (Chris Quick, page 1)
A proposed change to the UK’s money laundering rules would allow clients to discuss potential breaches of the rules with accountants without fear of prosecution. (Page 5)
The demand for quality candidates is high, not just within the accountancy firms but also among banks and financial services firms. With the recent downturn in the economy staff numbers were reduced. However, with the advent of SOX, IFRS and the new auditing standards, firms are now desperate to find staff. (Page 10)
The UK’s Companies Act, which is presently making its way though parliament, presently prohibits auditors from agreeing a pre-arranged limit on liability with clients. There is a campaign in the UK to limit the liability of auditors. However, this seems to have stalled. The DTI is in favour but other departments, notably the Treasury, are not convinced. (Page 11)
ED 7, Financial Instruments Disclosures, will not be part of the IASB’s 2005 platform. It will apply to annual periods commencing on or after 1 January 2007. It will replace IAS30 and IAS32. However, the IASB intends to encourage early application to avoid entities having to convert over twice in two years to different GAAP. This ED is still in the commentary phase. (Pages 14 and 93)
Chris Swinson is of the opinion that politics should not enter into standard setting. The European banks are arguing that the IAS rules on hedge accounting will provoke strong volatility in financial statements and are declining to endorse these provisions. (Page 28)
Pharmaceutical giant AstraZeneca, audited by KPMG, has the fastest sign-off record being 29 days this year. The FTSE 100 average is 58 days. (Page 37)
Audit fees are due to increase because of all the new changes taking place and especially if the UK government does not cap the liability of auditors. Auditing firms are battling to get insurance in the UK. (Page 38)
Paul Denvir sets out the four stages of leadership skills and the key capabilities/attributes in each stage:
Stage 1: Self Management
• Self awareness
• Self control
• Energy
• Goal orientation
• Doing the important
• Achievement motivation
• Trustworthiness
• Attitude to setbacks
• Self belief/self confidence
• Working with others
• Interpersonal skills
Stage 2: Leading peers and Project Teams
• Empathy/interest in others
• Influence/persuasion skills
• Negotiating skills
• Conflict resolution
Stage 3: Leading and Managing Others
• Empowering others
• Motivating others
• Consistency and integrity
• Setting the example
• Measurement
Stage 4: Leading the firm
• Selecting the leadership team
• Tuning into the corporate will
• Listening to clients
• Willingness to lead change
• Setting a vision
• Personal projection – vision articulation
• Personal humility (Page 60)
The second most important element in determining the value of an option after the volatility is the option’s expected life. Option pricing models use the contractual life. However, the IASB would have had to build some sort of a discount factor into the value to take into account that most employee options have a vesting period. They overcame this problem by requiring the option to be valued using expected life rather than the contractual life. The factors one would have to take into account in arriving at the expected life are:
1. The vesting period (the expected life is unlikely to be less than this period).
2. The price of the underlying instrument (once in the money, it is more likely to be taken up).
3. The employee’s position in the hierarchy (the lower down, the sooner the options are expected to be exercised).
4. The volatility (the higher the volatility, the earlier the options are likely to be exercised).
5. Past experience.
For small minority shareholdings in unquoted companies discounts for non-marketability of 70%-80% are quite common. (Page 89) [I find this really fascinating. We seem to go to about 30% in RSA.]
Each month the journal targets a sector for discussion on how IFRS will affect the accounts. This month it was the software industry. Here are things to watch out for:
Revenue recognition: How to account for the various elements of a typical software transaction – hardware, software and support.
Development costs: How to account for software development and client tailoring costs and how to test for impairment thereof if there is an indication that there is an impairment indicator.
Intangible assets: How to account for all the new forms of intangible assets on a takeover, how to arrive at their useful lives and how to test for impairment.
Employee compensation: How to measure and account for share options and other compensation schemes. (Page 90)
A 602 page ED on ISAs (auditing standards) has been published. It is expected to apply for periods commencing in December 2004. (Page 98) [Feeling overwhelmed?]
It is inevitable that some year 2005 accounts will be delayed and some audit reports will have to be qualified with the introduction of IFRS next year. [UK yes, SA no because we are clued up!?] Companies need to carry out a comprehensive analysis of their transactions and exposures, different accounting policies will have to be formulated and more extensive disclosures will be required. Auditors will have to be retrained to be able to cope with the additional audit risks. (Page 100)
Emile Woolf [this man is super!] states that SOX has done the business community a great service in demanding that auditors go back to basics and stop cutting corners by invoking risk-based strategic system methodologies and other euphemistic smokescreens that merely mask what is more accurately described as “procedureless audits”. But this comes at a huge cost. General Electric and BP complain that governance compliance in all its forms will cost $30m and $125m p.a. respectively. At $300 an hour, $30m gives 100 000 hours of high quality audit service. He asks: “What, pray, were their auditors doing previously?” (Page 101)
Under SOX auditors may not provide bookkeeping, appraisal and certain other non-audit services to their audit clients. Tax services may be provided with the approval of the audit committee. However, the US is re-looking at the provision of tax services. (Page 111) [This will be a major blow to the big four, some of whom earn more fees from tax services than from audit services.]
Dr, Trisha Greenhalgh [she is also fantastic] deals with the problem of “groupthink”. Freud defined a group as an “aggregation of individuals all in the same state of regression”. His theory is that members relinquish their individuality and identity through transference with the leader or figurehead. Internal conflicts between members have evolved a natural human tendency to give ground, compromise and line up behind a leader. When working in a group we feel good when there is agreement, a sense of common purpose and someone in charge with whom we tend to fall subliminally in love. The leader gets off on the confidence that others place in him or her and unconsciously emanates a growing air of authority and success. The group constructs “evil threats” beyond its boundaries, which it sets itself up to fight thereby strengthening its identity. The bigger the threat becomes in the minds of group members, the stronger and cosier the group itself feels. Such a group is inherently resistant to both internal dissent and external criticism, since these will both induce a sense of group panic. Pressure to conform in such groups is usually profound and leads inexorably to a shared sense of unanimity, invulnerability and moral blindness, in which poor decisions are irrationally produced and fiercely defended. (Page 146) [SAICA and the PAAB should avoid this at all costs!]
Accountancy SA
Pieter von Weilligh and Maretha Spies believe that some audit oversights can be prevented if experienced auditors spend more time with the client during audit planning and execution and share relevant information amongst audit team members and basic audit principles are properly applied. These basic principles are often neglected due to the time constraints [meeting budget]. (Page 5)
If you are confused from all those letters in Finance Week on how to calculate the capital gain on the sale of a property, go to the article on page 8 by Alex Prettenny and Jackie Arendse. They have clarified the situation.
A PwC survey revealed that in India 75% of analysts evaluate company performance by the use of free cash flow. [I will never understand why analysts do not use a holistic approach to financial analysis! They are always looking for the magic wand. There is none!] Fitch has introduced a cash flow adequacy ratio called CFAR that compares a company’s average net fee cash flow over the past three years with the average annual principal debt maturing over the next five years. The higher the CFAR, the stronger is the credit rating. [This is very similar to the ratio Prof. Andrews created a few years ago, which I converted to the “liability settlement ratio”.] The authors suggest that disclosure of “free cash flow” be a requirement of GAAP. [I believe that it is more important to give analysts enough information to calculate this measure and let them do it. Information required would be:
▪ The portion of the cash on hand that is not necessary for the operation of the business.
▪ The cost of replacing property plant and equipment as apposed to investment in expansion PPE – this is not compulsory at present.
From this information and existing disclosures, the analyst would be able to calculate his or her own projection of free cash flow based on his or her projected increases in revenue.] (Page 12)
Rieka von Well and Johan Oberholster continue with their excellent series dealing with the changes to the standards. This month they deal with AC105, leases. (Page 16)
Jan Dijkman deals with the sticky problem of whistle-blowing. [I have a simple solution to this problem: “Don’t”! I know that it is the coward’s way out but why try single handed to save the world and in the process destroy your life? My morals only go so far.] (Page 25)
Adrian Miric sets out errors that can occur in spreadsheets. [Don’t tell me!] Some problems highlighted are:
1. Copying and pasting where there is absolute and relative referencing.
2. Inserting columns and rows.
3. Deleting cells.
4. Overwriting hidden rows or columns. (Page 28)
And where is my article? I was two days late so lost out!
Business Day
In a special report published in BD it was found that 83% of fraud cases do not get to court, 5% result in guilty verdicts and 1% end up with not-guilty verdicts [I have a problem with the maths]. Nic Frangos says that the Scorpions and police are ill-equipped to understand fraudulent financial engineering and the prospect of criminals ending up behind bars is extremely slim. Stefan Grobler says that authorities are hampered by the fear that high-profile businessmen will act against them so have to ensure that every “i” is dotted and every “t” is crossed. Criminologists state that the three most outstanding features of white-collar offenders is that they are intelligent, manipulative and do not see themselves as criminals. Captain Ronnie Naidoo says that the police are dealing with more than R1bn of crimes involving auditors and 15 000 complainants. (13th, page 4) [The Scorpions are under pressure to get some successes on their record. Fortunately, in this country, the judiciary is a separate organisation so the police really have to work hard to achieve success, i.e. we are protected from the innocent being found guilty.]
Suresh Kana of PwC says that as a result of the new auditing rules about to be implemented, there will be an increased need for experience and effort with a resulting increase in costs and audit fees. (13th, page 16)
“SAICA’s preliminary view is that the objective for such entities (SMEs) would be the same as for any entity complying with international financial reporting standards. This would be high-quality accounting standards suitable for SMEs on a global basis.” (13th, page 16) [It is absolutely essential for some mythical user of financial statements to compare a Colesberg butcher’s financial statements with a Rotterdam jeweller’s financial statements.]
SAICA will submit its views (on SME accounting) which have had broad representation from all stakeholders. (13th, page 16) [Have you been consulted? Or are they going to use the comments of the over 2000 people I surveyed a few years ago? Just kidding.]
Barend du Plessis (of Sonnenberg Hoffmann Galombik) says that the main responsibility of the auditor is towards the public, investors and shareholders whereas that of a consultant such as a lawyer or independent tax consultant is towards the client. He feels that there is a lack of independence if the same person performs both services. He believes that leaving the decision up to the audit committee is wrong as the auditors are bound to use their influence to manipulate the audit committee. (13th, page 17) [Clearly Barend is not writing this article from the point of view of an independent commentator! A point that he did not make is that many audit committees are chaired by retired partners from auditing firms so guess who they will favour!]
A new law is likely to see the demise of close corporations and the emergence of a new corporate animal that may prove onerous for small businesses. Pierre Delaney, KPMG’s director of owner-managed business says that IFRS recognition and measurement rules will apply to SMEs. (13th, page 17) [Funny, but at a recent seminar in C.T. organised by SAICA, the presenter said that SMEs will be able to do their own thing in future. How does one plan ahead in this country when every finger on each hand has a different version of the future? It is becoming a joke.]
