Mafia Buzz Issue 3
January 2006 (45 Minutes)
Accountancy
The UK profession is angry with the Government regarding their decision not to make the proposed operating financial review compulsory (OFR). An enormous amount of effort went into the development of this document, which has major benefits for the users of financial statements. Clearly there is a political motive here. (Page 1)
The suggestion is that the OFR will, despite the Government’s action, become a feature of listed companies’ financial statements – the market will dictate. The Friends of the Earth have claimed that the government’s U-turn is unlawful and may seek a judicial review in the High Court! (Page 6)
The BBC has announced that it is to scrap 340 of its 650 accounting positions. The savings will be pumped into improving its programming. They are to introduce simpler business procedures. [Getting their priorities right?] (Page 11)
Since Enron begat Sarbanes-Oxley, the Securities and Exchange Commission of the US fined more companies in 2002 than in the period from 1934 to 2001! [Where is the money going?] (Page 19)
Robert Bruce explores why people are loyal to one service provider. He concludes that it is because people like belonging – they need warmth, kindness, dependability, energy and wit. [I presume he is not talking about accountants who want a top service at the cheapest price!] (Page 20)
Emile Woolf is worried that people are becoming desensitised to companies restating their results. Previously, there was a stigma attached to restatement. Now, it is common place. Fannie Mae, in the USA, for example, has admitted to misclassifying its mortgages by $6,7bn. The European Commission’s accountants have been qualified by the auditors for the past 11 years. They don’t even bother to restate because they would not know where to start. (Page 23)
Jonathan Russell, president of the UK 200 Group says that the profession should start to sell the audit as a value added service rather than a distressed product to SMEs. [As long as we see an “audit as an audit as an audit”, we will not be able to sell it. What we need to do is to develop a real audit for SMEs, not an Enron/WorldCom type audit that SMEs cannot afford.] (Page 45)
Sir David Tweedie says that there will be no new standards in the next 12 months as the emphasis will be on bedding down the existing standards. He says that there needs to be a move from a set of accounting rules to principles requiring the application of judgement. [Are we capable of applying judgement honestly when the chips are down?] Pensions, leasing, and special purpose entities will take up the time of the IASB in the coming year. (Page 45)
Nigel Jones of E&Y says that the IASB’s proposed new management report is similar to the operating and financial review so could achieve the original aim in the UK. (Page 45)
Peter Wyman of PwC says that 2006 will see a major corporate scandal where auditors will initially be blamed. The test for government and the regulatory community is whether there will be a thoughtful regulatory response or a knee-jerk over-reaction. (Page 46)
Ian Dixon’s excellent article on being prepared for a disaster such as bird flu is a must read if you get this journal. The World Bank estimates that bird flu could cost the global economy $800bn. It could kill between 50 000 and 700 000 in the UK alone. It is essential that scenario planning be done to visualise the possible situations and plan how to cope. The article looks at different industries to evaluate the impact on them, e.g. the female staff will either be down with the flu or will be looking after others that are. Closing shop is not an option as people need food. Opening stalls in the car park to minimise contacts may be a possibility. Lots of thought still has to go into the planning process. (Page 56)
Jon Moon’s article on how to effectively present information is brilliant. [While reading it, my neighbour popped in for assistance with some investment decisions. His portfolio is managed by a bank. He had no idea what investments he had because of the pathetic way in which the portfolio is presented to him. I rearranged his portfolio doing some basic classifications and, for the first time he knew what shares he had.] Jon says that showing information is about communicating and not about computing. He says that one should drop the words and give a table. He says pretty graphs, especially pie graphs, are a pathetic way of communicating facts – he says that the only thing worse than a pie chart is two of them. He says one should focus on improving the way information is presented to save the reader time and to ensure that better decisions are taken. He illustrates this with the report the engineers gave to convince the decision makers to abort the 1986 doomed space shuttle. Because of poor communication of the facts, the decision makers took the wrong decision with disastrous results. Clarity is power. (Page 63)
The auditors of the top 100 FTSE companies are PwC 41, KPMG 21, Deloitte 19 and Ernst and Young 19. (Page 70)
A recent survey by software providers Mind Your Own Business found that 32% of entrepreneurs regularly turn to their accountants for strategic business advice, which sounds impressive until you find out that 28% take advice from friends and 25% from their family. Entrepreneurs are sales people – they have an idea they passionately believe in and it is important that accountants who work with them are as enthusiastic about their business as they are. They do not always make good bosses as they tend to be task focused rather than people focused. (Page 72)
When hurricane Katrina hit the cost of North America it put a number of CPAs out of business – they had not planned for such an event. (Page 77)
Only 47% of analysts now believe that IFRS will provide a greater insight into a company’s true financial position. (Page 83)
Previously if the same partner and senior staff dealt with the same audit client over a number of years, this would have been seen as a benefit to the client due to the sound advice that was able to be given. This situation is now seen as a threat and auditors are rearranging their relationships with their clients. (Page 84)
ISA240 (the auditor’s responsibility to consider fraud in an audit of financial statements) states that although it is a basic premise that management is responsible for the prevention and detection of fraud, the auditor has a duty to consider the matter as a central part of the planning of the audit. Where the assignment is a pure audit, the extra resources spent on planning can produce a more tailored approach to the audit. However, where the auditor spends a significant amount of time on the preparation of the financial statements, that extra time will be of little benefit. Safeguards will need to be introduced to ensure that doing accountancy work and audit work does not threaten the audit opinion or the independence of the firm. Maintaining a first class service means that costs will increase resulting in SME clients looking for cheaper alternatives, provoking more debate on auditing standards. [There is a need for a differential auditing service, i.e. get out of this box of “an audit is an audit is an audit”!] (Page 85)
Tim Harris of PwC says that the quality, clarity and credibility of disclosure have become as much a competitive as a compliance issue, with implications for share prices and cost of capital. He recommends that reliance on ad hoc project teams have been needed to get over the first hurdle but a more sustainable approach is now required. Better training and organisation can achieve real improvements. People at group and business unit levels should be identified to run with IFRS responsibilities. [This is all very well for the large listed companies that can afford the luxury of in-house IFRS expertise. But for the small listed company it would, surely, be better to outsource this and let the staff get on with the job of running the company?] (Page 87)
UK travel company Go-Ahead considers that it is inappropriate to apply the requirements of IAS19 to rail industry pension schemes as on the expiry of the rail franchise it has no further rights or obligations in relation to pensions. [Nice people – just walk away from their obligations after promising them pensions?] (Page 92)
The IASB has published a discussion paper on measurement bases for financial accounting – measurement on initial recognition. It is calling for comments. The deadline for commentary is 19 May 2005. [They did not give us much time to comment!] (Page 93)
Ian Morris, the ICAEW president, says that the profession needs to encourage market leaders to adopt the operating and finance review best practices despite the government not supporting this initiative. (Page 117)
There are currently some 600 disciplinary cases open at any one time in the UK with a case manager handing 50 cases. [This is an indication of just how small we really are in little RSA!] (Page 119)
Here is a familiar story: “No matter how hard I work, there are always more emails, more files, more events to attend to. I know I should be doing more strategic stuff, but I never get around to it. I know I should be delegating more but I first need to spend time with my staff to help them take on the work. I already know the solutions but do not have the capacity to implement them. My to-do list grows faster than I can tick items as done.” What was the personal coach’s solution to this poor guy’s problem? List only three things and do and tick them and you will feel good about what you achieved. [Got to be kidding – dreamland. If I achieve 40 things in a day, I feel that I had a good day. My email list got down to only one item during December (Deon J, I just never got to your problem – sorry!!) and is now back to the normal 20 to 40 items (about 25 come in per day of which at least 10 are accounting or valuation problems requiring solutions.) (Page 120)
Accountancy SA
Note: I do not summarise these articles because you should read them in full. I merely draw your attention to them.
Jayne Mammatt writes about the “get tough” attitude of the authorities to white collar crime, e.g. the 25 year prison sentence given to the 63 year old Bernie Ebbers. [Just to update you, the Porritt/Bennett case that was due to start on 23 January 2006 was postponed once again.]
Tersia Booyzen writes about the problems minorities face in the workplace.
Rob Cooper discusses the annual bonus and tax implications thereof.
Theo Vermaak discusses the proposed changes to corporate law. His second last sentence is good news, i.e. it is on the cards that an inter vivos trust will be allowed to be a member of a cc, provided that no body corporate is a beneficiary of the trust. There will also be a number limit. [I think that this will result in 100’s of private companies converting to close corporations. However, I was speaking to the partners of PKF and they tell me that few of their clients will benefit from this.] [Note: This has now been gazetted – more next month. The total of the beneficiaries and members shall not exceed 10. There is a big scramble to convert to CCs to avoid audits for the 28 February 2006 year ends!]
Dave Lubbe and Cobus Rossow, my colleagues from the University of the Free State, write about the shocking culture of non-payment in local authorities.
Greg Fisher looks at funding a start-up business.
Beric Croome writes about the relationship between SARS and the taxpayer, e.g. registration, audits, the taxpayer’s charter, etc.
Billy de Beer, Chris Blair and Mark Bussin write about designing incentives for executives.
There were some nice letters to the editor supporting me regarding the straight lining of leases. One last word on the matter: CAs don’t seem to know when to let sleeping dogs lie. They are prepared to cause absolute chaos for no reason whatsoever. No wonder we are one of the most disliked professions!
My article this month was conspicuous by its absence – you can view it on my website. In the previous Mafia Buzz I implied that Accountancy SA did not like “free speech”. Tersia Booyzen, the editor of this journal, has assured me that “Accountancy SA is constantly striving for editorial independence to ensure that all views are given a fair hearing without compromising editorial integrity.” Not to put her under too much pressure, I will tone the rhetoric down (a little bit)! [For more on “free speech, see ‘Other Tit Bits’ below.]
The ever delightful Penelope Webb writes about the dangers of tax collecting and tax evasion.
Cees Bruggemans discusses the current economic situation.
Financial Mail
According to PwC research, intellectual intangibles accounted for about 75% of Fortune 500’s total market capitalisation in the late 1990s. PwC says that companies should:
1. Prepare an inventory of trademarks, patents, trade names, copyrights, protected works and know-how.
2. Objectively value these assets.
3. Develop cultures, rules and procedures for protecting this commodity.
[I would go further. You cannot manage something you cannot measure. And you need to know what the value of the intangible assets are from year to year to evaluate whether the expenditure on these assets is having its desired effect. My only problem is that valuing intangibles is highly subjective. PwC says that their valuation techniques overcome this problem.] (20th, page 40)
The fraud trials of Gary Porritt and Sue Bennett of Tigon and Jeff Levenstein of Regal have, once again, been postponed. [These are very clever people! One wonders whether the judicial service has the resources to take them on.] (27th, Page 8)
Mr Pravin Gordhan’s thoughts on success are:
1. Listen and learn (get the facts).
2. Analyse and strategise.
3. Have the humility to say “I don’t know.”
4. Keep the goal in mind.
5. Build a good support base.
Some complaints about SARS’s policies and actions are:
1. They seem to have a bad attitude in that they are trying to make an example of the big companies.
2. Their intransigent attitudes seem to be motivated by their performance bonuses.
3. Their “pay-now-argue-later” approach is causing much unhappiness.
4. They expect prompt responses to their queries but do not reciprocate.
SARS is trying to attack impermissible tax avoidance (ITA) schemes, which Lord Templeton says mostly involves some pretence. Some schemes are so intricate that a law would need to be specifically designed for each one. [I am on SARS’s side on this one! You would think that tax advisors would have learnt from what happened to KPMG in the US with their tax schemes!] (27th, page 16)
Tony Balshaw, of Grant Thornton, well known for his involvement in family business, gives us some insight into Anton Rupert’s beliefs, some of which are that business should be based on mutual trust, partnership with equal shareholdings, a willingness to share responsibility and accountability, clear vision and values and transparency resulting in lasting relationships. [Tony’s book called Cracking Broad-Based Black Economic Empowerment, Codes and Scorecard Unpacked, written with Jonathan Goldberg, has just hit the book shelves. It is on my reading list.] (27th, page 26)
Economist
This journal did a survey on financial literacy. Here are some of the findings:
1. In Australia it was found that 37% of people who owned investments did not know that they could fluctuate in value.
2. In America, 31% did not know that the finance charge on a credit card statement is what they paid to use credit.
3. Few people keep track of how their investments are performing.
4. Once people take decisions, they tend to stick with those decisions, e.g. about 50% of Britons do not change their allocations for their defined contribution plans as they get older.
5. In the US they get outside consultants to run seminars for their staff to help them plan for their retirement. The problem is that many of these experts are also sales persons for financial products! [That is where I can be of service – I am not tied to anyone and do not earn commission on the ideas I sell. Or would I have to register with FAIS before I do this?] (14th, page 71)
Finweek
Bernardt van der Linde, writes that regulatory requirements are forcing small auditing firms to their knees. The average accountant is planning to leave the profession within two years, down from five years not long ago. His article implies that the new accounting and auditing standards are overkill for SMEs. The benefit of these improved standards is far outweighed by the additional costs. Linda de Beer says that SAICA has been asking for relief for smaller companies for years. [Asking who? SAICA has the power to make the difference but does not seem able to do so.] The PAAB’s attitude is “an audit is an audit is and audit”. [Our profession will become redundant with this attitude. In the early days of the motor vehicle, Ford nearly went under with their attitude that “a car is a car is a car”! An audit can be a very valuable service to clients if the service is tailor-made for different circumstances. This attitude does nothing for the entrepreneurial sprit of our members. See my article on my website discussing “If architects thought like accountants.”] (19th, Page 46)
The SA market was unusual last year in that the all-share index beat the equity portfolios of all retirement fund manages covered in the Glenrand MIB review, with one exception – Allen Gray. [Read CawB Buzz for another portfolio manager who beat the index!] (26th, Page 57)
Fortune
The following are some attributes of leaders:
1. I get rid of the saboteurs, build a strong cadre of disciples and move all the fence sitters to the positive side. I prefer face-to-face whenever possible. Lincoln was my favourite leader: He persevered and stayed focused. (A G Lafley)
2. I have fervour in what I believe in and put my trust in my staff. (Carley Roney)
3. I have the courage to try something new, which can be scary. (Kevin Sharer)
4. I learn from watching other people. Bill Clinton is my favourite leader – when you are introduced to him it is as if you are the only person in the room. (Carol Bartz)
5. I look for integrity and clarity of thought. How a person attacks a problem is often more important than the conclusion arrived at because it tells one how that person will face other situations. (Stanley O’Neal)
6. It is important to listen to others. (Hank Paulson)
7. Remember the future and imagine the past. We need to imagine the past to learn from it and to make it relevant to the future. We need to remember the future because the future is shaped by decisions. (Paul Tagliabue) (December 19th, page 43)
Christopher Cox, head of the Securities and Exchange Commission in the US says that the accounting scandals we have weathered were made possible in part by the sheer complexity of the rules. (26th, December, page 94)
What if the Emperor, in the story about the Emperor’s new clothes, were to be brought up on charges of public lewdness? He would be acquitted because he never intended to go naked in public. He really believed he was wearing something, even if he couldn’t see exactly what it was. This is, in essence, the defence that the Enron executives, Ken Lay and Jeffrey Skilling, will be presenting. [The CEO and the CFO are trying to make out that they did not know that Enron was naked?] (23rd, page 43)
What will make the Enron case difficult to prove is that their outside accountants, attorneys and board signed off on most of the machinations concocted by management. (23rd, page 43)
Winning requires a sense of purpose and satisfaction comes from doing what is good and right. (23rd, page 55)
Sanlam
The team from Sanlam Private Investments predicts that the prime overdraft rate will remain at 10,5% for the next two years (2006 and 2007), RSA 10 year bonds will fall to 7% p.a. over that period and the exchange rate will drift to R6,74 to the $ by 2007.
Sundries
What you always wanted to know but were too afraid to ask
Value v Growth Investing
A value investor looks for value, i.e. he is looking to find intrinsic value in a share. Typical value investors are/were Benjamin Graham (the father of this form of investing), Warren Buffett, and John Templeton (Allan Gray). These investors look at earnings, dividends and other fundamentals.
A growth investor, on the other hand, looks to capitalise on future growth in the company’s share price resulting from future prospects. (Julius Cobbett of Moneyweb)
Accounting Scandals
Kenneth Lay, of Enron fame, says that he is entirely innocent and that CFO Andrew Fastow should take the blame. Fastow pleaded guilty last year and is expected to testify against his former CEO this year. (Page 160)
Tax Issues
Duncan Mc Allister, an old friend and ex student who now works for SARS, has written a simplification of how to calculate capital gains tax for clients who have share portfolios. It is on SAR’s website. I will give you more information about this in the next issue.
Other Tit Bits
Since the early 1990s almost 1 000 new “planet like objects” have been found in our solar system. The area where these objects reside is called the Kuiper belt. Pluto is one of these objects. One of these objects recently discovered is larger than Pluto, which brings Pluto’s standing of as a planet into dispute. A new probe called “New Horizons” has been launched by NASSA to investigate. We will all be the wiser in 2015 when the pictures from this probe are expected to be beamed back to Earth. [A good reason for me to hang in here!] (Economist, 14 January 2006, page 77)
The pass rate for the Chartered Financial Analysts part 1 examination held in December 2005 was 34% (compared to 36% for the June examination).
A medium sized audit firm in Durban has “blacklisted” Mafia Buzz! This firm is denying its clerks access to free education in the form of general knowledge, IFRS knowledge, valuations knowledge and investment knowledge. You know you have arrived when you get blacklisted!
A parastatal in Pretoria banned Mafia Buzz because the education officer objected to people phoning her and asking for a GAAP update!
I thought you would be interested in how business is done in the New South Africa. I was called in to advise a parastatal on some accounting issues. I spent two hours with them and charged them R1 000 plus VAT. To get paid I had to fill in a form that called for the following:
|Company name |Trading name |
|Physical address |Postal address |
|CC Registration |Year of establishment |
|VAT number |PAYE number |
|Name of bank |Branch number |
|Account number |Account type |
|Professional body belong to |Quality standards adhere to |
|Human resources policy |Environmental policy |
|Judgements against owners |Judgements against cc |
|Trade references |Credit bureau clearance |
|Race classification of staff |Names of shareholders |
|Race of shareholders |Names of managers |
|Race of managers |% black ownership |
|Plans to give % away |CC registration certificate |
|ID documents of owners |AFS of company |
|Certificate of turnover |Tax clearance certificate |
|Corporate brochure |Cancelled cheque |
|Articles of association |Registration with prof. bodies |
|Share certificates | |
37 items of information! Because one of my cheques to SARS was banked in someone else’s account and they cannot find it (I have sent them a copy of the paid cheque) I cannot get a tax clearance certificate so I will not get paid by the parastatal. Thank goodness I do not have to put up with this nonsense. I will now be getting paid upfront before I do any work for the Government! If they do not like it they can go elsewhere and pay four times as much.
Fun Corner
A man was fined R1 000 for not having a TV licence and another was released on R500 bail on a charge of murder. So the moral of the story is to kill the licence inspector. It will save you R500. (FM, 20th January 2006, page 74)
An advertisement for a Unisa course in economic and management science says that the answer to the following problem is 13: One third of the rest of a group of girl guides is in front of Judy and three fourths are behind her. How many are in the group?
