Mafia Buzz Issue 3



Mafia Buzz 2007

January 2007 (20 Minutes)

Accountancy

The Securities Exchange Commission in the US has agreed that companies with 5% or less of its shares trading in the US will not have to comply with The Sarbanes-Oxley (SOX) Act. [Sanity is starting to prevail! Problem: How do the companies who have incurred these enormous costs feel now that they are told: “It’s okay, you no longer have to comply.”?!] (Page 5)

The Public Company Accounting Oversight Board says that although SOX has benefits to companies and their investors, they are concerned that the costs are not adequately aligned with the benefits. (Page 5)

The IASB has announced its working group to tackle the leasing project. This could materially change the financial statements of companies. Take this simple example: A company enters into a 20 year lease agreement with a rental starting at R100 000 p.m. escalating at 10% p.a. A fair discount rate is 12% p.a.

The following table illustrates the expenses on the old basis (O), on the stupid straightlining basis (S) and on the expected new IFRS basis, which will probably require all leases to be capitalised (N). I have done the calculations using annual figures (being lazy) (R’000).

|Year |O |S |N |

|1 |1 200 |3 436 |3 086 |

|5 |1 757 |3 436 |3 548 |

|10 |2 830 |3 436 |3 960 |

|15 |4 557 |3 436 |3 710 |

|20 |7 339 |3 436 |1 694 |

Can you just imagine the outcry? The solution to the problem is easy; too easy for the standard setters to discover. If we are going to force companies to recognise assets on their balance sheets that do not belong to them, we should de-link the balance sheet from the income statement so that profit can mimic economic reality (cash flows). But accountants will never be this innovative. Instead, the financial performance will be pulled even further away from economic reality than straightlining leases did. All the more reason to publish two sets of financial statements. (Page 9)

Emile Woolf reports on the feedback of the Professional Oversight Board in the UK. The POB randomly selected 350 financial statements on public file. The sample reflected that 90% of companies were small companies of which 90% were exempt from audit of which 90% took advantage of the exemption, i.e. if my calculations are correct only 27% were subjected to audit. The POB reported that the majority of the financial statements contained errors and that a sizable minority contained serious errors such as balance sheets not balancing, presenting issued share capital in excess of authorised share capital and including prior year adjustments in the first year of trading [I love this one!]. Emile points out that the new Companies Act now permits loans to directors, financing the purchase of the company’s own shares and is even considering extending the exemption for having to have an audit. He concludes with the words: “Welcome to the 21st Century company law.” (Page 18)

Conrad Hewitt, chief accountant of SEC, is of the opinion that accountants need to become more comfortable applying the standards in ways that are consistent with the underlying principles and economic substance of the transactions and providing transparent information to the investors. [With respect, auditors have long lost this ability. They treat standards as rules with, often, disastrous results.] (Page 25)

Charles Tilley, CIMA’s chief executive, says that at the end of the day it is the users of financial statements who should be saying what they want. [Question: Do they know what they want?] (Page 79)

The Financial Reporting Review Panel has slated the boilerplate approach used by companies in their financial statements. The panel is of the opinion that with more focused and thoughtful treatment, the length of financial statements could be reduced and made more understandable. [Speaking to one of the top banking analysts the other day in Midrand, I was told that he takes a week to read Absa’s financial statements. Is it really necessary to prepare a book each year?] (Page 79)

IFRS 8 on operating segments has been published and is applicable to the financial statements of companies who have listed instruments for annual periods beginning on or after 1 January 2009. It adopts a management approach to segment reporting and requires a reconciliation of the amounts to those in the published financial statements. (Page 80)

IFRIC 12 on Service Concession Arrangements has been issued. It deals with how to account and disclose situations where concession operators construct, operate and service assets controlled by government, e.g. roads, prisons, etc. (Page 80)

The IASB has issued a discussion paper on fair value measurement. It’s intention is to establish a concise definition of fair value and a single source of guidance for fair value measurements. (Page 80)

UK betting and market-making company IG discloses that it uses its market capitalisation to estimate fair value less costs-to-sell in testing its goodwill for impairment and on this basis did not feel it had to impair goodwill. [This is really pushing it!] (Page 81)

Peter Holgate of PwC is of the opinion that IFRS is not suitable for SMEs. [What have I been saying for years?] (Page 85)

The top six auditing firms in the UK have got together and have produced a vision for financial reporting. The points they make are:

• Today’s financial statements remain largely “one-size fits all”.

• Standard financial statements have less and less meaning and relevance.

• Liability risks inhibit companies from reporting the kinds of non-financial and forward looking information that users need.

• Complex rules produce financial statements that virtually no one understands.

Let’s hope that this great idea does not peter out! (Page 87)

The Financial Reporting Council in the UK is seeking views on how to define, monitor, improve and measure audit quality. At present there is no single agreed definition against which performance can be measured. Some of the drivers of audit quality identified by the FRC are:

1. The culture within the audit firm

2. The skills and personal qualities of audit partners and staff

3. The effectiveness of the audit process

4. The reliability and usefulness of audit reporting (Page 88)

IFRS 7 requires information to be given for different classes of financial instruments. PwC explains that a class of financial instrument is different to a category, e.g. fair value through profit or loss, available for sale, etc. A class could be a type of loan or a type of customer. If a savings bank provides loans only to individuals, there would only be one class of financial instrument. (Page 92)

Some people discount decommissioning costs at the company’s weighted average cost of capital. PwC says that this is incorrect as it takes into account company risk. They say that one should rather use the risk rate applicable to the obligation, i.e. the incremental rate at which the company can borrow money for the discounting period. I am a little confused. The standard says that the discount rate should reflect the time value of money and the risks specific to the liability. It then goes on to say that the rate should not reflect the risks for which future cash flows have been adjusted. I read this as being that you could either reflect the risk in the cash flow or the discount rate. They are implying that the risk should not be reflected in the rate but in the cash flows. If PwC is correct, then the standard is not flawed – I have always seen this as one of IFRS’s stupidities! (Page 92)

A question was asked whether guarantees given by group companies have to be fairly valued on initial recognition. PwC said: “Yes”. There is much unhappiness about this in RSA at present and I know that many companies are ignoring this requirement. (Page 93)

The UK needs to assess whether changing the threshold for audits to be performed has had any impact on the quality of information in financial statements, the levels of bankruptcies and economic crime before adjusting the threshold again. At present, 90% of companies in the UK do not have to be audited and of those, 90% are in fact not audited. (Page 115)

Kazakhstan (Borat-land) is looking for senior audit staff. With the cut in tax rate to 10% for expat workers this option will become more attractive. But if your company car turns out to be a horse and cart, don’t say that you were not warned. (Page 160)

Accountancy SA

I do not summarise this journal as you should read it in full.

Wall Street Journal

Jonathan Clements gives advice on how not to be taken in by financial advisors. Their secret is to win your confidence and trust. This is what they do:

1. They feign friendship by asking all about yourself and pretending to have things in common with you.

2. They will look for your hot buttons, e.g. greed, fear, goals, etc. This is known as “putting you under ether” so that you can’t think straight.

3. They will tout an investment’s scarcity to make it seem more valuable. Alternatively, they will point out that the bargain price will not last. Or they will state that others are clamouring to get into the deal.

4. They may exploit your good-natured tendency to return favours by giving you something up-front, such as take you out to lunch.

5. They will then hit you with what is known as the presumptive close by suggesting a high figure and then lowering it to make you feel more comfortable.

[I was sold insurance in my first year at varsity by the maths teacher playing the above tricks on me. For something like 30 years I paid premiums of 10% of my salary. The total sum the policies will pay out when I die is less than one month’s salary today.]

Tax Tips

I have never understood why some cases go to court. An employee was given options in a company. The company paid a special dividend which reduced the value of the options so the company gave the employee an ex gratia payment to compensate the employee for the loss in the option value. The employee objected to paying tax on the amount so it went to court. Any guess as to who one this one? I would have laid 10 to one on this case. Clearly this is part of the remuneration of the employee. Do they hope the judge is drunk when taking this to court or is it a scam to drum up legal fees? (ITC1790)

And here is one that I got wrong (I have a hobby: I assess the circumstances in a tax case and try to guess the outcome). A SA company paid royalties for the exclusive right to use a name. The judge held that these royalties were of a capital nature and disallowed the expense. [I think that this decision has since been reversed by a higher court?]

Dear Gom*,

We are entering into a twelve year lease agreement for a new distribution warehouse and are grappling with how to handle the issue with straightlining rental income. We are considering using a CPI index but building a cap in the agreement if it goes too high to protect us and a floor to protect the lessor. What pearls of wisdom do you have for us?

Dear Pearl,

1. Never let GAAP dictate how you do business. The GAAP problem can be solved by (2) below.

2. If IFRS gives ridiculous results, disclose the full extent of the stupidity and guide the user towards economic reality.

I expect the standard setters will sort this problem out one day. They are not stupid, just slow.

* GOM (Grumpy old man) has replaced “Uncle Charlie”

Fun Corner

I was sent an extract from Uncyclopedia, the content free encyclopaedia, . Some extracts are:

Auditor, noun: an accountant with a grudge.

Auditors are a species of nomadic mammals, who came to Earth from the planet Debitor. They are paperivores, hunt in packs known as audit teams. Each audit team is part of a bigger tribe. There is much tribal rivalry and situations are subject to change as large tribes seek to exterminate one another. Audit packs have their own dens, known as home offices. The pack visits the office on average once a month in order to refuel on stationery. Auditors can survive for several days and nights without water, sex or sunlight but are liable to fall seriously ill if deprived of paper clips and yellow post-its. [And so it goes on.]

Here are some other items on accountants sent to me by an employee at SARS:

Definition of an accountant: Someone who solves a problem you did not know you had in a way you do not understand.

Definition of an extroverted accountant: One who looks at your shoes while he is talking instead of his own.

Question: Why did the auditor cross the road? Because he looked in the file and that is what he did last year.