Finance Week
Virgilio da Silva says that many strategies for dealing with post-retirement medical liabilities are deeply flawed and could affect the long-term financial health of companies. The provision is often underestimated and needs constant correction when the two key variables (medical inflation and mortality rates) fail to perform as expected. (8th, page 58) [Another variable that is often wrong is the discount rate used to arrive at the obligation. I have seen discount rates of 15% p.a. GAAP has got it wrong in that they do not take tax into account.]
From January 2005 the new auditing standards will be in place (ISA). Suresh Kana says that these standards are preferable as they will eliminate some of the emerging market risk premiums typically attached to SA companies by international investors. He says that the overall responsibilities of auditors will not have changed but there will be more compulsory procedures to detect earnings manipulation. Bernard Agulhas says that auditors will have to look at company accounts with “greater professional scepticism. They are not expected to uncover fraud but to perform rigorous procedures in areas of testing how management estimates are made and accounting policies executed.” (22nd, page 16) [One day our profession will give the market what it wants, i.e. to take responsibility for detecting fraud.]
Kirsty Laschinger is “concerned” because Vodacom’s working capital is negative. (22nd, page 34) [Liquidity has got nothing to do with a current asset to current liability ratio. This company prints money, so why would this worry her?]
Chris Eagar points out that homeowner associations are not exempt from tax if their revenue exceeds R300 000 p.a. (22nd, page 43) [Don’t tell me! We were caught on this. The auditors assured the trustees at the time that we were not subject to VAT.]
Financial Mail
In SAB v the Food & Allied Workers’ Union the Cape labour court ruled that employers may no longer retrench workers to make way for better-skilled workers without making adequate training opportunities available. (10th, page 8)
One of Beyers Naude’s greatest gifts was his ability to listen and never condemn, even when he disagreed. He had an unshakeable belief in the power of genuinely held conviction. (Carl Niehaus) (10th, page 45)
Merrill Lynch is of the opinion that in the next five to ten years we can expect average annual returns of 8% for stocks, 5% for bonds and 2% for cash. They are of the opinion that valuations are high now but nowhere near the peaks of the late 1990s. (10th, page 108) [If they are looking at 8% for stocks and 5% for bonds (presumably before tax) they are looking at a systematic risk premium of 8% - 60% of 5% = 5%, which sounds about right.]
Fortune
A new SEC requirement took effect on 31 August 2004, which requires that fund managers must declare how they voted in respect of the shares they hold. This will have the effect of exposing any conflict of interest between the fund managers and the companies. This will probably also apply to pension fund managers. (20th, page 28)
The housing market in the US is rapidly losing touch with reality. Fuelled by low interest rates prices have soared. The gap between house values and the underlying fundamentals such as personal income and job growth is greater than ever. The most alarming development is that the market has become emotion-driven where people are buying on the expectation of future appreciation. Such a market will eventually come back to earth. This will be triggered by an increase in interest rates coupled with continued increases in property taxes. (20th, page 40) [One can easily change US to SA in the first line!]
Techtalk
SAICA has issued circular 7/2004, which sets out the effective dates of GAAP statements.
The IASB has issued three exposure drafts proposing amendments to IAS 39:
▪ ED185 dealing with transitional and initial recognition of financial instruments.
▪ ED186 dealing with cash flow hedges in group financial statements with foreign subsidiaries.
▪ ED187 dealing with the measurement of financial guarantee contracts and insurance contracts that take the form of financial guarantee contracts.
IFRIC has issued the following EDs:
▪ An ED proposing changes to SIC12, special purpose entities
▪ ED183 dealing with members’ shares in co-operative entities
▪ ED184 dealing with employee benefit plans with promised returns on contributions or notional contributions
The IAASB has revised ISA 300, planning an audit of financial statements.
SA has adopted the standards issued by the AASB – see the circular on the PAAB’s website.
October 2004 (25 Minutes)
Accountancy
The UK standard setter believes that carving 17 paragraphs out of IAS39 (like the EU wants to do) is not amending an accounting standard but is ending up with a new and different standard. The IASB is willing to amend IAS 39 if immediate solutions emerge. It has set up a new working group to eventually replace the standard. (Page 6) [Will it EVER stop?]
The UK accountants are pushing to get the Government to cap liability for auditors. Even investor groups are supporting this move. However, the Government is reluctant to go this route at present. (Page 11)
All of the big four in the US have lost clients during the first eight months of the year. In two thirds of the 396 departures a big four firm lost out, the main reason being rising audit fees because of increased regulations. The mid-tier firms were the main gainers, BDO picking up 58 and Grant Thornton 50 clients. (Page 17) [Expect this to happen in RSA?]
Under a heading “Please release SME, let SME go” (with apologies to Engelbert Humperdinck) in a newspaper called the Scotsman, various writers waxed angrily at the bureaucracy run wild and the red tape surrounding SMEs. (Page 19) [They should pay a visit to the Southern tip of Africa.]
Forget about the charts, graphs, sector comparisons, etc. when analysing a company. Look for the non-financial signs. The following are bail out indicators:
Personalised number plates for management.
A fountain in the reception area. [I saw a lift go through a fishpond at the head office of the company – the CEO did not last for more that a year.]
A salesman or an engineer as chief executive [what’s wrong with that?].
New offices opened by the minister of . . .
The chairman is well known for his charity work. [Why?]
A flagpole outside the head office.
Chairman awarded for his services to the industry.
The company received the award for the best set of AFS.
(Page 22)
Emile Woolf cannot understand why, after the shareholders of Shell got whacked with a massive fall in the share price, the SEC has to come along and take $150m from the company in fines, thereby penalising the shareholders a second time. And then, to add insult to injury, Shell paid out millions from its corporate coffers to make the perpetrators of this lie go away quietly! (Page 23) [Who was it that said “crime doesn’t pay”?]
Recent research from the US has found that the typical person under the age of 40 has sex less than once a week. Only 6% of people have sex more than three times a week. And rich people don’t have more sex. (Page 25) [What’s this got to do with accounting?]
The UK is proposing that companies publish an operating and financial review in their published financial statements. The purpose of the OFR is to provide a balanced and comprehensive analysis of the past, current and future developments of the business so as to enable members of the company to assess the strategies adopted and the potential for those strategies to succeed. As is normal for the UK, the ongoing debate is furious. (Page 26) [The UK profession really does consult with and listen to its members.]
The demand for high quality accountants is on the up in the UK due to all the new compliance requirements and the slight upturn in the economy. (Page 29)
The UK government is still considering whether audit firms should conduct non-audit work for their clients. They are also looking into rotation of auditors, audit quality reviews and the banning of low-balling on audit fees. (Page 69)
There are many consequences of companies having to convert to IFRS some of which are:
Additional disclosures and changes in measurement, recognition and presentation of results.
Considering the impact on debt covenants because of changes in debt/equity classifications.
Re-looking at dividend policies.
Reconsidering remuneration policies.
A changed approach to business combinations, e.g. the recognition of intangible assets. (Page 76)
Anthony Rayman is of the opinion that fair value accounting is fraudulent if the change goes through the income statement. He gives a complicated example to illustrate. [I am going to give a simpler example to illustrate his point. Assuming a company raises a R100m five year loan liability at a cost of 10% p.a. The charge to the income statement over the five years will be R50m (5 x R10m). At the end of the first year interest rates go up by 500 basis points so the company re-values the liability to R85,7m by taking a gain to income of R14,3m. His point is that this is not a profit as the total interest charge to income has not changed. All that is going to happen is that the R14,3m is going to reverse over the next four years as an additional charge to income. In the year that the liability was re-valued the company mislead its shareholders by telling them that they are better off. He goes so far as to argue that management can be jailed for up to seven years for this fraud!] (Page 83)
The total number of companies in Great Britain was 2 070 865 at the end of August 2004, 1 959 637 in England and Wales and 111 228 in Scotland. [This puts S.A. into the minnow category!] (Page 85)
Accountancy SA
Jan Dijkman lists the lessons one can learn from Ferrari:
• Employ the best and be prepared to pay them well
• Enter into business partnerships when necessary
• Give employees new challenges
• Focus all your energy on your primary goal – do not get sidetracked
• Have a clear number one goal and focus on making it a success
(Page 3)
Greg Bogiages warns against costing becoming a routine exercise. He believes that we should re-look at what costing is trying to achieve to better business. Why, for example do we:
• Have to close the books every day/week/month?
• Try to oversimplify the complex?
• Try to absorb, without understanding, overheads?
• Strive for accurately inaccurate results?
• Rely on possibly invalid standards as a basis for measuring performance?
• Focus on measurement rather than on generating profits?
• Not relate accounting to the needs of the decision makers?
(Page 5)
A Deloitte management survey has found that 90% of SA executives currently suffer from medium to high stress levels. They need to spend more time on strategic issues but are overburdened with operational responsibilities. Earnings growth and shareholder returns were identified as the leading strategic objectives. However, attention was not being paid to the drivers of improved financial performance such as revenue growth, cost reduction, market share, customer retention, new product development, enhanced pricing capabilities, strategic alliances, etc. There were concerns regarding exchange rate volatility, commodity prices, fluctuation of interest rates, new and changing legislation, empowerment charters, competitive pressures, trade union activism and the Zimbabwe problem. (Page 6)
Dr Pieter Buys sets out the advantages of converting to Extensible Business Reporting Language (XBRL) to streamline and simplify the flow and preparation and analysis of financial reports and accounting data. Various regulators around the world are implementing this system for filing of financial statement purposes. [This has been around for many years but cannot seem to take off.] (Page 10)
Rob Cooper says that hiring the right person for a job is one of the most important decisions a company will make and ensuring that the person hired performs the tasks assigned is equally important. But when it comes to dismissing an employee, proper procedures should be followed. He recommends that this be done in-house and that labour consultants should not be used. There are two important practices for dismissals: it should be fair and the procedure should be fair. If both procedures are properly followed, there should not be a problem. (Page 13)
Prof Pieter von Wielligh sets out the problems that auditors will have to consider regarding the three new auditing standards, SAAS200, SAAS315 and SAAS330. [In the space available, it is not possible to summarise his discussions but I would seriously recommend that if you are a small audit practitioner you devour these three standards as well as his article. When practice review turns up and says: “Why did you not evaluate the design and the implementation of the internal controls?” and you say: “Because I decided not to rely on them to reduce my audit risk.” you will get nailed as it is now a standard procedure that you must evaluate the design and implementation of internal controls. Go and study the new standards and the article and redesign your audit approach, if necessary.] (Page 14)
Gary Vogelman takes a preliminary look at the proposed legislation on closing tax loopholes from the use of hybrid instruments. (Page 19)
My article was on defining the date of the transaction in AC112. (Page 25)
If you are interested in the TOPP programme, read the special report from page 37 to page 46.