0,33 x (G – 1) + 0,75 x (G – 1) + 1 = G
0,33G – 0,33 + 0,75G – 0,75 + 1 = G
1,08G – 0,08 = G
0,08G = 0,08
G = 1
So the answer is that Judy thinks she is Snow White. Some of her imaginary dwarfs are in front and some behind her. (And the FM could not work this one out! Shame. I hope that they issue an apology to Unisa.) (FM, 20 January 2006, page 74)
February 2006 (30 Minutes)
Accountancy
Robert Bruce is of the opinion that companies are coping with the increased regulation quite well but the auditors have spent so much time and resources trying to sell companies more lucrative non-audit services that they simply had their eye off the ball when the tide of regulation arrived. [One wonders what evidence Rob has for this statement.] He goes on to say that audit firms have become so terrified of taking decisions on IFRS that they push the decision making responsibility up the audit partner ladder to the extent that the senior technical partners have seen their workload grow at a terrifying rate. He says that the biggest failure of firms is their inability to give timely advice. He says that what clients want is technical support and they are not getting this from their auditors. [My experience is that because of the massive information overload and lack of education in handling the new information coming out, auditors are being pressurised into giving the wrong advice resulting in financial presentation disasters. And I have ample evidence of this!] (Page 25)
And we think we have problems in Africa? Last year the Court of Auditors in the EU estimated that 50% of cows claimed to be grazing in Portugal don’t exist. 90% of Luxembourg farmers claim payments based on acreages that would double the size of the EU’s tiniest country. And a Greek farmer claimed for a loss of 500 sheep to wolves when he had only 470 to begin with and a year later claimed support for 470 sheep without doing any restocking. When these frauds were uncovered, the two employees who exposed them were sacked. (Page 26)
Emile Woolf supports a forthcoming EU legal requirement for audit engagement partners to sign audit reports in their own name. This will really make the signing partner think twice if he or she has to take personal responsibility for the opinion. (Page 26)
Mike Brooks is of the opinion that downsizing could increase the risk of potential loss and increase the loss of potential opportunities. (Page 28)
Since 1998 UK quoted companies with a combined value of more that £37bn have been taken private, mostly funded by private equity firms. [This is an option more companies in RSA should look at. In this morning’s Citizen, there is speculation that Shoprite may be considering this move. It really does make sense. Who needs the JSE if you are a long term investor in a company? And there is a major reduction in the regulatory burden and public exposure. There is a large pool of private equity funds out there looking for such investments.] (Page 34)
A financial director of a small listed IT company specialising in call-centres issued a statement to the stock market saying that the company had a satisfactory year and that it had won three new contracts worth £4,8m. The first half of the statement was not true and the new contracts had not been signed and fell away after the year end. Result? The FD is now sitting in jail. The judge, who sentenced him, said that investors must be able to trust information given to the market as the whole financial services industry relies on reliable information. Directors must be held personally responsible for misinformation distributed. It is essential that directors check their facts before making statements. (Page 42)
Mike Brooks sets out the objectives to be achieved and the procedures one should take when fraud happens. The critical principle is that you do not wait for it to happen before planning the procedure. He defines the objectives as:
1. Get the assets back (first priority)!
2. Implement damage control.
3. Deal with the perpetrators.
4. Clear the innocent.
5. Learn from the event to improve defences.
He then goes on to list the procedures. [If you have defined the objectives correctly, the procedures fall into place. (Page 45)
Sir David Tweedie is staying on as chairman of the IASB for another five years. This is excellent news – he is a clear headed thinker who will, if he gets the right support, get IFRS sorted out. However, I have a serious problem with his statement that his biggest challenge is to make the standards more easily understood for the average accountant. I would have thought that his goal should be to make them more relevant to businesses and investors! (Page 69)
Andrew Vials of KPMG sets out the future projects of the IASB. They include a re-write of the conceptual framework, revenue recognition, performance reporting, segmental reporting, capitalisation of borrowing costs, insurance accounting, emission rights accounting, government grants and special purpose entities. A scary thought is that he says that all assets should be fairly valued on initial recognition – so if you buy stock on a sale you can take a profit on the purchase? Another area to be considered is the comment by management and alternative performance measures. (Page 70)
Most people wander through their lives without a plan. Emotionally intelligent individuals map out their lives and achieve much more with them. Successful people don’t believe in luck – they create their own success by having a vision and setting out to achieve it. Your goals should create a challenge but as there are only 24 hours in a day, you have to limit those ambitions. Ensure that your activities are goal related. Research was conducted at Harvard back in the 1950s. Students were asked what their goals were. They all had goals but only 3% had crystallised them in writing. A follow-up survey 30 years later found that those who had written out their goals had amassed as much wealth as the other 97% together. (Page 120)
Accountancy SA
Note: I do not summarise these articles because you should study them in depth. My objective here is to inform you about the existence of the articles.
1. SAICA is reviewing its CA qualification process with a politically correct team of people on its committee. Do you think that they will start making the topics relevant to real life in future, e.g. agriculture, insurance, banks?
2. The International Auditing and Assurance Standards Board has embarked on a project to “clarify” its auditing standards.
3. The Ethics Committee has embarked on a project to strengthen the code on independence.
4. A trainee was disciplined for breaking his training contract with his principal by having to forfeit 13 months of training and with an add-on penalty of 6 months. [It is about time that accountants understood that contracts cannot be terminated unilaterally. They are serious undertakings.]
5. Practice review lists the things it will watch out for on the third cycle. [I blow hot and cold on practice review. On the one hand, I find that auditors do not do audits anymore – all they do is prepare a file for practice review. Verifying fair presentation is no longer their objective. Their objective is to avoid disciplinary action. In fact they even employ experts to protect them from disciplinary action these days! And then on the other hand I see the level of some auditors in practice and I realise that the profession as a whole has to be protected against the gross incompetence of a few practitioners as their incompetence rubs off on the profession as a whole. Last night, for example, I was asked to advise on whether an auditor needs to audit the take-on balances for the conversion from a close corporation to a company. He had been advised by an auditing lecturer that it was not necessary to do this! Please read the first point in the list carefully Mr Lecturer.]
6. I really must congratulate the tax team at SAICA for the work they are doing. The technical page is informative, the opinions given to practitioners are spot on, the tax articles in ASA are excellent and the articles written for the daily media are doing wonders for the profession’s image. Keep up the good work Jackie and her team.
7. The auditing technical page sets out the new standards that have been re-drafted in the new format and recent amendments to existing standards.
8. See IFRS Buzz for the details on the accounting technical page.
9. Paul O’Flaherty asks the question whether we should retain headline earnings per share. I agree with the contents of his article. However, I think that he is missing the point: the whole objective of headline earnings per share originally was to arrive at a measure for calculating average P.E. ratios (or earnings yields) on the JSE. To ask the question: Does headline earnings represent maintainable earnings?” is a reflection of ignorance of the concept of headline earnings. The idea behind headline earnings was to eliminate capital gains and losses from earnings, e.g. profits or losses on the sale of land and buildings, to reduce the volatility of PE ratios on the JSE. The idea was never to get maintainable earnings. Should we scrap it? I think that the JSE should be asked this question as it was developed for them. It is not an accounting standard.
10. Roger Sinclair, at every possible opportunity, tries to push accountants into fair value accounting all the items on a balance sheet. I will address this issue in a future article in ASA.
11. Kobus Rossouw writes on how to account for changes in accounting policies and estimates. He uses IFRIC 1 to suggest that the catch-up method of accounting for changes in estimates is no longer acceptable.
12. Linda de Beer writes about XBRL and how it will eventually, one day, improve financial reporting. [I wonder if I will be able to load it directly onto Excel and then into my valuation models? It would save me five hours per company analysed.]
13. Gunther Hoppe, all the way from that wonderful country, Malawi, gives some ideas on keeping a balanced life. The ability to say “NO” is one of his keys.
14. Jackie Arendse deals with the amendments to the Tax Act.
15. Greg Fisher gives some sound advice on how to pitch a business idea to investors, customers, creditors and other stakeholders. One brilliant point he makes is that execution of the idea is everything. Ideas are two pence a dozen.
16. My article was on the problem that accountants do not want to solve (because it generates mega fee income?), i.e. how to calculate deferred tax on the revaluation of buildings.
17. Penelope Webb writes about when damages are tax deductible and when they were not.
Congratulations to the editorial team for their recognition as the best business-to-business magazine in RSA. I have a suggestion to make it better. All the adverts are at the end of the magazine. To ensure that the reader carries on reading, it is a good idea to have a last page article. Accountancy has a letter from the president: anything to get the readers to not bail out when the adverts start.
Citizen
The Pension Funds’ Adjudicator, Mr Vuyani Ngalwana lists ten dirty little pension fund tricks that undermine pensions:
1. Poor investment decisions resulting in poor returns.
2. Hidden costs.
3. Sneaky interest charges.
4. Incestuous relationships.
5. Funds not sticking to the spirit of the law.
6. Trustees who don’t use their brains.
7. Trustees who surrender their fiduciary duties to service providers.
8. Penalties charged for pulling out.
9. Plundering the funds.
10. Employers pocketing savings for themselves.
[If you are forced to join a pension fund as part of your employment contract, see the contributions as an expense and not as an investment. Make your own provisions for your retirement, if that is your goal.] (21st)
Economist
In September 2005 a British retailer, WH Smith, sold all the shares and bonds in its pension fund (£870m) and “invested” the lot in swaps and equity options to make the pension fund asset more secure for its members! [I wonder if they know what a derivative is? Maybe they should read Mr Warren Buffett’s shareholders’ meeting minutes.] (Jan 28th, page 14)
When Pope Benedict XVI was asked what his views on erotic love were, he stated that he was broadly in favour of it. (Jan 28th, page 32)
The Enron chickens are coming home to roost. Mr Skilling is facing 35 charges of conspiracy, e.g. manufacturing earnings, concealing debt and selling poorly performing assets to off-balance-sheet partnerships run by Mr Fastow. Mr Fastow has accepted a ten year jail sentence under a plea bargain depending on his evidence against Mr Skilling and Mr Lay. Mr Causey has avoided a 40 year stay in prison by pleading guilty to one count against him – reduced to seven years. (Jan 28th, page 65)
False precision and reckless approximation have defined the actuarial profession’s role in the crisis that has evolved around corporate pensions. By failing to forecast the future liabilities and how assets will be required to meet them, they hastened the collapse of the defined benefit pension schemes. [Great! Another profession can take some flack for a change!] However, the accountants do not escape entirely from this attack. Accounting conventions allowed companies to post profits derived from future expected returns, allowed companies to smooth and not account for liabilities and, in the UK, allowed companies to reduce their liabilities by holding equities in the portfolio. Of course, the trustees also come in for flack permitting asset managers to invest for the short term instead of the long term (see our very own Willie Morgan who wiped out R1,2bn of assets of the Joint Municipal Pension Fund). This article contains many more accusations and suggestions, one which states that pension funds should be seen as part of the sponsoring company’s balance sheet and risk profile. [I understand that this aspect is being considered by the IASB. It will result in the final nail in the coffin for defined pension funds.] (Jan 28th, page 67)
Of the 174 auditors inspected by the regulator in the US, almost 50% have been found to be deficient. This criticism is not confined to small firms. The main compliant by the regulators was that not enough evidence was obtained to support audit opinions. The firms complained that the regulators were being too technical. [Sound familiar?] (Jan 28th, page 74)
Modigliani and Miller received the Nobel Prize for their assertion that the split between equity and different forms of debt and its dividend policy make no difference to the total value of the entity. [I have battled with this idea for the past 30 years! I fought many a student in the past who had this rule drilled into them by their lecturers.] The Economist says that this principle is not wrong but is only true in circumstances so rare that it is the exception rather than the rule and says that structure does affect the value of the firm. [Thank you, thank you, thank you! When I was in merchant banking, we used to structure companies to increase wealth.] The Economist says that this idea set back the study by economists of corporate finance for a generation. (11th, page 71)
Financial Mail
David Shapiro (one of my old students who has risen to the top) has stuck his neck out and formed a portfolio of 27 shares which he believes will benefit from increased government spending on infrastructure, health and social welfare. For fun we will watch these shares in my CawB course later in the year and see how it performed. (3rd, page 56)
FinWeek
Willem Punt of the Ethics Institute of SA sets out five steps for creating a culture of ethics:
1. Get top managements buy-in.
2. Conduct an ethical audit.
3. Develop a code of ethics.
4. Educate and train.
5. Ingrain ethics into the entity and the staff.
[I often wonder if this all helps. Surely, choosing the right staff to work for you is all important? Unethical people do not change their stripes.] (9th, page 50)
Based on a survey carried out by E&Y, one of the most common internal control problems reported by companies as a result of SOX was the poor application of GAAP. [Why? Trying to deceive, ignorance or both?] (16th page 47)
Risk management should become endemic in an organisation – part of its very culture without erring on the side of excessive caution. (16th, page 42)
16% of job applicants lie about their secondary qualifications, 18% claim to have done short courses when they have not, 13% claim to have university degrees which they don’t, 24% have fake identity documents, 8% lie about their criminal records and 18% applying for jobs as drivers claim to have drivers licences when they don’t. [Are you qualified to interview an applicant?] (18th, page 52)
A few years back, the Economist had a great-reading cover story on how the price of oil was set to crash to $5 a barrel. [I remember Joel Stern predicting that the gold price would go to $2 000 an ounce about then years ago!] (16th, page 60)
When Kevin Mitnick was sent to jail for computer hacking, he spent eight months in solitary confinement because one of the guards convinced the authorities that he could launch nuclear missiles by whistling into a telephone handset! (16th, page 64)
Stephen Mulholland always has something relevant to say in his articles. I never miss any of them. This article deals with those who want to be the boss but do not want to take responsibility. [If you want authority accept responsibility.] He quotes Ronald Reagan who said that you can achieve practically anything if you don’t mind who gets the credit. Winston Churchill never hesitated to take personal blame for anything that went wrong whereas Hitler constantly blamed others when the war went against him. Leaders encourage constructive dissent. (23rd, page 26)
Zimbabwe’s inflation for the year to January accelerated from 585,5% to 613,2%. [Don’t you just love the 0,2%!] (26th, page 38)
Here is an interesting comparison of PE ratios and dividend yields:
|Index |PE Ratio |D.Y. |
|SA’s Alsi |16,6 |2,3% |
|SA’s Indi 25 |15,6 |2,0% |
|SA’s Fini 15 |15,9 |3.2% |
|US’s S&P500 |17,8 |2,3% |
|US’s Nasdaq |35,3 |0,6% |
|UK’s FTSE100 |15,6 |3,5% |
|Australia |16,8 |3,8% |
(23rd, page 102)
Fortune
Phillip E Tetlock, a professor at Berkeley, has written a book on how good experts are at making judgement calls. Over seven years he collected 82 361 forecasts. He found that experts were no better at making forecasts than non-experts. The only thing that separates experts from non-experts is the level of confidence they have when making their projections. He also found that the more famous the experts, the worse they performed! (6th, page 24)
The frauds perpetrated by Takafumi Horie at Livedoor in Japan were so basic that any freshman accounting major would have spotted them. Some examples were trumpeting plans to acquire companies he already owned, falsifying financial statements by reporting stock gains as operating income and diverting money illegally to secret Swiss bank accounts. [They could learn a thing or two from our Financial Services Board!] (20th, page 10)
Time
I could not believe my eyes when I started reading the article in the 13th of February issue of this journal. I had written the article called “Stupid or Lazy” asking the question “What sparks different people to become successful” and along comes this article. The author starts off by saying: “A fire in the belly doesn’t light itself. Does the spark of ambition lie in genes, family, culture or even in your own hands? Science has answers.” You then read the article and there are no answers! Here are some ideas from the article:
1. It is possible for the non-ambitious to jump-start their drive provided the right jolt comes along. [Stating the obvious! What is the jolt?]
2. Two of the biggest influences on your level of ambition are the family that produced you and the culture that produced your family.
3. Parents who set tough but realistic challenges, applaud success and go easy on failures produce kids with the greatest self-confidence.
4. It is the upper middle class that produces the greatest proportion of ambitious people, mostly because it also produces the greatest proportion of anxious people. (13th, page 22)
Fun Corner
A farmer has two fields of sheep. He asks an actuary how many sheep he thinks are on the farm. The actuary says “1 007”. The astonished farmer asks him how he arrived at this figure. The actuary says that there are seven sheep in the one field and about 1 000 in the other. (Economist, 28th January, page 67)
March 2006 (35 Minutes)
Accountancy
There is chaos, confusion and anger in the UK as a result of the government’s initial rejection of the operating and financial review standard proposed by the accounting profession and then its u-turn announcement in which it said that it will reconsider giving the OFR legal backing. [Was the one lobby (business) out-muscled by the other lobby (environmentalists, users and the accounting profession)?] (Page 5)
There is also anger at the government’s proposals in the Company Law Bill which has introduced a new criminal offence described as “reckless auditing”. The profession believes that there is no need for this. And yet more anger: the profession negotiated over a long period with the government about the idea of proportional liability and it appeared as if the government accepted this idea. However, the bill contains a liability cap in its place. (Page 6)
The US Free Enterprise Fund has launched a challenge to the Sarbanes-Oxley Act arguing that it is unconstitutional. Of over 700 cases brought against corporate executives since August 2002, only one was under SOX and that case was dismissed. It has been estimated that the stock value of American companies has been reduced by $1,4 trillion as a result of SOX. [This is called KJORL, or knee jerk over reaction legislation.] (Page 11)
Due to the increased attention auditors will have to devote to meetings and planning under the new international auditing standards, auditors will take over 40% longer to carry out an audit. Almost 75% of clients are going to have to pay more for their audits and they do not know why. Some 22% of professionals are reconsidering whether to continue doing audits. (Page 18)
A horror story appears in this journal about how over zealous regulators destroyed 50% of the value of an IT company in the US. [See the story about the bully boys and bully girls of the GMP in RSA.] An IT company with sales of $20m booked a $750 000 sale as a sale when it should have been deferred income – management were not informed that there was a contingency clause in the sale. The SEC climbed into the company accusing it of fraud. Management were forced to defend themselves at massive legal costs. Because of the uncertainty created by the investigation, the company was not able to meet its filing requirements for the NASDAQ and lost its listing. Eventually the company settled with SEC but only after people lost their jobs and massive value was destroyed. [Why could the company not be requested to restate its results and pay a fine? Because the regulators want to be “seen to be doing their jobs – like our local Scorpions who stage-manage raids for the media on suspects’ houses before they are found guilty by the courts. We need to become more gentle and polite and listen to the other person’s story before over-reacting.] (Page 48)
Be careful with emails. An email has an informality and flippancy to it. You are inclined to dash off an email without thinking and years down the line when you are subject to an investigation, you will need to explain certain nuances and words that can misrepresent your intention at the time. (Page 49)
The Enron trial has commenced. The intrigue, the personalities, the grandstanding, etc. will make for superb TV. I would love to be in Texas with time to spare to witness this event. I will have to wait for the book to be published. Unfortunately, because of the level of education of the 12 jurors, they are going to keep it simple (you lied – no, we did not). At the start of the trial one of the jurors was overcome by the defence attorney’s cologne and an adjournment was requested for him to go and wash himself! [If you’ve ever smelt a corpse, you will also react adversely to this vile sweet smell.] (Page 51)
Mike Brooks continues with his advice on what to do when fraud happens in an organisation. He says that one must restrict knowledge of the fraud to only those who need to know, check policies for insurance cover, follow the correct procedures, avoid any bad publicity and learn from the experience. (Page 53)
Luke Ahern writes an interesting thesis on how to react as an investor to directors buying and selling their investments. These dealings send conflicting signals. Here are a few:
1. When you see directors buying:
• Do they know something you don’t?
• Are they setting you up to believing that the shares are undervalued only to dump them on the market when the price increases?
• Are they merely meeting their qualification requirements to be a director?
• Are they trying to support the value?
2. When you see directors selling:
• Do they know something you don’t?
• Are they just cashing in their salary alternative?
• Do they want to diversify their portfolio?
• Are they merely providing liquidity to the market?
• Is the director moving onto greener pastures?
Other aspects to watch are:
• Who is doing the buying or selling – the CEO or non-executive director?
• What is the number of shares and what is the value of the transaction?