Peaches Geldof has appealed to celebrities to stop giving their children odd names. Her own name has made her life a living hell: Peaches Honeyblossom Michelle Charlotte Angel Vanessa Gelfdof. Her sisters’ names are Fifi Trizabelle, Pixie and Heavenly Hiraani Tiger Lilly. (Sunday Times January 22nd)

February 2007 (15 Minutes)

Accountancy

KPMG is to face a disciplinary hearing for its involvement in the collapse of Independent Insurance, where policy holders lost as much as £1bn. [It looks like auditors should evaluate the business plan of a client before taking on an audit!] (Page 5)

The European Commission has proposed a cap on audit liability, which the profession in the UK has been pursuing for years. (Page 6)

Deloitte has been fined £130 000 (the largest fine in the UK to date?) for negligence in that it failed to obtain sufficient evidence when auditing a listed company. KPMG was fined £80 000 for signing off a company which materially understated its trade creditors. (Page 6)

FRSSE, the UK standard for SMEs, has decreed that SMEs will not have to account for share based payments in terms of IFRS 2. Only disclosure will be required. [I find this interesting in that a local big four auditing firm told their client that they may not use IFRS 2 where the shares were not listed as there was no market value in a non-listed company.] (Page 9)

Deloitte has agreed to pay Parmalat $149m in settlement of claims against it. (Page 9)

Emile Woolf states that there should be a compilation report supporting the financial statements that are no longer subject to audit. He says that without an audit or some kind of compilation report by a qualified accountant, the system of accounts filing (the UK requires financial statements to be filed) will be brought into disrepute. [I wonder when SAICA is going to get something like this going. Or will we wait, like the UK profession did, for the system to fall into disrepute before we do something about it? Or will some other professional body step in and offer this service while we are fiddling?] (Page 18)

This month’s issue debates valuing heritage assets. They used to say: “Give an accountant a problem and he will form a company.” It should be: “Give an accountant a problem and he will try to place a value on it!” What ever does one have to try to measure and account for an asset such as the stones of Stonehenge? The accountant’s argument is that if you cannot measure it you cannot manage it. Surely all you need to do is to describe it and photograph it and you will be able to manage it! But, hey, with SOX behind us and IFRS in limbo we must find something to generate fee income!

One commentator said that it can take an expert up to an hour to value a single coin and his entity has 750 000 coins! Standard setters are good at wording accounting standards but they tend to walk away from the practicality of their pronouncements. For example, some suggestions on how to value heritage assets are:

1. What could it sell for in the open market – look to similar assets and what they fetched - a good way to value Da Vinci’s Virgin on the Rocks painting!

2. Capitalise the cash flow that you can generate from making the asset available to the public. [I thought that most museums are sponsored because they could not survive on attendance fees alone.]

3. Compute the cost of reconstructing the asset – any idea what the cost of reconstructing the Mona Lisa is?

[I thought that one protects assets by granting them heritage status because they are priceless. It seems that accountants do not understand this concept – they live in a world where they believe that there is a price for everything. Can you just imagine the poor auditors trying to obtain audit evidence for the values they are going to be dished up?] (Page 25)

Over 75% of British bosses believe that there is prejudice against seriously overweight people in business. The thinking is that fit people who exercise regularly are more able to come cope with the stresses of a senior position – being overweight gives the message that they lack self control. (Page 55)

Philip Tilston says that accountants need to open their minds to new ways of thinking if they wish to reach their full potential. He says that idea generation is only a part of the problem-solving process, which must include problem diagnosis, data collection, diagnosis of the relevant facts, idea generation, solution generation and implementation. He says that one of the keys to idea generation is to ignore the constraints of physical reality. (Page 61)

It looks as if SA is exporting its scam expertise. A phishing scam is operating in the UK where taxpayers are contacted and told that they are due for a refund. They are requested to give their personal information including their debit card number so that the money can be deposited in it. Once they have your details kiss your cash goodbye. (Page 65)

The new standard on segment reporting, IFRS 8, is applicable for annual periods beginning on or after 1 January 2009. Early application is permitted. The standard is based on the American standard. The concept of the standard is that it is based on the information that the CEO is given to decide on how to allocate resources and evaluate performance. It requires a measure of operating segment profit or loss and segment assets and liabilities. It requires entities to report information about the revenues derived from its products or services or groups of products or services and about the countries in which it earns revenues and holds assets and about major customers. It will be interesting to see how companies interpret this standard. (Page 78)

Brian Singleton-Green says that there is a perception that consistency is the supreme virtue in accounting. However, he believes that one should avoid dogmatism when it comes to measurement as he believes that not all items on a balance sheet should be measured in the same way. (Page 102)

Fear is striking UK accountants. A crowd called “Insolvency Management Limited”, an American styled litigation funding operation, is behind the £90m negligence claim brought against Moore Stephens for the audit of Stone and Rolls. The way it works is that “investors” can “invest” (“speculate” would be a better word) in the outcome of litigation. The cash “invested” is used to fund the legal fees for the court case. If the case is successful, the investors get a portion of the payout. The good thing about this system is that claimants who do not have the resources to fund litigation can now get access to such funds. The downside is that this could end up in frivolous cases being brought against accountants just because they have deep pockets. (Page 26)

Business Day

Sanchia Temkin writes that when the new Companies Bill becomes law small businesses will no longer be required to prepare financial statements! [You wonder why we have all these accountants busy writing SME gaap then.] (21st)

Paul Austin of Deloitte says that close corporations will be retained for a period of at least 10 years as a parallel form of corporation. After eight years the minister is required to determine whether this form of entity will be retained. (21st)

Street Dogs reports on the announcement by Pinnacle which stated that its chairman had sold 1,2m shares in the company and that had authorisation for this trade been sought, it would have been given had the company not been in a closed trading period. [You work this one out!]

When the Mineworkers Provident Fund’s principal officer, Frans Mahlangu began questioning the relationship with Fidentia, he was suspended! [It is tough being honest when you are among a bunch of crooks!] “It is common knowledge that large investment companies wine and dine trustees, wooing then with fanciful gifts rather than with figures.” The article goes on to describe the conflicts of interests in this whole affair. It will be interesting and sad to see what emerges from this mess.

CFA Magazine

Investors should ask probing questions regarding related party transactions. Such transactions can expose investors to significant financial risk. Investors want to invest in companies that they can trust, not where managers skim funds or loot them. Andrew Fastow, of Enron fame, was able to take home over $30 million. When S&P evaluate companies they look for transparency and fairness. A related party should derive no particular benefit beyond what is available in the market. (March/April 2005)

British Columbia, Canada’s third largest province, has scrapped dozens of rules governing investing and has replaced them with a 28 point code of conduct. However, the problem with principles, without rules, is that they are open to widely differing interpretations. [We have seen this with IFRS.]

IRBA

The Companies Bill, 2007, provides for the incorporation, registration, capitalisation, organisation and management of for profit and not for profit companies. It defines the relationships between companies and their shareholders or members and directors, provides for mergers, amalgamations and takeovers and for the efficient rescue of failing companies. It provides for the appropriate legal redress for investors and third parties, to establish a Commission and a Takeover Regulation Panel to administer the requirements of the Act and a Companies Ombud for dispute resolution. It provides for a Financial Reporting Standards Council to advise on financial record keeping and reporting and provides for the possible demise of Close Corporations. Comment closed on 19 March 2007.

Taxgram

Mr Gordhan has asked tax advisors to refrain from designing aggressive tax schemes intended to abuse the law and deprive the fiscus of its fair share of revenue. [This is like asking a jackal not to kill the ducks!]

The Durban Tax Court has ruled that settlement discounts cannot go to reduce gross income. It stated that a receivable is the amount per the invoice and the statement. The marginal rate for Zim taxpayers only hits 40% when taxable income reaches Z$24 million!

IRBA has received 200 reports of alleged irregularities since the Auditing Profession Act 26 of 2005 came into being. This Act requires auditors to report irregularities without first consulting clients. Auditors face jail time of 10 years if they fail to do so. Mr Sehoole reports that there has been much adverse reaction to this piece of legislation.

What you have always wanted to know but have been too afraid to ask

Soft dollar commissions (otherwise known as softing) is the kick-back given to investment managers in the form of securities research, dedicated telephone lines, and other goods and services. The UK authorities are attempting to restrict this practice.

March 2007 (15 Minutes)

Accountancy

Shareholders of Enron are launching a class action against Credit Suisse, Merrill Lynch and law firm Vinson & Elkins on the basis that they participated in a scheme to hide Enron’s losses. (Page 10)

It has been found that professional advisors are arrogant, with a tendency to dominate discussions. They have poor listening skills. [Don’t tell me!] (Page 12)

Emile Woolf says that as an investor the most useful information he wants is that the auditors are happy that the accounts give a true and fair view. The Audit Quality Forum have come to the conclusion that audit reports do not generate useful information. EW wants to know if they want audit reports to include jokes! The AQF want auditors to state that there are no matters of emphasis to which they wish to draw attention. (Page 15)

The Corporate Reporting Users Form has stated that accounting standards should be principle based and comprehensible to the financially literate. They should not result in outputs that are at odds with economic reality. Many companies are now having to marginalise accounting standards by telling the true story in their financial statements. [This is what happens when you have a bunch of arrogant standard setters who will not listen to their constituents.] (Page 16)

A recent survey has found that nine out of ten male accountants are threatened by their female counterparts. [We need to start a new movement called “Male Lib”.] (Page 55)

Many corporate boards destroy value by focusing on fashionable activities and acquisitions that reduce shareholder returns. Some 2 000 companies and 500 professional firms have contributed to a recent study to identify critical success factors. Here are some of the findings:

1. Boards spend their time focusing on compliance rather than on boosting performance. Entrepreneurs view their boards as burdens rather than as contributors to success.

2. Boards should be the heart and soul of a company with a sense of purpose, a sound strategy and a will to achieve.

3. They should care about their people and customers, be alert to developments in the business environment and sensitive to market trends.

4. They should assume personal responsibility and collective accountability for their actions.

5. They should confront dilemmas, balance interests and take a longer-term view.

6. They should focus on doing what is right in winning ways.

7. They should focus on external, strategic and business development aspects of corporate governance.

8. They should provide strategic direction and communicate a distinctive vision, a compelling purpose, achievable goals and clear objectives.

9. They should build critical success factors into key processes.

10. They should develop additional income streams, new capabilities and fresh intellectual capital.

11. They should be proactive, selective and only change what needs to be changed. (Page 74)

The UK’s gaap for SMEs has scrapped accounting for equity share-based payments at fair value. All they need to do now is disclose. (Page 77)

Business Day

The ten rules of investing from Peter Lynch:

1. Know what you own

2. You can’t predict the market so don’t waste your time trying to

3. Take time to identify exceptional companies

4. Avoid long shots (no revenue, lots of promise)

5. Buy into great businesses and management

6. Be flexible and humble

7. Explain why you are buying so you will know when to sell

8. The stomach is more important than the brain when investing – worrying comes with the territory (Street Dogs)

More from Street Dogs - Clichés that get you into trouble:

1. If it’s gone down this far, how much further can it go? (Try to zero – Saambou)

2. If it’s gone this high, how can it go higher? (Much.)

3. Eventually they all come back. (No they don’t.)

4. It’s only a R2 share – what can I lose? (R2.)

5. It’s always darkest before the dawn. (Assuming there is a dawn.)

6. When it rebounds to my cost, I’ll sell. (What if it doesn’t?)

7. Conservative shares don’t fluctuate much. (Who says?)

8. Look at the money I lost because I did not buy it. (Nothing.)

9. I missed that one. I’ll catch the next one. (It doesn’t work that way!)

10. It went up so I was right. It went down so I was wrong. (There is no right or wrong in investing.)

Mr Eugene van As was asked at the company’s AGM whether Sappi’s transparency and disclosure were selective. His reply was: “There is no selective disclosure. There are things that we disclose and there are things we do not disclose.” So there you have it. (12th)