Business Day
The profits of Corpcapital attributable to Cytech were based on a valuation of Cytech by Corpcap’s executives, on which they received bonuses. The valuation of Cytech went from zero to R300m in little over a year, contributing almost the entire profits of Corcapital in 2000. By the end of 2001 the valuation of Cytech had reached almost R500m. Cytech was recently sold for R20m. (Per Nic Frangos, 14th, page 13) [This is one of the consequences of permitting unlisted equities to be re-valued through the income statement, as part of headline earnings.]
The Institute of Certified Public Accountants (used to be CFAs, cribbed from Chartered Financial Analysts and now CPAs cribbed from the USA institute!) has recommended to Government that they scrap the necessity to have 300 000 private companies audited so that the CFAs, sorry, CPAs can get additional work. (29th, page 2) [The battle lines have been drawn.]
Citizen
Famous Brands increased earnings by 70%. However, this was partly due to the inclusion in the current period of earnings derived from the acquisition of Pleasure Foods. The CEO declined to disclose the contribution this acquisition made to the total results. (29th) [I have a problem with hiding the truth. How do analysts analyse with attitudes like this?]
Only 9% of South Africans can afford to retire. Experts blame apathy and ignorance. When you are in your 20s, the last thing on your mind is to prepare for retirement. But the earlier you start, the less you need to invest each month to build your nest egg Leaving it until your 40s is too late. (29th, page 27)
Sasfin Frankel Pollak Securites recommends the following portfolio, presumably for no particular investor:
Equity 70%
Bank preference shares 10%
Listed properties 15%
Cash 0%
Bonds 5%
The spread of equities, (only 6 of these names are not in my and my wife’s combined portfolio, which has performed way above the market portfolio over the past eight months):
|Name |Price |Number |Amount |
|Anglo American |13302 |902 |120000 |
|BHP Billiton |6200 |1129 |70000 |
|Kumba |4295 |698 |30000 |
|Implats |49990 |100 |50000 |
|Sasol |12100 |413 |50000 |
|Afrox |2070 |2415 |50000 |
|Barloworld |8725 |573 |50000 |
|Altech |4020 |995 |40000 |
|Richemont |1725 |2319 |40000 |
|SABMiller |8780 |342 |30000 |
|Tongaat |4900 |816 |40000 |
|Tiger Brands |8699 |575 |50000 |
|Nampak |1495 |3345 |50000 |
|Pick’n Pay |2155 |2320 |50000 |
|Spar |2050 |1463 |30000 |
|Standard Bank |5399 |926 |50000 |
|Nedcor |6700 |448 |30000 |
|Remgro |8340 |719 |60000 |
|Venfin |2200 |1364 |30000 |
|Liberty International |9660 |518 |50000 |
|Investec |13870 |216 |30000 |
|Total | | |1000000 |
Criticism: There are too many shares in this portfolio. I would drop six and equally weight the portfolio – I will tell you why when you attend my CawB workshop.
Finance Week
A former Enron executive currently serving a five-year prison term testified in the first Enron criminal trial that he worked on a secret deal with Merrill Lynch to fraudulently boost the disgraced energy giant’s profits. (13th, page 7)
Nedcor and Investec raised preference shares paying 75% of prime bank overdraft rate. When these prefs were listed, they stood at a 6% premium over their issue price. Standard Bank followed with a dividend of 70% of prime. When listed, they stood at a 3% premium over their issue price. First Rand has now decided to offer at 68% above prime. (20th, page 83) [Vic De Klerk says that these are good investments in an environment of rising interest rates but offer no protection when interest rates go down. Compare this to Standard Bank’s fixed dividend. If interest rates go down, the value of the capital goes up. One could create a barbell investment by combining the two types thereby hedging against interest rates going up or down – whoops, I am not allowed to say this – may get arrested under FAIS!]
Fortune
Fannie Mae, a US company that owns or guarantees more than $2,3 trillion in US residential mortgage debt, has been caught cooking the books. It appears as if the objective was to keep the earnings growth steady and secure the bonuses paid to management. This comes a year after the Freddie Mac scandal ($7,6 trillion in US residential mortgage debt). (18th, page 22) [Where were the auditors?]
Maria Ramos has been listed as the 29th most powerful woman outside the US. (18th, page 42)
Hundreds of local beers, with no international potential, account for about 80% of all beer consumption worldwide. Bud Light, for example, has barely 3% of the global market. (18th, page 65)
Techtalk
The IASB has issued three EDs proposing amendments to IAS39, ED185 (Transition and initial recognition of financial assets and financial liabilities), ED186 (Cash flow hedge accounting of forecast intragroup transactions) and ED187 (Financial guarantee contracts and credit insurance).
Other EDs issued by the IASB are SIC12 (Consolidations – special purpose entities), ED183 (Members’ shares in co-operative entities), ED184 (Employee benefit plans with a promised return on contributions or notional contributions).
The IAASB has released a revised standard ISA 300 (Planning an audit of financial statements).
SA has adopted the IAASB standards – see a circular covering this on paab.co.za.
November 2004 (35 Minutes)
Accountancy
The profession suffers a particularly high rate of stress-related work absence, alcoholism and even suicide caused by constant client demands, billing targets, collecting fees, deadlines to be met, the difficult nature of the work, etc. [And the UK does not have the stress of practice review yet! Just watch the stress levels go through the roof when this kicks in.] Expect these problems to escalate with the snowstorm of new regulations arriving in 2005 (IFRS, the new auditing standards, SOX, etc.). (Pages 1 and 29) [Who wants to be an accountant?]
The profession is angry that the APB is to force its five ethical standards on all audits, meaning that many small and medium sized entities will be caught in the net. The proposed approach to dealing with SME audits tries to solve a problem that does not exist in a way that will have unintended consequences for SMEs and will act as a burden on such businesses. This cannot be in the public interest. [Why does the profession not use their democratic rights and kick the people on the APB off their perches?] (Page 5)
The accounting bodies in the UK are trying once again to reduce the fragmentation of the profession in that country by getting the ICAEW, the CIMA and the CIPFA to merge into one body. (Page 6)
The EU has signalled an end to self-regulation for audit committees to tighten corporate governance in the wake of Enron, WorldCom and Parmalat. Proposals include audit rotation, banning off-balance sheet structures and publication of compliance with corporate governance rules. [Presumably SMEs will be caught in this net as well!] (Page 8)
The junior Alternative Investment Market has escaped the clutches of the European legislation. It will become an “exchange-regulated” rather than an EU-regulated market. [So, Europe does not have a “one-size fits all” policy. I apologise for the comment at the end of the previous paragraph.] (Page 8)
The audit liability cap proposal did not reach the shorter Companies Bill in the UK. There is still a hope that it could make the longer Companies Bill in the new-year. (Page 11)
The Practice Assurance scheme, which attracted widespread criticism from UK accountants, has been delayed until February 2005. [To give members more time to find alternative employment?] (Page 12)
E&Y reported that the number of profit warnings in the UK is on the increase. [A sign of the economy slowing down?] (Page 15)
Aggressive earnings management is still present and is expected to accelerate with the expected downturn in the economy and the introduction of IFRS. Auditors have been warned to be vigilant. (Page 16)
It has been suggested that the financial statements of charities report on the achievements of the organisation. A correspondent wants to know how to get data on how many souls go to heaven and how many to hell when reporting the results of a church, this being one of the prime objectives of the organisation. (Page 18)
Emile Woolf suggests that proportional liability, which works successfully in a number of other advance jurisdictions, is the only rational approach to reforming the present UK law, which still allows a prospective claimant to cherry-pick a target perceived to have the deepest pockets for the full amount of the alleged losses regardless of fault. (Page 20)
To run British motor vehicles using energy from wind turbines would require 100 000 turbines covering an area larger than the whole of Wales. [News you can use!] (Page 25)
Chris Swinson suggests that the law should not only be changed to protect auditors but should also be changed to protect trustees who expose themselves to liability by becoming trustees of charities. (Page 26)
The partners of BDO were able to reverse falling staff motivation by joining together with the staff to develop a core set of values to identify what BDO stood for. What emerged was:
• Honesty and integrity
• Taking personal responsibility
• Strong and personal client relationships
• Mutual support
They then developed guidelines on how to implement these values. This has given the firm renewed clarity of purpose and confidence in themselves and in the firm. [What a super idea!] (Page 66)
The US could drop its reconciliation requirement to US GAAP for foreign registrants using IFRS by 2007. (Pages 75 and 76)
The UK has decided to adopt IAS39 undiluted, unlike the EU. (Page 75)
The UK’s operating and financial review is likely to be delayed for three months. (Page 75)
Nicholas Anderson, who specialises in intangible asset valuations, looks at the problem caused by IFRS 3 of having to allocate what we used to dump in “goodwill” to the various types of intangible assets in a business combination. He lists three problems:
Identifying the intangible assets arising from the acquisition, e.g. brands, trademarks, patents, copyrights, customer contracts, databases, customer lists, computer software, licences and franchises, mastheads and publishing titles, development assets, etc.
Sourcing the relevant supporting documentation.
Applying a suitable valuation methodology.
The valuation methodologies could include:
The cost approach, which would be suitable for internally developed software for which there is no market.
The income approach based on discounting cash flows generated by the asset at an appropriate cost of capital. The relief from royalty (RFR) approach is widely used (decide on a % of sales for the royalty rate and then project the sales to determine the amount of the royalties).
The market transaction approach, which is seldom used due to the nature of the intangible assets.
He states that the auditors may not undertake such valuations due to the ethical rules governing audits. (Page 87)
It is suggested that the IASB standards are not being written based on an effective conceptual framework and that the re-writing of the framework should be a priority of the standard setters. (Page 88)
The key changes to the new audit approach are on the assessment of audit risk and how auditors plan their activities as a result of this assessment. There will be a training cost involved and the first few audits will necessarily take longer as auditors become familiar with the new approach. (Page 90)
Jon Grant defends the APB’s approach to applying the new ethical standards to all audits, including SMEs. He feels that the £5,6m turnover limit for SMEs goes some way to reduce the criticism of overburdening SMEs with these new rules. He says that an audit is an audit and to have two levels of audits will downgrade the benefit of an audit certificate. He suggests that SMEs under the turnover limit can be “reviewed” instead of being “audited” to overcome the burden of these rules. (Page 91)
Auditors cannot rely entirely on management representation letters as audit evidence. They need to do their own homework. However such letters are valuable in subsequently determining whether management were a party to the fraud. (Page 109)
Accountancy SA
A Canadian organisation called the Value Measurement and Reporting Collaborative believes that value is defined not only in monetary units but also in objectives, ideas, events and processes. [Wow, is this a new idea or what?] They are trying to push to get financial statements to at least disclose enough information about the value drivers to allow analysts to assess future performance. [When, if ever, the IASB runs out of things to do, here we have something that will keep them in business.] (Page 2)
Vincent Faris discusses what has been done regarding the attack by the Attorney’s Fidelity Fund on the audit of attorney trust accounts. Auditors have been advised to obtain knowledge of the business of the law practice, understand the transactions that take place, assess the risk and materiality and plan the tests to be performed. [The profession has become so enamoured with its new toy “planning” that it has forgotten that success is 95% sweat and tears and only 5% planning. A friend arrived to do the audit of an attorney’s trust account only to find that the place was in a shambles. With the help of his staff he wrote up the books and accounted for all the cash. He provided a real tangible service to his client, which he was proud of. He was nailed because he did not “document his assessment of the risks and his plan”! Who needs this in their lives. My advice is not to take on this type of work, no matter what joy you get out of helping people.]