• Is the deal inside or outside the closed period for trading?
(Page 60)
David Beer lists the true nature of jargon used in business plans:
Acquisition strategy: The current products have no market
Cyclical industry: Posted a huge loss last year
Entrepreneurial team: Manic and uncontrollable
Investing heavily in R&D: Trying to catch the opposition
Limited downside: Can’t get much worse
Long-selling cycle: Not yet found a customer
Repositioning the business: Multi-million investment written off
Turn-around opportunity: Lost cause
Unique: No more than 10 others in the market
Upgrading the management team: We’re in a total mess
Volume sensitive: Massive fixed costs
Window of opportunity: Without funds the business is dead (Page 72)
The UK is tackling the convergence with IFRS. Here are some of the issues they have identified:
1. Some IFRSs are not founded on clear principles
2. One size does not fit all
3. IFRSs are written for the world’s capital markets. We need GAAP applicable to the UK.
4. IFRS is too complex for us in the UK.
5. Our markets have worked perfectly well without IFRS in the past. Why fix something if it is not broken?
6. IFRS should only be imposed on large listed companies.
7. Do the users of financial statements really want IFRS?
8. Why do we need standards for non-publicly accountable entities at all? It works in the US.
Recognise these arguments? No one listens to them! (Page 50)
The first draft of SME GAAP written by the IASB’s Paul Pacter has not been received well by commentators. It still needs lots of work on it. The EU members have asked Paul to reconsider the way he is going about the project. The EU has said that if the SME standards are not simplified, they will stick with the directives presently in force in the EU. The UK says that the SME standards should at least meet the FRSSE standards, i.e. the existing standards in the UK designed for SMEs. The banks say that they do not need consolidated accounts for SMEs but some IASB members feel that their absence is an invitation to fraud. [Will accountants ever agree on these things?] (Page 92)
The UK auditing standard setters have issued an eight point plan to give guidance on how to approach group audits:
1. Get organised (Always a good start!).
2. Analyse the group structure.
3. Focus on the quality of the other auditors.
4. Focus on high audit risk areas.
5. Understand the internal controls across the group.
6. Understand the technical complexities of group audits.
7. Review the other auditors’ working papers.
8. Review and update procedures, training and tools.
(Page 94)
According to Brian Singleton-Green, fair value in accounting is making in-roads without much debate. [I would have thought that the “fair value option” was the start of a move away from fair value accounting through profit or loss.] He says that, for example, there is a proposal that all assets and liabilities be fairly valued on initial recognition. [So if you buy plant on a sale, you will take a profit on the purchase of the plant. Was value created by merely buying plant? Surely value is only created when products manufactured by the plant are sold? I agree with Brian – we do need to debate at the highest level this move very seriously.] (Page 97)
The IASB has issued an exposure draft on segmental reporting. It moves away from the risks and rewards approach of the IASC to the method management uses internally to assess the performance of the segments. There will have to be reconciliations to the published information and certain disclosures made. [Sounds logical.] (Page 102)
An exposure draft modifying IFRS 2 has been issued. It proposes to limit the vesting period to service conditions and performance conditions. [Also sounds logical.] (Page 102)
The operating and financial review (OFR) should reflect the directors’ view of the business to enable the investors to assess their strategies. It should be forward looking, complement and supplement the financial statements, comprehensive, understandable, balanced, neutral and comparable over time. It should contain the nature, objectives and strategies of the business, the development and performance of the business, the resources, risks and uncertainties and relationships that may affect the long term value and the position of the business including the capital structure, treasury policies and objectives and liquidity. (Page 106)
Accountancy SA
It turns out that “Charles Hattingh’s often controversial column” was again the most popular column in ASA. If you voted for me, thank you so much for your support.
I do not summarise the articles in ASA because you should study them in depth. My objective here is to inform you about the existence of them.
1. The technical legislation section contains a summary of what to expect from the new Companies Act and a notice of how to submit financial statements of retirement funds.
2. The technical tax section refers you to the website for details of meetings with SARS tax court judgements. There is also a story about SDL, which expired for entities such as mine as from 1 August 2005.
3. It would have been nice had technical accounting told us what the amendments to IAS21 were instead of giving us the history of why the standard was changed. Revised guidance on IFRS 4 has been published.
4. On the auditing side, a circular has been published to do with conveyancing, enhanced audit procedures are now required for related party transactions (they still have not solved the accounting problem), and various guides have been withdrawn.
5. Peter Cramer tries to defend straight-lining leases. The article is full of omissions and inaccuracies, e.g. the standard does NOT say that leases have to be straight lined and the inflation rate of buildings is NOT less than the average escalation in lease agreements. Peter, you cannot defend this stupid decision. I can assure you that Growthpoint did not decide to go with straight lining because they thought it was the right thing to do. They were bulldozed into this decision by the auditors.
6. Charles MacKenzie writes about the administrative burden being experienced by SA global companies regarding tax compliance.
7. Jed Michaletos points out that customs and excise was a major contributor to the tax collections because of the strengthening of the Rand and the resultant explosion of imports.
8. Andrew West criticises the profession for religiously following IFRS when solving GAAP problems. My friend, if you experienced practice review or the GMP, you cannot afford to think anymore. You follow the rules.
9. Various academics write about the poor disclosures on HIV/Aids in financial statements. [You are not allowed to point out these kinds of risks in RSA – you will be seen to be unpatriotic – see Sasol. When is SAICA going to address the accounting issue for Aids? I had to advise recently on how to measure the liability and income statement charge for a company that had a policy of providing anti-retroviral drugs to their staff and their families. I was working in a vacuum.]
10. Robert Stretch says that the result of the survey conducted by E&Y on IFRS and tax revealed that deferred tax calculations were the major problems experienced [surprise, surprise].
11. Rob Cooper gives us a lesson on leave, absenteeism and the law. [Thank goodness I do not have staff problems anymore!]
12. Marc Scheepbouwer gives pointers on financial modelling. He warns against the use of spreadsheets - he says that there is a high possibility of error in them. [Not if you do proper stress testing of them and if you use macros to run them.]
13. My article was on the horrors of IFRS and a simple problem of staff empowerment.
14. Penelope Webb got a little weird on us in her article. I hope that this is not a sign that old age is creeping in.
Financial Mail
Both PwC and Grant Thornton ran adverts in Business Day on 27 February stating that their employees had beaten the national average. PwC said the average was 63% and GT said it was 70%. [What would you like the average to be and I will make a plan.] (10th, page 90)
A Cape judge ruled that a bursary trust set up in 1920 limited to non-Jewish white males is racist and sexist and must be thrown open to all. (31st, page 8)
Philip Morris will have to pay one Judy Boeken, widow of a long-time Marlboro smoker, a record $82m damages awarded in 2001, after exhausting all legal appeals. (31st, page 8)
FinWeek
Nigerian villagers stormed a poultry farm infected with the deadly strain of bird flu and made off with chickens scheduled for protective slaughter. (9th, page 8)
The staff of a privately owned correctional facility at Makhado (formally Louis Trichardt) went on strike and opened the cell doors housing the inmates. [As much as I love this country I often wonder what hope there is when striking cleaners trash streets, striking security guards trash buildings and striking supermarket staff intimidate shoppers. The risks of doing business in this country go up when investors witness these events.] (9th, page 19)
Vic de Klerk confirms the idea that value = the future cash flow that an investment can provide discounted at a realistic rate. The concept is so simple and powerful, but investors lost the plot for many years by ignoring it. He uses this idea to check to see whether shares are under or over valued on the JSE and concludes that there is still value in some of the favourite shares on the JSE. Of course, this all depends on the rate of growth projected and how far into the future you are prepared to look. (23rd, page 24)
Vic de Klerk picked up on my suggestion that you do it yourself when planning a retirement portfolio and supports this idea. So now we have Warren, Vic and Charles saying “DIY!” (23rd, page 89)
Fortune
Ever heard of the salesman who goes to a sales convention and takes his household curtains to be laundered by the hotel at which he is staying at the company’s expense? [Thought you had heard it all?] (6th, page 82)
Each year Warren Buffett, in his newsletter to shareholders, sets out words of wisdom on matters to do with investing. This year Fortune quotes him on how wealth can be dissipated by interposing between the investors and the investments people called advisors. [If you have ever attended one of my workshops you will have been told the story about investing R10 000 at 18% p.a. for 40 years on the market v giving R10 000 to an advisor to invest for you who also earns 18% p.a. but keeps 6% p.a. for him or her self and gives you 12% p.a.. Try the maths. If this does not convince you to DIY, nothing will.] (20th, page 20)
Every now and again, Fortune comes up with an article that persuades me to continue investing in the subscription. Here is a summary of such an article. Fortune interviewed various top performers and here are their “secrets”:
1. I never have a clock in my workroom (Edison).
2. Ask yourself the following three questions:
▪ What am I supposed to accomplish in my work?
▪ How do I actually spend my time?
▪ Have I achieved wu-wei, i.e. effortless effort?
3. Try to get into the “zone”, i.e. the place where you are calm yet alert, focused yet receptive, achieving without expending too much energy, at the eye of the storm yet drawing from its source. This is “wu-wei”.
4. When focusing on a project, avoid interruptions as it takes time to get back into the zone again.
5. Being busy is about getting things done, not necessarily the right things done. Being bust is a waste of time and energy.
6. Focus on putting decisions into action.
7. Be selective in what you do – you cannot do it all. Delegate if you have to.
8. Block schedule time for activities.
9. Work quality time.
10. Do not take your work home with you – allow yourself to distance yourself from the work – helps you to see more clearly.
11. Focus on one thing at a time – do not jump from one thing to another.
12. Listen.
13. Write or type out a prioritized task list.
14. Do not have a secretary – cut your dependence on others – be lean and mean.
15. Set aside time for strategising.
16. Plan well into the future.
17. Develop a system to handle emails (delete, archive, set aside time to answer the difficult ones and clear easy ones immediately).
18. Get into a routine – doing the same tasks at the same time each day.
19. Use downtime to read, e.g. waiting for meetings to start, sitting in an aircraft, waiting for an appointment, etc.
20. Get into a routine of doing exercise – it clears the mind and tones the body.
21. Manage your energy as well as managing your time.
22. Try to minimise the information onslaught by proper planning and sound information systems.
23. Do not procrastinate.
24. Learn to say “no” if it does not result in goal congruence.
25. Leave for home in the evening after a business trip to be back at your desk the next morning.
26. When all else fails, just do it! (20th, page 29)
Accounting Scandals
A CA in the UK set up an insider scam with three ex-school friends in which they placed spread bets on share price movements often minutes before major financial announcements. He received a two year jail sentence, was kicked out of the profession and was fined £4 500. They also relieved him of the profits he made from the scam. (Accountancy page 176)
AIG, a large insurance company, agreed to pay a fine of $1,64bn to settle SEC charges relating to “deceptive accounting practices”. (Accountancy, page 176)
Fun Corner
Paddy, who has an important meeting, is driving around in a sweat trying to find parking. He looks up to heaven and says: “Lord, take pity on me. If you find me a parking place I will go to Mass every Sunday for the rest of me life and give up me Irish whiskey.” Miraculously, a parking place appears. Says Paddy, looking up again: “Never mind Lord, I found one.” (Financial Mail, 31 March, page 98)
April 2006 (35 Minutes)
Compulsory Professional Development
I keep on receiving calls saying: “Are your workshops CPD certified?” It is usually the poor secretary of the boss who is enquiring because the boss knows that I will ask him if he has read SAICA’s policy statement, which he obviously hasn’t. Well in case you have not bothered to read this document, which is on SAICA’s website, here are some critical quotes:
1. CPD refers to learning activities that develop and maintain capabilities to enable members and associates to perform competently within their professional environments.
2. The primary responsibility for competence lies with the member or associate and all members and associates have an obligation to develop and maintain their professional competence, relevant to the nature of their work and professional responsibilities.
3. CPD is compulsory and is applicable to all members and associates within public practice, industry, commerce, education, the public sector or any other field.
4. The first reporting cycle starts on 1 January 2006.
5. Members will be required to complete 120 hours of relevant CPD activity in a three-year period, of which 60 hours should be verifiable. A minimum of 20 hours must be completed each year.
6. SAICA will not prescribe specific courses, programmes, journals or other forms of learning or training material. Members are free to choose relevant CPD activities based on their identified learning and development needs and SAICA will rely on the professional judgement of members in this regard. [So there you have it boss. One wonders for how long though? Because of the paranoid need to control others, we will soon see that people will have to apply to be accredited suppliers of CPD training. That is when favouritism and all the other horrors that go with power will kick in. BUT WE ARE THANKFULLY NOT THERE YET!]
7. Members bear primary responsibility for documenting compliance with CPD activities. Members have to log CPD activities using the on-line CPD log of SAICA (this is the start of Big Brother is Watching You). You will be required to explain how you planned the activities, identified your learning needs, what activities you performed, what the source was of your leaning activities and the number of learning hours spent. [Dear SAICA, I identified Noseweek as a valuable source of knowledge as I am the accountant of a media company so I spent 10 hours during the year studying this journal.]
8. Not completing your annual CPD tasks is punishable by a three year jail sentence in the Maximum Security Facilities in Kroonstad. [Not quite yet but the next step?]
I spent two months studying the new IFRS standards, on average 5 hours a day, i.e. 300 hours. From reading Mafia Buzz you will see that I spend at least another 20 hours a month reading. 40 hours a year is a bit of a joke is it not?
Accountancy
A Glasgow accountant was apparently kidnapped by two men posing as fraud detectives in February and has not been seen since. He was due to appear in court as a witness in a VAT fraud case with possible links to terrorist activity. A few weeks earlier, the chief accountant of the Scottish Law Society was stabbed outside his home. He believes that it was the work of a corrupt lawyer whom he was investigating. Once you get into the criminal courts and give evidence as a witness, the threats are very frightening. [A similar thing happened to me. This is why I will not act as an expert witness in a court.] (Page 5)
Emile Woolf questions whether the cost (in excess of $25bn) of applying the Sarbanes-Oxley legislation is giving the investing community value for money. Of the 700 cases against corporate executives since August 2002, only one was brought under SOX and it was dismissed. This law is now being challenged as being unconstitutional. 1 300 listed companies out of 15 000 reported material internal control weaknesses in terms of SOX. Emile says: “So what?” (Page 26)
Companies that have delisted from the Nasdaq or New York Stock Exchange because of the costs of complying with SOX include the Rank Organisation and Cable and Wireless. Others have been put off listing such as Porsche. Discontent with the regulatory regime post-SOX is growing. The enforcement programme is becoming increasingly punitive and adversarial in nature which can have serious consequences for companies and personal careers. A study has been undertaken which shows that SOX has had the effect of reducing stock values of US companies by $1,4 trillion. Audit fees have increased by between 35% and 40% because of the new pressures. London is becoming the international financial centre because of the increased US regulations. (Page 52)
Directors of smaller companies are unclear over the role of accountants and the various financial accounting and reporting options available to them. The Professional Oversight Board in the UK, the equivalent of Practice Review in RSA, has recommended that the constituents should get together to provide clarity. James Barbour, director of accounting and auditing at the Institute, says that as it stands, they believe that the documentation requirements for audits of SMEs are disproportionate. [This is why the UK is such a business friendly environment in which to operate!] (Page 81)
Companies are being warned to negotiate more flexible lease arrangements with landlords because of the pending GAAP on leases which will be requiring lease liabilities to be recognised on the balance sheet. [This is another case of GAAP dictating how business is done.] (Page 81)
There is awareness at the IASB that local interpretations of IFRS standards will diminish the benefits of having a single set of global standards. The problem is that the standards have progressed too fast and issues are discovered after a standard has been produced. The need for guidance on how IFRS should be interpreted is becoming more and more important. IFRSs are principle-based standards, which, unlike rule-based standards, require the preparer to use professional judgement in applying the standards. There is a call for a dispute resolution mechanism. There is even talk of appointing an arbitrator to settle issues. There are major disputes between the companies and their auditors or the companies and the investors. This is likely to be an obstacle to the EU companies listing on US stock exchanges, even if the US SEC lifts its reconciliation requirement for IFRS. Everyone will have their own interpretation of the standards which will lead to chaos. [Boy, oh boy, is this an issue in RSA. I had already taken a decision to start lobbying for something to be done before I read this article. Some of the convoluted interpretations by auditors are becoming ludicrous in RSA.] (Page 82)
The International Auditing Standards are being revamped or “clarified”. [It is my opinion that instead of re-writing what is already there, we need a completely new approach to auditing. The reason auditing is failing around the world is because auditors are looking to cover their backsides all the time instead of identifying what the audit objectives are and developing sound strategic methodologies to achieve these objectives.] From a reading of this article by Jon Grant, we may be lucky and find that in the re-writing of the standards they may look at the whole approach and change it to being more objective and principles based, instead of a box ticking operation. As long as the regulatory bodies are able to adapt, it may work. (Page 84)
The standard on presentation of financial statements standard is being revised (yet again). They are thinking of killing the changes in equity statement and renaming the balance sheet a “statement of financial position”. Surely, if they are going to do that they should rename the income statement a “statement of financial performance”. Either this or change the balance sheet to “statement of assets and liabilities”. [One has to ask the question: “Why are they messing around with cosmetics when there are other major issues to address such as leases, revenue, business combinations, insurance, and mining?”] (Page 86)
The IASB and FASB are seeking the views of users regarding information they need regarding fair value accounting. [Isn’t it nice that they recognise that they need the views of the users and do not just impose standards without consultation?] (Page 86)
An entity is now prohibited from reclassifying an embedded derivative unless there is a change in the terms of the contract that significantly modifies the cash flows. (IFRIC 9) (Page 86)
H guarantees the debt of its subsidiary. IFRS requires the guarantee to be fairly valued (assuming there was no explicit statement that it would be treated as an insurance policy – stupid). According to PwC the journal entry is to credit the liability (no problem) and to debit the investment in the subsidiary (help). Surely this is a loss? By doing this, this “loss” ends up in goodwill. Can anybody out there please enlighten me? I normally understand these things but am flummoxed by this one. (Page 89)
According to BDO Stoy Hayward, fraud in the UK shot up by nearly 30% in 2005. 65% of frauds were motivated by greed and desire to lead a lavish lifestyle. 11% were linked to gambling and 10% to pay off debts. (Page 109)
General Motors, whose financial statements are under investigation by SEC, has revised its losses upwards by $2bn to $10,6bn. It still has to restate its previous five years financial statements after uncovering accounting “errors”. There are mounting fears that the company is heading for bankruptcy. (Page 176)
Accountancy SA
Note: I do not summarise these articles because you should read them yourself. Earn additional CPD points by doing so.
On page 5 is a summary of the difference between GAAP and IFRS. I will never know why SAICA did not just adopt IFRS 10 years ago. At least one company in SA would have saved R25m had it done so. There is an interesting comment stating that SAICA is working on a circular on how to handle clients who refuse to go GAAP.
Pieter von Wielligh wrote an excellent article explaining the difference between a material irregularity under the old PAAA and the new reportable irregularity under the new APA. If you are an auditor, you had better read this carefully – jail time if you slip up – no joking!
An article, written by Andrea Roberts from New Zealand, talks about what generation Y people want. [I have such a problem with making generalisations such as this.]
Sue Ludolph writes about the advantages of having a global standard. She touches on an important issue being different interpretations around the world and mentions straight lining operating lease payments/receipts as an example. How can you have the same accounting standard for the UK with a 1% p.a. inflation rate and Zim with a 1 000% inflation rate??? There is clearly something wrong with a standard if it cannot be tailor-made to apply to different situations. Another example is having one standard for deferred tax where the asset is tax deductible v one where the asset is not tax deductible. We won’t even start mentioning the same standards for Anglo American v the corner stationery shop.