FinWeek

One of the analysts states: “If cash flow per share is not at least equal to the profit per share, the quality rating of the share is marked down unless there is good reason for the low cash flow.” What rubbish. If a company is growing organically, it will need to increase its capacity and working capital. One should expect cash flow per share to be less than profit per share. On this basis solid growth companies would be marked down and cash cows would be marked up. One should have a holistic approach to analysis, not a fad like this! (22nd, page 15)

In SA 31% of people who reach retirement age will have to continue working, 47% will be dependent on family, 16% will depend on the meagre State pension and only 6% will be able to retire financially independent. (22nd, page 58)

The new Companies Bill will extend personal liability of company directors. It will include a liability to those who suffered losses due to false financial statements. Reckless management becomes a criminal offence punishable by a decade behind bars. (29th, page 49)

Sunday Times

“The auditing regulator is cracking the whip on companies in a bid to restore investor confidence in SA in the wake of the alleged R2 billion fraud at Fidentia.” Where is the logic in this???? This is like punishing the brothers and the sisters of the sibling that is naughty. Surely the logical thing to do is to punish the naughty child – this will restore confidence in the family unit. But what happens in our profession is that the perpetrator gets off scot-free and the innocent bystanders are held responsible. Our profession needs to get their priorities right. (18th)

Catch up on Financial Journals

An empirical study in the US has found that low dividend payout ratios precede low earnings growth and high payout ratios precede high earnings growth. The authors state that real life acts in precisely the opposite way to what many would forecast. Rather than future growth rising to offset a low payout policy, future growth falls when more earnings are retained. [You just know that these guys are academics! If a company is forecasting good growth in earnings they can afford to pay out more dividends! Management send the message: “We are expecting to do well so we will reward you in advance”.] (Financial Analysts Journal Vol. 59 No. 1)

Robert D Arnott states that taxing dividends is not ethical as it is taxing income twice and taxing inflation (capital gains tax) is also unethical as these are fictional gains. He says that taxing inflation encourages governments to permit inflation. [Interesting thought.] (Financial Analysts Journal Vol. 59 No. 1)

SA Reserve Bank Review

The financial stability review gives a summary of the US sub-prime lending market and carry trade.

Sub-prime lending refers to high-interest loans to consumers with impaired or non-existing credit histories. Lenders often ask for collateral, e.g. mortgages on properties. The industry accounted for $330 billion, or 9% of US mortgages in 2002, up from $35 billion a decade earlier. Players have been reporting massive losses from this activity and recently fears have intensified that the crises could spread to mainstream lenders.

Carry trade involves investors who borrow at low interest rates in one county and invest in high yielding assets in another country. In 1998 the yen unexpectedly strengthen by 20% in less than two months, which caused a massive market sell-off worldwide by investors who had borrowed in Japan. The 3% increase in the yen against the $ since February 2007 sparked the unwinding of yen carry trades which could have been the cause of the global sell-off in bonds and equity markets. It is estimated that carry trade is worth $1 trillion, scattered among hedge funds, insurance companies and mutual funds. An increase in the value of the yen could cause volatile global financial markets.

Weekender

I am test driving a new publication called The Weekender by Business Day. I loved the article written by Ian Stewart on how mathematicians prove propositions. He says that for mathematicians, it is not enough to try something out 10 times and if it works each time it must be right. They need to prove it logically. I am so pleased that I did not choose this discipline because I would not have had the patience. He gives the example of Bertrand Russell and Alfred North Whitehead who took several hundred pages to prove that 2+2=4. The proof is virtually unreadable and Bertrand nearly had a nervous breakdown checking it! Maybe I had better revisit my 10 stress tests I did to satisfy myself that my valuation models work!

PKF’s Auditorial

This publication gives an excellent summary of the Corporate Laws Amendment Act. A summary of their summary is:

1. The concept of widely held companies and limited interest companies has been introduced.

2. A person within an audit firm is now responsible for the audit of a widely held company and may not serve as auditor for more than five years.

3. An auditor of a widely held company may not perform any non-audit services that will be subject to the auditor’s own auditing.

4. A body to be known as the Financial Reporting Standards Council will be established to promote sound and consistent accounting practices for both widely held and limited interest companies.

5. Financial assistance previously prohibited will now be allowed subject to solvency checks and a special resolution.

6. Section 228 disposals will now require a special resolution (previously a company could dispose of its operations with only an ordinary resolution).

7. For widely held companies, an audit committee is now compulsory.

8. Provision is made for differential reporting for limited purpose entities.

April 2007 (15 Minutes)

Accountancy

Jon Moulton, head of buyout firm Alchemy, says that the current private equity bubble could burst because of the high levels of debt taken on by the companies and the lack of transparency. An advantage of private equity is that the investors get close to management and pay attention to the running of the business. This contrasts with some listed companies where managements become so preoccupied with dealing with the investment community that they take their eyes off the ball. (Page 1)

Corporate finance and accountancy firms earned nearly £1bn in fees from private equity work in 2005, representing 6% of their total income. Recently private equity has been heavily criticised by trade unions and MPs, who accuse the industry of asset stripping, short term thinking and a lack of transparency. (Page 5)

The proposed class action by Enron Investors was thrown out of court (see last month’s Accountancy). The court ruled that investors cannot band together but must pursue their cases individually, thereby greatly increasing costs. (Page 13)

On the letters page there was much discussion on the profession’s proposal to value heritage assets such as Stonehenge. Here were some of the comments:

1. It depresses me to see that the profession is expending energy in trying to put a monetary value on heritage assets such as the contents in museums, buildings, monuments, etc. This will not add any value to these assets.

2. I find it absurd to think that heritage assets can be given any meaningful accounting treatment especially as one cannot attribute any direct income to them.

3. Please tell me that this idea was an early April fools joke. Surely accountants have got better things to do than to waste resources on such a ridiculous idea.

[Isn’t it so refreshing to see such letters published in Accountancy. Free speech exists in the UK!]

The EU imposes strict accounting and auditing rules on companies in member states yet their own accounts are pure fantasy. Their accounts are produced on single-entry spreadsheets, irreconcilable with any other accounting records, prior-year comparative figures differed from the actual figures by hundreds of millions of euros, which simply disappeared from both sides of the balance sheet, multi-million euro grants for projects were paid in advance and booked as expenses without any supporting documents and the bank linked computer system was accessible to unauthorised users free to intercept and amend payment orders without trace. Officials set up their own companies and paid themselves huge fees out of Commission funds. After 10 internal investigations with findings forwarded to prosecuting authorities, there has not been a single prosecution. [Please note that you were not reading about Africa here. This is Europe!!!] (Page 19)

One of the best known acronyms for setting objectives or goals is SMART:

Specific: They should specify what is to be achieved

Measurable: You should be able to measure whether you are achieving them

Achievable: They must not be impossible to achieve

Realistic: They should be achievable with the existing resources in the time set

Target: There must be a deadline [Page 43]

Debate is raging on about fair value accounting.:

1. Should the standard work on the basis of one size fits all or should each standard deal with fair value?

2. Should market prices be based on exit prices?

3. Should we only look at value from the market perspective or should we look at entity specific values? (Page 71)

Paul Pacter outlines the IASB’s proposals for SME IFRS. [I will deal with this as a separate IFRS Buzz in the next few months.] (Page 76)

Richard Dyson writes that we must challenge the regulations that require us to tick boxes. Ticking boxes destroys professional judgement. It undermines the purpose of being professionals, creates unnecessary complexity for accountants and confuses the businesses we seek to serve. [I recently saw a case where a big four auditing firm attended an audit, asked all the questions needed to tick the boxes and missed that the assets were overstated in the balance sheet by a few hundred million rand. When I did due diligence investigations back in the 60’s, we were not allowed to take our checklists with us. We had to use our brains. Checklists were used purely as a back-up.] (Page 105)

Business Times

PwC did a survey on the know-how of those entrusted to run pension funds. Without going into detail, they found that trustees fell hopelessly short. For example, 29% do not have full attendances at the trustee meetings. (1st, page 71)

I had breakfast with an investment advisor from one of the big investment houses recently and he advised me to get and read a book called “Sane investing in an insane world” by Jim Cramer. I am battling to keep my temper with this pompous male sprouting about how good he is throughout the book – why can’t these authors get down to the nitty gritty without trying to boost their petty egos? The bottom line is that he really does not have much to say other than how to compare one PE ratio with another. Then I found an article in Business Times where he admits that he rigged the market when he was still in the game. For example, when he was short on stock and needed the price to fall, he would place sell orders before the market opened thereby driving the market down. Where he was long in a share he did the opposite. He commented: “It was a fun game and it’s a lucrative game.” Here is hoping that sufficient evidence is found to throw the guy in jail for fraud as a warning to others. The article makes the following valid point: “What he (Cramer) discusses in the controversial video is one more example of how Wall Street makes money at the expense of the small investor. Too often investors are seduced by the allure of easy money. They believe that they too can become rich playing the market like professional investors.” It is so very easy for these con artists to separate a fool from his or her money. Don’t let them get to you. Kill your greed urge! There is no free lunch out there.

FinWeek

Lucas De Lange reports that during the housing market in the US buyers were being offered interest rates of 1% p.a. According to the Mortgage Bankers’ Association 13% of borrowers are already in trouble. Alan Greenspan is of the opinion that the US could have a recession in the second half of 2007.

Lucas sets out the psychological cycle of stock market investors, or how to lose your shirt:

The start of the rise

• Mistrust

• Disbelief

• Careful

Acceleration

• Confidence improves

• Enthusiastic

• Greed takes hold (Time to buy)

Deceleration

• Indifferent

• Denial

• Worried

Crash

• Fear

• Panic

• Capitulation (Time to sell) (5th)

Catch up on Financial Journals

Ideas gleaned from the CFA Institute conference held in March 2007:

1. Alpha is earned at the expense of ordinary investors who make persistent and typical mistakes. [Obviously comes from the US professional investors who think that they are perfect!]

2. Individual investors tend to be over-confident (believe in their information and their ability), trade to reduce regret (hold onto losers and sell winners so as not to experience regret), have limited attention (tend only to buy stocks that catch their attention) and love to chase trends (make use of managers who have already won and stocks that have already gone up). Advice given to such investors is:

• Invest for the long term

• Buy and hold

• Diversify

• Keep costs and taxes to a minimum

• Don’t fall prey to glamour investing

3. High worth investors typically have three goals:

• Personal (meet personal needs)

• Dynastic (leave a legacy)

• Philanthropic (give back to society)

4. Policies to consider when investing are:

• Top down/bottom up

• Time horizon

• Return expectations

• Portfolio costs

• Impact of volatility

• Recovery from large losses

• Diversification

• Rebalancing

• Benchmarking

• Time allocation to the investing activity

• Evaluation tools

• Financial objectives

• Defining success

• Defining risk

Almost all of these are covered in the Store of Wealth Builders Workshops.

SAICA

Linda de Beer reports that Sir David Tweedie has proposed that the next step to be taken by the IASB is to simplify the IFRS standards and “go back to principles-based” standards. [Not in my lifetime!]