Congratulations to Futhi Mtoba, for being chosen business woman of the year! Well done young lady. (Page 8)
Eric Levenstein says that directors should understand the difference between actual insolvency and commercial insolvency. Actual insolvency is when the liabilities exceed the market value of the assets at the date of the application for liquidation of the company whereas commercial insolvency is the inability to pay debts when they fall due. Directors and managers, who carry on the business of a company recklessly or with intent to defraud creditors or for any fraudulent purpose, may be held liable for the debts of the company. Judge Stegmann was of the opinion that it was immoral to carry on business while a company is insolvent whereas Judge Goldstone was of the opinion that there is nothing wrong with incurring credit while insolvent when there is a genuine belief that the company will recover. The state of mind of a director can be problematic when considering whether or not a company is trading in insolvent situations. [Better to be safe than sorry?] (Page 10)
Victoria Vaksman says that SOX is making executives risk averse, which is hampering the entrepreneurial instincts that helped make the US great. It is also adding to the costs of running a company (estimated to be 3% of total costs), which have to be passed onto customers. The need to link sound corporate governance to effective process control is, therefore, important. Business process management, when designed, implemented and managed correctly, can have a profound impact on the business. (Page 19)
Jan Dijkman says that professional privilege is currently confined to legal advisors. Doctors, journalists, clergymen and accountants have no such privilege. He believes that the time has come to extend this privilege to a broader range of professionals. (Page 23)
My article was on the significance of the word “significant” in GAAP. (Page 25)
Business Day
Graham Terry, Vice President of SAICA, countered the article in BD on 29 October with: “To suggest that a report by an accounting officer not trained in auditing could substitute for an audit report is ludicrous. An accounting officer’s report is simply a report by an accountant. It does not pretend to provide any assurance about the accuracy of the underlying information. It would be irresponsible to suggest that such a report provides the same assurance as an audit report.” He goes on to state that businesses have the choice in RSA to operate as a company or a CC. Those that operate as companies do so because they want the protection that the Companies Act and an audit gives. (2nd, page 12) [I agree. So why are they wanting to scrap close corporations? Have they thought through the consequences of such a move or are we going to see articles all over the place in future headed: “Unintended consequences of scrapping CCs”. One only gets “unintended consequences” when proper thinking and planning do not precede action.]
The PAAB is taking the Institute of CPAs to court claiming that they cannot call themselves CPAs. (2nd, page 3) [I totally agree. Why could they not choose an original name? First they have to annoy my second Institute (Chartered Financial Analysts) and now they are annoying my first one.]
Finance Week
As a result of the application of IFRS 2 to share options and the recent release of draft amendments to the Income Tax Act companies will have to re-think their staff option schemes. (3rd, page 15)
The following pitfalls are inevitable and predictable:
Buying at the top end of a boom.
Selling when the market is undervalued.
[The way to avoid this is to have a policy and a system that takes the emotion element out of the equation.] Tiene van der Mescht says that one should keep the building blocks of your portfolio simple, i.e. equities, property, bonds and cash [I would add preference shares, which are like bonds but have a tax advantage]. He suggests that one should avoid sophisticated products built on top of these asset classes as they are often designed for “marketing purposes” [he means to earn fee income for the persons marketing these instruments] and are little understood. (10th, page 44)
Prof. David Clutterbuck says that we should strive for a balance between the six life streams: 1. Work. 2. Career. 3. Family. 4. Health. 5. Self-fulfilment. 6. Spiritual/community. Reconsider how you spend your time and energy. Get your priorities right. Create space between the six activities. Build a long term integrated strategy. Work smart – measure success by results and not by effort. (17th, page 53) [This is the time of the year to do this study. Get rid of the clutter (sorry Prof.) in your life and start planning for success, i.e. to achieve what you value most.]
Deon Basson compares the returns he received on three investments with three finance houses (gross v net). The average gross returns over five years was 13,9% compared to a average net return of 9,3%. The resulting cost is 4,6%. (24th, page 18) [Try this study: X inherited R10 000 when he was 20 years of age. Had he invested this directly in the market and earned 18% p.a. over this period, which the market did yield, he would have, at age 60, a total nest-egg of R7,5 million. Had someone else invested the money for him and took fees of 4,6% away from the 18,0% (net 13,4%) he would have, at age 60, R1,5 million, i.e. he would have earned R1,49 million and paid fees of R6,0 million! Nice fees if you can earn them. To learn more about how not to invest, join the CawB workshops.]
Vic de Klerk (this man IS interesting!) says that buying back shares with borrowed money is beneficial if the after tax cost of borrowed capital is lower than the cost of capital. [The question to ask is: “Will Mr. SARS give the company a tax deduction on monies borrowed to buy shares?” If I was the judge and it was clear what the borrowings were used to buy back the shares I would disallow such a deduction. Another problem I have with this idea is: “Is it correct to compare a return that contains no risk (a borrowing cost) with a risk return on equities?”] (24th, page 29)
Revenue is proposing to tax employees who obtain share options on the difference between the exercise and market prices when they are entitled to dispose of the shares. Previously it was on the difference between the exercise and market prices when they exercised the option. (24th, page 58)
Financial Mail
The SEC hit KPMG with a $10m fine for shoddy auditing of TV guide publisher Gemstar, on which NewsCorp lost $6bn. (Page 7)
Finance Week
“One of the fundamental accounting conventions is the principle of “prudence”. (Page 50) [When last did this journalist read GAAP? Fifteen years ago? In case you think she is right, “prudence” is no longer one of the four fundamental concepts of GAAP. And neither is the “matching concept”.]
Merrill Lynch’s view is that the rand will weaken to R7,75 by the end of 2005. They believe that resource shares remain above-average risk for the average investor and are best left to seasoned traders. [Whatever happened to the idea of diversifying one’s portfolio?] Warren Buffett now holds $12bn in foreign exchange contracts in five unspecified currencies and $1bn in high-yield euro bonds. [He must have made a nice return on this “investment” to date. Watch what happens to the value of the dollar the day he takes his profits.] (Page 72)
Financial Analysts Journal
The great challenge in golf is not how to hit the ball or how to line up a putt or come out of a sand trap. It is to control the golfer, yourself. It’s the same with investing. Know your capabilities and resources and play within them. Simplicity, concentration and economy of effort have been the distinguishing features of every great player’s methods while others lost their way to glory by wandering in a mass of detail. Too many investors suffer the penalties of too much turnover. In golf action before thought is the ruination of most of your shots. And so it is in investing. The way to win is making fewer bad shots. The main reason for selling a share is inadequate research and judgment at the time of purchase. (Charles D Ellis taking ideas from the great golf coach Tommy Armour and applying them to investing.) (Page 15)
Fortune
Jeremy Grantham, a well respected investment guru who has been accurate in the past, says that the market will sink into a black hole losing about a third of its value over the next two to three years. He says that the greatest bull market in American history is still unravelling. He and his team have tracked every historical bubble worldwide (they documented 27) and found that all the gains from the bubbles were completely wiped out before a new bull market began. He says that it is an impeccable record. His advice on how to handle the coming meltdown is to panic. He recommends safeguarding wealth for what could be the biggest buying opportunity of a lifetime. (15th, page 97)
Maneo
The DTI has published a policy statement proposing to scrap the Close Corporations Act and have a “one law fits all” new Companies Act. Smaller companies would be subject to less onerous reporting [I will believe it when I see it] and will not require an audit. [Can you just imagine what the “unintended (i.e. not properly thought through) consequences” will be for our profession?]
If you perform the audit function, do yourself a favour and read the 16 pages of disciplinary matters. The theme that seems to run through all of these cases is that the practitioner did not have a proper strategic approach to performing an audit and did not document the evidence obtained. Some interesting points from these pages are:
He should have required the client to comply with AC112 in respect of the treatment of forex losses and gains. [How can an auditor give a clean audit report stating that the company’s financial statements fairly present in accordance with generally accepted accounting practice if the financial statements do not comply?]
The practitioner was fined R20 000 and ordered to contribute R40 000 to costs. [Ouch!]
There was an element of cavalier about the way he went about the business of an auditor and a member of the profession. [Get serious, mate.]
He failed to answer correspondence in a reasonable time. [A lawyer friend, due to pressure of work, took two weeks to answer a letter from a client and was fined R20 000 by his Society.]
You are sentenced to a fine of R20 000, which is wholly suspended for three years on condition that you seek regular medical treatment to the extent that you are able to afford same. [The medical treatment or the fine? What has seeking medical treatment got to do with the PAAB? They can govern the way you do an audit but they have no right to dictate that the guy gets medical attention.]
Time
There was an in depth article on the inside story about Parmalat in the 29th of November issue. It is fascinating stuff, e.g.:
From the early 1990s the company borrowed money from global banks justifying such borrowings by inflating revenues through fictitious sales to retailers.
The authorities are saying that the top management, the company’s outside lawyer and the two outside auditors were part of the team that cooked the books.
They achieved this by transferring debt to off-share tax havens and creating a bogus milk producer in Singapore that “supplied” 300 000 tons of nonexistent mild powder to a Cuban importer via the Cayman Islands in which they held a fake Bank of America account.
The core trick was to double bill for the same supplies. As many as 300 people in the company knew what was going on. They either did not understand the implications or kept it quiet.
Tanzi, [da boss] has admitted transferring some €500m to family firms but this figure could be over €1bn.
Parmalat ended up owing €14bn to its investors.
The story goes that when one of the partners on the audit started asking too many pertinent questions, the CFO lost his temper and the auditor backed off. Another partner was so concerned that he took the matter to the top partner of the firm. He was taken off the job. This fight is going to go on and on. Those who are being investigated, other than all the individuals involved, include Citigroup, UBS, Deutsche Bank, Morgan Staley, Nestra Investment Management, Bank of America, Deloitte and Grant Thornton. Watch this space. (29th, starting on page 42)
Techtalk
There is still doubt as to whether an estate agent’s books as well as the trust accounts books need to be audited. There is a need to get the Act amended to clarify the situation.
The accounting systems at banks do not facilitate the preparation of audit certificates confirming all accounts with a client. The banks recommend that auditors find other ways of obtaining evidence of the completeness of bank balances until they, the banks, can get their act together.