Good to read something from Paul Sulcas again. He describes the problems one can experience in a family business. Interestingly he mentions a family business expert who came to the rescue. He called this expert “Tony”. Is this too much of a coincidence to be Tony Balshaw from Grant Thornton who wrote an excellent book called “Making family business work”? If your family business is experiencing problems, get the book or, better still, get the man who wrote the book to sort the problem/s out!
It is such a pleasure to see sanity being expressed in the manner that only Doug Brooking can do. He quite rightly points out, in my opinion, that headline earnings per share is not a GAAP issue but a necessity for the JSE on which to base certain statistics. The original idea was (I was on the committees at the time) to arrive at a meaningful measure of operating performance. The principle was simple: Include operating profits and exclude capital profits. However, the principle was undermined by committees tampering with the idea. The worst case was to argue that profits or losses on equity investment fairly valued through profit or loss were operating profits (i.e. treat the same as dividends received) but that gains and losses on investment properties revalued through profit and loss were of a capital nature. Had we stuck to the old “tree and fruit” story you were taught in tax law, there would not have been so much controversy. However, I like Doug’s alternative solution and that is to eliminate all revaluations from profit, i.e. headline earnings will be the bottom line in the income statement before these adjustments. The only problem with this is that this can be manipulated by selling shares and buying them back the next day. Why not simplify and leave all realised and unrealised capital gains and losses out of headline earnings, as the concept was originally conceived?
Jackie Arendse, in her usual clear style, discusses the government’s initiative to reduce tax avoidance.
My article caused quite a stir – don’t they always. It was about people that are too lazy to think and plan before they act.
Matt Nel talks about leadership – the old hardy annuals such as doing the right things right, integrity, people acumen, assertiveness, effective communication, trust, etc.
Business Day
The new Auditing Profession Act was passed into law on 1 April, an auspicious date if any. Here are some pointers:
1. Members of the profession will be in the minority on the Board. Organisations such as the JSE and FSB will be members.
2. Garth Coppin says that audit fees are expected to increase by between 30% and 40% because of the new regulations. [Nice money if you can get it.]
3. Practice reviews will in future focus on auditing firms rather than on individuals – the big four are being reviewed at a cost of R1m per review. [Nice money if you can get it.]
4. Auditors will now have to report irregularities (without giving their client an opportunity to rectify the matter) or face 10 years in jail. [Who needs the money if you are sitting in jail?]
5. This could open the door to bodies other than SAICA being accredited with performing audits. ACCA are in the forefront of applicants.
What happens when you dig a hole for yourself and decide that you like it so much down there you would like to stay there? Why, you call on the Government to get you out knowing full well that this process could take forever! Accountants are calling for relief from accounting red-tape for SMEs, according to this and other newspapers. SAICA was the body that pushed for full compliance with GAAP for SMEs in the first place. I know this because I was on the committees at the time. In fact, they even tried to force close corporations to comply but found that they did not have jurisdiction over CCs so had to back off. Now they are calling on Government to help them out of the hole they dug for themselves. You have no idea what this has cost our economy. (11th)
Alick Costa, a Director of Werksmans, says that if you are considering moving in with your partner, before you are lured into the lion’s den, sign a cohabitation agreement that governs your rights and obligations on termination of the relationship. (11th)
Citizen
Prof Alex Watson, Chairman of the APC writes: As things stand at present, SMEs are obliged to comply with IFRS, though there is a move to a simpler form of accounting for SME companies. Such a move will, however, only eventuate once the necessary changes are made to our Companies Act after which we will require a body of standards to be issued. Two comments:
1. SMEs in RSA do not have to comply with IFRS, i.e. they do not have to have an opening balance sheet as if they had always complied in the past. They have to comply with SA Statements of GAAP.
2. On the very same page as her article was an article by Clive Simpkins. His opening sentence is: “The days of responding to a business or personal crisis only as and when it occurs are gone.” Is the APC going to wait for the Companies Act to be published and then say: “Well, we had now better take the next ten years writing GAAP for SMEs but in the meantime they must comply with IFRS.”? Do you get the impression that this is a conspiracy? See more on this topic below. (11th)
Economist
A new product called multi-strike convertible bonds (MSCBS) is taking Japan by storm ($410m of them issued in 2003). They are convertible into equity when the market price of the shares hits a certain level. Bond holders can make a lot of money on these instruments at the expense of the equity shareholders due to their dilutionary effect. They have been called “toxic”, “floorless” and a “death spiral”. One company’s share price was diluted by 25% and the management apologised publicly to its shareholders for the disaster! (15th page 76)
A survey in Switzerland found that surgeons performed more operations than were strictly necessary. The more sophisticated the patient, the less scalpel-happy the doctors. Lawyers’ wives had the fewest hysterectomies! Their services are known as “credence goods” as customers take it on faith that the supplier has given them what they need, and no more. [I have had a personal experience with a relative who was dying of cancer. The doctor operated, against my wishes. My relative died a day later. I asked the surgeon what the purpose of the operation was and he said: “To establish the type of cancer.” I asked him what he could have done with this knowledge and he said: “Nothing!”] (15th, page 78)
In recent years it is hard to find a CEO of a public company that does not complain vehemently about the burdens imposed by SOX. The complaints are getting louder. They say that SOX has been a colossal failure, it was poorly conceived and was hastily enacted during a regulatory panic. It is killing management’s ability to take risks necessary to generate returns and the costs are exorbitant. The accounting firms are being seen as the beneficiaries of SOX, despite the fact that they caused the problem in the first place. Sarbanes-Oxley contains five different reforms intended to protect investors from future Enrons:
1. Improved internal monitoring for potential fraud
2. Improved monitoring by outsiders, such as auditors
3. More disclosure, e.g. the firms internal control structure
4. New rules on the conduct of corporate insiders, e.g. loans to officers
5. Requiring security analysts at banks to operate independently from investment banking activities (22nd, page 59)
Financial Mail
Stephen Cranston says that he has heard both hedge funds and private equity described as remuneration packages disguised as investment strategies – practitioners of both these crafts pay themselves extremely well and there will be years when there is little left over for their extremely patient clients. (21st, page 57)
Unit trusts, provident funds, retirement annuities and all the other hyped “products” out there are pathetic investments in the long run, unable to beat the market’s average. The financially literate have abandoned “products” and their B-grade salesmen who, with government and Financial Services Board consent get to plunder our savings. The smart have abandoned the snake-oil peddlers and tend to manage their own investments more profitably leaving only the ignorant and poor masses as cannon fodder for the income statements of financial institutions. [Whew! He withheld his name!] (28th, page 10)
Heritage Collection Holdings stated that they have adopted “Internal reporting standards”. [A possible alternative to IFRS?] (28th, page 82)
FinWeek
Nancy Kline, founder of “Time to Think” says that it is remarkable how changes can come about when staff are forced to think for themselves. She says that the quality of what you do depends on the quality of the thinking that preceded the doing. [If you ever did my Q.E. course you will have remembered how I battled to get candidates to think the answers through before writing them out. Thinking requires too much energy for most people so they are not prepared to do it.] She goes on to define ten components of creating a thinking environment. Some of the more important ones are:
• Listening to people without interruption
• Offering them the freedom from internal rush or urgency
• Welcoming divergent thinking
• Removing assumptions we live by
• Creating the right environment
[Instead of stopping to smell the roses, stop to think.] (20th, page 52)
Employers may soon have to accept sick notes from traditional healers when their employees have been off work due to illness. The Traditional Health Practitioners Act, which was passed earlier this year, paves the way for employees to submit sick notes from traditional practitioners to their employers. (27th, page 62)
Fortune
Stock buyback mania has hit the US. The total amount of repurchases among S&P companies last year totalled $325bn. It is debateable whether buybacks lead to higher stock prices. Some consider that buybacks reflect management’s inability to find new ways to invest. If stocks become under-valued, however, a buyback would make sense. (3rd, page 70)
The new CEO of Hewlett-Packard says that execution trumps vision. He is obviously taking a swipe at Carly Fiorina, the previous CEO, who was a visionary. [My motto is attitude trumps IQ.] (17th, page 95)
Maneo
Mr Kariem Hoosain says that the new Independent Regulatory Board for Auditors’ (IRBA, IRBA, IRBA no more PAAB – goodbye to P and welcome to I and R) vision is to be an internationally recognised and respected regulator of the auditing profession in SA. The mission is to protect the financial interest of the SA public and international investors in SA though the effective regulation of audits conducted by registered auditors in accordance with internationally recognised standards and processes. [Does this mean that if there is no public interest in a little private company, the auditors will be left alone? Or does the “financial interest of the SA public” embrace taxpayers who need to be protected from fraudulent under-payment of taxes by little private companies?] The IRBA will comprise no more than 40% registered auditors. [If one has, on a board, 4 out of 10 from one lobby and the other 6 are spread between 6 other lobbies, who will dictate?]
The local auditing regulators have stated that local auditing firms should not early adopt international auditing standards even though the international body encourages it. I have great difficulty with this. Hang onto the old as long as possible and discourage the new? I wonder what the average age of the members on this committee is. They did the same thing with the new accounting standards. Surely if the new standards are better than the old, the quicker we get rid of the old the better. Why do they think that the users will be confused? DON’T UNDERRATE THE USERS, EVER!
A member pleaded with me recently for the standards to be written in English. Don’t you just love this extract from Maneo: “. . . gave rise to conforming amendments to the extant ISA 800, The Auditor’s Report on Special Purpose Engagements, included in appendix 5 of the extant ISA 800. The conforming amendments to the extant ISA 800 are effective for auditor’s reports dated on or after 31 December 2006. The proposed ED ISA 800, The Independent Auditor’s Report on Summary Audited Financial statements, which is yet to be issued as a final pronouncement, will replace the extant ISA 800, The Auditor’s Report on Special Purpose Engagements, including the conforming amendments contained in appendix 5 of the extant ISA 800. Therefore, if the proposed ED ISA 800, The Independent Auditor’s Report on Summary Audited Financial Statements is issued as a final pronouncement before 31 December 2006, the conforming amendments to the extant ISA 800, The Auditors Report on Special Purpose Engagements will also never become effective. [No well, yes fine.]
Real Business – A Business Day Publication
One of the most widely used and practical approaches to problem solving is the Lyles seven-step method:
1. Define the problem, what is causing the undesirable effect?
2. Define the objectives, what are the desired outcomes?
3. Generate alternatives, brainstorm ideas.
4. Develop an action plan.
5. Troubleshoot, i.e. identify obstacles and risks.
6. Communicate.
7. Implement.
If you ever did my Q.E. or Unisa course you will remember the approach called: “IF think POKI, Passing Completely Assured”. It is virtually the same as the above. (If you need further information on this system, go to the examination technique section of our website.)
SAICA Publications
The Auditing Profession Act, 2005 was signed into legislation on 16 January. I have been getting calls from concerned practitioners complaining that they can now be jailed if their clients do not comply with GAAP or IFRS!
On April Fools Day SAICA sent out a circular calling for “urgent interim accounting relief for small companies”. Subsequent enquires resulted in assurance that this was not a cruel April Fools Joke. In case you have not been following this story:
1. About seven years ago I was lecturing in East London on some or other GAAP topic when a member got up and said something like: “All this is totally irrelevant to a small private company!” I said: “Are you calling for differential accounting?” He said: “Yes.” So I thought, let’s see if the accountants in East London are prepared to challenge the system. During coffee break we formed a small committee and drafted a petition to SAICA calling for differential accounting. To my utter astonishment, every one of 51 attendees except for the lecturer at Rhodes University gave their support to this call by signing their names on the petition. Unfortunately I was half-way through that year’s lecture tour but I tried the members in Durban, Johannesburg and Pretoria and got similar responses. That year I collected over 900 signatures. I reported back to SAICA and nothing was done.
2. The next year I drafted a proper petition and collected thousands of names calling for differential reporting. I analysed the results and delivered three lever arch files containing the petitions together with a covering letter addressed to the CEO of SAICA to their offices. The resulting silence was deafening.
3. I then started writing articles on the subject. Dan the Stationery Man became the talking point in 2001. Still nothing from SAICA.
4. And now we are told that SAICA is “urgently” calling for relief just when the Companies Act is in the process of being finalised. There are only two possible conclusions one can draw from all this: (1) SAICA has no idea how to plan ahead and does not know the most potent of Covey’s seven habits of highly effective people, i.e. being proactive. OR (2) There is method in their madness – hey let’s postpone this call for relief till the last moment and that way we will not get it. Or am I missing another possible reason for their procrastination? Please help me here.
Time
There is one simple adage that many investment advisers live by and that is “when rates are high, stocks will die”. (17th, page 32)
Other Tit Bits
Did you know that the Close Corporations Act now permits trusts to be members provided:
1. No juristic person may directly or indirectly be a beneficiary of that trust.
2. The same rights and obligations will apply to such members as for other members of the cc.
3. The cc is not obliged to observe any agreements between the trust and its beneficiaries.
4. The total number of beneficiaries plus members of the cc may not in total exceed ten.
Fun Corner (Not for Children Under 18)
An old man was sitting at a restaurant watching a teenager sitting next to him. The teenager had spiked hair in colours green, red, orange, purple and blue. The old man could not take his eyes off the teenager. Eventually the teenager turned to the old man and asked: “What’s the matter old man, never done anything wild in your life?” The old man’s response was: “Got drunk once and had sex with a peacock. I was just wondering if you were my son.”
Have you ever heard of someone who says: I deliver 103%? Try this exercise: If A, B, … Z were allocated numbers 1, 2, … 26 then:
HARDWORK = 8+1+18+4+23+15+18+11= 98%
KNOWLEDGE = 11+14+15+23+12+5+4+7+5= 96%
ATTITUDE = 1+20+20+9+20+21+4+5= 100%
BULLSHIT = 2+21+12+12+19+8+9+20= 103%
ASSKISSING = 1+19+19+11+9+19+19+9+14+7 = 118%
So mathematically, hard work and knowledge will get you close, attitude will get you there but bullshit and ass-kissing will put you over the top.
May 2006 (30 Minutes)
Accountancy
The accounting profession in the UK is in turmoil over the government’s proposal to move the deadline for self assessments forward from 31 January to 30 September. The main complaints are that no consultation took place with members of the profession, work load will increase and information may not be ready at such an early time to complete the assessments. But the real gripe is that the summer holidays of accountants will be affected.
Jon Symonds, one of the top financial directors in the UK is concerned with the move towards fair values in financial statements as he believes that they are not useful and would be a burden to prepare. [The also reduce the reliability of financial statements.] (Page 44)
The banks in the UK are, like in RSA, coming under scrutiny because of the excessive profits they are making out of SMEs. (Page 53)
A report on the competition in the auditing profession finds (which we all knew) that the big four auditing firms dominate completely. Only one of the companies listed in the FTSE top 100 is audited by a firm outside this “quadropoly” and only eight in the top 250 companies. The fear is what will happen if the big four become the big three! (Page 60)
The complexity of various insurance products is holding up the next phase of the insurance standard. (Page 80)
Some proposals in the new IAS 1 are:
1. The name “balance sheet” will be replaced by “statement of financial position”.
2. Preparers will have a choice of preparing the income statement in a single format or in two separate statements. The second statement would include items that do not go through profit or loss, e.g. gains or losses on available for sale financial assets.
3. The statement of changes in equity (the columnar format as we know it) will disappear. [As an analyst, I object as this statement is an excellent way of articulating the income statement with the balance sheet.]
4. The way information is presented in the financial statements will be altered to make it more user friendly for the analysts. (Page 82)
Under the old audit methodology auditors had to obtain and document an understanding of the internal control system sufficient to determine the audit approach. Under the new system they have to understand and document controls regardless of the intended audit approach. The work load on small company audits will therefore increase with an associated increase in audit fees. [I am so pleased that I am a close corporation!] (Page 88)
The US is proposing that the deferral of actuarial gains and losses iro post retirement benefit costs be scrapped and that the plan assets and plan liabilities be measured at the balance sheet date. So no more corridor method for them! [A matter of time before this becomes an IASB proposal.] (Page 90)
In the US SMEs merely have to file tax returns, not financial statements, so there are no US accounting standards for SMEs. [Africa is the only continent which is being forced to use big GAAP for SMEs – a conspiracy to keep us uncompetitive?] (Page 121)
Robert Hodgkinson, the executive director of the ICAEW, says that one solution does not fit all. He says that not recognising this is the root cause of many regulatory problems. He says that we should focus on making sure that those differences are clearly understood by international policymakers before making decisions. [It is so nice to see someone with some common sense. I wonder what he would think about straight lining leases in Zim or comments like “an audit is an audit is an audit”?] (Page 121)
Accountancy SA
Note: I do not summarise these articles because you should read them yourself.
Page 2: See some examples of trainee accountants being disciplined for unethical behaviour.
Page 3: Kariem Hoosain heralds the new Auditing Profession Act and sets out the focus of the IRBA in implementing it.
Page 5: Changes to IAS 21, IFRIC 7, IFRIC 8, AC 503 and circular 1/2006 are introduced. It really would be nice if there was a synopsis of each of these. This page was a waste of reading effort as nothing was gained from it.
Page 9: SAICA received a query asking what IFRS stands for! They should institute disciplinary action against people that ask questions like this.
Page 10: Sean de la Rosa outlines the topic called Enterprise Risk Management.
Page 15: Lee-Anne Bac states that 8% of business owners in SA consider HIV/AIDS to be a constraint to business. This is up from 77% in 2005. I would say that there is a “slight” editorial problem here! Could it be 88%?
Page 16: Kerry de Hart explains the new medical aid tax cap.
Page 19: Jenny Greyling says that managers within an organisation are responsible for helping retain talented employees.
Page 20: Sanelda Beets discusses the deductibility of software costs for tax purposes.
Page 24: Can anyone enlighten me as to what value this article adds?
Page 26: My article was on the critical question to ask when performing a valuation, i.e. “exactly what am I valuing?”
Page 28: Beric Croome sets out the procedures to be followed by SARS in its dealings with taxpayers.
Page 32: Penelope Webb gives us a short history on tax.
Page 35: The pass rate for the Financial Management Q.E. of November 2005 was 55% compared to 67% of the previous year.
Economist
Investigators have found that Fannie Mae, the massive American mortgage underwriter, indulged in fraudulent accounting and will have to pay a fine of $400m to settle the case. Executives may still face prosecution for misrepresenting profits to fatten their bonuses. [I find it so sad that people have feed their greed.] (27th, page 7)
FinWeek
The International Auditing Council decided to rewrite the international auditing standards because of the difficult English in which they are written. SA’s Independent Regulatory Board for Auditors has been approached to assist with the rewriting in simpler English. [Accountants write simple English? They also need to do something about the communication in the IASB standards!] (11th, page 8)
Mr Laurie Dippenaar, gives us some of his precious wisdom regarding investments:
1. Think long term, not short term
2. Buy and hold – churning undermines wealth
3. Do not hold poor assets for the sake of diversification (did you hear that you SATRIX fans?)
4. Invest in what you understand – a solid Warren Buffett principle
5. The market does not talk, it is there to serve us, not to instruct us
6. Avoid investing in companies if you do not trust the management – watch for creative accounting tricks
7. Invest in companies that are owner managed where the management is passionate about the business
8. Value the shares as you would value a business – my valuation models are based on this philosophy
9. Buy on fundamentals, not on technical movements – act rationally
10. Avoid investments that don’t pay dividends
11. Focus on a few good ideas, do not spread yourself too thinly
12. Ridicule fads
Noseweek
The editorial of this month’s journal sets out a shocking exposé of how investments belonging to pensioners can be plundered by those who have been entrusted with control over these investments. The figure mentioned is R200bn. There is little substance in the article but “where there is smoke . . . ?”