Taxgram

As from 1 October 2007, STC will be renamed “dividend tax” and the rate will drop to 10%. The tax base will be broadened to cover all distributions by companies, not just those from profits. [What few realise is that a 10% “STC” is a lower tax than 10% withholding tax as the “STC” goes to reduce reserves whereas the withholding tax does not.]

Fun Corner

I had to copy this story from the Citizen. This is what makes living in South Africa so interesting. Thank you, Citizen for this. I read you every day because of your reporting.

A cow with a broken leg was found in a ditch at a rural settlement. The suffering animal was mercifully killed. Its owners prepared the community to feast on the meat. However it was pointed out that the beast had been retuning from the direction of the opposing faction when it landed in the ditch. Fears were expressed that the other group might have poisoned the cow and deliberately set up the accident knowing that the animal would end up on the plates of their enemy. Grey heads decided that a portion of the meat be given to a dog. If it survived, they could all feast to their hearts’ content. The mongrel did indeed survive the night and so the next day saw the party in full swing, until a child reported that the dog had died. Panic set in, with the group of about 60 rushing for traditional herbs and swallowing water from a dirty steam to induce vomiting. The ambulance services were summoned and the local hospital was placed on standby. The municipal disaster truck was brought in and police reinforcements arrived to assist the on-duty members. At some point in the chaos and fear, someone thought to ask where the dog was – no doubt so that the type of poison used might be identified. Upon being called in for questioning, the same child said that the dog was “still lying in the road where the vehicle had struck it.”

A gent, trying to chat up a blond on an aeroplane, suggests that they play a game. If she asks him a question and he is unable to answer it correctly, he will pay her $500. However, if he asks her a question and she is unable to answer it, she must pay him only $50. She agrees and asks him: “What goes uphill on four legs and comes down on three?” He pulls out his computer; logs onto the internet and after 30 minutes of desperate searching cannot find the answer. As the plane is about to land he hands her $500, and says: “Okay, I give up. What goes uphill on four legs and comes down on three?” She says: “I have no idea” and hands him $50. The moral of the story is do not mess with blondes! (Finweek)

May 2007 (5 Minutes)

Accountancy

General practitioners are the unsung heroes of the accounting profession. They hold the hands of businesses and individuals around the country. They wade through a sea of forms, wrestle with bureaucrats, tussle with the tax man and try to make sense of the relentless flow of litigation and regulation that threatens, at times, to overwhelm both them and their clients. And they do all of this without the back-up that big practices enjoy. [And they get abused by their Institute in SA for not ticking all the boxes. It does not matter that they get the job done – it matters that the boxes get ticked.] Some of the comments that came out of a forum of small practitioners in the UK were:

1. It is a fallacy that a big firm can do an audit better than a small firm. If you know the business, you know the risks. Someone can tick a box to say that they’ve looked at the risk, but that does not mean that they understood the risk.

2. Succession planning is a real problem with an ageing population of chartered accountants who are in practice.

3. Our own institute criticised its own membership which was a big mistake. (Page 22)

Danny Gabay writes that the sub-prime crisis is likely to result in a new set of knee-jerk regulations governing financial institutions and auditors. (Page 34)

If a company interprets a standard in a particular manner and the issue is then referred to IFRIC, who rejects the interpretation on the basis that the standard is clear, then the company has to treat the accounting treatment as a prior period error. So it is important not only to know what standards have been issued by IFRIC but also to know what interpretations have been rejected. (Page 78)

Michael St Clair George says that fair value accounting makes a nonsense of an agricultural company’s results. Passing substantial unrealised gains or losses through profit or loss gives a completely false idea of the results of the company. [I have been arguing this for years!] (Page 81]

20% of all crime committed in the UK is against small business (£19bn a year). Over 85% of this is committed by employees or former employees. Disgruntled staff can be driven to dishonesty by the perception of being under-paid or by holding some personal grudge against their employer. (Page 114)

HSBC’s annual report is now a book of 454 pages weighing in at 3lbs. 133 pages are devoted to IFRS alone. The Royal Mail has had to limit the number of reports its postmen can carry to prevent back problems. [We need to do some serious work on the carbon footprint in our profession.] (Page 160)

Finweek

Ernest Mazansky, the well known tax expert, says that in other countries they apply the “profits first” rule when distributions are made, i.e. if a company distributes share premium to its shareholders and they have profits available for distribution, profits will have been deemed to have been distributed. He suggests that this will probably be the case in SA when the new withholding tax details are worked out. He also points out that an STC rate of 10% is not the same as a withholding tax rate of 10% and suggests that when STC falls away, the rate should drop to 9%. [Wishful thinking!] (10 May 2007)

What you always wanted to know but were too afraid to ask

XBRL (Extensible Business Reporting Language) is a standard electronic-enabling language that allows data items to be tagged. It will make downloading into Excel spreadsheets a breeze – to be used for tax filing, regulatory filing, financial analysis, etc.

Short selling is the activity of borrowing shares and selling them. Proponents of this activity argue that it keeps the market efficient. Opponents believe that it results in declines in markets and is merely speculation that does not add any value, i.e. it is not socially productive. [I tend to agree with the latter view.] (CFA September 2006)

Naked short selling is the activity of selling shares before buying them, i.e. you do not have them to sell.

June 2007 (10 Minutes)

Accountancy

There is a move in the UK to restrict the term “Accountant” to only those who are qualified under one of the recognised bodies. However, a government spokesman says that such a move would be bureaucratic and would add significantly to business costs. It would also be anti-competitive. [Is this not what the profession is looking for? Kill your competitors, have the field to yourself and control the world.] (Page 8)

An accountant in the UK has been expelled for showing a degree of inefficiency and incompetence which is quite extraordinary. [Only a Brit could put it so quaintly!] (Page 10)

One of the executives in the Ahold case was jailed for seven years for participating in artificially boosting operating results. (Page 10)

The England and Wales Institute has apologised for sending CPD reminders to members who had submitted their CPD declarations. [In RSA the Institute apologised for the “tone” (arrogance) of their reminder.] (Page 12)

The MD of a company in the UK has asked whether the IASB ever listens to their critics. [From my experience, the answer is no.] He goes on to write: “What could be better than spinning out your employment term by producing more and more ever complicated standards? A classic example of the tail wagging the dog. One professor of finance and accounting at a well-known management school has written: ‘The quantity of compulsory accounting standards has more than doubled in the last 10 years to more than 2 000 pages. When will the explosion of incomprehensible verbiage end?’ Probably never, if the IASB technicians have anything to do with it. This organisation has turned accounting into an end rather than the means to an end . Its terms of reference are in dire need of a complete overhaul. (Page 15)

The Securities Exchange Commission in the US has agreed that it will no longer be necessary to reconcile IFRS with FASB in published financial statements. (Page 16)

In the previous journal, Emile Woolf cause an uproar with his accusations that the EU accounts were a mess. The chief accountant of the European Commission has defended his performance.(Page 20)

Grant Thornton has merged with Robson Rhodes to give it a boost to its claim to become one of the big players in the profession, but it is still a long way from the big four. (Page 54)

Labour members of the House of Commons has attacked the new standard on segment reporting as it gives management carte blanche to decide what they disclose and how to disclose it. (Page 75)

The debate on fair value measures is raging on. Some of the points being debated are:

1. Few liabilities have active markets so to use the price at which you could pay someone else to take over the liability is far too subjective.

2. The IASB should abandon the term “fair value” as it implies that everything else is unfair.

3. Transaction costs should be taken into account in determining fair values. [I brought this point up in Malaysia many years ago at an IASC meeting and was shouted down!]

The insurance accounting debate is on. It seems to be around the measurement of the contractual obligation the insurance company has entered into, i.e. what would it cost to exit the obligation. Because this value is not observable, it must be estimated using building blocks:

1. An explicit, unbiased, market consistent, probability-weighted and current estimate of the contractual cash flows.

2. Current market discount rates that adjust the estimated future cash flows for the time value of money.

3. Explicit and unbiased estimate of the margin that market participants require for bearing risk and for providing other services.

[Boy, can you just imagine the fun accountants are going to have applying these convoluted concepts to valuing insurance liabilities. Of what value will financial statements be in the future? After many years of making money out of this concept, accountants will be forced by the market to go back to a matching concept of accounting for profits of insurance activities. Nothing will stop this steamroller from destroying insurance accounting for the next few years.] (Page 79)

The IASB has stressed that measurement of insurance obligations at exit values is not intended to imply that an insurer will transfer its insurance liabilities to a third party. The purpose is merely to provide useful information that will help users of accounts to make appropriate decisions. [This has got to be the all-time stupidest comment I have ever read. Surely we should be telling it like it is, not telling it if we were to do something out of this world. If you are going to settle a liability, then value it at the settlement amount, not what you would pay some non-existent person from another planet to take over the liability! These guys are really losing it!] (Page 81)

Here is the sort of problem that can cost a company many hours of debate and lots of advisor’s fees. Holding company holds 80% of Subsidiary company and 30% of Associated company. Does Subsidiary have to disclose transactions as related party transactions with Associated? PwC’s answer is “No” as these companies are not related parties with each other in terms of IAS 24.9. However, this will probably change when the new standard is published. (Page 84)

Here is another lovely problem: H acquires 60% of S for R10m. The value of the identifiable assets is R100m and the liabilities are valued at R150m. No guarantees have been given by the other 40% of S to back the liabilities of S. Can one recognise the debit minority as an asset? The answer is no. The consolidating journal entry would be:

|Assets |Dr. |100 | |

|Goodwill |Dr. |60 | |

|Liabilities |Cr. | |150 |

|Cash |Cr. | |10 |

If the R10m was a fair value of the goodwill of the 60% holding, what is the additional R50m? An impairment loss?

CFA Institute

The Aspen Institute, among several other organisations, has added their voices to the chorus for companies to get off the earnings treadmill and get back to managing the business. [Companies that do this need to educate their shareholders as to their long term plans so that they can understand the long term strategy.]

Financial Mail

A broker entered a sale order for Anglo American at R129,50 when the price of the share was R429,50! The broker lost R90 000 on the deal. In another case a trader confused a warrant on Sasol with the share. This mistake cost the trader R200 000. Moral? Edit carefully before sending!

The man who has taken over from Mark Lamberti at Massmart has some interesting and effective ideas on management which are worth considering:

1. Finish what you start.

2. Choose five things to do in a day and when they are finished, tick them off and reward yourself.

3. Once a quarter, block out a period to take time off to think.

4. Write ideas down.

5. Do not overuse consultants.

6. Surround yourself with bright people.

7. People need to be loved and led so do it.

8. Say what you mean and do what you say.

9. Trying to be someone else is a waste of time.

10. Once you have made up your mind, sleep on any difficult decision. (29th, page 46)

What you always wanted to know but were too afraid to ask

BRIC countries (Brazil, Russia, India and China) are were the world’s new growth potential lies.