IFAC has published a series of examples on first time adoption of IFRS, which can be downloaded from the “other” category under the bookstore on Store/. [I really must be doff because I can never find these things when I go into websites. But I will try again.]
The APC has issued a discussion paper on accounting for BEE transactions.
December 2004 (30 Minutes)
Accountancy
Chris Quick says that it is alarming that accountants in listed companies have not bothered to get their heads round something so imminent as the impact of IFRS on their company’s results. Companies need to set up a communications drive to explain how IFRS will affect their results. (Page 1)
A KPMG survey has revealed that two-thirds of analysts still do not understand what the impact of IFRS will have on the results of companies they cover. 69% were not being trained by their employers. Allister Wilson has advised companies to produce two sets of results: one under old GAAP and one under IFRS and explain the differences. [Similar to what our banks did. Good idea.] (Page 6)
The IASB is due to publish IFRS 6, Exploration for and evaluation of mineral resources in December. (Page 16)
Regular walking can reduce the risk of contracting dementia in later life. [Too late!] (Page 17)
It seems as if the UK authorities also do not understand the problem with SMEs. There is widespread concern that SMEs have to comply with SOX type ethical standards re their audits. Emile Woolf asks why SMEs should have to comply with listed company standards in the first place. [Because, sir, there are some in authority who live by stupid rules such as “an audit is an audit is an audit”!] If SMEs want to avoid a “qualification” in their audit report they will have to appoint a different firm to undertake their accounting and tax work (and for another £100 they can also have their brains tested!) (Page 23)
KPMG allows all staff to take a half day’s paid leave each month in which to volunteer their time for charity work. They believe that there is a business case for community involvement in that schools need to work, inner cities need to work and people need to get to work. Grant Thornton says that getting employees involved gives then personal fulfilment and develops them professionally. Deloitte says that volunteer work broadens staff horizons and widens their skills. [We really need to do more of this in RSA.] (Page 27)
The average amount donated to charities per person in the UK is £1,70 per week, less that one third of the weekly spend on alcohol. (Page 32)
More than 50% of those starting in accountancy firms are women yet they only comprise 9,6% of partners of audit firms. The old boy’s club is still a factor. However, another reason is that some women prefer to become entrepreneurs to get their work-life balance sorted. (Page 42)
Sole practitioners are spending more time on unproductive regulation and compliance work and are being challenged by unqualified accountants who do bread and butter work at discount prices. These unqualified accountants do not have to comply with all the red tape. Sole practitioners complain that they have to spend up to a day a week completing forms – they are becoming the extension of the government/Inland Revenue for no remuneration. The Institute (in the UK) is doing little to assist them. SMPs are becoming a dying breed. (Page 70)
The Financial Services Authority in the UK has given companies an additional 30 days to prepare their interim results under IFRS. (Page 83)
The FASB and the IASB have agreed to add a project to their agendas to develop a common conceptual framework. The time-frame for this could be between five and ten years. (Page 84)
The IASB members seem to disagree fundamentally on whether a separate standard for SMEs is necessary. This is holding up the development of this standard. They were warned that people were watching the discussions and waiting for them to fail so that they could set their own SME standards. [The IASB should stick to its knitting, i.e. to develop standards for public interest companies. They are wasting resources going off on a tangent like this!] (Page 85)
Some of the IFRS challenges for insurance companies are:
Product classification: They will have to classify products between insurance and financial instruments. The latter will be dealt with under IAS39.
Asset-liability mismatch: This is a major problem in insurance companies – if assets are to be revalued, liabilities should also be revalued to avoid volatility.
There are major disclosures under new IFRS.
Equalisation provisions are not permitted under IFRS so these will have to be reconsidered.
The capitalisation and expensing of transaction costs will have to be addressed.
SPEs will have to be consolidated. (Page 87)
IFRIC has removed the scope exclusion for equity compensation plans from SIC 12, not because “clearly we control an SPE, stupid” but because of the advent of IFRS2. (Page 89)
The IVSC has issued two revised drafts of its standards on valuation for financial reporting and the cost approach for financial reporting. [I need to investigate this crowd. Their website address is .] (Page 89)
Citizen
The draft Audit Professions Bill is available for comment until February 11. Claude O’Flaherty has welcomed the Bill as an initiative to align SA’s corporate law with international best practice to protect both local and foreign investors. However, it appears as if E&Y are not that charmed and sees at least five critical areas where the bill requires further “fine tuning”. (14th, Page 13)
Finance Week
Graham Smith writes that retirement funds often compare their returns with those of the Alsi. Retirement funds must capitalise the dividend yield into this return “by law”. However, the dividend yield is not capitalised into the Alsi return. So comparisons look favourable. [What about the costs of administering the fund, GS? Do they calculate the returns before or after costs? And tax?] (15th, page 7)
Financial Mail
South Africa was ranked 50th out of 50 participants in Grade 8 science and maths. [This sounds better than “last”! It does not augur well for future members of our profession. If we cannot rely on our school system to get these topics upgraded, you as parents (and me as a grandparent) need to get active and encourage our kids to get motivated to improve themselves.] (17th, page 23)
Maneo
Claude O’Flaherty warns that 2005 is going to be a tough year with the advent of IFRS, FAIS, FICA, the new auditing standards and SARS’s move to have tax consultants registered. [This is not an easy profession to be in.]
Practice Review will start focusing on auditors of public interest entities. [Great: starting to get their priories right!] “The process is designed to be educative and constructive.” [This is not the feedback I am receiving! I have, of late, been inundated with complaints about reviewers being petty. I know that there are always two sides to a story, but complaints are flooding in from one particular area in RSA. Maybe PR should re-look at their objectives, especially with regard to audits that have absolutely no public interest.]
Noseweek
Grant Ramsay (of the Tigon saga) told investigators that up to 400 businesses had defrauded SARS of millions of rands with the help of their auditors and SARS officials. [Why have I not read anything about these people being charged?] (December 2004, page 20)
Other (60 Minutes)
Corporate Law Reform
“It is important that CCs are subject to the same rules regarding formation, governance and capitalisation as companies so that members of the public and creditors receive the same level of protection. Investor confidence has been badly shaken by events at Enron, WoldCom, Tyco, Adelphia, Vivendi and Parmalat.” [Don’t you love the connection: because a thief steals from shareholders in the US and Italy, I, who do not have any loans or creditors, will now have to operate through a company (independent directors, etc.) In the old days we used to call this “crooked thinking”. Today it is called “common sense”!]
CFA Magazine
Peter Bernstein, (Mr. Risk) says that risk is not about uncertainty but about the unknown, the inescapable darkness of the future. He says that the beginning of wisdom in life is to accept the inevitability of being wrong on occasion. He believes that the problem can be broken down into three constituent parts:
Understand the balance between the consequences of being wrong and the probability of being wrong. The probability of being hit by a car when crossing against the lights may be small but the consequences of being hit deserve greater weight in the decision.
Expect the unexpected and prepare for such events, e.g. what do you do if you lose a major client?
Where decisions are not easily reversible (where they are, you can always have an exit strategy) try to have control over the outcome, e.g. getting out of a marriage can be extremely costly so before embarking on such a venture, do your homework and make sure that it is going to work. (Mar/Apr 2004, page 5)
Investors need to come to terms with the past scams, shared delusions and outright criminality, which were so pervasive and brazen that it is hard to imagine how the perpetrators thought that they could get away with them:
Dumping truckloads of toxic financial waste into SPEs (Enron)
Capitalising operating expenses (WorldCom)
Cooking up “bandwidth swaps” and swapping them for similar assets and taking the profit (Global Crossing and Qwest Communications)
Stuffing the channel (dumping excess inventory on its customers and treating them as sales) (Coca-Cola)
Listing all stocks as “buys” and none as “sells” (various investment houses)
Paying auditors to create tax shelters who then audit their own work
Purchasing high priced capital assets of companies around the world and then leasing them back to the previous owners to claim tax allowances, thereby creating enormous assessed losses
Using derivatives to get around limitations on investing in certain assets by regulated industries
Compensation committees signing off exorbitant pay packages for executives and audit committees allowing auditors to earn more than their audit fees in consulting jobs (May/Jun 2004, page 34)
Things to watch for that may suggest that a company is engaging in financial mischief:
• Earnings problems
• Downward trend in cash flows
• Excessive debt
• Receivables rising faster than sales
• Switching audit firms
• Hyped sales
• Expenses falling in relation to sales
• Off-balance sheet items
• Unconsolidated business entities
• Board of directors controlled by management
(May/Jun 2004, page 61)
The Canadians are scrapping dozens of ethical rules for investment advisors and are replacing them with a 28-point code of conduct. The Chairman of the Ontario Securities Commission says that the problem is that principles alone are rarely sufficient as they could be open to widely differing interpretations unless supported by sufficient guidance. [Agree. IFRS also needs more guidance.] (Jul/Aug 2004, page 22)
High quality research focuses on the returns the company can be expected to earn and the risks investors will be exposed to. It does not take disclosures at face value but delves into them and ferrets out both the red flags and questions that need to be asked of management. The author points out that only one out of the seven FASB voting members are from the investor/analyst community. [We had the same situation when I was on the APC. The problem was that we could not encourage anyone in that industry to invest their time in standard setting.] (Sep/Oct 2004, page 8)
Aswath Damodaran discusses the inappropriate practice of applying a discount to a majority valuation of a share to arrive at a minority value. He says that one should develop a model to arrive at a minority valuation and not use a discount arrived at arbitrarily to convert a majority value to a minority value. “Why should we expend time and resources on well-thought-out valuations if we end up discounting the resulting value arbitrarily for sundry variables? If this is what we plan to do, let us just save the valuation chef some time and just pick a number, any number, and be done with it. [Perfectly said, sir. I was recently asked by SARS what I considered an appropriate discount to be for a minority holding and I wrote back and said that the whole process of arriving at discounts for minority valuations was flawed as different models should be used for minority and majority valuations. I don’t think that they liked my answer because it is so much easier for a big four auditing firm to say: “The magic discount is 25%” and take this as gospel.] (Nov/Dec 2004, Page 7)
The CFA Institute has launched an “Asset manager code of professional conduct”. The general principles covered in this code are that managers have the following responsibilities to their clients:
1. Act in a professional and ethical manner at all times
2. Act for the benefit of clients
3. Act with independence and objectivity
4. Act with skill, competence and diligence
5. Provide timely and accurate communication with clients
(Nov/Dec 2004, Page 24)
If there is one unifying element among the major economic valuations models, it’s to try to adjust the financial statements based on GAAP by reinterpreting income statement and balance sheet items. Some common areas of concern are asset depreciation and depletion, goodwill amortisation (will be gone soon), expensing research and development costs and the treatment of operating leases. (Page 26)
In an ideal world an asset valuation model would yield a true representation of what is going on in a company. But no matter how expertly fined turned, extensively back tested and heavily stress-tested a model may be, it is bound to disappoint at one time or another. The trick is to avoid the temptation of the newest and the fanciest. (Nov/Dec 2004, Page 29)
Disclosures on the Christmas wish list for analysts:
Expenditure on brand maintenance and brand development and the consequences, being increase in market share, premium price, repeat customers, etc. [Just imagine the fun preparers could have developing this information!]