Sanlam Private Investments Newsletter
This letter sets out some typical mistakes investors make:
1. Not having a clearly defined flexible investment strategy to guide their decisions.
2. Not diversifying their portfolio thereby leaving them vulnerable to fluctuations in specific sectors or shares.
3. Having unrealistic expectations about their investments. Markets do go up and down. It is the time in the market that produces returns and not the ability to time the market.
4. Being too conservative. To improve returns one has to expose oneself to some risk.
5. Buying high and selling low. The reason for this is investors wait to buy after shares have increased in value and then, when they fall, get depressed and sell.
6. Jumping in and out of shares. This results in high transaction costs and attracts the attention of SARS.
7. Buying on rumour. Investments should only be made after proper research into the share/company in which one is investing.
8. Letting tax drive investment decisions. When assessing the fundamentals one should calculate the after tax returns in taking the decision.
9. Neglecting your investment portfolio. It is essential to monitor and measure performance, take views and ensure that your portfolio is properly positioned to take advantage of future expectations.
10. Not understanding and evaluating your tolerance for risk. Hope for the best but expect the worst.
11. Leaving it too late. Because of the marvels of time value of money, the earlier you start investing, the better off you will be at the end of your time horizon.
In this same newsletter they predict that the prime overdraft rate will be 10,5%, the long term bond rate will be 7,0% and the rate of exchange to the dollar will be R6,50 by the end of 2006. Amazing how they are not prepared to stick their necks out! We are already at 11%, 8% and R7 and we are only half way through the year.
Michel Pireu points out the errors that we, as investors make:
1. We overrate our skills, e.g. seeing order in information where none really exits and making predictions based on skimpy evidence.
2. We use bias to support an investment we favour.
3. When our predictions do not materialise, we are not prepared to accept that we made a mistake. We hang onto investments too long.
4. We avoid taking risk when there is a good chance of gain but become risk takers in the face of certain loss.
5. We tend to sell a good investment too quickly.
6. We feel a loss to a greater extent than we enjoy a gain.
7. We focus too much on the short term.
8. We tend to be influenced by the herd.
9. We become obsessed with prices and trends ignoring solid information. (Business Day)
Other Tit Bits
Some pearls of wisdom from Mr Warren Buffett:
1. When being presented with growth rates achieved, be wary of the start point and the terminal points for calculating the growth. Spectacular growth can be achieved if the start points and terminal points are carefully chosen.
2. When a company issues its own shares to acquire assets what it is really doing is to give away part of what the existing shareholders own.
3. Be nervous about derivatives: they are little understood and pose a serious threat to the global financial system.
4. Buy companies that have as their goal customer satisfaction rather than shareholder satisfaction. If you treat your customers with indifference your business will wither.
5. Do not take decisions merely to meet short term targets.
6. Don’t hand over your hard earned cash to others to invest. The layers of costs going to the intermediaries between you and your assets eat into your returns thereby undermining your wealth. (Citizen)
Fun Corner
The following appeared in a trade and industry draft strategy document: “The persistence of partially associated inequalities within national space economies and the varying opportunities and constraints imposed by market forces have made the DTI to reassess issues related to spatial planning and regional development in many countries and in SA in particular.” (Business Day)
US Attorney General John Ashcroft was speaking at an elementary school about rights and freedoms in America. “Any questions?” he asked. A little boy raised his hand. “My name is Billy and I have two questions. First, why are you using the Patriot Act to limit Americans’ civil liberties? Second, why haven’t any weapons of mass destruction been found in Iraq?” Just then the bell rang and Ashcroft stated, “We’ll resume after the recess”. After the recess, Ashcroft again asked: “Are there any questions?” A little girl raised her hand. “My name is Julie and I have four questions. First, why are you using the Patriot Act to limit Americans’ civil liberties? Second, why haven’t any weapons of mass destruction been found in Iraq? Third, why did the recess bell ring 10 minutes early? And fourth, where is Billy?” (Noseweek)
June 2006 (25 Minutes)
Accountancy
A two month audit ban has been imposed on PwC in Japan because of problems in the cosmetics giant Kanebo, one of its audits. The spectre of Andersen must be looming large in the minds of the partners of PwC around the world! (Page 1)
E&Y is taking flack over a report it prepared stating that the non-performing loans in China totalled £911bn. The People’s Bank of China labelled it “ridiculous.” (Page 12)
When we read we tend to filter out information that does not reflect our views. By doing this we perpetuate our view of conventional wisdom. As professionals we should satisfy ourselves that we have not allowed an accumulation of untested conventional wisdom to stifle our critical faculties and our independence. (Page 26)
Increased demand for assurance services in the wake of Sarbanes-Oxley and other regulatory requirements are creating a boom in accounting work for firms across the globe. All four of the big firms are showing solid growth in their fee income. (Page 28)
The threat of litigation is real and potentially devastating and the best protection lies in careful client selection, rigorous procedures and robust quality control. (Page 30)
Going global exposes partners to more risk. The shock of the Andersen failure alerted larger firms to the fact that they are responsible for the integrity of professional skill of people they hardly known in other parts of the world (see the PwC problem in Japan above). (Page 32)
When markets are rising, the envy factor often outweighs the fear of making a loss. When a market is rising, investors will continue to pile in even if their analysis tells them that it is all too good to be true. The embarrassment of losing out outweighs the downside risk. The feeling seems to be that if I lose, we all lose so that’s OK but if I miss out on the general gain, I will suffer alone. Gore Vidal summed up this psychology when he said: “Whenever a friend succeeds, a little something in me dies.” One needs to change one’s mindset that people can amass great wealth by clever investing in equities or real estate and that traditional virtues of thrift and prudence are out of date. (Page 58)
The objective of practice assurance in the UK is not to pass or to fail partners like it is in RSA but to help practitioners develop their practices. They provide members with the know-how to meet standards and develop their businesses. Firms are free to develop their own procedures and their effectiveness is more important than the way in which they are recorded. Firms that have been reviewed can use the legend: “A member of the Practice Assurance Scheme” to demonstrate to the public their commitment to PA standards.
71% of those attending a conference hosted by the Association of Corporate Treasures reported that IAS 39 and IAS 21 make company accounts confusing for everybody. [Have you read my article called “Forex Madness”?] (Page 77)
Some comments by PwC’s feedback on what has been learned from IFRS so far:
1. Investors and analysts are finding comparability difficult because of the increased subjectivity inherent in the application of many rules under IFRS.
2. The rules are flexible and with flexibility comes subjectivity.
3. The volume of disclosures is rising at an alarming rate. An example is the notes that have to accompany goodwill each year.
4. Companies should develop in-house resources and skills to develop IFRS instead of relying on external expertise. [One wonders whether every company should try to reinvent the wheel.] (Page 78)
Some comments from senior people on the IFRS implementation so far:
• Martin Cubbon does not think that the numbers being produced are right. He believes that IFRS is inferior and that accounting will come full circle.
• Tony Good says that it would have been helpful if the standards platform could have been more stable.
• Jon Symonds says that the standards are incomprehensible and that because there is no body of GAAP and no support it is difficult to interpret them.
• Robert Koethner says that there is a huge impact on costs in following two sets of standards. He says that he is looking forward to the day when he can dump US GAAP. (Page 80)
The meeting between FASB and IASB agreed on two possible approaches to revenue recognition:
• Based on the progress the entity has made in performing its obligations and
• The acceptance by the customer.
On the leases issue it appears as if they are moving towards capitalising the rights inherent in all leases. Both boards know that they are going to get into a massive fight with the preparers as this will result in trillions of dollars of assets and liabilities being recognised on balance sheets. (Page 85)
The Oscar nominated documentary “Enron: The Smartest Guys in the Room” opened in the UK at the beginning of May to rave reviews and took over £30 000 in the first three days. [Let’s hope that they see fit to bring it to RSA.]
Accountancy SA
Note: I do not summarise these articles because you should read them yourself.
Page 4: An amendment to the headline earnings circular now requires that the expensing of BEE credentials must be included in headline earnings. No wonder headline earnings is losing its relevance! If you create an asset called BEE credentials you have to expense it as part of headline earnings but if you buy it as part of a business combination it is called goodwill and any impairment of this asset is outside headline earnings. It is becoming more and more imperative that companies publish alternative results to IFRS/GAAP results – management has an obligation to inform shareholders. GAAP/IFRS has lost its relevance!
Page 4: IFRIC 9 states that reassessment of an embedded derivative in a contract is prohibited unless “there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required.”
Page 4: I get the impression that the exposure draft on IAS1 is merely fiddling with the set-out of the financial statements. It looks like they are reverting back to where we were 25 years ago!
Page 7: The IASB and FASB have developed a roadmap to remove the reconciliation requirement for non-US companies that use IFRSs and are registered in the US and to identify areas for improvement in accounting standards.
Page 8: Phil Gott gives ideas on how to get more out of professional staff. He believes that professional service firms should move beyond classifying their staff into finders (those who win new clients), minders (those who look after the clients) and grinders (those who do the work).
Page 13: Dave Thayser looks at the possible negative effects that IAS38 could have on merger and acquisition activities. He seems to support a growing trend among preparers, which is to encourage companies to “make the market aware as soon as possible of any adverse accounting consequences” to avoid good deals being turned down for the wrong reasons. [It really is sad that IFRS has come to this.]
Page 16: Pieter Buys looks at certain strategic costing techniques.
Page 18: Garth Coppin, whom I highly respect, has tried to defend the indefensible. I will, hopefully, be addressing some of the issues he raises in my new suite of articles I will be writing in the coming months. An interesting comment I would like to draw your attention to in the meantime is: “The one consolation is that if companies really believe their results do not reflect economic reality in the manner required by accounting standards, they at least have the opportunity to supplement their financial statements with additional information when they believe it appropriate. Herein lies the strength of corporate reporting. Financial statements are only one section of the annual report. Commentary by management in the remainder is equally as important to understand the company.” Garth is from E&Y. I have had feedback from clients of the other big four that they will not tolerate this approach. Standard Bank publishes a separate document “normalising” its financial position and performance.
Page 22: Estienne de Beer writes that positive thinking is not the beginning and end of success. [In my opinion it absolutely essential for success – no compromise!]
Page 26: Stephen Coetzee resurrects an old concept called “fund accounting” for charities. I believe that this method of accounting is brilliant but it was rejected by the IASC at the time.
Page 28: John van Wyk of Barloworld writes about inventory management.
Page 29: My article was on the element called “beta” used in valuations.
Page 39: SAICA writes about the TOPP programme. In my opinion this was a sound idea but was ahead of its time. After seven years only 87 candidates ended up writing. Clearly, something went wrong. With the potential demise of the small company audit, this will be one of the practical ways university graduates will be able to become CAs if they do not get into one of the big four or mid-tier firms. So, TOPP, hang in there.
CFA Institute
The Securities and Exchange Commission is investigating the back-dating of stock option rewards to management by US companies. [It has been found that companies wait for favourable news to be reflected in share prices and then grant options at an earlier date based on exercise prices at the lower share price. It is happening in RSA as well.]
Citizen
Mr Vuyani Ngalwana, the Pension Fund’s Adjudicator, has warned trustees to stop the process of churning, i.e. changing one policy for another purely to generate fee income. [He should look into the process of changing from one fund to another and changing one investment for another. A massive amount of wealth is destroyed for investors because of this churning process.] (15th)
It was really super to see that Mr Bill Lynch was recognised for his entrepreneurship by being awarded the prestigious Ernst and Young World Entrepreneur of the Year. The down to earth Mr Lynch gives us some of his “secrets” of success:
1. Life is not easy – hard work is rewarded.
2. One needs a high dose of ambition sprinkled with integrity, honesty, frugality and enthusiasm for real success.
3. You must learn to take decisions. You have to commit yourself – get on with it – do not hesitate and procrastinate.
4. Nothing happens over night – you should look at a 50 year time frame to build the sort of business that Imperial became.
5. You should not be shy about borrowing to fund a good business idea.
6. You must surround yourself with the right people.
[Internalise these home truths your future Bill Lynches!] (15th)
Economist
It appears as if companies in the US are backdating options given to management after share prices increase. The exercise prices are based on the price before the increase. SEC is onto this and so far at least 20 companies are being investigated. We must put a stop to backdating! Auditors will be implicated if they are not vigilant. (3rd, page 60)
Financial Mail
Unit Trusts have a host of undisclosed fees that unit trust holders know nothing about (brokerage (from churning), management fees, banking costs, audit fees, etc.). The Chairman of the Association of Collective Investments says that the ACI will be publishing a total expense ratio in the coming months. [The question is: “Who will audit it?” The only true cost is the difference between what an investor could have earned on the ALSI (including in and out costs) and what he or she actually earned on unit trust (including in and out costs). Will we ever know the truth?] (30th, page 66)
FinWeek
Vic de Klerk introduces us to another fad called the Neff formula. It goes like this: (Dividend yield plus expected growth)/PE ratio. If this is greater than 50% of the average for the market then the share is a buy. [Fads are for people who are too lazy to do their homework; that is why they are so popular – people want something for nothing!] (8th, page 70)
According to ABSA, a disadvantage of a close corporation is that the owners are taxed twice. [Gee, I did not know this. Maybe SARS better do an audit of my operations because I must be missing something!] (15th, page 53)
Shaun Harris writes that feedback from retirement fund managers is that presentations made to boards of trustees are often suffered in open boredom. Some trustees couldn’t care less about the performance of the fund and matching assets and liabilities. [When it is not your money, no one cares. That is why you should take responsibility for your own wealth development.] (15th, page 73)
SAICA Publications
SAICA has withdrawn its circular 3/2006 which gave auditors guidance on how to report where companies did not fully comply with Statements of GAAP. So we are back in a void – what a mess they created for themselves by not being proactive and doing something about differential reporting ages ago!
Other Tit Bits
Mr Rhys Summerton of Citi Group had the pleasure of going to Omaha to meet with Mr Warren Buffett and Mr Charlie Munger in 2004 and summarised some of the words of wisdom he picked up at the conference:
1. Try to buy businesses that do not require huge capex and can price in inflationary increases.
2. It is dangerous to project high growth rates. Not many companies can exceed 10% p.a. for any length of time.
3. The problem with derivatives is that people do not think of the consequences of the consequences.
4. Investing does not require enormous intellect. It requires enormous discipline.
5. Diversification is madness. The best way to minimise risk is to think.
6. Using brokers to advise you today is equivalent to kings in ancient times using fortune tellers. You will get the same result.
7. We do not believe that EVA does anything for a company’s profitability. EVA is one of many fads used by companies (as an excuse for thinking!).
8. We calculate all variables fairly conservatively and then make a provision for a margin of safety.
9. Some people are very stupid when they know something is wrong but do it anyway. [Like straight lining leases!]
10. Stock buy backs are often motivated by management wanting to increase the price of the shares.
11. Investing is a life-long game. You keep learning. The two most important ingredients are temperament and common sense.
Fun Corner
What is the fastest way to a man’s heart? Through his chest with a sharp knife.
July 2006 (30 Minutes)
Accountancy
The large auditing firms can thank Messrs Sarbanes and Oxley, the bureaucrats at the EU for implementing IFRS and the former Enron chiefs, dearly departed Ken Lay and yet to be incarcerated Jeffrey Skilling, for their good fortune. (Page 1)
The Company Law reform bill of the UK has, after 1 600 amendments, not dropped the criminal offence for reckless auditing to the horror of UK auditors. The jail term has been dropped and the penalty has been reduced to an unlimited fine. This will result in additional costs to clients because of all the box ticking that will take place. (Page 6)
The Audit Inspection Unit of the Professional Oversight Board in the UK is now considering naming and shaming auditors who fail to meet adequate auditing standards. [I told you that it would not be long before they start getting nasty – see a previous MB.] (Page 11)
A coalition of 300 charities and NGOs are lobbing the IASB to drop its proposal to abandon the geographical basis of reporting segments. [The new framework, as far as I can tell, is dropping the “general purpose” objective of financial reporting so I do not think that these people have got a leg to stand on. Financial reporting is for investors, not bunny-huggers.] (Page 14)
iSoft, the healthcare software provider, has been forced to change its revenue recognition policy from accounting for revenue on delivery of the software licences and services to when the software is implemented. This has resulted in a massive reduction in profits. (Page 16)
Another company was forced to restate its financial statements because it valued its shares used as currency to buy a business on the date the deal was signed whereas it should have used the date the deal was completed. (Page 16)
And yet another company was forced to restate its profits because of backdating the sale of land. (Page 16)
The UK government had to go back to the drawing board on trust proposals because of inadequate consultation with affected parties. “Good consultation requires time, thought and consideration. This has to be part of the process.” [Our local authorities should learn from this.] (Page 24)
Robert Bruce says that sceptical and independent minded managers need to be encouraged. Audit committees and accountants ought to provide scepticism and independence. (Page 26)
The highly articulate Emile Woolf makes the point that if routine auditing procedures cannot detect 64 000 phoney insurance policies, $25m in counterfeit bonds and $100m in missing assets, what is the point of audits?” This was in response to the comment by the auditors in the Equity Funding Insurance fraud that “routine audit procedures aren’t designed to detect fraud.” He points out that underwriters had examined the company’s historical record in detail, banks analysed its accounts intensively before making huge loans, lawyers were paid vast fees to prepare prospectuses, external actuaries certified its insurance reserves and auditors passed each year’s accounts without qualification. And yet all these safeguards failed! (Page 27)
A recent survey of FDs in the US has revealed that the vast majority of senior finance officers still felt that the costs of s404 of Sarbox outweigh the benefits. Some of the complaints are:
• We are spending a so much time on value protection that we have stopped creating value.
• The absence of a practical top down/risk-based approach is a root cause of Sarbox implementation problems.
As a result of consultation, the authorities are working on getting it right. (Page 53)
Recent research has revealed that creative services agencies are spending a growing amount of time justifying their bills and then billing their clients for the time it takes to justify. [Sound familiar?] (Page 64)
Airlines have written off $3,5bn of net assets under the transition to IFRS. [I am very sceptical about this. What a wonderful way to push up future profits – blame IFRS!] (Page 85)
The UK is re-looking at its gaap for SMEs and is considering extending it to larger companies. [Part of a backlash to IFRS?] (Page 87)
Nick Chandler has a go at the IASB proposals to delete the exemption for first time recognition of deferred tax. [See my IFRS Buzz 011where I addressed this issue.] He ends his excellent article by making the following points: “What is of paramount importance is that accounting standards portray faithfully the economic consequences of transactions and do not distort the information content by introducing artificial complexity. If accounting standard fail as a tool to communicate the true economic effect of transitions they will alienate the very community they are intended to serve.” (Page 89)
The IASB has published an exposure draft changing the standard on borrowing costs. It will require that borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset be capitalised as part of the cost of that asset. It is proposed that the alternative be deleted. (Page 93)
According to research conducted by KPMG, audit committee members feel more exposed to litigation than any other members of the board. (Page 119)
According to new research people hit their lowest ebb at 2.16 p.m. and their second lowest at 11.37 a.m. [Ensure that you set your alarms to these two times to wake yourself up!] (Page 133)
Accountancy SA
Note: I do not summarise these articles because you should read them yourself.
Page 2: Congratulations to our (SAICA’s) new chairman, Trevor Petersen on his appointment.
Page 3: Congratulations to Futi Mtoba on her appointment to the board of the UN Global Compact.
Page 3: Congratulations to Alta Prinsloo on her appointment to the position of Deputy Director of the International Auditing and Assurance Standards Board. (I would congratulate James Gunn but have never met him.)
Page 6: At last the debate is on – how long have we been fighting to remove the red tape iro SMEs? Why did it take the profession so long to react to the pleas from small practitioners? Anyway, hopefully we are at last on the path to common sense and reality – I can dream can’t I?
Page 7: Circular 8/2006 has been issued to try to undo the embarrassing circular 1/2005 iro BEE accounting.