July 2007 (25 Minutes)

Accountancy

The large eight auditing practices in the UK are to be subjected to inspections undertaken by The Financial Reporting Council’s Professional Oversight Board. The Board will publish high level reports of inspections undertaken. [Who wants to be an auditor in this day and age.] (Page 8)

The “Publish What You Pay” lobby group is attacking the standard on segment reporting for not requiring country by country breakdown of results. (Page 10)

Two E&Y partners in the US have been charged with conspiracy to defraud over the sale of tax shelters. (Page 11)

This month’s journal was devoted to a group discussion of the smaller auditing firms in the UK and the problems they face. (Page 32 and on)

Simon Hussain makes an excellent point in that the operating segment information given to directors may not be what the investor needs when analysing the results. [One has to wonder what input users had iro this standard.] (Page 82)

Peter Hogate says that a possible scenario regarding US GAAP v IFRS is:

1. The SEC agrees that reconciliation between FASB and IFRS will no longer be required.

2. Global companies move towards IFRS.

3. US companies gradually move towards IFRS.

4. US GAAP is no longer taught at US universities.

5. US GAAP falls into disuse.

[Dream on Peter.] (Page 85)

A company decides to demolish a building and construct a new one on the site. The question arises: “How does one account for the demolishment costs?” According to PwC, these costs should be added to the cost of the new building. I would have thought that site restoration costs should be part of the cost of the original building and should be amortised over the life of the first building. I guess that their argument will be that this is only necessary if there was an obligation to restore the site when the original building was built. (Page 88)

Business Day

Hester Hickey, SAICA’s Chairman, says that a category of small companies should not be required to be audited since the costs of an audit outweigh the benefits. In terms of the Companies Bill 2007, small companies that do not have a high degree of risk to the public will not have to be audited. [Any logical person will agree with this. The question is, why did it take so long to come to this realisation? The money wasted by SMEs in the past could have been put to far greater use than in preparing and paying auditors to audit useless financial statements. We won’t even go into all the unnecessary disciplinary actions, trauma and grief that auditors of small companies have had to endure because of not ticking the appropriate boxes. However, I suppose that the saying “better late than never” is appropriate here.]

Citizen

Andrew Kenny says that there are two reason not to invest with an insurance company: You will lose money and they will not tell you why. He goes on to give his disaster experience with a retirement annuity investment.

“I worked for a prominent insurance firm. The manager had a plaque in his drawer that read: ‘Any benefit that accrues to the client is entirely incidental.’ ” (19th)

“I invested a total of R711 630 with an insurance company in five separate five-year contracts. At the end of the whole period I netted the princely sum of R6 023” The company will not provide any explanation.” (19th)

Financial Mail

Retail and institutional investors are moving away from relative performance and focusing on outcome orientation. They are actively separating alpha and beta performance, i.e. the bit you get from being in the market (beta) and the bit you get from the skills of the asset manager (alpha). [Gee, I did not realise that our SowB strategy was called “outcome orientation”!]

Chris Otto says that ticking corporate government boxes is not the solution to well managed companies. He gives LeisureNet as an example. It had a non-executive chairman, a separate CEO, committees chaired by non-executive independents. [Try Corpcapital for size.] He says that he wishes he had invested in companies run by people with integrity, spirit and passion such as Harry Oppenheimer, Donald Gordon, Anton Rupert, Bill Venter, Warren Buffett, Bill Gates, etc. [I agree whole heartedly. The system of ticking boxes is normally designed by theorists who have never been in business. A classic example is how box ticking has destroyed effective auditing. Auditors today are missing the big picture because the objective is no longer to evaluate whether financial statements fairly present the financial position and performance of a company but to prepare a model set of auditing working papers that will pass the test of Practice Review.] (27th, page 11)

Fortune

A judge gave permission to United Airlines to default on $6,6 billion in pension commitments. If you pilot your own ship you may still be able to fulfil your dreams (combing beaches, climbing mountains, travelling to interesting places, etc.) but it will require saving, planning, thinking, taking risks and possible redefining old age to over 80. [Rule 1: Keep control of and manage your own store of wealth.] (11th, page 19)

Some ideas on share picking:

1. Look for companies favoured by fund managers with proven records.

2. Over the long term companies with tried and proven products outperform others.

3. Go for companies with better than average earnings growth, strong brands and generous dividend payouts. (11th, page 22)

About 40% of workers say they are saving nothing for retirement. [And that is in the US. Can you just imagine what that ratio is in SA.] A lot of baby boomers will not be able to retire. They will have to find new occupations. (11th, page 34)

Many people who are planning for their own retirement say that they would love a return of 10% without the risk of losing any money. [This is in the US] If you want to construct a portfolio with this sort of return you must learn to live with volatility and risk. (11th, page 39)

If a company pays dividends it means that it has good managers who are not running the company for their own benefit. (11th, page 39)

You should keep 15% to 20% of your portfolio in fixed income securities. When markets fall, this may help keep you from panicking and selling. [Cheaper to go to a psychologist.] One should rigorously rebalance one’s portfolio. When shares are going crazy on the upside, one should rebalance to fixed income securities. When markets go down in the opposite direction, it is time to reduce the fixed income securities and reinvest in the market. [Excellent advice. The only problem is to try to project the future.] (11th, page 40)

Ken Dychtwald says that two-thirds of people who have ever lived past 65 in the entire history of the world are alive today. In the 18th century couples didn’t say: “What should we do in retirement?” They would be dead by then. Today one has to redefine “old” from being 60 to being 80. (11th, page 43)

Cait Murphy and Julia Boorstin list five threats to your financial security:

1. Equity investment returns are expected to be lower. In the US 6% p.a. is the consensus opinion. PE’s in 1981 averaged 8 in the US. Today they average 20.

2. Inflation is eating into the standard of living.

3. Interest rates are going down. [Not SA at present.]

4. Medical costs are going through the roof.

5. People are living longer. (11th, page 49)

Here are some ideas for saving:

1. Pay yourself first. Do not see money in your current account as spending money.

2. Treat all money the same. Do not treat windfall money as spending money.

3. Don’t throw good money after bad, e.g. if you are spending a fortune on your yacht, think about selling it.

4. Don’t see saving as depriving yourself. Visualise something concrete that your savings will do for you. (11th, Page 52)

The Ohio Police and Fire Pension Fund has nearly 7% of its portfolio in mortgage- and asset-backed obligations. The Ohio attorney general, Marc Dann, has accused the rating agencies of aiding and abetting the fraud that has become known as “sub-prime”. The credit agencies have responded by stating that they provide a very significant but extremely limited role in credit markets: they have no obligation to perform and do not perform due diligence. Their ratings are merely opinions. [Does this defence sound familiar? It is used by auditors every time they miss a major fraud. One must wonder just what “significant role” rating agencies do play.] (23rd, page 16)

Here is a list of the world’s largest companies by revenues, profits and assets:

| |Revenues |Profits |Assets |

|1 |Wal-Mart |Exxon Mobile |UBS |

|2 |Exxon Mobil |Shell |Barclays |

|3 |Shell |UAL |BNP Baribas |

|4 |BP |BP |Citigroup |

|5 |General Motors |Citigroup |HSBC Hold |

|6 |Toyota |Bank of Amer. |Credit Agricole |

|7 |Chevron |General Elect. |BankofScotland |

|8 |DaimlerChryslr |Gazprom |Ing Group |

|9 |Conocophillips |Pfizer |Mitsubishi Fin. |

|10 |Total |Chevron |Deutche Bank |

Oil, motors and banks dominate. (23rd)

Time

Liz Cialborne converted her 35 piece collection of clothes she designed into a $5 billion business. When asked how she achieved this she said: “I listened to the customer.” [Simplicity wins again.] (9th, page 15)

Tax Issues

Not being a tax expert, I am not qualified to comment on these issues but you should be aware of a recent case where a taxpayer claimed a deduction for settlement discounts. SARS challenged this in the Natal Tax Court and won. It then went to the Natal High Court and SARS lost. I thought that after the Peoples Stores case the Act was changed. The judge in the high court argued that the deduction was not a settlement discount but a penalty for late payment and the penalty, if paid, would only accrue in the following year. [I can see every company in SA scrapping settlement discounts and issuing penalties! I cannot imagine what this will do to customer relations.] (Gud Holdings (Pty) Ltd v SARS 69 SATC 115 reported in the July issue of Taxgram)

August 2007 (20 Minutes)

Accountancy

For the first time in the UK a case has been brought against an auditing firm (Moore Stephens) where wealthy fund-holders put up money to fight the case in which they have no direct interest other than in making money from winning it. [I find it sad that wealthy people can’t find better investments.] (Page 5)

Here is one for the books: A federal judge in the US has thrown out charges of illegal tax planning against 13 former executives of KPMG as their constitutional rights to counsel and a fair trial had been violated because prosecutors had threatened to indict KPMG if it refused to cut off the defendant’s legal fees. [You had better read that again if you have a normal IQ!] (Page 11)

Private equity firms are being attacked because of their lack of transparency in reporting the performance of their investments. (Page 26)

Roger Lister says that having stronger covenants in financing private equity deals could be self defeating as they are straitjackets whose protectiveness undermines the safeguards they are supposed to provide. [I experienced this when working at the IDC many years ago.] (Page 28)

The pension fund industry in the UK has taken three hits recently:

1. The equity bear market that began in 2001.

2. Falling bond yields that result in increases in the present value of pension fund obligations.

3. The incorrect assumption regarding longevity – the actuaries got it wrong – people are living longer than they thought! (Page 31)

As Darwin stated, the winners of tomorrow may well be those that can adapt to change rather than the strongest or the most intelligent. Prof Chris Edwards and Rob Lambert set out the elements needed to facilitate change, the most important being to create a culture of continuous change, to understand the drivers that point to change and to identify change initiatives [a very much simplified version of a complex list that only these professors can understand.] (Page 46)

Lloyds TSB, a bank in the UK, has introduced a cheaper tax preparation service for its clients, much to the consternation of practitioners. Could the same thing happen in RSA? (Page 51)

Hugh Williams recommends that accountants stop charging fees based on time sheets. Some of the points he makes are:

1. Of the accountants he surveyed, not one said that they were honest in filling in their time sheets.

2. The more inefficient the accountant, the more the client pays.

3. Accountants never charge for the full time spent anyway.

4. Time is wasted trying to track every minute.

5. Your employees will love it if you scrap timesheets.

6. Setting a price for a service and then having a goal to work for makes much more sense.

7. The client will have more certainty as to what the cost of the service will be. [I am in total agreement with these ideas!] (Page 56)

A report by KPMG based on interviews with senior accounting regulatory and industry figures reveals a widespread expectation of a more rules-based approach to IFRS. [I have always said this will happen. Principles result in subjectivity and therefore produce results that cannot be relied upon. As a user, I would prefer certainty – but let’s get the rules right first!] (Page 79)

86% of respondents to a survey believe that stewardship should be an objective of financial reporting, using the agency theory. (Page 79)

There has been a backlash in the EU against the SEC’s proposal to scrap the reconciliation between IFRS and US GAAP because the proposal is that only companies that fully comply with IFRS will be exempt. The EU carved out sections of IAS 39 so would not qualify for the exemption. The EU has been uncomfortable with a private body setting accounting standards for the region. (Page 81)

Some points emerging from a PwC survey of IFRS in the UK:

1. Over 50% of UK finance executives believe that the IASB will produce high quality standards.

2. 46%, however, are not convinced

3. 75% oppose fair values in the primary statements.