Number of customers, market share, how much revenue depends on a few high-value customers, the proportion of the five largest customers [Can you just imagine SA companies disclosing this?] (Nov/Dec 2004, Page 31)
With the deadline looming for IFRS, the next several months are a critical period for investment analysts who must judge the extent to which the new accounting principles will affect investments and adjust valuation models accordingly. One analyst said that she had not seen any companies providing adequate information about its translation to IFRS yet. At this stage a company should at least have identified and disclosed the major accounting principles that will change and what impact those changes are likely to have on its next balance sheet. [I have been trying to encourage this disclosure in RSA. Not winning.] (Nov/Dec 2004, Page 54)
CFA Digest
It has been found that restricting the sale of shares can result in a much higher discount on value that was thought in the past, e.g. as high as 50%. (August 2003, page 26)
It has been found that when volatility is high, information about a company is more valuable and more investors are willing to pay to become better informed. Managers respond by smoothing earnings to affect market perceptions of earnings volatility and hence the company’s share price. This maximises mangers’ compensation where it is tied to the price of the shares. (August 2003, page 61)
The widely held belief that the allocation decision is more important than security selection may have been misinterpreted in the past. Choosing securities within the equity component of the portfolio is substantially more valuable than choosing a portfolio exposure among equities, bonds and cash. (August 2003, page 74) [This is my experience.]
Evidence has come to light that high portfolio turnover is detrimental to after tax returns. [Wow – the Americans are at last waking up to the fact that one should look to after tax returns!] It is contended that a long term strategy is more suited to taxable investors [are there any other types?]. Disciplined investing and maintaining a strategy during adverse times are the challenges to be faced. (August 2003, page 102)
It has been found that a high level of management participation in board selection is associated with high levels of company performance. [Or, in other words, King is detrimental to company performance.] (November 2003, page 10)
It has been found that there is a positive correlation between sunlight and share prices – the more sunlight, the more positive are investors and the higher the values of shares. [These academics seem to have nothing better to do with their time. So what? How does this help me make money? Watch the weather forecast?] (November 2003, page 44)
When testing the effect of adding hedge funds to otherwise efficient portfolios, Sharpe ratios decline (i.e. the relationship of return to risk). The possible cause of this is the high cost associated with hedge funds.] (February 2004, page 4)
When hedge funds are used in a portfolio context, they add value, not on a stand alone basis. (February 2004, page 5) [When one can only justify an investment by the fact that it reduces the portfolio risk, leave it alone. Who needs an investment that makes losses to improve the correlation of a portfolio?]
Companies often have a share split prior to raising equity to improve the price and liquidity of the shares. (February 2004, page 19) [What a great idea!]
The ratio of book value to market value can be used as a predictor of returns. (February 2004, page 40) [This statement is incredibly naive! If a company is expecting to produce poor returns, the market price of the share will be low, and visa versa. So you swing the argument around and say: “If the market value of shares is higher than the book value of shares one can predict a low return from the company.” Pathetic.]
The three perils of numeracy:
That history repeats itself – assume one-way traffic.
A bias towards optimism – overlook the negatives.
The worship of hard numbers – prevents investors from seeing reality. (February 2004, page 83)
It has been found that managing earnings is more prevalent in economies with concentrated ownership, weak investor protection and less-developed stock markets. (May 2004, page 18)
An analysis of the equity risk premiums of 16 countries over a 103-year period concluded that a 3% geometric mean and a 5% arithmetic mean are the best estimates of a forward-looking equity risk premium. [So SA’s risk premium is the same as Zim’s?] (May 2004, page 42)
It has been found that Tobin’s q ratio (market value to replacement cost of equity) and PE ratios are good predictors of future stock market performance. “A bull market encourages investors to keep putting money into the market, pushing prices higher, whereas a bear market produces the opposite result.” [Isn’t that just fascinating? Now you know the secret of the bulls and the bears! You wonder where they find these authors.] (May 2004, page 48)
Many companies with large defined benefit retirement plans are overstating their profits by making rosy estimates of returns expected on plan assets. [In RSA many do not see tax as a deduction from the return – they pre-tax returns!] (May 2004, page 52)
Despite many investment managers not using optimal risk/return models when allocating investments, it has been found that when testing their recommendations, they are surprisingly near optimal. (May 2004, page 55)
If one uses market rates to price pension fund liabilities one will find that pension funds are in crisis. Failure to use market rates when valuing pension funds means that plan sponsors cannot know their funds’ true economic return behaviour. [Blame the standard setters for this. At the time SA tried to point out to the IASC that they had got it wrong but we were outvoted.] (May 2004, page 61)
Investment returns are typically calculated and reported using a pre-tax basis. After-tax returns, however, can differ significantly from pre-tax returns. Active managers will have to outperform the benchmark on a pre-tax basis to offset the negative tax impact arising from the turnover that produces taxable events. [Why don’t they change the way they calculate and report returns to an after tax basis? Because no one does it (groupthink)!] (May 2004, page 67]
A methodology that incorporates behavioural finance is a valuable tool for allocating assets in a portfolio. The way it works is to identify the four investment goals: liquidity, income, capital preservation and growth and to create sub-portfolios into one whole portfolio with each sub-portfolio achieving the required goal. [What a gem of an idea! I have effectively been doing this for years without seeing it as a formal tool.] (May 2004, page 71)
Daniel Nevins believes that the traditional approach to measuring risks is not relevant to individual investors (standard deviation). He says that investors are not risk averse but loss averse. Measures based on severity of loss based on investor preferences and goals would be more applicable to investors than volatility measured using standard deviations. (Page 76)
CFA Conference Proceedings
Questions to ask your investment manager:
Are you really generating alpha returns (beating the market) or are you merely giving me beta returns (market returns)?
What soft dollar (rand) commissions will you earn by churning my portfolio?
How do you anticipate beating the market without putting my money at risk?
Are you only interested in short term gains or are you really interested in generating long term gains?
Are you prepared to take contrarian positions?
What is your churn ratio? Will the costs of churning be able to be recovered from your excess (alpha) returns?
Jeremy Siegel believes that the equity risk premium in the US is roughly 3% p.a. [Remember that this is before tax as these guys do not yet see tax as an expense.]
Collective Insight (Finance Week)
Chantal Valentine points out some dangers in using statistics to support decision making, e.g.:
One should be careful when choosing a timeframe. [To illustrate: the JSE’s Asli yielded a gain of 10,7% p.a. from December 1995 to December 2001 whereas it yielded a gain of only 6,9% from December 1996 to December 2002.]
Correlations could be flukes. (Page 4)
Ann Cabot-Alletzhauser warns against paying too much attention to ratings given to investment managers. She illustrates that yesterday’s losers are often tomorrow’s winners and visa versa. (Page 7)
Shaun Levitan warns against using tools such as the Sharpe ratio when analysing investments. He says that the use of the standard deviations makes the assumption that return distributions are normally distributed, whereas in practice they are not. [We will do some experiments on these measures and assumptions in the CawB workshops.] (Page 9)
Peter Urbani warns against the use of standard deviation as a measure of risk due to the fact that returns in real life are rarely normal but often contain thin arches and skewed patterns. [See the research we will do above.]
Financial Analysts Journal
Recent financial reporting scandals have shown that the cash flow statement is in need of reform. [That and the fact that preparers do not understand the cash flow statement so misrepresent the true picture.] The areas requiring improvement are the classification into the three categories, requiring the direct method to be presented, better guidance on classification of cash flows and improved reconciliation between net income and operating cash flows. (Vol. 60, No. 2, page 1)
A large portion of the total benefits of equity diversification is obtained with a portfolio of 20 stocks. A study of 40 000 stock accounts by Goetzmann and Kumar (2001) revealed that the mean number of stocks was four with a median of three. Whereas “mean-variance investors” consider their portfolios as a whole and are always risk adverse, “behavioural investors” divide their assets into two layers, one to protect them from downside (poverty) and the other to make them rich. [Hey, I have just discovered that I am a behavioural investor! The problem is that, being an accountant, I have been too concerned about the downside so am not rich.] (Vol. 60, No. 4, page 44)
Morgan Stanley
EBITDA is not a meaningful measure of operating cash flow for various reasons, e.g. it does not take into account capacity cost, i.e. the additional investment in property, plant and equipment and working capital required to maintain [or grow] sales. (July 2, 2002)
PAAB’s Annual Report
The most common critical areas of non-compliance with SAAS during the second review cycle were:
• Verifying income statement items, e.g. completeness of income and validity of expenses
• Identifying risks in the planning stage
• Verifying accounts payable and provisions
• Verifying property, plant and equipment (ownership and carrying amount)
• Verifying investments
• Verifying and valuing inventory (costs and net realisable values)
• Verifying accounts receivable and the provision for doubtful debts
• Verifying intangible assets
• Testing for going concern
• Performing subsequent events reviews
• Performing analytical reviews
[This stuff is so basic! Of what value is an audit report if it is not done?]
IFRS Watch: Citigroup
Vodafone UK owns 77% of Vodafone Italy. However, the minority shareholder (23%) has additional rights, which they have not used. Based on IFRS, the fact that these rights are in existence means that Vodafone UK may no longer consolidated Vodafone Italy. [I really have a problem with this standard, and clearly so do the analysts.]
The adoption of IAS39 may be delayed due to France, Italy, Spain and Belgium voting against it.
Proposals are on the table to account for revenue when entities sell two for the price of one. For example an item costs 100 and the deal is: “Buy one and you will get two for 300.”
Now Future
Sales 300 600
Cost of sales 200 500
Margin 100 100
[It gets weirder by the day!]
Engineering News
Barclays Plc published a profit of £2,7bn in the UK and £1,7bn in the US. [Makes us accountants look silly. We need real Global GAAP]
Financial Advisory and Intermediary Services Act
In case you did not know, this Act could apply to the following activities and you could find yourself in serious trouble if you perform them and have not registered with the FSB:
• Store documents on behalf of your clients
• Advise a client to increase his/her RAF investment to save tax
• Advise a client on how to earn a higher interest rate with a bank
• Value a financial instrument that may be the subject of a deal
• Assist with a reconstruction that may result in a share transaction
• Act as a trustee of a client’s trust
• Advise your wife (she is a client as she pays in kind) on her share portfolio
[I have a real problem with bringing an Act out before these kinds of issues have been resolved. And they penalise auditors for not planning???]
From James Came - Australia
Network Foods early adopted IFRS 3 and used this opportunity to write goodwill down by $2,45m. In the article sent to me by James they say: “It would appear Network Foods has taken the opportunity to conjure up an image of being innovative in financial reporting terms rather than say bluntly the business lost the right to distribute Fisherman’s Friend.” Had the journalist bothered to read IFRS 3 he would have found that it does not permit one to write goodwill off unless it is impaired!