Page 12: This article commences with the comment that accounting is governed by the principle of “substance over form”. This is actually not true. IAS 8.10 only permits this concept to be used in the absence of an applicable standard. The balance of this article comments on IFRIC 4, the standard that will change the balance sheets of companies once all leases are deemed to be finance leases. Just another small point: when one capitalises a lease one does not recognise the asset on the balance sheet but the right to use the asset. Ownership of the asset remains with the lessor.
Page 18: Estienne de Beer writes about bureaucracy in the work place.
Page 20: Stephen Coetzee writes about the “new” idea of treating settlement discounts as a deduction from revenue. His article uses, as an example, a 10% “settlement discount” for payment in 30 days. Clearly, this was never in doubt as “receivable” would have been 90%. The issue is not 10% but 2,5% for 60 days. To argue that we have always been wrong by not treating settlement discounts as a deduction from revenue is gross arrogance. Is it now wrong to have a different interpretation? We have always interpreted “receivable” to mean what we expected to receive on the date of the sale. The new “correct” method requires us to catch a time machine, go into the future, check what we actually received, catch the time machine back into the past and then pass the journal entry. Clearly this is crazy thinking! And what about discounting of debtors? If we offer a settlement discount of 2,5% do we also have to discount the debtor? Stephen: we need people to challenge stupid ideas. Yes-men are boring.
Page 22: Jenny Greyling writes about managing people through change.
Page 26: Ben Marx and Jan Dijkman talk about the search for people with suitable skills for manning audit and other committees.
Page 27: My last article for the journal was on forex madness. (The deal I had was if they do not allow free speech, I would stop writing for them. They banned my article called “Parents Unit” so no more freebies for SAICA.) See IFRS Buzz 15 for the follow-up short cut journal entries to solve the madness problem.
Citizen
Based on a survey carried out by E&Y, 66% of users believe that IFRS gives more meaningful information than the old GAAP accounting system. [They are living in a fool’s paradise! If they really knew what went on behind the scenes, they would not be so sanguine about IFRS.] The CEO of BP says (shortened): “Volatility results from the requirement to mark to market embedded and financial derivatives and the effective inability to account for economically matched transactions as hedges resulting in asymmetric treatment of different parts of the same economic event. This produces neither a record of accountability of management nor a measure of economic performance.” [I could not have said it more poetically.] (David Carte (excellent journalist) 26 July)
Financial Mail
A scandal has broken out among those entrusted with your investments. It is called “bulking”, i.e. taking the spare cash in all the portfolios and earning a higher return on these funds than could be earned by each of the funds individually and the managing company keeping the excess. Alexander Forbes, Glenrand MIB, NBC and Lekana were the big players in this scandal. [Personally, I cannot see that this is such a problem. Individually the investors could not earn the higher return. It makes good business sense to do what these companies did. They were not harming anyone, the first rule of being a trustee of funds.] (13th, page 45)
Stafford Thomas has constructed a portfolio of ten “safe-haven shares” to get one through the expected turbulence we could be facing. They are:
|Share |31 July |28 Sept |Gain |
|Altech |5160 |5499 |6,6% |
|Bidvest |9950 |11380 |14,4% |
|Illovo |1919 |1575 |-17,3% |
|Pick ‘n Pay* |2907 |2920 |0,5% |
|PPC |36995 |35700 |-3,5% |
|Reunert |6549 |6800 |3,8% |
|Remgro* |14225 |15580 |9,5% |
|SABMiller* |13600 |14665 |7,8% |
|Sasol* |24945 |25550 |2,4% |
|Tongaat-Hulett |9500 |8850 |-6.8% |
|Average |12575 |12852 |2,2% |
|Alsi |20732 |22491 |8,5% |
I think this is an excellent portfolio (sugar, a safe haven?). Let’s see how it performs over the next few years. [Note that four of these counters (*) are in my personal portfolio.] (28th, Page 40)
Finweek
Data at the Bond Exchange of SA shows that foreigners bought R7,2bn worth of bonds in July, matching their net purchases for the entire six months to June 2006, indicating that local interest rates were expected to rise. [Rise? Why would someone buy bonds if interest rates are expected to rise? If this happens, bonds will fall (bonds usually have fixed interest rate coupons). Am I being doff again? Help!] (3rd page 10)
The Financial Advisory and Intermediaries Services (FAIS) Act ombudsman will rule, in the next few months, on whether the brokers who sold the Leaderguard product to investors will be required to refund the investors with their losses (about R350m). Like most dodgy investment schemes, this product was characterised by high-pressure marketing with high commissions being paid to brokers. [I have said it before and I will say it until I die: Do not hand your hard earned cash over to some stranger to invest: DIY!] (20th, page 12)
Noah Greenhill (JSE GM) says that the problem with the retail investor is that they tend to be last in and last out. Richard Sneddon, head of Online Share Trading at Standard Bank, says that investors are starting to become aware of the costs associated with investment products and are turning to DIY investing. (20th, page 28)
Charles Chapman of PSG Online says that the way for brokers to increase their client base is to educate the man in the street and not to poach other brokers’ clients. (20th, page 30)
“The greatest threat will therefore be to the companies that have already signed lease agreements with the clear understanding that they’ll not be in compliance with IFRS guidelines. It could be a problem if you’re dealing with an auditing firm that has an excessively cautious approach.” [Don’t you love it? What auditing firm does not have “an excessively cautious approach” with three years jail and/or R1m fine hanging over their head?] (27th, page 92)
IRBA News
“We remain committed to serving the financial interests of the public, but as the same time provide the necessary support to registered auditors to equip them with the required competences to deliver high quality audits.”
A new ED on group audits has been issued for comment.
A guide has been issued on reportable irregularities for registered auditors – better get hold of it and study it.
A circular has been issued on giving second accounting opinions. [I wonder why this was considered necessary?]
The Corporate Laws Amendment Bill was exposed for comment. It provides for, among other things, the formation of a financial reporting standards council that will establish financial reporting standards for public interest companies as well as for SMEs. [So will they abandon the APC or is this another loop for accounting standards to jump through before becoming implemented?]
The guidance that SAICA gave in Circular 3/2006 on how to report on financial statements that do not fully comply with GAAP/IFRS has been withdrawn.
The format of the public practice examination has been changed from a morning examination to a full day one (9h00 to 17h00). [And we used to write a four hour examination!]
The period 1 January 2006 to 31 March 2006 saw 15 cases related to practice review being dealt with. It looks like the fines are increasing – R30 000 now seems to be the norm. Who wants to be an auditor? An auditor told me recently that he had done the audit of a corporate body of a sectional title set-up. There were, say, 15 units and the levy for each unit was, say, R1 000 p.m. His audit procedure was to verify revenue by comparing the actual levies received with the budget and to follow up those who had not paid by the end of the year. One of the reasons he failed practice review was that he did not do “cut-off” tests on revenue!
Time
Sherron Watkins: “Enron was fast-paced, inventive, exciting; we epitomized the New Economy, able to innovate virtually overnight. Unfortunately, in life our strengths can become our weaknesses. Just as the dark side of charisma is narcissism, the dark side of innovation is fraud. Enron fell victim to both. Our finances, accounting and legal departments pushed the use of off-balance sheet vehicles over the line that separates creative transactions from fraudulent ones. Our corporate culture became narcissistic; we were focused on our image, not our customers or our products. The most alarming revelation is how easy it was to co-opt the outside world into joining us as we sang our praises: auditors, lawyers, bankers, the media. We want honest leaders who are divisive, creative, optimistic and even courageous, but we so easily settle for talk that marks those traits instead of action. We often don’t even look for one of the most critical traits of a leader: humility. A humble leader listens to others. He or she values input from employees and is ready to hear the truth, even if it is bad news. Humility is marked by an ability to admit mistakes. Is our society cultivating humility? Do we exhibit that trait individually and collectively as a nation? Will we stop and learn from the Enron lesson in leadership failures, or will we just shrug our shoulders and thank God we’re not Ken Lay?” [Wow! This is powerful stuff from a powerful woman!]
Fortune
The top 10 companies in the world by revenue in 2005 were:
|05 |04 |Name |$ billion |
|1 |3 |Exxon Mobile |340 |
|2 |1 |Wal-Mart Stores |316 |
|3 |4 |Royal Dutch Shell |307 |
|4 |2 |BP |268 |
|5 |5 |General Motors |193 |
|6 |11 |Chevron |190 |
|7 |6 |Daimlerchrysler |186 |
|8 |7 |Toyota Motor |185 |
|9 |8 |Ford Motor |177 |
|10 |12 |Conocophyllips |167 |
General Electric dropped from 9th to 11th place and Total dropped from 10th to 12th place.
Tit Bits
SA Airways’ Audited Group Results: “As a consequence of the S258 enquiry, an amount of R6 089 million relating to shares issued to Transnet and previously shown as issued shares in prior financial years has now been reversed and reflected as a holding company loan.” [Whew! What the dickens happened here? This is the second time I have come across a situation where a share issue has been found to be irregular. Should SAICA/IRB not consider the publication of guidelines on how to audit share issues?]
Tax Snippets
In volume 45 part 3 2006 of the Income Tax Reporter, two cases caught my eye:
1. ITC 1797 deals with a taxpayer who invested the proceeds from a pension fund into a “life annuity” with a financial services company. The taxpayer contended that the annuity received was not an annuity but a reduction in the capital sum invested and income thereon, and won. If you have clients with life annuities, you had better check this case out.
2. In CIR v Conhage SARS challenged a sale and leaseback of plant and equipment as being of the nature of the loan and wanted to disallow the “rent” payments. SARS lost the case. GAAP has clearly got this wrong and I empathise with SARS on this. Mr. Andrews used this “error” in GAAP to coin it when working for SA Airways. The standard setters should really reconsider this issue.
Taxgram
The exemption portion of an estate has increased from R1,5m to R2,5m.
Small assets purchased for business purposes on or after 1 March 2006 costing up to R5 000 can now be depreciated in full.
August 2006 (30 Minutes)
Accountancy
The IASB has, as a result of pressure from users of the standards, stated that no new standards will be imposed on companies before 2009. (Page 6)
As a result of a massive outcry, the UK government backed down on its proposal to bring forward the tax filing date. The lesson learnt from this debacle was that consultation needed to be more effective. (Page 8)
Ken Lay’s death has sparked anger among former employees and shareholders of Enron as they feel that they have been robbed of justice. [Death is better than jail?] His death could result in his conviction being dismissed and his conviction erased. Ken’s strategy was superb: by dying he was able to cheat his accusers! (Page 12)
Andrew Ramsay, who it was thought would appear as a witness in a High Court case, has been abducted from his home town in Scotland and has disappeared into thin air. [Do not get involved in forensic work unless you are looking for real excitement!] (Page 12)
Accountants in the UK have swamped the authorities with reports as a result of the money laundering act. The authorities are begging them to stop sending in trivial items but accountants are ignoring their pleas and the avalanche continues unabated! (Page 21)
Allen Lane, the man that started Penguin Books had a simple philosophy: people will choose the best if they can afford it. Out of this idea he made a small fortune. (Page 25)
I have said it before and will continue to say it: Emile Woolf is tops! He writes: “Why is convergence more fashionable that diversity? The latter reflects the natural order.” What he is against is the “one-size-fits-all” approach that the IASB has adopted. His solution to the problem is to lobby the government to allow the profession to set up a dedicated standards board catering for the reporting needs of the 95% of companies not catered for by these standards. (Page 26)
There is the awful story about a respected 59 year old UK accountant who has landed up in a US jail with hardened criminals as his cell mates because of something he allegedly did in the US which is perfectly acceptable in the UK. The description in this article of his existence in jail is horrendous. Can you just imagine how more horrendous this experience would be in a SA jail? Well, brace yourself because one of these days you may do something quite innocently in your financial statements such as to state that you capitalise internally generated development costs and because of poor legal representation and ignorance of your accusers and the judge, you may have to face such an experience. (Page 40)
You do not want to know how close we came to a new system of capitalising borrowing costs. The idea was to capitalise “borrowing costs” at a rate that would reflect the current market assessment of time value of money and the risks specific to the asset regardless of whether or not borrowing costs were incurred. This would have resulted in capitalising to the cost of the asset a return for the risk incurred in the funds tied up during the process of constructing the asset. It is getting weirder by the day. Fortunately, sanity has prevailed for now (don’t count on it) and the exposure draft only requires one to capitalise borrowing costs actually incurred. (Page 84)
The proposals contained in the new conceptual framework presently being developed deals with the broader notion of financial reporting rather than the narrower notion of financial statements contained in the existing framework. (Page 87)
The IASB has published an exposure draft on puttable financial instruments and obligations arising on liquidation. From my first reading of this ED, it appears as if it is not going to be of assistance in the typical BEE deal. (Page 87)
Usually the letters requesting assistance in this journal are intelligent. But this one must take the cake: “Will discounting using pre-tax rates and post-tax rates give the same answer? Get a calculator you nit! (Page 89)
Want to improve the mood of your staff, thereby improving their productivity? Set them challenging goals. The things that make staff happy are good colleagues, receiving praise, undertaking challenging work and making progress. The things that make staff unhappy are high workloads, poorly performing colleagues, poor leadership, failure to achieve results and office politics. (Page 123)
There are many ways to measure a person’s reputation, one of which is the OCEAN method:
Openness to experience – measures a person’s need to seek new intellectual stimulation.
Conscientiousness – measures the individual’s need to be responsible, structured and organised in how they live their lives.
Extroversion – measures a person’s need for social interaction.
Agreeableness – measures a person’s need to avoid conflict and to seek harmony with others.
Neuroticism – measures an individual’s level of trait anxiety and tendency to worry.
[I only passed 2 out of the five! Now I know why I have such a poor reputation, i.e. am so infamous, ignominious and opprobrious – gee did not even know that these words existed.] (Page 127)
Accountancy SA
Note: I do not summarise these articles because you should read them yourself.
Page 2: The Eastern, Central and Southern African Federation of Accountants has developed a guide to assist SMEs that are required to prepare financial statements in recognition that IFRS may be burdensome for small entities (Really? Burdensome?) You do not want to know what their proposals are.
Page 4: The APC is aware that up to now in SA many entities that receive or allow cash discounts and rebates have been accounting for them incorrectly. Why? GAAP/IFRS is, and has always been, very clear as to how to account for these items. If auditors have been allowing the companies to incorrectly account for these items the auditors and the companies should be disciplined. Why is a circular required in this regard? To protect the members of SAICA? I thought that the IRBA was to take a tough stand against such blatant contraventions of GAAP/IFRS? Regarding the settlement discounts, see the IFRS Buzzes for further commentary.
Page 7: IFAC has published a paper on business planning for SMEs. It can be accessed from their website .
Page 9: Estienne de Beer writes about change agents.
Page 13: I have seen some horrendous things in GAAP but never anything as stupid as what is being proposed in this article. Accounting standards have completely lost the plot and it is time for preparers to see these standards for what they really are – a total and utter joke. To avoid going to jail and the fines imposed for not doing these stupid things, we will do them. But then it will be necessary to prepare a second set of financial statements that tells the story like it is. I will deal with these stupidities in an IFRS Buzz.
Page 21: Grant Thornton has established that 65% of SA business owners are more stressed than a year ago. I can understand this with what is happening in our profession.
Page 22: Elmar Venter and Tania Tomes deal with the situation of when a lease is not a lease (SIC 27)
Page 28: Jackie Arendse explains that if companies and CCs did not obtain valuations for their capital assets at 1 October 2001, the portion of any capital gain made on disposal of an asset prior to this date will be subject to STC on the liquidation of the entity. Note that the entity will be able to use the TAB method to calculate the capital gain on which CGT is payable but any gain made will be included in revenue reserves for STC purposes.
Page 33: Prof Nerine Stegmann gives the results of the headline earnings survey. I cannot understand why “some feel that it (headline earnings) might undermine the credibility and integrity of SA financial reporting.” Are these people saying that additional information is not allowed to be presented in financial statements to clarify the reported results? What about “core earnings” that some present? Do they want these banned as well. Have these commentators ever bothered to ask the users what they need?
Page 43: There were some interesting stats and comments given on the recent Part 1 Q.E. results. I really must be getting old because I truly do not understand them. Would you like to try?
Although more males (917) than females (867) passed the examination, the pass ratio between the two was higher for the female candidates (42,33%) than the male candidates (45,07%). [What is a “pass ratio between the two?? And 42,33% is higher than 45,07%? Wishful thinking?]
Pass rate among females was higher than among males (40,74%) with the respective numbers for 2005 having been 43,84% (female) and (male). [Maybe this is some new language that I am not familiar with.]
Despite these significant highlights, Ignatius Sehoole, SAICA’s executive president says: “SAICA is currently re-examining the qualification process in lieu of wanting to develop the most efficient system of delivering top CAs (SA).” [Does he want a system that makes all equal?]
Business Day
There was a very confusing article by Sanchia Temkin stating that the new accounting standards were to become mandatory in 2009. The article started by stating that SA companies have been given a reprieve until 1 January 2009 to implement the new accounting standards. All hell broke loose! What has really happened is that the IASB has said that it will not publish any new major standards for a while to allow companies to get the existing ones up and running. When I used to be quoted in the past by journalists, I used to insist on seeing the final draft before publication. Journalists can be dangerous if given carte blanche! (7th August)
The Joint Municipal Pension Fund, which lost R1,4bn from speculating on maize futures, [what is a pension fund doing speculating with pensioners’ money???] is suing the JSE, the Financial Services Board, Deloitte, PwC and 21 others for the loss. Russell Loubser, the CEO of the JSE, said that he found the lawsuit “amaizing” [sorry, could not resist this]. [I really feel sorry for the pensioners of this fund. They work all their lives, thinking that they are saving for their retirement only to find that the people to whom they entrusted their investments are a bunch of fools. If you are forced to contribute to a retirement fund, see your contributions as an expense and take responsibility for your own financial security in your old age.] (16th)
In the Management Review section of Business Day Jonathan Cook looks at the problem I suffer from called “Urgency Addiction”. He defines it as an unhealthy, physical and psychological dependence on the adrenaline rush and validation experience delivered by handling urgent matters. Indicators of this killer disease are:
1. Monitoring time excessively.
2. Going at too fast a pace.
3. Accepting time demands at work.
4. Giving up personal time.
5. Losing the ability to enjoy the present moment.
6. Possessing an inadequate sense of the future.
7. Believing time will be controlled by working faster.
The only symptom that I do not have is (6) above, which means that there is no hope for me! As a possible solution the article gives Stephen Covey’s “Urgency addiction matrix”
| |Urgent |Not Urgent |
|Important |Crises, pressing problems,|Preparation, prevention, |
| |deadlines, meetings |planning, building |
| | |relationships |
|Not important |Interruptions, phone |Trivia, time wasters, |
| |calls, mail, meetings, |excessive TV |
| |pressing matters | |
The trick is to operate in the important/not urgent block.
Citizen
David Carte explores why companies buy back shares and declare special dividends. Some ideas are:
1. The company believes that the best investment it can make is in itself.
2. It can improve ratios such as earnings per share, return on assets and equity and gearing.
3. To avoid criticism that the company is empire building.
4. The company has run out of ideas for further investments.
The alternative is to build up cash reserves and when the cycle turns, pick up assets at cheap prices. However, with the short term nature of investment thinking among shareholders and investment analysts, one has to be pretty strong to fend off criticism if one takes this stand. (18th)
Chris Buchanan writes that financial planners will have to choose between becoming sales agents for financial products or providing independent advice for a fee. [They will not survive on the latter!] Greg Snedden of the Financial Couch gives the six steps one should follow when giving financial planning advice:
1. Establish and define the client-planner relationship (like an engagement letter in auditing).
2. Gather information about the client (goals, timeframe, risk attitude, etc.)
3. Analyse and evaluate the financial status of the client (financial position, income generating ability, cash flows, insurance coverage, tax status).