4. The complexity of the standards is a great concern.

5. IFRS is affecting the behaviour of companies.

6. IFRS is resulting in increased costs, longer time to prepare the financial statements and more difficulties during the process.

7. 59% feel that IFRS is neither helpful nor unhelpful. (Page 82)

Non-GAAP measures are under discussion now that the IASB is looking at the best way to report performance. These measures include EBIT, EBITDA and earnings before abnormal items such as impairments, restructuring costs, gains and losses on the sale of fixed assets and value re-measurements. (Page 84)

Here is a thought for you: The Professional Oversight Board performs a review of an audit firm, gives it a clean bill of health and then a client of the firm collapses. The firm is found to have conducted the audit negligently. Can the creditors sue the oversight board? (Page 90)

A company has a loyalty programme whereby for each rand of sales the customer gets one point. After accumulating 1 000 points the customer can get R100 of goods free. Sales during the month total R6 500. It is estimated that 10% of the loyalty points will be forfeited. What is the journal entry to provide for the loyalty programme?

|Sales |Dr. |R585 |

|Liability |Cr. |R585 |

6 500/1 000 x 90% x 100

(Page 92)

The audit quality forum in the UK is looking into whether third parties who make misleading disclosures to auditors should be held criminally responsible. [This is nice: I do favours for clients to whom I lecture by valuing options, intangible assets, post retirement benefit obligations, long term employee benefits, etc. and they are now considering jailing me if I get it wrong? Where are they going to find people to do these jobs? Or is this another scam to justify charging massive fees for these tasks using the “danger money” argument?] (Page 123)

Argus: Personal Finance

“When markets are volatile, investors are often attracted to alternative investments such as hedge funds, commodities, private equity and venture capital, in the belief that they can obtain positive returns at relatively lower levels of risk.” This has got to be the biggest lot of bull I have ever read! I won’t insult your intelligence by analysing this statement for you.

On the same page they recommend that you hold some of your investments overseas for riding out storms. They quote 23 off-shore fund returns over the past five years. They graph the performance of the best fund (11,2% p.a. over this period.) The average returns of the other funds was 6% p.a. Our JSE from 31 July 2002 to 31 July 2007 yielded 24% p.a. over this period. Are these guys brain-dead?

Business Day

The Street Dogs lists some words of wisdom from Felix Dennis’ book on how to get rich. He writes that you will not get rich if:

1. You are unwilling to fail

2. You care what your neighbours think of you

3. You feel guilty about neglecting your family while you are burning the midnight oil

4. You believe that being rich will impair your soul

5. You are not prepared to work when others play

6. You don’t see the process as a game

He says that sometimes all you need is a spark to go for it. (16th)

The Street Dogs says that something like 90% of all online traders go broke within the first few months of trading. This applies equally to currency, stock, futures and commodity trading. [Listen to GOM – use the SowB approach to investing and if you have the gambling instinct in your body, play dice with your children betting ten cents on a throw. Let your spouse take 20% of all winnings and you will soon realise who makes the money out of gambling.]

Financial Mail

The Public Investment Corporation is the single biggest investor in the JSE holding 9% of the market cap – R720 billion. Its top holdings are (guesses as worked off graph): (24th, page 23)

|CBS Property |25% |Tiger Brands |14% |

|Imperial |22% |Bidvest |13% |

|Aveng |20% |Standard Bank |13% |

|Super Group |19% |Business Connection |13% |

|Telkom |18% |Netcare |13% |

|Sasol |17% |Truworths |13% |

|Barloworld |17% |Reunert |13% |

|Lewis Group |16% |MTN |13% |

|JD Group |15% |AVI |13% |

|Woolworths |15% |Ellerines |12% |

|Steinhoff |15% |Sappi |12% |

|Remgro |15% |Murray & Roberts |12% |

|Sanlam |14% |Naspers |9% |

Bryan Malakou of Melrose writes: “About 90% of the trades are decided on by professionals, the same professionals who, 75% of the time, cannot beat an index. I put it to you that if the market is characterised by irrational herd behaviour, then this herd is largely made up of professional investors.” (17th, page 10)

Prof Bob Williams, says that taxing money stolen from investors is “disquieting”. [Let’s call a spade a spade: it is downright disgusting!] Marietjie Prinsloo’s Krion pyramid scheme took R1,5bn from 30 000 greedy/gullible investors. SARS now gets a cut of this fraudulent money before the curators can start distributing it to the “investors”. [What was the thinking at SARS? To teach investors not to be greedy/gullible?] (17th page 27)

The Financial Services Board has taken its first case public under its new regulations. A Mr Berman bought and sold shares at a higher than market price to manipulate the closing price to boost a fund’s reported performance. The FSB is looking for a R10m fine. [One must wonder how rampant this practice is – I find that at the quarter ends, prices miraculously jump. One workshop participant said that he saw the price of a certain share jump R4 a few seconds before the close on one of the key days.] (10th, page 21)

Mr Patrice Motsepe said at the Harmony results presentation that companies need grumpy old men who don’t smile and who are always asking difficult, unpleasant and fundamental questions. [I fit that category. However, I am ignored and ridiculed for asking such questions. People prefer “yes” men and women, especially in our profession. You have to be really mature to put up with GOMs!] (31st, page 12)

FinWeek

Pick n Pay’s directors and secretary sold 750 609 shares forward in Pick n Pay on 1 August at a price of R35,23 = R26 million. Llewellyn Jones speculates about the motive, e.g. is the price too high at present. I would like to find out who bought these shares – all deals have two parties to them. Is Pick n Pay the buyer? If it is, then the premium should be charged to salaries and wages!!! (16th page 44)

Selected members of the public were given only three hours to decide whether or not to take up shares in a company called Placecol, a manufacturer, distributor and marketer of beauty and skin care products. When this happens, investors do not have time to read the prospectus and do their sums. The pre-placement offer to management was at 60 cents per share and the public were offered the shares at 100 cents per share. The latest market price is 49 cents a share, a loss of 51% on the placement price. What are people doing investing in companies such as this? Being able to stag a share is no guarantee that you will make money. (30th page 42)

Sunday Times

Kim Pratley has criticised the authorities for forcing IFRS, which was written for large public entities, onto small companies, that merely prepare financial statements for tax and management purposes. Two gripes of his are having to depreciate components of assets and trying to determine residual values in calculating depreciation. Question: Why has this sort of thing only been exposed in the press now? I have been fighting for reform for 10 years. The bottom line is that the press is not interested in these issues, despite the fact that it impedes business in SA.

Tax Issues

Taxgram summarises the new laws on retirement funds:

1. Retirees will be able to withdraw one third plus R50 000 of any lump sum on retirement or death. The balance is lost, other than for an annuity payable until death!

2. The first R300 000 of the amount withdrawn is tax free. The next R300 000 is subject to tax at 18%. The next R300 000 is subject to tax at 27% and any amount above R900 000 is subject to tax at 36%.

Some participants of my Store of Wealth Builders Workshops got quite excited as they thought that the above taxes applied on resignation of a fund. No such luck.

Regarding STC, from 1 October 2007 until 2008, the rate has dropped from 12,5% to 10%. Thereafter, STC will fall away and be replaced by a withholding tax.

September 2007 (10 Minutes)

Accountancy

Statutory audit fees for the top 100 FTSE companies in the UK have doubled in the past five years from £212m to £398m. The reasons for this are Enron, IFRS, increased regulation, less people joining the profession and increased corporate activity. The biggest of the big four, PwC, saw an increase of 30% in the past year whereas the smallest, E&Y saw no increase. (Page 1)

The marketing director of the ACCA says that his association is on track to becoming the biggest accountancy body worldwide by 2010. (Page 7)

Grant Thornton says that the lawsuit brought by Refco (a finance company) by its creditors against all its corporate advisers (including PwC, GT and E&Y) is merely an attempt to avoid the consequences of its own actions and to seek scapegoats with deep pockets. The amount involved is £1bn – the UK’s version of Fidentia. (Page 7)

Here is a nice defence by big and mid-tier auditing firms: “If you hit us with punitive penalties you will take us out, which will have an impact on the choice clients have on which companies to do the audit.” [There is fear in the world that the big four could become the big three – so the four are automatically protected. Similarly, there is fear if they take out one of the mid-tier firms, there will be less competition for the big four.] (Page 7)

The UK’s Companies Act requires financial statements to be true and fair. IAS 1 only requires them to fairly present, which is a much weaker concept. Emile Woolf states that the concept of true and fair overrides all the IFRS rules. [The man is dead right!] The Enron executives insisted that they did not contravene any accounting standards. [We had the same situation in SA where Corpcap executives insisted that they did not contravene any accounting rules, but their financial statements were far from “true and fair”.] Applying accounting standards produce results that are unrelated to the entity’s underlying trading activities. [You are ahead of your time, Mr Woolf, sir.] (Page 22)

Phil Shohet writes that just when pensioners were starting to see the light with the stock markets increasing, the UK government, to raise revenue, killed the dividend tax credit given to pension funds, thereby creating another hole in pension funding. With companies now having to provide for the shortfalls, their prices start to fall. This impacts on pension fund assets, which requires more provisions for shortfalls having to be made, which causes more provisions having to be made, and so on into the black hole we go. (Page 23)

Business Day

A shock decision by the Supreme Court of Appeal has left taxpayers stunned. It has always been accepted that one cannot be taxed on an interest free loan. However, the court ruled in favour of SARS in the case of Brumeria Renaissance, Palms Renaissance and Randpoort Renaissance that the recipient of an interest free loan can be taxed on the interest not being paid on the basis that the use of interest free money constitutes a benefit being received. In this case interest free loans were given to entities who built retirement villages. The lenders then had the right to live in the houses rent free. There is now much uncertainty as to how SARS is going to view other interest free loans. Some tax advisors are saying that they won’t attack interest free loans given, for example, to family to help them in a crisis. SARS’ attitude remains to be seen. (14th)

Fortune

From the letters page (shortened): I have been an investor since 1968, a broker and an economics professor since 1971. With regard to the destructive effects of hedge funds, I tell my classes that all monetary gain must add value to the economy of a country. There must be a balance between the service and production sectors. Other than making billions of dollars for a select few, I see no value added to the economy by hedge funds. The world is awakening to this economic threat, but not fast enough. Henry Ford, Dale Carnegie and John Rockefeller all made money but they gave us an industrial might that was the envy of the world. Hedge funds are simply a drain on the world’s economy. The day of reckoning will come. (24th)

October 2007 (10 Minutes)

Accountancy

Northern Rock’s sub-prime liquidity problems has opened up the debate about fair value accounting. [I am not sure what fair value accounting has to do with bad investing.] (Page 6)