IASB
My brother, Carel, attempted to register with the IASB to get their documentation. After going through the whole procedure he got a message that read: “It is not possible to order form the store at this time. Please contact the merchant for further information.” So he wrote to the IASB telling them what happened. This is the reply he got: “We are not privy to reasons why cards are declined – you will need to contract your bank.” Don’t you just love it! The arrogance of these people – they assume that us South Africans are totally stupid.
CIPRO
It is planned that annual returns for private companies will be introduced as from 1 February 2005. No date has yet been set for Close Corporations. [Any bets that this date will be not extended?]
Taxgram
Goldblatt J, in an unreported decision stated: “An allotment or issuing of shares by a company does not in any way reduce the assets of the company although it may reduce the value of the shares held by its shareholders. In these circumstances, such issue or allotment of shares does not constitute expenditure by the company.” This is an important tax principle and is relevant to IFRS2, share based payment transactions. (August, page 6)
The DTI has published a policy document on corporate law reform with the following objectives:
• To encourage entrepreneurship and enterprise diversity by simplifying company formation [This only happens once in the life of a company so why bother!]
• Promoting investment and innovation [How does an Act achieve this?]
• Promoting efficiency of firms and their management [How does an Act achieve this?]
• Encouraging transparency and high standards of corporate governance, recognising the broader social role of enterprises [What has this got to do with a typical SME?]
• Encouraging compatibility and harmonisation with best practice jurisdictions [Get real!!!]
• Introduce a single corporate entity and remove distinctions between close corporations, private companies and public companies. [So existing CCs will have to have remuneration committees, audit committees, non-executive directors, etc.?]
(September 2004, page 7)
Parties are free to arrange their affairs so as to remain outside the provisions of a particular statute. However they may not conceal the true nature of their transactions or call them by a name or give them a shape to disguise their true nature. The court will strip off the ostensible form and give effect to what the transaction really was based on the facts of the particular case. (September 2004, page 9)
Irene Christorpher of the ACCA says that in SA it will be an interesting challenge when it comes to accounting for share based payments in BEE situations. [My rule is: “Tell it like it is”. Do not try to camouflage the true nature of a transaction.]
US President Vice President
Earnings $822 000 $1 300 000
Tax paid $227 000 $ 253 000
Tax rate 28% 19% [Tricky Dicky]
Income Tax Reporter
“The practice note concludes by reminding taxpayers that they have the option to use as the opening base cost of any financial instrument quoted on a recognised exchange either the market value or the time-apportionment base cost.” (Vol. 40, part 8, page 408) [I have been told that SARS will not allow the time-apportionment base cost for listed shares. I am not aware that this has changed. Note that the base market value for Krugerrands on 1 October are R2 750 (full), R1 202 (half), R602 (quarter) and R295 (tenth).]
Pravin Gordhan (SARS) and Ignatius Sehoole (SAICA) have signed a statement of intent that states that SARS and members of SAICA will strive to ensure full compliance with fiscal laws of the country. The authors of the ITR comment: “Have you (Mr Sehoole) any idea of the enormity of this task? While your intent is admirable, and even noble, it would seem that not a single member of your more that 22 000 members will be able to achieve this target.” The commentary goes on to list the acts that were amended during the past year alone (Transfer Duty Act, Income Tax Act, Customs and Excise Act, Value-Added Tax Act, Tax on Retirement Funds Act, Estate Duty Act, Stamp Duty Act, Uncertificated Securities Tax Act, Market Securities Tax Act, Skills Development Levies Act, Unemployment Insurance Contributes Act, Exchange Control Amnesty and Amendment of Tax Laws Act). “Repeated complaints from accountants are heard to the effect that more than half of the tax assessments they receive are incorrect. The assessors are either unwilling or unable to deal with responses to these assessments. (Vol. 43, part 7, page 341) [I truly do not know how small practitioners cope. I am on “holiday” at present trying to catch up with all the backlog reading and I am being buried in the volume. And I am skipping everything to do with VAT, Customs Duty, etc., which the small practitioner cannot skip. Who wants to spend their life in this profession trying to earn a living and being expected to be an expert on everything from taxes to the new auditing rules to IFRS to the JSE requirements to Company Law to etc, etc? And hey, make a mistake and the disciplinary committee is out to pounce with fines, costs and threats. And if they don’t get you the Review Panel will with the penalty of being re-reviewed. Who wants to be an accountant?]
South African Tax Cases Reports
In Commissioner for SARS v AA The Motorist Publications (Pty) Ltd, (CDP) the problem arose as to whether costs incurred prior to the final “go ahead” for publication of a book was stock in trade. The decision was that it was not stock in trade as the costs did not produce anything. [My question is: “Why did the accountants/auditors allow this cost to be capitalised in the first place? Based on my reading of the case, it met the definition of research costs so should not have been capitalised. The moral of the story is: “If you choose to capitalise an expense and expect it to be deductible for tax purposes, be prepared to incur lots of lolly fighting the court case.”] (Volume 63 part 9)
Accounting Scandals
Shell has been fined £17m for “unprecedented misconduct in relation to misstatements of its proved reserves”.
The former tax chief of investment bank Investec Asset Management was sentenced to four years after admitting tax frauds worth £1,85m. [Is our very own Investec being naughty in the UK?]
Two of Parmalat’s former auditors are to stand trial for their role in the collapse of the company. 27 others are in line to face prosecution.
SEC has filed fraud charges against former officers of Peregrine Systems for deception and lies relating to inflated revenues. It has also charged the CPA and two former customers for aiding and abetting.
An E&Y partner has pleaded guilty to destroying documents under SOX. [And then there were three?]
What You Have Always Wanted to Know but Have been too Afraid to Ask
GIPS®, which stands for Global Investment Performance Standards, is a reporting system that sets out to standardise the calculation and presentation of investment performance information to make companies around the world more comparable and to give investors more transparency into the companies they are doing business with or are considering doing business with. [I am often sceptical about claims made by investment companies of the returns that they have achieved. Are they lying? Do they include cash in their investments? Do they account for the costs of administering the funds? How much is taxable income (normal and CGT) and how much is tax exempt? What risks were taken to arrive at these returns? We need to start lobbying for GIPS® to be used in RSA.] (CFA Magazine May/Jun 2004, page 20)
Soft Dollar Commissions: Fund managers receive securities research, trading screens, dedicated telephone lines and other goods and services from brokers who charge higher execution costs on the purchase or sale of securities. Because of the conflicts of interests caused by such arrangements, the UK Financial Services Authority has introduced a rule restricting the use of this form of compensation. (CFA Magazine, Jul/Aug 2004, page 54)
A chugger is someone who collects for charities in the street (a charity mugger).
The Sharpe Ratio is (the return of a share or portfolio minus the risk free rate) divided by the standard deviation of the returns, e.g.:
Portfolio A B
Return 12% 15%
Risk-free rate (after tax!) 5% 5%
Excess return 7% 10%
Standard deviation 4% 8%
Sharpe ratio 1,8 1,3
Therefore, portfolio A wins the competition! Do you agree with this thinking? I would rather earn 15% than 12%.
From Published Financial Statements
Mustek’s AFS
30 June 2004: Foreign exchange and derivative losses consists (sic) of . . . a gain of R12,9 million due to the valuation of embedded derivatives in foreign payables. [Two problems: how can a loss include a gain and please, pretty please, explain to me how one can have an embedded derivative in foreign payables. AC112 requires foreign monetary items to be carried at the spot rate at the year-end.]
Transnet’s AFS
“Transnet is exposed to the strong rand and high commodity prices through embedded derivatives that carry a fair value of R4,5bn. Kumba has indicated its willingness to renegotiate the contract. [Question: I wonder if Kumba will take an embedded derivative asset of R4,5bn in view of the fact that Transnet has taken the liability in their balance sheet?]
The biggest headache remains Transnet’s R7,6bn in pension obligations. It had a year-end liability of R5,1bn, though the latest actuarial valuation has got the deficit down to R3,7bn. [Amazing what actuaries can do. I wonder what the real deficit is and I wonder why they continually have a deficit – not providing for the correct charge in the income statement?]
Casey Investment’s AFS
From the auditors’ report: “We did not verify any of the income statement transactions for the year as the documents for the period under review could not be located due to restructuring of the company.” (10th, page 130) [There is clearly more to this than meets the eye!]
Remgro’s AFS
“Due to the nature and composition of the Group, segmental analysis in respect of revenue is not meaningful.” [Is this a new exemption for not complying with AC115?]
Metorex’s AFS
A profit on closure of hedges of R48m appeared in the company’s income statement (the loss for the year was R14m). [How do you make a profit if you hedge? The objective of hedging is to avoid making losses and to forfeit profits in the process.]
Book Review
How Companies Lie, by A Larry Elliot and Richard J Schroth
“The odds in Las Vegas and the odds of making money by investing in companies have two major differences. In Las Vegas, one can compute the odds of winning or losing. These days, the way publicly traded companies are behaving, you cannot. The dealers usually do not insert or remove a couple of aces during the game, but on Wall Street and among many of the publicly traded companies, they do.”
“Managed mendacity, systematically applied to the investing public, has become the new science of publicly traded corporations.”
Examples given in the book:
▪ Cendant allegedly booked $500m in fake revenue over three years
▪ Waste Management became the most frequently sued company in 1998 due to accounting scandals
▪ Sunbeam shifted $231m from reserves to income
▪ Global Crossing used Enron-like accounting fraud and inflated revenue
▪ Tyco International was investigated for hiding debt to make revenues look better
▪ The Korean unit of Lernout & Hauspie Speech Products funnelled bank loans through third parties to make it look like customers were paying for sales that never took place
“If investors cannot validate the factual basis of revenue reporting, return on capital and reports of cash flows, logically they should not invest. But with all this deception and deliberate concealment, there is no way to validate all the reporting. This is the investors’ “catch-22”.
“Warren Buffett commented that if he could not understand an annual report, perhaps the company did not intend for him to understand it.”
“Companies that lie are the equivalent of economic terrorists in our midst.”
“78% of corporate financial executives said that they had been asked to use accounting rules to cast reporting in a better light and 38% had complied – from a KPMG report.”
“It takes moral courage to tell it like it is.”
Fun Corner
Feeling Nostalgic?
According to present regulators and bureaucrats, we, who were kids before 1980, should not have survived because:
• Our cribs were covered with bright coloured lead-based paint
• We had no childproof lids or locks on bottles or doors
• We rode our bikes without helmets
• We hitchhiked
• We road in cars with no seatbelts or air bags
• We road in the back of bakkies on warm days
• We drank water from the garden hose
• We ate cupcakes, bread and butter and drank sugared cool drinks but were never overweight because we are always outside playing
• We shared one soft drink with four friends from one bottle
• We spent hours building go-carts out of scrap and then rode down the hill only to find that we forgot about brakes - after running into the bushes a few times we learned how to solve the problem
• We would leave home in the morning and play all day until the streetlights came on – out of touch as there were no cellular phones
• We did not have Playstations, Nintendo 64, X-Boxes, video games, videotape movies, personal computers or internet chat rooms. We had friends. We went outside and found them.