4. Present financial planning recommendations and options.
5. Implement the financial planning recommendations.
6. Monitor the outcome of the recommendations.
Financial Mail
Ignatius Sehoole, CEO of SAICA, says that if the new regulator (the IASB) follows through with its statement that it intends to be a tough regulator, it may end up having no-one to regulate. He warns that we must not allow the auditor to go the way of the dodo. [If SAICA pursues its policy of forcing chairmen, CEOs and CFOs of companies who happen to be CAs to sit for 20 hours in lectures once a year, I can foresee SAICA losing these very valuable and high profile members as well.]
FinWeek
“I thought that the article written by Paddy Upton, former trainer of the SA cricket team and currently leadership and mental conditioning coach in business and professional sport, in the 10 August 2006 journal was brilliant. He maintains that too much emphasis is given to instructing and not enough to coaching, too much on skill, technique and fitness and too little on the mind and too much on performance and too little on the person. He gives a list of the differences between instructing and coaching:
|Instructor |Coach |
|Tells |Asks |
|One way relationship |Partnership |
|Reflects and plans |Gets player to reflect/plan |
|Teaches |Helps learn |
|The old way |The new way |
|Exerts power |Influences |
|Gets frustrated |Empowers |
|Goes for the quick fix |Takes time and patience |
|Sometimes works |Most time works |
He sets out a cycle of how players learn:
Step 1: Analyse and plan
Step 2: Practise and train
Step 3: Play the game
Step 4: Reflect (I call this doing a post-mortem)
Step 5: Redo steps 1 to 4, and so on and so on.
In Vic de Klerk’s article on share buybacks he says: “Unfortunately, dividends are currently taxable in the hands of the company that declares them – in the form of the detestable 15% secondary tax on companies. That results in directors sometimes choosing the paternalistic route of buying shares back rather than declaring a special dividend.” Firstly, the “detestable 15% secondary tax on companies” is not 15% but 12,5% and secondly, STC is payable on any buyback that cannot be charged to share capital or share premium once the 10% limit is reached on using subsidiaries to house the shares.]
Fortune
Once in a while this prestigious magazine comes up with something that is really good. In the August 7th issue there is an excellent article on General Electric’s new management style. Jack Welch’s (departed from GE five years ago) rules for running a large company are being questioned with Jeff Immelt now at the helm. I will attempt in the synopsis below to capture the essence of the battle that is raging between the old and the new. JW’s approach was consistent earnings growth. He would not tolerate low margin low growth units. If you did not shape up in JW’s GE, you were shipped out. JW went for size, being number 1, keeping lean, exploiting niches, placing the customer first, looking outward and ranking employees and firing those who did not meet his standards. Debate is now taking place as to whether the old rules are still applicable in today’s environment:
1.O: Big dogs won the street.
1.N: Agile is best; being big can bite you.
2.O: Be number 1 or number 2 in your market.
2.N: Find a niche, create something new.
3.O: Shareholders rule.
3.N: The customer is king.
4.O: Be lean and mean.
4.N: Look out, not in.
5.O: Rank your players; go with the A’s.
5.N: Hire passionate people.
6.O: Hire a charismatic CEO
7.N: Hire a courageous CEO
8.O: Admire my might.
8.N: Admire my soul.
Makes you think, doesn’t it? My only comment is that one should have a holistic approach to management and to choose one rule over another can become narrow thinking.
Taxgram
SARS has posted a TAB calculator on its website which will come in handy if you do capital gains tax calculations for clients or yourself. Well done to Duncan Mc Allister for designing it. (Page 8)
Other Tit Bits
Mr Charlie Munger, Warren Buffett’s long-time partner, has some advice for those going out into the big wide world:
1. To those who much is given, much is expected.
2. Always live below your financial means so you will have money to invest.
3. To get smart ask “why, why, why” and relate the answers to a structure of deep theory.
4. To ensure a miserable life ingest chemicals in an effort to alter mood or perception allowing one to indulge in envy and to wallow in resentment, all of which will guarantee an unhappy existence.
5. To guarantee failure learn everything from your own experience rather than learning from others, give up trying after your first, second, or third failure and give in to fuzzy thinking. (From Michel Pireu’s column in Business Day – always an interesting read.)
Kerry Sutherland of Alexander Forbes Financial Services set out in Business Times the definitions one needs to know to understand financial statements. She defined a liability as “something you owe, which must be repaid.” It really would be nice if this definition were followed by the IASB. Pick ‘n Pay, for example has recognised a liability of R500m on its balance sheet that is never going to be paid but is going to be recycled back to income. I have got scores of other examples of liabilities being recognised on balance sheets that will never be repaid. We need people like Kerry to join the IASB and infuse it with some simple common sense. We will not, at this stage go into her common sense definition of an asset (a thing you own that has more than sentimental value). IFRIC 4, for example, is forcing users of Eskom’s power to recognise Eskom’s power stations on their balance sheets!
September 2006 (15 Minutes)
Accountancy
Increases in the audit threshold in the UK have resulted in the reduction in the number of small auditing firms from 7 000 to 5 000. Expect the same situation in SA. (Page 1)
A small audit firm partner in the UK feels that there is a need for an assurance report between an audit report and a compilation report. However, there has been little enthusiasm for such a service among business people. (Page 12)
Emile Woolf finds it astonishing that the auditors of Apple and 60 other companies under scrutiny by SEC failed to see that the issue dates of options given to management had been left blank. These dates were completed retrospectively after the share price rose. The SEC investigation is likely to result in major restatements of financials already issued and audited. (Page 24)
Emile goes on to request an interpretation of the following declaration required by directors in the UK: “So far as each director is aware, there is no relevant audit information of which the company’s auditors are unaware; and he has taken all steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the company’s auditors are aware of that information.” He says that the second guessing by directors, particularly non-executives, of what blissfully unaware auditors might wish to be aware of is the stuff of fantasy. (Page 24)
At the graduation ceremony of Durham University, Bill Bryson gave graduates the following three fundamental pieces of advice:
1. Go for what you feel you are best fitted.
2. Never whinge
3. When you see someone dropping litter, kill them. (Page 26)
Fraud costs the UK an estimated £20bn p.a. (Page 40)
Budgeting is supposed to be a roadmap for the future, a process that turns strategy into action, but very few involved in the process see it that way. It remains largely a time and resource-consuming activity that delivers little value. However, technology can add value to the process. (Page 79)
Philippe Danjou, director of the accounting division of the French stock market regulator, says that the standard setters should be careful not to use words that are subject to interpretation. [Like “benefits” in IAS17, Philippe?] (Page 86)
Almost two-thirds of fund managers said that they were confident that the current standard settling process would produce high quality enforceable global standards whereas the majority of finance directors said that they were not confident. [When I asked a top analyst why there was such a discrepancy, his comment was “ignorance”!] (Page 91)
Nearly twice as many finance directors oppose the greater use of fair values than support it whereas 59% of fund managers support the trend towards fair value accounting. [Is this another case of ignorance?] (Page 91)
A forum in the UK has been established to investigate what the purpose of an audit is! [This is how accountants think: first do something and then say: “What are we trying to achieve?” I used to teach my students to think before you plan and plan before you act.] (Page 94)
Three former partners of PwC in Japan pleaded guilty to conspiring to falsify cosmetics group Kanebo’s earnings for 2001 and 2002 to cover up a £730m deficit. All three got off with suspended sentences. (Page 176)
Accountancy SA
Note: I do not summarise these articles because you should read them yourself.
The IFAC’s international accounting education standards board has issued a new standard outlining the skills, training, professional values and attitudes necessary for auditors to perform competently. [Does this mean we all have to start over again? Re-write CA (SA)?] (Page 3)
IRBA has issued guidance on reportable irregularities. If you are an auditor, get it. (Page 4)
Circular 3/2006 has been withdrawn as IRBA disagreed with the guidance given therein. (Page 4)
SAICA has issued circular 10/2006 on recognising and measuring short term insurance contracts. (Page 4)
The IASB is considering changing the definition of a liability to permit certain credits previously treated as liabilities to be classified as equity. (Page 7)
I will be keeping you up to date on all the IASB and IFRIC publications in “Future Watch” and IFRS Buzz starting in two months.
Elmar Venter and Rieka von Well have missed the point in their article on deferred tax – see my IFRS Buzz on this issue. (Page 15)
Sean de la Rosa provides us with a detailed discussion on cultivating the best board of directors. (Page 16)
Estienne de Beer explains what it means to be “mature”. (Page 25)
Ivan Epstein explains why it is necessary for accountants to be able to convert raw financial numbers into usable information. (Page 27)
Anton van Wyk and Morné du Toit explain the complex hedging rules of IAS 39. (Page 30)
Tonia Jackson begins to explain the consequences of the National Credit Act. (Page 36)
FinWeek
The regulators are, quite rightly, looking into two practices used by asset managers to generate income for themselves. They are scrip lending and softing. The former is where shares owned by the investors are lent to third parties. A commission is earned on the value of the shares lent. The latter is the practice of passing part of the brokerage charged on transactions back to the asset managers in a form other than cash. The practice of softing encourages asset managers to churn portfolios under management which has the effect of reducing returns on the investments. The practice of bulking has already been addressed in a previous Mafia Buzz. (28th, page 10)
Time
I loved this letter from a proud mom:
Your essay about boys goofing off at college while girls are overachieving was nothing more that the flip side of the stories during the 1950s and 60s that claimed women went to college only to find husbands. I didn’t care to be stereotyped that way back then, and as the mother of 18-year-old twin sons who are honour students, eagle scouts, Young Democrats and all-around sold citizens, I deeply resent such a demeaning picture of the current crop of young men. Surely there are also plenty of unfocused, lazy, binge-drinking young women on today’s campuses?
October 2006 (20 Minutes)
Accountancy
George Soros is unhappy with the IASB’s decision not to disclose payments made by companies to individual governments in segment reports. (Page 10)
The SEC has dropped charges against the chairman and finance director of Shell for overstating its reserves. (Page 11)
David Cairns is of the opinion that IAS 12 should be scrapped as it requires provision to be made for future liabilities. [One day the standard setters will listen to me: measure all assets and liabilities on an after tax basis and then there will be no necessity to provide for this stupid “liability”.] (Page 14)
Emile Woolf says that independent directors should be indulged when they ask basic questions as it is often such questions that lead to the uncovering of problems. He says that the days of the rampant buccaneering dominant chief executive are rightly over. (Page 18)
Mike Brooks is convinced that the argument that share options align management’s interests to those of the shareholders is fundamentally flawed. He is of the opinion that they act against the interests of the shareholders for the following reasons:
1. They are a one-way bet – the shareholders live with a two-way bet.
2. An option is geared whereas shareholders usually pay for their investments in full.
3. Options are short term investments whereas equities are long term interests.
He says that he has evidence that companies leak bad news just before option granting time to depress the exercise price! (Page 20)
Nick Land, outgoing senior partner of E&Y, says that innocent people making really immaterial mistakes around compliance are terrified by the aggressive legal environment. [You must see what I have seen over the past few years in SA my friend!] (Page 24)
Age discrimination in the workplace is now unlawful in the UK. [Gee, can I go there to get a job?] (Page 31)
A global study on IFRS conducted by E&Y has found that the value of data being produced because of IFRS is obscuring key information in financial statements. (Page 77)
The IASB’s exposure draft D20, Customer Loyalty Programmes, states that one should allocate the sales proceeds between the original sale and the value of the future service. [I fought with SAA many years ago on this issue. They only provided for the variable cost of the customer loyalty service.] (Page 78)
Some of the issues being debated around the new conceptual framework are:
1. The objective of the framework excludes stewardship. Many feel that stewardship is necessary. I believe that one should focus on trying to achieve one thing at a time, so I like the IASB’s idea.
2. The objective is purely to enable users to assess the amounts, timing and uncertainty of the entity’s future cash flow. I have a problem with this. As a user, I want to assess, in addition to cash flows, the financial position and performance of an entity.
3. The IASB wants to scrap the concept of “reliability” [thereby opening the door to fair value accounting?]
4. The IASB wants to broaden the framework to include not only the financial statements of the entity but the financial reporting of the entity. They are not too sure at this stage what “reporting” will include.
5. The IASB wants to target not only present investors and creditors but also future ones.
6. There is a fear that the framework will come out strongly in favour of fair value accounting. (Page 80)
Authorities are becoming concerned about the risk that one of the big four auditing firms could leave the market and the impact this could have on the availability and quality of audits. (Four is already a monopoly!) (Page 83)
Accountancy SA
Note: I do not summarise these articles because you should read them yourself.
Participants of the IFAC’s first global forum focusing on small and medium entities concluded that SMEs need financial reporting standards that are appropriate for the users’ needs and reduce the associated cost of compliance and ways should be found to support the growth and accountability of SMEs. [You need a forum to conclude this?] (Page 3)
News from the IASB is that they are going to go easy on us until 2009. They are working on a new and improved conceptual framework, a new IFRIC 10 has been published and they are working on leases and related party disclosures. (Page 5)
IFAC has published guidance on ethics in networking firms. (Page 6)
Alex Watson summarises the local standards in so far as they are applicable to BEE transactions – some heavy stuff here! If you are involved, study the article. (Page 10)
Anoosh Rooplal gives insight into how securitisation schemes work and some of the IFRS requirements for accounting for them. (Page 16)
Estienne de Beer describes a micro manager, how he or she becomes one, how to deal with this character and how he or she could become a true leader. (Page 19)
Elmar Venter and Rieka von Well discuss circular 1/2006, which deals with deferred tax disclosures. They have totally missed the point – see IFRS Buzz 11. (Page 20)
Kim Bromfield and Tracey Ruddy clarify the provisions of the proposed amendments to the definition of a liability. (Page 30)
Veli Ntombela considers whether the granting of the Sullivan Code expenditure as a tax deduction by the Supreme Court of Appeal could have similar consequences for BEE compliance expenditure. (Page 33)
Tonia Jackson sets out the scope of the National Credit Act and looks at the possible role of the auditor. (Page 34)
Financial Mail
Nkosinathi Mdakane, from deep in Soweto, wanted to be an accountant but his school only offered standard grade maths so he taught himself and obtained a distinction in accounting and a B for higher grade maths in matric. He is now a first year student at the University of Johannesburg and says that he is stronger because he did not depend on teachers. “If I want to do something, it is up to me.” [We need to educate children into this type of thinking. Well done young man – you are a self-starter, which is the main ingredient for being a winner.] (6th, page 80)
FinWeek
Michael Coulson explains that HEPS (headline earnings per share) assumes that almost any transaction a company undertakes during a period must go through the P&L account. [You would think that before writing something like this a journalist would go and read the circular. He probably assumed that no one would check up on him!] (19th, page 36)
Fortune
Cash flow generation can be a poor indicator of value where a company is investing in future intangible assets and not capitalising such costs. On the other hand a cash cow could be running itself into the ground as its capital depreciates. (2nd, page 24)
Commenting on a mistake made by an employee at Google, Larry Page said: “I am glad that you made this mistake. I want to run a company that is moving too quickly and doing too much, not being too cautious and doing too little. If we don’t have any of these mistakes, we’re just not taking enough risk. [Clearly this guy was not trained as an accountant!]. (2nd, page 36)
How Jeff Pajcin and Gene Plotkin (the court case is on going) got illegal stock tips:
1. They planted a spy at a newspaper to pass on news before it was published.
2. They recruited someone at a merchant bank to pass on information about pending takeovers.
3. They trained strippers to ask questions about deals going down.
[Lazy people look for short cuts with jail consequences. Do not try this at home!] (2nd page 44)
Sunday Times
The Independent Regulatory Board for Auditors published a statement clarifying that they do not mean to undermine the CA qualification by promoting the RA qualification. (22 October)
Kerry Sutherland of Alexander Forbes wrote a brilliant article to help young people understand the investment game. She gave a list of definitions and one in particular caught my eye: “Liability: Something you owe, which must be repaid.” I have seen at least ten cases in practice where auditors have forced their clients to raise liabilities on their balance sheets that will not be repaid but merely recycled back to income. We need people like Kerry on our standard setting bodies to bring sanity back to GAAP.
Taxgram
The big four auditing firms have objected to a proposal that would prohibit them from providing tax advisory services to their audit clients.
Time
9 October, under “Numbers” on page 14: “25%: Percentage hike in Greece’s GDP last week after recalculating it to include income from prostitution, cigarette smuggling and money laundering. The estimated annual value of Greece’s black market is $76 billion!”
We hope to challenge today’s Europeans to eradicate the most dangerous of all frontiers – that between a closed mind and an open one. (8th, page 27)
Fun Corner
A blonde goes to her doctor and reports that her body hurts all over. The doctor examiners her and asks he to illustrate. The blond touches various parts of her body and each times yells in pain. The doctor asks her if she is a natural bond to which she replies: “Yes”. He informs her that she has a sprained finger. (Finweek)
The family of a deceased motorcyclist sued a funeral parlour after a cellphone set off a merry jingle inside the dead man’s coffin. Anguished family members fled the room as attendants rummaged in the casket to switch off the phone. (Financial Mail)
November 2006 (25 Minutes)
Accountancy
Top jobs are by their nature tough jobs, but modern society is in danger of making them so tough that we won’t be able to find anyone to do them. The increasingly superhuman qualities demanded of business leaders narrows down the pool of those deemed to have the necessary experience and qualities. And the growing demands of such roles deter many of these deemed to be suitable thereby reducing the pool still further. (Page 1)
The UK is thinking of raising the turnover limit to £6,6m, which will exempt a further 67 000 companies from having to be audited. [How many auditing additional firms will that put out of business?] (Page 8)
Because Kenneth Lay of Enron fame was denied the opportunity of appealing by his untimely (well planned?) death, his conviction has been quashed. This will make it difficult for the prosecutors to claim restoration from his estate. Enron went bankrupt with debts of $32bn. (Page 10)
Because he showed remorse, Andrew Fastow, also of Enron fame, was given a light six-year sentence. (Page 13)
And Mr Bernie Ebbers has started his 25 year jail sentence for his role in the $11bn Worldcom accounting fraud. (Page 13)
Alan Dangerfield writes: “How come the IASB can ignore your views so successfully? The International Accounting Standards Committee Foundation trustees have the duty to drum up cash to finance the IASB, but their constitution prevents them from exercising proper oversight and interfering with the Board’s standard-setting independence by questioning whether its results are actually practically useful, beneficial and worthwhile. So the IASB ends up accountable to, er, well, God for its work.” (Page 15)
Emile Woolf says that when he started writing for Accountancy he noted that the role of accounting is to reflect economic activity. Accounting should objectively record transactions driven by market forces. The role of accounting should be passive. It should not seek to influence the activity it records. However, the principle of accounting neutrality, the bedrock of financial reporting, is being overlooked. He says that any reduction in the usefulness of financial reporting will provide incentives for private alternative systems to appear. [Come and look at Standard Bank’s and Sanlam’s reporting here at the tip of Africa, Emile.] (Page 18)
The conceptual framework debate has started. Here are some of the issues being discussed:
1. The proposed objective is to provide financial information that is useful for making resource allocation decisions. Commentators are asking: “What about the stewardship role?”
2. The proposed primary users are investors, creditors and their advisors. Commentators want to broaden the users. [Try to please everybody and you end up pleasing nobody.]
3. It is proposed that the scope be broadened to beyond the financial statements, i.e. to financial reporting. The standard setters have yet to define what this will embrace.