The European Commission and the UK standard setting board have adopted IFRS 8, despite the controversy surrounding this standard (segment reporting). (Page 8)

The European Commission has rejected the IFRS for SMEs. They are of the opinion that it is not simple enough for use by the bulk of SMEs. [Agree] The UK accountants, however, like it. (Page 8)

Only 14% of US CFOs are very familiar with IFRS and fewer than 10% say that they are very likely to adopt it. (Page 15)

Jeremy Newman says that he has become acutely aware that auditors look at issues from the perspective of the company that appoints them and not from the user perspective. He feels that the views of investors is crucial in this debate. [Where has this guy been? The whole purpose of financial statements is to meet the needs of users! But he is right – auditors do not even consider the users when taking stands on issues. They are only concerned about the rules in IFRS, regardless of whether their interpretation results in fair presentation.] (Page 22)

Rob Yeung say that many business people believe that if they build a business, customers will be drawn to it because it is there. He quite rightly points out that a business will only succeed if it provides customers with something they want or need. (Page 57)

Actuarial firm Hymans Robertson has warned that the new rules in IAS 19 will penalise a company’s financial statements if the company has a prudent funding policy for its pension scheme. (Page 73)

There is a rising tide in Europe against IFRS. Members of the parliament’s economic and monetary affairs committee feel that Europe cannot give up its right to endorse or reject IFRS, which is thought of as a pieces of legislation. (Page 75)

The Audit Quality Forum is looking into providing penalties iro experts that supply evidence to auditors if they are negligent or fraudulent. [I had better be careful because I do this often!] (Page 78)

The European Commission is considering scrapping the obligation to prepare and publish financial statements for micro entities, i.e. those with fewer than 10 employees, with assets below about €5k and turnover of less than about €1m. They estimate that this could save €6,4bn p.a.! [Why do we not have people in SA who can see this. Or is it that they do not want to see it?] (Page 103)

The US sub-prime mortgage market – worth $1 200bn or 10% of US GDP – made loans to high-credit-risk borrowers, including some with no proof of income. Interest on these loans started at a low rate and are due to reset in future. These loans were packaged as collateralised debt obligations (CDOs) and sold to pension funds, hedge funds, insurance companies and banks around the world. The two problems with these securities are lack of liquidity and possible impairment due to default. The extent of the problem is unknown. (Page 105)

FinWeek

One of the most frequent questions I am asked in the Store of Wealth Builders workshops is: “Who should I use as a stockbroker?” Well, Finweek come to the rescue with this list:

ABSA

Brokerage: 0,4% with a minimum of R120 per deal.

Administration fee: R41,66 per month but waived if more than four trades p.a..

15 minute delayed prices and research: Free.

BOE

Brokerage: A sliding scale of 0,7% for up to R250 000 to 0,35% for over R1m with a minimum of R70.

Administration fee: R120 per quarter.

Live prices and live research: Charged separately (R80 and R70) but free if one or more trades per month.

PSG Online

Brokerage: A sliding scale of 0,9% for up to R25 000 to 0,5% up to R1m. Can negotiate over R1m. Minimum R98.

Administration fee: R40 per month.

Live prices and live research: Charged separately (R70 and R57) but free if more than two trades for prices or a trade for research.

Sanlam i-Trade

Brokerage: A sliding scale of 0,75% for up to R25 000 to 0,5% for between R250 000 and R1m - over R1m negotiable with a minimum of R99.

Administration fee: R57 per month but waived if brokerage more than R300 per month.

Live prices and live research: Included in the fees.

Standard Bank

Brokerage: 0,7% with a minimum of R70 per deal.

Administration fee: R54 per month but waived if more than two trades per month..

Live prices: Charged separately

Research: Free.

Fortune

Geoff Colvin says that sales at retail chains in the US have dropped in recent weeks in real terms. Wal-Mart has cut its profit forecast and Target and Lowe have forecast weaker sales . He says that investors in the US have to brace themselves as consumers are going to start living within their means again. (29th, page 37)

Time

I really liked the following comment in Nancy Gibbs’ article on Mario Capeccihi’s winning the Nobel Prize for medicine. “It’s a cliché that strength comes from adversity. But clichés are just hard truths tamed by familiarity. Maybe he triumphed in spite of his ordeals, not because of them.” (22nd, page 52)

November 2007 (15 Minutes)

Accountancy

This month’s journal was devoted to “green” issues. The Prince of Wales believes that accountants should take the lead in identifying green issues, monitoring and measuring them and advising clients on them.

Emile Woolf asks the question: “Why did the bankers break all of the traditional rules of lending, which resulted in the sub-prime mortgage fiasco?” Some of the points he makes in the article are:

1. It was convention not to lend more than 90% of the value of the property or three times annual earnings. Why was this changed to 130% of the value of the property and six times earnings.

2. A standard rule in banking is not to borrow short to lend long. These instruments carry a few months payment term yet the underlying loans are repayable over 20 years.

It is important to distinguish between liquidity and insolvency when trying to understand the sub-prime problem. Central banks can assist with liquidity but cannot support insolvency. (Page 20)

Climate change and carbon issues are now being seen as real business issues. Add to these concerns environmental (leaving behind a blighted landscape) and social (sweat shops) issues and sustainability becomes a priority in big business. Sustainability should be seen as a mainstream issue and connecting sustainability, financial and narrative reporting will give a more complete view of how companies are operating. (Page 23)

Our very own Mick Davis, CEO of Xstrata, is the highest paid accountant in the FTSE 100 companies. [I wonder if he received a threatening letter from SAICA that he would be disciplined if he did not put in the CPD hours?] (Page 38)

A third of Britons think it is okay to exaggerate their work expenses, 30% of employees admit to doing so and 41% can see nothing wrong with adding up to 9% onto an expense claim! (Page 51)

It appears as if Europe could reject the standard on Business Combinations. To try to counter such actions by countries around the world, the IASB will be published with a 20 to 25 page feedback statement for the non-technical decision makers setting out the cost-benefit analysis and the thinking behind the conclusions reached. [Why don’t they just simplify the basis for conclusions instead of wasting more trees?] (Page 72)

Many preparers are becoming weary of having to implement a framework that keeps being altered and updated. Instability is difficult to live with and the benefits of all the changes are not apparent. (Page 73)

Joanna Osborne of KPMG writes that a good principle based standard should be:

1. Written in plain English

2. Can be explained in a few minutes

3. Is intuitively right

4. Helps preparers explain the substance of the transaction.

She then tears IFRS 2 apart at the seams for being a bundle of rules that go against the simple four principles set out above. One of the points she makes is that good standards should not contain rules to avoid abuse. [A good example of this is IAS39.88.] The real issue here is: “Where are we heading with IFRS? Will it ultimately be a set of principles or a set of rules? It seems as if “rules” is winning the battle over “principles” at present. (Page 75)

UK auditors now face a provision in their Companies Act that states it will be a criminal offence for an auditor to knowingly or recklessly cause an audit report to include any matter that is misleading, false or deceptive in a material particular or omits a statement that is required under the Act. This sanction does not include a custodial sentence but will result in a criminal record. [Who wants to be an auditor?] (Page 76)

If a lease agreement with unfavourable terms is acquired as part of a business combination, it should be measured and recognised as a liability even if it is not an onerous contract. (Page 78)

A proposed amendment to IAS 16 recommends that if assets held for rental are regularly sold in the ordinary course of business, they should be transferred to inventory and included in revenue when sold. [I was told recently that an auditor is insisting that a large item of plant being built for servicing a customer that will be hit by IFRIC 4, must be treated as a sale through revenue. Note that the above is “regularly sold” which I can live with. But not a one-off item of plant.] (Page 80)

Business Day

The Financial Services Board has, at last, under new regulations, successfully prosecuted two market manipulators. The asset manager who placed buy and sell orders to manipulate a share price and the stockbroker who did the deal both got R2m fines. Rob Barrow, executive officer of the FSB, said that the judgement sends a clear message that those who knowingly break JSE rules will pay the price. (2nd)

Business Times

BT published its top 100 companies. The winners are based on a five year return on investment. Before you get hyped up on investing in the winners, take a look at the list of the previous winners, e.g. Waltons, Metro Cash and Carry (a three times winner), W&A ( a two times winner), etc. Just because a share has performed incredibly well off a low base in the past, does not mean it will be a winner in the future. Imperial is a “lovely” example of this! Position yourself for the future; do not go forward looking backwards. (11th)

Richard Oldfield is a much admired fund manager in London with an excellent investment pedigree. He has written a book called “Simple but not easy”. He says that investing is not complicated but it is difficult to beat the market in the long term. He says that analysing one’s mistakes makes one a better investor. He devotes a chapter to hedge funds and states that “In aggregate, hedge funds are a con.” [Now that is kind of brutal!] (25th)

FinWeek

The Pension Fund Amendment Act of 2007 now allows a maximum of one-third of the accumulated benefits to be taken as a lump sum, of which R300 000 is tax free. The balance must be used to acquire to acquire an annuity, which is fully taxable on receipt. (16th, page 46)

Fortune

Mr Alan Greenspan’s comments on the sub-prime debacle:

“This was an accident waiting to happen. We get to a state of extraordinary exuberance which, when confronted with reality, turns to unrelenting fear, huge withdrawals, extraordinary little liquidity, and considerable credit fears. We know where it is going. We just don’t know the actual specific resolution. We have never had the capacity to defuse a bubble.” (1st, page 84)

Stanley Bing said to his daughter that he was thinking of joining Facebook. Her response was: “Dad, anybody over 25 who is on Facebook is a dork.” (1st, page 108)

Geoff Colvin says that Wall Street analysts are still awful at predicting bad news. They have not lost their habit of falling in love with the company they cover and refusing to face unpleasant realities until everyone else has already done so. (24th, page 52)

A pack of the highest paid executives on the planet backed by math whizzes and computer geeks have managed to lose tens of billions of dollars on exotic instruments built on the shaky foundation of subprime mortgages. The blow to shareholder wealth has been staggering. Citigroup’s share price has fallen 35% and Merrill’s by 36%. The Bank of America, JP Morgan Chase and Credit Suisse have lost more than $240bn in market value. [So just tell me: Did all of the regulations like SOX, CPD points, practice review, etc. that were supposed to stop another Enron work? People who sit in their Ivory Towers and make these kinds of rules must understand one fact of life: “You cannot legislate to stop GREED. What you have got to do is to increase the penalties (lots of jail time) so that those bent on perpetrating schemes for their own gain can weigh up the costs against the benefits. Bureaucrats are missing the point: internal controls, corporate governance and filling in audit checklists will never stop this sort of thing. Make the cost of perpetrating crimes high and prosecute effectively. And don’t let them out of jail early!] (26th, page

December 2007 (20 Minutes)

Accountancy

A member of the ICAEW has slammed the Institute over grossly unfair penalties handed down in disciplinary hearings. One member was fined £740 for a child pornography conviction and another £3 800 for a cheque that bounced. [I can tell you some horror stories from SA my mate!] (Page 6)

A survey was conducted among investors and analysts. Here are some of the results:

1. 40% could not name E&Y as one of the top six firms.