• We fell out of trees, got cut and broke bones and teeth, and there were no resulting lawsuits. We took responsibility for our own actions.
• We got into fights and punched each other until we were black and blue, and got over it
• We made up games with sticks and tennis balls
• We rode bikes or walked to a friend’s home, knocked and walked in
• If we did not make the soccer team, we tried harder next time
• If we failed at school, we were held back a year
• If we got into trouble at school, our parents took the school’s side
This generation has produced some of the best risk-takers, problem-solvers and inventors ever. We had freedom, failure, successes and responsibility and learned how to deal with them. (Restoa, November 2004)
When John Moulton of Alchemy Partners was asked by the Treasure in the UK which of the three models it was proposing would be the best he said: “I find this question to be unduly restrictive. Haemorrhoids are better than tumours, but it does not make them necessary.” Accountancy, May 2004, page 19)
When Anne McGuire, under-secretary of state at the Scotland Office, was told that she needed an accountant, she revealed that her husband was one. When asked if he charged her she replied that she slept with him. “Does he charge VAT?” came the reply? (Accountancy, August 2004, page 17)
The secretary-general of the ANC has stated that the next struggle will be to ensure that each province has its own sea so that people will not die in road accidents heading for the coast. [You have to admit that this is brilliant lateral thinking!] (Financial Mail, April 23rd, page 82)
Denis Beckett gave some lovely direct translations from our rich Afrikaans language to our staid English language in the Citizen on Friday 23 April. I thought that the following were particularly beautiful:
“Ons hare was deurmekaar. Ons het dit netjies gemaak en in die bakkie geklim.” “Our hairs were though each other. We made it small nets and climbed in the dish.”
“Ek en my swaer en my skoonseun het per vliegtuig na Windhoek gereis on die dierelewe to besigtig.” “My and my heavy and my cleanson travelled by flying harness to Windcorner to belook the animal-living.”
“Ons het volop springbokke, steenbokke, blesbokke, kameelperde en ook meerkatte gesien.” We saw full-up jumping goats, brick goats, bald goats, camel horses and also more cats.”
“Langs die pad het ons papwiel gekry.” Along the road we got porridge wheel.”
Een keer was ons senuweees egter skoon op hol.” “One time genuine our sinews were clean on hollow.”
Mr Gordon Hanna sent me this thesis to support a request that beers be provided before and during sessions instead of the traditional coffee and tea: “A herd of buffalo can only move as fast as the slowest buffalo. When the herd is hunted, it is the slowest and the weakest ones at the back of the herd that are killed first. This natural selection is good for the heard as a whole, because the general speed and health of the whole group keeps improving by the natural killing of the weakest members. In much the same way, the human brain can only operate as fast as the slowest brain cells. Now, as we all know, excessive intake of alcohol kills brain cells. But naturally, it attacks the slowest and weakest brain cells first, making the brain a faster and more efficient machine.
Dear Mr. Hanna, when you reach my age you have few brain cells left and they are all slow moving so if I had a beer before the session . . .”
Seen in a cash flow statement: “Fixed assets acquired/stolen.” (Thanks for this Kevin)
When Voltaire was asked by a priest on his deathbed to renounce Satan he said: “Now, now my good man, this is no time for making enemies.” (Business Day, 27 August, Quirky quotes)
Success is going from failure to failure without loss of enthusiasm. (Sir Winston Churchill)
Bully Boys and Girls
This matter is still on the boil. If you are interested in the abuse that took place in this case, read my follow-up article, which will be posted on our website at the end of January 2005.
Titbits
Quote by Bill Clinton: Only a fool does not seek to understand why he or she makes the mistakes they make. (Time)
Want to know what your IQ is for free? Go to and do the test. Louis Luyt scored at genius level. (Finance Week, 5 May, page 15)
Mr Ernst Mazansky wrote in Finance Week on 7 May 2003 that STC is payable on capital gains made by companies after 1 October 2001, but not on capital gains made before 1 October 2001. He suggests that capital assets on a company’s balance sheet at this date be valued to establish the amount of the gain that is not subject to STC. My suggestion is that to capture this amount for posterity, the amount should appear in a note to the reserves so that it is not lost to future generations. Note that one cannot use the time apportionment method for this purpose – a valuation must be done to claim the benefit.
The average lifespan of a car in the UK is 13,5 years. [Imperial told me that the average life of a Toyota is 15 years. But remember that RSA (inland) does not have the rust problem that they probably have in the UK. Or are we just safer drivers?] (Accountancy, July, page 52)
BDO Spencer Steward states in its ADDitude Plus, No. 7, June 2004, that VAT returns that are submitted without a cheque are regarded by SARS as fraud. (I presume that a return with a deposit slip counts as a cheque otherwise I am in serious trouble!) It goes on to state that financial statements that disclose a VAT liability without payment having been made constitutes a material irregularity. [A few years ago I was informed that when a practitioner reported this to the PAAB, he was told that it was not a material irregularity. Presumably the PAAB has changed its mind.]
Book Reviews
The book called “Final Accounting” by Barbara Toffler should be prescribed reading for every CA who decides to take auditing as a career. It is about the downfall of Arthur Andersen, a once proud and highly professional firm that came to grief because of arrogance, greed and neglect of the basic principles of ethics.
After reading this book I read a more powerful book covering the same topic called “Shifting values, unexpected consequences” by Susan Squires, Cynthia Smith, Lorna McDougall and William Yeack published by Prentice Hall. (Many thanks to BDO for giving it to me.) This book gave the background to the demise in standards at Arthur Andersen. The extremely high level of ethics set down by the founder of the firm (his mantra was “think straight and talk straight”) was compromised by a decision by the partners to chase fee income. The book takes the reader through the scandals building up to the big one: the Baptist Foundation where AA missed a $650m fraud, Sunbeam Corporation where AA was implicated in improper accounting, Waste Management where AA missed $1,7b of hidden expenses and then, of course, the infamous Enron. What I found so sick in the whole saga, other than how quickly the firm died, was that it was one memo from the in-house attorney to the partner in charge recommending that the word “misleading” in the notes to the accounts of Enron be changed to “nonrecurring” that caused the jury to find AA guilty of obstruction of justice. And this memo was given to the court by the partner to prove that the firm had not shredded all the evidence!
Something that I picked up in the book that I did not know was that in The Continental Vending case in the US (1968) the judge ruled that adherence to GAAP did not exempt auditors from liability if the court found that there was a need for further disclosures. This ruling opened the door to further litigation against auditors (71 cases in 1970, 140 in 1971 and 200 by 1972).
Accounting Scandals
Swiss employment agency Adecco has admitted finding a €50 million accounting black hole in its 2003 results.
Ahold, the Dutch retailer, has announced plans to tighten its internal accounting controls following 2004’s €1bn financial scandal.
Jamie Olis, former accountant at Dynergy, the US energy company, was sentenced to 24 years in jail for his role in a $300m fraud in the group.
Carl Cushnie, CEO of Versailles Trade Finance has been jailed for six years for his part in the collapse of the company. Shareholders lost £630m. He admitted in court that maintaining the fraud was so much hard work that he had to employ additional staff to write out false cheques. A manager at the audit firm, Nunn Hayward, raised a number of concerns. Due to the significance of the fee income to the firm, she was moved off the audit and her concerns were ignored.
From Published Financial Statements
Mustek, 30 June 2004: Foreign exchange and derivative losses consists (sic) of . . . a gain of R12,9 million due to the valuation of embedded derivatives in foreign payables. [Two problems: how can a loss include a gain and please, pretty please, explain to me how one can have an embedded derivative in foreign payables?]
Transnet: 31 March 2004: This year saw impairment losses of R4,2bn, R4,5bn “hedge” losses (my mommy taught me that if you hedge you cannot make a loss) and R4,9bn loss on an embedded derivative in agreements to transport iron ore, which agreements are to be renegotiated. [These losses must go down in the history of accounting as the biggest new broom sweep/kitty/cookie jar accounting ever made. I wonder if the companies who negotiated the transport contracts with Transnet took gains to their income statements on the value of the embedded derivatives?]
Arnold Property Fund: 30 June 2004: The net profit for the year of R63m includes a revaluation of properties of R37m in a year when the net rental from such properties went down and a gain from the revaluation of debenture capital [don’t you love it!] of R71m when interest received by the debenture holders went up. It also includes a loss of R44m “costs in respect of unwind of interest rate fixes”! [The wonders of new GAAP! The old-timers must be turning in their graves.]
Metorex Limited, 30 June 2004: An item appears in the income statement called “Profit on closure of hedges” R48m. How can one make a profit on closure of a hedge? I would have thought that the journal entry was cash debit or credit and derivative credit or debit when a hedge is closed out? Maybe the company does not comply with IAS39 and does not recognise derivatives?
Mini-Courses
Time Management
The following 10 ideas should improve your time management:
1. Plan your day the night before and revise the plan before you start the day.
2. Think before your perform an activity: what am I trying to achieve and what is the best way of going about it?
3. Do one thing at a time: think, plan, do, wrap-up.
4. Focus, invest energy, pull the curtains down and avoid interruptions while performing.
5. Set aside a low energy part of the day to take calls, meet with staff and deal with unavoidable trivia.
6. Priority rate: do first things first.
7. Keep organised, have a place for everything and keep everything in its place.
8. Travel light: dump what you don’t need and avoid low value activities.
9. Block schedule quality time to perform activities and get into a routine of doing so.
10. Set aside time for relaxation, meditation and exercise.
Information Processing
The following procedure should improve your approach to dealing with the information explosion:
Step 1: Preview and Decide
Preview the information arriving on your desk and assess it to determine whether or not it will be of value to you and then decide whether to:
1. Trash it
2. File it for future reference
3. Place it onto your holiday reading pile
4. Place it onto your weekend reading pile
5. Deal with it immediately
Step 2: Objectives
In respect of information to be dealt with, review the objectives to be achieved, i.e.:
1. Understand the contents
2. Register and retain the ideas/facts
3. Be able to accurately recall the them when needed
4. Internalise the ideas
5. Integrate the ideas/facts into your daily activities
Step 3: Read
1. Scan the material to get the big picture
2. Read the material to achieve full understanding
3. Capture the ideas and facts you read
Step 4: Wrap-up
1. Reinforce your understanding of what you read
2. Reinforce your retention of what you read
3. File it way for easy accessibility if needed.
Websites to Visit
paab.co.za For professional information
saica.co.za For professional information
For GAAP information
mafiabuzz.co.za For all sorts of information
Here is wishing you a really superb 2005!
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