4. It is proposed that the concept of “reliability” be replaced with “faithful representation”. The complaints here are that this term is too vague to be useful. (Page 20)
FASB has opted to fully recognise all defined benefit pension fund assets and obligations at the reporting date of an entity, with the actuarial gains and losses going through comprehensive income. [I have been predicting that the IASB would go this route but FASB has beaten them to it. Will the IASB play catch-up now?] (Page 74)
Some preparers in the Media sector have argued that it is not possible to separate their intangibles from goodwill on the acquisition of businesses. The author of this article says that this attitude is indefensible as many are giving this information. People are recognising items such as customer lists, relationships, technology, trade names and trademarks and are amortising these items over periods between two and 30 years. [This is why they are proposing that the concept of “reliable” be deleted from the framework. How can you possibly, without a smile on your face, value such things as customer relations? I need to go into this business. I will promise not to smile when I present my valuations.] (Page 81)
Accountancy SA
Note: I do not summarise these articles because you should read them yourself.
Adri Kleinhans writes that the TOPP programme has been “re-launched”. With the potential demise of small company audits, this is going to be the only savoir for training meaningful numbers of CAs in SA. (Page 5)
Ignatius Shehoole has been appointed to chair the Developing Nations Committee at IFAC. Congratulations! (Page 6)
IFAC has created a resource centre for professional accountants in business called KnowledgeNet. No information is given on how to access this or what the cost is. (Page 6)
IFAC has released a new publication summarising key internal control frameworks, highlighting recent legislative and other initiatives and discussing the role of internal control in enhancing corporate governance. (Page 8)
Don’t fall for this scam: “I am terribly sorry but I deposited an amount in your account in error. Could you please return it to me?” I know of two people who fell for it and lost big time. (Page 9)
Contingent rentals are not straight-lined. (Page 10)
Articles such as the one called “Share-based executive incentive schemes” should be headed “Advertorial”! (Page 14)
Zwi Y Sacho discusses the impact of converting to IFRS in Europe. (Page 21)
Gerhardus Burger takes a look at the BEE Charter for CAs. (Page 24)
Martin Prozesky says that when looking at what is “generally accepted behaviour” (in relation to ethics) one should take into account the cultural diversity in SA. He believes that the eight shared core ethical values identified by the Global Ethics Institute in the US of love, truthfulness, fairness, freedom, unity, tolerance, responsibility and respect for life is a good place to start. [How would these differ in SA?] (Page 29)
Grant Thornton says that red tape is the greatest constraint to business growth in SA. Second is the lack of skills. (Page 31)
Estienne de Beer discusses the quest for career success. A point well made is: “One should realise that as long as your salary is being paid by an organisation, it is only fair to expect that you deliver results.” How many people believe that their employers owe them a living?
Günther Hoppe, all the way from the lovely country of Malawi, gives guidance on how to get through deadlines (plan in advance, don’t over-promise, warn early when things start to go wrong, get enough sleep, eat properly and get sufficient exercise). (Page 35)
Pieter Buys takes us through the advantages of Activity Based Costing. (Page 37)
Business Day
In 2005, 186 000 new CCs were registered, 60 000 more than in 2004. We are looking at something like 220 000 new CCs in 2006. This indicates a boom in small business. And the Government wanted to do away with CCs!! (10th)
The Independent Regulatory Board for Auditors has opened the door to other bodies, thereby breaking the monopoly held by CAs in the past. Watch out for competition from ACCAs. (13th)
The report on the Corpcap/Cytech investigation has at last been released. The report clears the company of wrong doing. However, the Minister of Trade and Industry, Mandisi Mpahlwa, has expressed reservations over the weaknesses in the report. From the little that I gathered from press reports, it appears as if the critical issue was not addressed. Corpcap revalued its investment in Cytech, treated the revaluation as a normal operating profit and paid bonuses out of the revaluation. Business Day says that Cytech was a subsidiary. If this is true, how in heaven’s name can one revalue a subsidiary and take the profit through the income statement? I think that BD got it wrong. Cytech was, in all likelihood, an associated company. GAAP does not permit one to revalue an investment in an associate, full stop. Where was the GAAP Monitoring Panel? I have been able to access the full report and will take off a few days to get to the bottom of this mess. (22nd)
Sir David Tweedie says that accounting standards are getting so complex that they have to be interpreted by specialists such as the technical partners in an audit firm, which he says is “wrong”. He does not elaborate on why he thinks it is wrong. In my opinion it is wrong because it gives too much power to the auditors in determining what to present to users. No consultation takes place when technical partners take decisions. Auditors are terrified of disciplinary action so compromise fair presentation to the detriment of the preparers and the users. Something needs to be done to rectify this. No one seems to have the guts (if this is the right word) to take this on. I try but have no power base. (29th)
A new financial watchdog will be set up next year to be known as the Financial Reporting Investigations Panel. The good thing about this body is that its reports will have to be made public thereby ensuring that any attack on a company is open to public scrutiny, not like the existing GAAP Monitoring Panel, which operates behind closed doors – easier to abuse power when there is no public scrutiny. (30th)
Citizen
Anne Cabot-Alletzhauser says that when building a portfolio one should focus on the financial goal, the timeframe and the targeted risk-tolerable variation. One should then structure a solution that will be robust for the timeframe chosen. Monitor progress in relation to the goal and the timeframe and rebalance to the optimal blend. She says everything else is irrelevant. [It is such a pleasure to see someone cut to the chase!] (15th)
Financial Mail
Nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own. So if you want efficiency and effectiveness, if you want the knowledge to be properly utilised, you have to do it though the means of private property. (Milton Friedman, who died recently at the age of 94) [Or to put it simpler: Take control of your own investments.] (24th, page 24)
FinWeek
A lovely letter written by “Noguru” appeared in this journal complaining about the size of financial statements. I fully support his/her point that if the financial statements of a company are not printed in A4 size and cannot fit into an envelope, they should be disqualified from any competition for the best annual report competition. I am developing a financial analysis service at present and it is a mission designing a filing system to cater for the different sizes and shapes of company financial statements. Accountants have lost the art of communication. It is not necessary to dump the whole accounting system into a set of financial statements. Preparers should identify the needs of the users and then accommodate those needs. I was speaking to one of the top banking analysts recently and he told me that a bank’s financial statements can take up to a week to read! (16th, page 8)
Fortune
Just when I was about to give up on this journal there appeared some fantastic articles about what makes people excellent. Here we go:
Research shows that it is not a natural gift that makes a Warren Buffett or a Tiger Woods but an enormous amount of hard work over many years. However, the secret is not just any hard work. It is deliberate practice, i.e. going beyond one’s level of competence by setting increasingly tougher targets and, by consistent relentless repetition, achieving the targets through feedback, analysis and continuous improvement. It usually takes 10 years to achieve this level, e.g. Bobby Fischer studied for nine years to become a grandmaster chess player. (Some international chess masters have IQs in the 90s!) Disciplines such as music and literature require 20 to 30 years. The great unanswered question, however, which Fortune does not address, is: “What motivates someone to want to reach these heights?” Researches cannot come up with an answer. No one seems to know why some people are more motivated to become successful than others. The important point is that we can make ourselves what we want. [Is this not the secret – a want, need or desire?]. Greatness is available to anyone who decides to go for it. [See my article called “Stupid or lazy” where I talk about the “Spark”, i.e. the key to opening the path to greatness.] (6th, Page 32)
At least 120 companies in the US are under investigation for backdating options, and the number is rising weekly. An interesting feature of the scandal is emerging: The companies share directors to a far greater extent than would be in a random sample of US firms. So it appears as if the directors were spreading this practice by word of mouth. (20th, page 30)
IRBA
The official designation for persons registered with IRBA is now “Registered Auditor” or RA. The old designation of “Registered Accountant and Auditor” has now fallen away.
Noseweek
The Auditor General’s most recent report on the state of the Eastern Cape’s finances revealed that the Eastern Cape provincial administration was unable to account for R30,2 billion out of R34,1 billion it spent during the 2005/2006 financial year. This was double the figure unaccounted for in the previous year. (Issue 85, page 7)
Fun Corner
A psychologist whose discipline is subjective and lacking in precision had a secret desire to be an accountant. She read about a share whose market value was half its book value. Believing accounting to be objective and precise, she bought the share hoping to see the market price rise to book value. Instead the price moved down. She persevered until one day the accountants decided to impair the company’s assets to bring them into line with the market price. She yearns to be an accountant no more. (Michel Pireu, Business Day, 14th)
Tax Tip
A friend retired a few years ago and was advised to acquire a “living annuity”, the subject of an article I wrote for SAICA called “Your nightmare financial advisor”. Over the years he has been taxed on the full “annuity” received, including the capital portion. A taxpayer challenged this on the basis that part of the receipt was a return of capital and won. See Commissioner for SARS v Higgo, Cape of Good Hope Provincial Division.
December 2006 (25 Minutes)
Accountancy
The Irish government has resurrected the notion that the word “Accountant” should be protected in the same manner as the words “Doctor” and “Lawyer”. The argument is that one should only be able to call oneself an accountant if one belongs to a recognised institute or society. A spokesman for the UK’s DTI is concerned that this would become bureaucratic and anticompetitive. (Pages 1 and 5)
KPMG has signed a 999-year lease [not 99 but 999!] on a building with the Canary Wharf Group. I wonder if they are going to straight-line the rental cost. Assuming an escalation of 2% p.a. and rental of £100 000 in the first year for the land, the first year’s charge to the income statement would be £195,4bn. I wonder if they are going to increase their fees to cover this little additional cost?] (Page 5)
The Global Public Policy Group, comprising the big four auditing firms plus Grant Thornton and BDO have stated that there was a need to recognise that the current structure of company reporting has been set by regulators and not by users and preparers of accounts. [In SA one should recognise that they are set by regulators as interpreted by the auditors! The preparers and users have no power whatsoever to influence them.] (Page 5)
The Pensions Bill in the UK seeks to increase the state pension age from 65 to 68 by 2046. [Now that is what I call planning!] (Page 9)
The fear that smaller international accounting networks may have to be broken up for fear of litigation is growing. So far AGN Shipleys has dropped its prefix on the basis that they could be left open to claims from clients of other member firms with whom they had no involvement. MRI Moores Rowland has taken the decision to dissolve the MRI network by March of next year. (Page 11)
Robert Bruce argues that lawyers prefer a rules-based system because it guarantees that management will have to come running to them for an interpretation of each rule. A principles based system is of no use to them. UK finance directors say that auditing firms in the US are completely under the influence of lawyers. [What Mr Bruce does not say is that by having a principles based system, the auditors have all the power because they dictate how the principles are to be interpreted and have the power to enforce their rulings by threatening qualifications. In any business, the customer is king. It is time to take the power away from the auditors and give it to the preparers and users.] (Page 16)
A professor of finance in Madrid recently calculated betas of 4 000 companies using 60 monthly returns for each day of December 2001 and January 2002. The maximum beta for any given company was on average 16 times its minimum beta, which “is devastating given the importance of beta in arriving at required returns.” [Anybody who uses a mathematically calculated beta based on the past performance of a company without adjustment to value a share is an idiot. An interesting thing in this article was that when calculating WACC he took the pre-tax expected yield to maturity on non-callable, non-convertible debt and multiplied it by (1 – the tax rate). At least the UK has woken up to the fact that one must discount post tax cash flow at a post tax rate. How long before SA wakes up to this fact, if ever?] (Page 43)
Mark Lee offers some tips on how to stay out of trouble when offering tax advice. I have converted this to offering IFRS advice:
1. Ensure that you are fully conversant with every IFRS Standard
2. Keep up to date with changes to the Standards
3. Stay in touch with future developments
4. Get all the information before applying the relevant standard
5. Give competent advice using due professional care
6. Keep your ethics intact – do not bow to pressure (Page 50)
Alex Blyth gives seven qualities of a great business leader:
1. Be genuinely passionate about improvement
2. Be congruent, i.e. your actions must support your words
3. Be flexible – no one style of leadership is effective in all circumstances
4. Provide clarity and purpose
5. Possess people skills – be able to get people to do something you want done because they want it done
6. Listen and learn – show humility
7. Possess the X factor, the emotional attachment to the people you seek to lead (Page 57)
Rob Yeung gives ideas on how to motivate people:
1. Understand what motivates them: rational factors such as financial incentives or promotion or emotional factors such as recognition and appreciation
2. Communicate business-critical information to them, e.g. how the business works
3. Ask them for their input into decisions
4. Allow them to contradict you and give alternatives
5. Explain to them why certain decisions were taken
6. Explain to them the rules of the game
7. Explain to them what is in it for them (Page 59)
Trisha Greenhalgh (I love her articles) says that 9m out of the 56m people in the UK have some sort of long term health problem (high blood pressure, arthritis, mental health, depression, asthma, diabetes, epilepsy and chronic obstructive lung disease). She says that in most cases it is not doctors who look after the illness but the patients themselves. The Department of Health (UK) has at long last recognised this and developed a self-management programme called the Expert Patients in which people with chronic illness pass on their expert tricks and knowledge to others with the same illness. [Anyone want to know how I have managed my asthma over the past 40 years?] (Page 62)
The leasing project (bad news!) of the IASB will be running parallel to the Conceptual Framework project. (Page 79)
It appears as if the IASB will drop the whole idea of recycling. [Resurrect the ban on reserve accounting? Well not quite as we do have IFRS 2.] (Page 79)
Statement FIN 48, Accounting for Uncertainty in Income Taxes, has been published in the US. The objective of this statement is to provide guidance on the recognition and measurement of tax risks. It will require companies to look at its tax positions and decide whether each position, if material, is more likely than not correct in the view of a hypothetical court. Such positions will have to be measured and disclosed in the financial statements. Tax positions that have not been resolved will have to be measured and recognised as a liability. The hope is that the IASB does not adopt this standard. [Of course it will!] (Page 81)
The biggest impacts on UK profits as a result of converting to IFRS were not amortising goodwill and recognising revaluations of investment properties through profit or loss. The other changes were immaterial. (Page 83)
Three years ago the UK increased the threshold of companies requiring audits from a turnover of £1m to £5,6m. This resulted in the demise of 1 500 auditing firms. The group representing small business is fully in support of raising this threshold further. Some are arguing that this would increase the risk of fraud and error. Others are saying that the threshold should be based on ownership rather than on turnover. The institute tested small business to see if another form of assurance report would be welcome but found no interest. (Page 85)
Accountancy SA
Note: I do not summarise these articles because you should read them yourself.
Ignatius Sehoole talks about the corporate social investment programme of the Institute and the profession. (Page 3)
See the step by step approach to completing your CPD points. (Page 4)
See the report-back on the IASB’s initiative on SME GAAP. (Page 4)
SAICA has posted a sample letter for practitioners to make their clients aware of the reporting requirements of the Auditing Profession Act relating to reportable irregularities. (Page 5)
The IFRIC has released a draft interpretation on customer loyalty programmes. (Page 7)
If the IFRIC states that it is not prepared to consider an issue because it is obvious, this amounts to an “informal opinion”. (Page 7)
The IFRIC approved Service concession arrangements and Group and treasury share transactions. (Page 7)
Elmar Venter discusses the two approaches to accounting for loyalty programmes. (Page 13)
Fifteen people were contacted to put together a long rambling article on private equity. One interesting point made was that 99% of venture capital applicants are turned down in SA. (Page 16)
Ilse French explains how third party cell facilities provided by insurers are accounted for. If you are not involved in these things, give it a skip. (Page 26)
Lester Rogers and Mike Gardner have written a “must read” article on taking a good look at what it is that you really do. Read it! Give it a break then read it again. Then think. (Page 30)
Cheryl James emphasises the importance of mentoring in the job situation, e.g. aspects such as time management, dress code, office etiquette, etc. (Page 32)
Linda de Beer takes a look at obtaining confirmations in auditing, what the risks of not obtaining them are, whether or not they are mandatory and what the alternatives are, with specific reference to bank confirmations. (Page 34)
Linda de Beer gives us a rundown on the “Clarity project” of the Auditing and Assurance Standards Board. [Damn! They are trying to put me out of business? My mission in the past has been to clarify complexities, the “cc” after my corporation’s name. I will have to find a new occupation.] (Page 35)
Günter Hoppe describes what it is like to work in a country like Malawi. (Page 37)
Carol Butcher writes about “investing” in motor cars. [My bakkie is the best “investment” I have ever made!] (Page 38)
Business Day
Piet Viljoen, the founder of Capital Management, has decided to close his fund to new investors as he is of the opinion that the JSE has become expensive. However, there are opposing views out there as to how expensive the market has become. Jeremy Gardiner of Investec Asset Management says that the JSE is not cheap but it is not in dangerous territory. [There seems to be more downside potential at present than upside potential. But, hey, was this not the view this time last year? We will have to wait and see whose view is right.] (19th)
Business Report
Linda de Beer says that without action, we are in danger of making the auditing profession so unattractive that it becomes devoid of people willing to provide an audit service. Too late: we should have taken action ages ago.
Business Times
Want a quick way to find out how long it will take to double your money? Divide 72 by the rate. For example:
|If rate is |72/Rate |= |Actual |
|5% |72/5 |14,4 years |14,2 years |
|8% |72/8 |9,0 years |9,0 years |
|12% |72/12 |6,0 years |6,1 years |
|15% |72/15 |4,8 years |5,0 years |
|20% |72/20 |3,6 years |3,8 years |
Just as easy to do it using a calculator!
Citizen
It is not like David Carte, an excellent journalist, to get something as wrong as he did in his article on 6th December. Here are his words: “The private-equity players have done their multibillion-dollar deals there and are still awash with cash looking for that magical “alpha” – or return in excess of the risk-free rate, …” David, my mate, alpha is the a in the formula for a straight line: y = a + bx. In portfolio theory, y = the expected return on the share, x = the expected return on the market, b = the slope of the line and a is where the line of best fit cuts the y axis. For example, if the market is expected to return 12,5% p.a. and the share’s beta is 0,8 one would expect the share to return 12,5% x 0,8 = 10,0% p.a. However, if the share is expected to return 15% p.a., it is said to have an alpha of 5% p.a. (6th)
David Carte gives his checklist for evaluating a new listing:
1. How long has the company been in business?
2. Does the company have sound products/services?
3. Is the company competitive?
4. Is the company cashing in on a fashionable trend?
5. How does the Rand affect the company?
6. How bullish are the prospects communicated?
7. What is to happen to the money raised from the listing?
8. Who are the legal advisors, auditors, etc.?
9. What adjustments were made to the pro forma info?
10. Have institutions supported the listing?
11. Is there a reasonable free float?
12. How does the issue price compare to NAV?
13. What is the historical price earnings ratio?
14. Is there a margin of safety in the price? (13th)
Financial Mail
How the JSE has changed:
| |Apr 2003 |Nov 2006 |
|Alsi index |7 361 |23 950 |
|Companies listed |457 |394 |
|Market cap |R1 303bn |R4 866bn |
(15th page 26)
Enterprises with revenue of less than R5m have been completely exempted from the BEE regulations. [So please stop sending me these 30 page documents to complete!] (15th, page 47)
FinWeek
If you are involved in anyway in providing and charging for credit, whether as a bank or a supplier of goods, or on the receiving end of credit, you had better get hold of the National Credit Act and evaluate how it will affect you. The act kicks in on 1 June 2007. Finweek sets out an excellent summary of the various provisions and their possible consequences. (14th, page 50)
IRBA
The following three proposed standards have been redrafted following the new drafting conventions.
• ISA 320 Materiality in planning and performing an audit
• ISA 450 Evaluation of misstatements identified during an audit
• ISA 260 Communication with those charged with governance (6th)
IRBA has provided guidance on its website on the application of the revised ISA 700 standard on the independent auditor’s report on a complete set of general purpose financial statements issued in South Africa. (12th)
IRBA’s Committee for auditing standards has released the following exposure drafts:
1. Reporting on donor funding engagements – comments required by 5 March 2007.
2. Guidance on how to define and develop an effective code of conduct – comments required by 16 February 2007
SAICA Publications
The board of SAICA has agreed not to object to the removal of the audit requirement for a certain group of smaller companies where the cost of an audit outweighs the benefit obtained. 75% of the respondents concurred with this view.
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