2. 37% did not know that KPMG was part of this group.

3. 29% knew that Grant Thornton was part of this group.

4. 18% knew that BDO was part of this group.

5. 7% thought that Arthur Andersen was a part of this group!

6. 44% said that they would be concerned if a company changed auditors from one of the big four to another firm outside the big four. (Page 8)

The Securities Exchange Commission in the US unanimously agreed to scrap the reconciliation between US GAAP and IFRS, if the financial statements fully comply with the latter. (Page 8)

For the 13th year in a row the auditors of the EU failed to give an unqualified audit report. (Page 15)

The ex chairman and managing director of the Independent Insurance Company has been jailed for his part in the demise of the company. Emile Woolf asks how it was possible that the company with the lowest premiums and the lowest reserves and the highest profits in the game missed the attention of the regulator. The company achieved these results by hiding claims. [No amount of box ticking by auditors would pick up something like this. We have got to go back to the days where auditors did proper audits. Where they did analytical reviews and kept their eyes and ears open rather than focusing on pre-programmed audit procedures.] (Page 20)

Most successful partners of audit firms say that effective marketing begins with work well done. Study after study shows that after a good experience, clients talk, creating reputation. They come back for more and refer the firm to others. [I had the privilege of working for the Industrial Development Corporation (the IDC) back in the 1960s. The then chairman, Dr. Kuschke, taught us that if you give a really great service, success will follow. I have followed this advice all my life.] (Page 47)

Martin Pollins reminds us that we should not neglect issuing engagement letters before undertaking assignments for clients. He gives, among others, the following reasons:

1. They are invaluable if a dispute arises as to the scope of the assignment

2. They reduce the risk of fees being disputed

This is something I do not do and, as a result, seldom get paid for ad hoc services I perform. (Page 50)

Rob Yeung sets out the seven deadly sins of making presentations. Here are the top five:

1. Not anticipating the needs of the audience

2. Not being properly prepared [this is my biggest nightmare]

3. Not keeping it simple and logical

4. Overdoing the visual aids

5. Not engaging the audience (Page 56)

The results of a major research study undertaken by nine universities in four countries over five years linking diet and cancer has been published. The following five conclusions were arrived at:

1. Obesity, alcohol and red meat all significantly increase the risk of cancer

2. Physical exercise convincingly protects against cancer.

3. Nutritional supplements do not prevent cancer – they can actually increase the risk of some cancers

4. Excess salt is a cause of stomach cancer

5. Breast feeding reduces the risk of breast cancer in mother and of obesity in babies.

The previous rule of five portions a day of vegetables should be increased to 7,5 portions. (Page 58)

Recent floods in the UK have made people re-look at disaster recovery. 62% of respondents to a survey admitted that they do not have information security systems in place. Although many run regular back-ups, they have not put their firms through a full disaster recovery test. (Page 67)

Financial Mail

When a BEE partner tried to get out of a company by selling his 10% back to the company/the other shareholders, he was told that his shareholding was worthless. My second rule of investing is never to take a minority share in a private company. Why? Because when you try to sell you will be in a very weak negotiating position and regardless of the intrinsic value of the investment, you will lose. Last year I had to value a BEE minority stake. The majority shareholders formed a new company and moved all the business contacts/contracts from the old to the new, rendering the old business worthless. A minority shareholder is left out in the cold. A week ago I had to value a minority stake in a service company. When we sat down with the majority shareholders and tried to work out budgeted profits for the next five years, all sorts of problems presented themselves resulting in budgeted losses for the foreseeable future. If you want a stake in a company, rather get a share of the profits resulting from your efforts. Do not invest in a minority holding. Doing so breaks my first rule of investing: Do not lose control of your investments. (14th page 21)

FinWeek

Boel Pretorius, the CEO of Reunert, says: “Empowerment adds no value. If people expect it to, then they want to resort to bribery. It’s your products and services that will determine how successful you are. Having the right empowerment just ensures you won’t be discriminated against.” He goes on to say that the accounting treatment of BEE is insane. [He is absolutely correct! To take a one-off cost such as this to headline earnings is an absolute joke when one considers what the objective of headline earnings is supposed to be.] (6th, page 39)

An investor gives her money to an investment manager. She thinks that he is investing it in a bank. Instead, he gives it to Fidentia to invest. What I find amazing is that if she wanted it invested in a bank, why did she not do it herself. NEVER lose control over your own investments by handing your hard earned cash over to another to invest! DIY. (6th, page 24)

A journalist I never miss reading is Stephen Mulholland. It is a real privilege to be able to share in his wisdom on a weekly basis. May I have this privilege for many years to come. This week he looks at the Barber cross – draw it – on the top is Active, at the bottom is Passive, on the left is Positive and on the right is Negative. Thus there are four categories of characteristics and style:

1. Active-Positive: Those with high self esteem, well defined goals who like to get things done.

2. Active-Negative: Those who put in effort but do not feel rewarded from such effort, find life tough going.

3. Passive-Positive: Those who are agreeably co-operative rather than assertive, receptive, compliant with a low self-esteem.

4. Passive-Negative: Those who carry out duties based on a sense of uselessness and avoid conflicts.

He then proceeds to place former US presidents into these categories (Ronald Reagan (1), Richard Nixon (2), Jimmy Carter (4)) and then categorises Messrs Mandela, Mbeki and Zuma – like to guess? (6th, page 26)

Fortune

Think we’ve got problems. The Egbin thermal power station in Lagos, Nigeria, has a capacity of 1 320 megawatts. Two of its six units have been cannibalised to repair the remaining four. The funding they are supposed to receive never arrives. The builders of the plant do not get the maintenance contracts – they are awarded by the regime in power. Large parts of the day Lagos is without power and after 8 p.m. darkness reigns. At best Nigeria generates 4 000 megawatts for its 140 million people. [SA 37 000 (?) megawatts for its (50 million (?) people.] Businesses in Nigeria have to provide their own power to survive. Is this where we are heading? (10th, page 10)

Fun Corner

Bill Gates, in a speech given at a high school, told “learners”:

1. Life is not fair – get used to it.

2. The world does not care about your self esteem – accomplish something before you feel good about yourself

3. You will not earn $60 000 p.a. straight out of high school

4. If you think your teacher is tough, wait until you get a boss

5. Flipping burgers is not beneath your dignity – your grandparents called this opportunity

6. You do not have to compete at school because they have done away with winners and losers. In practice, it is all about competition.

7. Life is not divided into semesters. You do not get summers off.

8. Be nice to nerds at school because the chances are you will be working for a nerd one day. (Financial Mail)

A flight in the US was diverted due to bad weather. A regular passenger, a blind women, decided to remain on the plane while the others got off to stretch their legs. The pilot asked the blind woman if he could take her dog for a walk. She agreed. When the pilot, wearing sunglasses, emerged from the plane with a seeing eye dog, the passengers panicked, tried to change planes and even tried to arrange alternative airlines. (Financial Mail)

I loved the comparisons between going to school in the US in 1997 and going to school in the US in 2007. Here are three of the best you can relate to in RSA:

Billy breaks a window in his neighbour’s car. His dad gives him a whipping with his belt.

1997: Billy is more careful next time, grows up normal, goes to college and becomes a successful businessman.

2007: Dad is arrested for child abuse. Billy is removed to foster care and joins a gang. Billy’s sister tells the state psychologist that she remembers being abused herself and dad goes to prison. Billy’s mom has an affair with the psychologist.

Pedro fails English.

1997: Pedro goes to summer school, passes English and goes onto college.

2007: Pedro’s cause is taken up by a local human rights group. Newspaper articles appear nationally explaining that making English a requirement for graduation is racist. Lawyers file a class action lawsuit against the public school system and Pedro’s English teacher. English is banned from the core curriculum. Pedro is given his diploma anyway but ends up mowing lawns for a living because he cannot speak English.

Johnny falls during recess and scrapes his knee. His teacher, Mary, finds him crying and gives him a hug to comfort him.

1997: Johnny soon feels better and goes back to playing with his friends.

2007: Mary is accused of being a sexual predator and loses her job. She faces three years in federal prison. Johnny undergoes five years of therapy.

And this is called progress.

I really loved Stanley Bing’s story in the March issue of Fortune about an obnoxious being on a plane in First Class flying between New York and Los Angeles. From the time the plane took off he talked at the top of his voice on his cellphone to business associates, his wife, and his girl friend. The more he drank the louder he got. The flight attendants were asked to intervene, but could do nothing to stem to annoyance. A baby in the plane had screamed for about an hour before going off to sleep. A piecing shriek of glee from our obnoxious fellow woke the baby. Two passengers then approached the guy and asked him to tone down his rhetoric. He gave them the finger. A crowd formed and started attacking him. He was knocked unconscious by a bottle, a fork was jammed up his nose, his cellphone was destroyed and everybody took a turn in venting their fury on his limp body. After a brief trial, the jury took a mere 15 minutes to give a not guilty verdict. Want to join a vigilante group to sort out all those inconsiderate, objectionable excuses for human beings that make our lives a misery?

Sad Corner

If you have not done so yet you should consider joining the Living Will Society, P O Box 1460, Wandsbeck, 3631. Here is a poem from their latest newsletter called “Open your eyes”:

What do you see, Nurse, what do you see?

What are you thinking when you’re looking at me?

A crabbed old woman, not very wise

Uncertain of habit, with far-away eyes

Who dribbles her food, and makes no replies

What are you thinking? What do you see?

Open your eyes, Nurse, you’re looking at me.

I’ll tell you who I am, and just how I feel,

How life never changes, and is always so real.

I’m a small child of ten with a farther and mother,

Brothers and sisters who love one another,

A young girl of sixteen, with wings on her feet

Dreaming that soon, a lover she’ll meet.

A bride now at twenty, my heat gives a leap,

Remembering the vows that I promised to keep.

At twenty-five now I have young of my own.

Who need me to build a secure, happy home.

A woman of thirty, my young now grow fast

Bound to each other, with ties that should last.

At forty my young ones have grown and are gone,

But my man’s still beside me, I’m not yet alone.

At fifty, once more, babies play round my knee

Again we know children, my loved one and me.

Dark days are upon me, my husband is dead,

I look to the future, I shudder with dread,

For my young are now rearing young of their own

And I think of the years, and the love I have known.

I’m an old woman now and nature is cruel,

‘Tis her jest to make old age look like a fool.

The body it crumbles, grace and depart,

There now is a stone where there once was a heart.

But in this old carcass, a young girl still dwells,

And now and again this battered heart swells,

I remember the joys, I remember the pain

And I’m living and loving life over again.

I think of the years, all gone too fast,

And accept the stark fact that nothing can last.

So open your eyes, Nurse, open and see

Not a crabbed old woman, look closer, see me.

I hope and trust that you have a truly great 2008.

Kind regards,

Charles Hattingh

1 January 2008 (Just made it!)

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