Mafia Buzz Issue 3
January 2003 (20 Minutes)
Abbreviations Used Mafia Buzz 2003
(Question: Why is the word “abbreviation” so long?)
AIMR = Association for Investment Management and Research
APB = Accounting practices board
ASB = Accounting Standards Board of the UK
APB = Accounting Practices Board
ASB = Accounting Standards Board of the UK
BEE = Black economic empowerment
DC = Defined contribution
DIY = Do it yourself
EBITDA = Earnings before interest, tax, depreciation and amort.
EC = European Commission
ED = Exposure draft
EU = European Union
FRC = Financial Reporting Council
FSB = Financial Services Board in RSA
GAAP = Generally accepted accounting practice
IASB = International Accounting Standards Board
IAASB = International Auditing and Assurance Standards Board
IAPS = International auditing practice statement
ICAEW = Institute of CAs of England and Wales
IFRS = International financial reporting standards
JSE = Johannesburg Stock Exchange of S.A.
PCAOB = Public Company Accounting Oversight Board in US
SAICA = South African Institute of Chartered Accountants
SARS = South African Revenue Services
SEC = Securities Exchange Commission of the US
SERP = Supplemental executive-retirement plan
SHAC = Stop Huntingdon Animal Cruelty
SME = Small and medium enterprise
SOX = Sarbanes-Oxley
SMP = Small and medium accounting practice
SOX = Sarbanes-Oxley
SEC = Securities Exchange Commission of the US
Accountancy
One of the great losers of the Enron affair was the reputation of the audit. The world does not understand what an audit is for and the profession is looking to do a selling job. One suggestion is that a special qualification for auditors be launched to show the world that auditors have special training and expertise. The suggestion is to have a college of auditors. Most big firms have their own specialist training so this is not a solution for the big firms. (Maybe the smaller firms should pool their resources to give their staff the necessary training. They need our Henk Heymans in the UK!) (Page 7)
PwC caught the profession by surprise when they changed the wording of their audit opinion as a result of the judge’s comments in the Bannerman case in Glasgow. A bank relied on the audit opinion given by the auditors of Bannerman in making a loan. (See later for action taken by the UK in this regard.) (Page 9)
MyTravel has caused the UK profession an embarrassment – they were smugly saying “It can’t happen here in the UK”. Accounting irregularities ranging from aggressive revenue recognition to misallocation of costs took place. (Why couldn’t they take the knock and blame 9/11? Why do they have to try to deceive their shareholders and loan holders?) (Page 9)
John Shuttleworth lists the following lessons to be learnt from 2002:
1. Investors should see pension funds for what they really are and that is collateralised debt.
2. Equities do have a higher expected return than bonds – maybe this is why they give a lower return!
3. We re-learnt the universal truth that equities are risky. One must remember it is not what can go wrong that is important but how badly it can go wrong.
4. Pension funds in the UK are in serious trouble. (Page 46)
Are your really prepared for a catastrophe? Have you got sound business continuity management plans in place? You can’t wait for it to happen. You have to prepare for the worst. The IT function is obviously important but one must have a holistic approach to the problem. One should look at the four P’s: people, processes, premises and providers. Not only should the plan be in place; it should be tested. Small businesses need to ask a series of “what if” questions. Examples are: “What if there is a break-in?” “What if my hard drive blows?” “What if there is a lightening strike?” “What if my car gets stolen with my client’s files in the boot?” “What if I get seriously ill?” If you haven’t done it yet, it is time to plan. (If you plan, it tends not to happen!) (Page 49)
The Enron affair has made auditors look not so much at what has happened in the past but as to what can trip you up in the future. (Page 52)
Business travellers need to take precautions to reduce their vulnerability to danger. Some ideas are:
1. Stand or sit where you can see what is going on.
2. Take note of emergency exits.
3. Walk in well-lit heavily travelled streets – avoid short cuts.
4. Face the traffic when walking.
5. Stand near the control panel in a lift and check the hallway before exiting.
6. Keep mentally and physically fit – stay alert.
7. Dress modestly – be the grey man or woman.
8. Keep your personal details hidden from sight and keep copies of vital documents, e.g. passports, visas, etc.
9. Beware of scams to separate you from your luggage.
10. Keep a dummy wallet with some money in it.
11. Use a door wedge for extra security in your hotel room.
12. Don’t hang a “Make up room” sign on your door. (Page 57)
PwC audit chief Glyn Barker says that Enron has made all the players realise what they should have known all along and that is a good audit is not an imposition to be tolerated but an asset worth paying for. (Page 78)
Sir David Tweedie says that the IASB favours an approach that requires the company and its auditor to take a step back and consider whether the accounting suggested is consistent with the underlying principle. This approach requires that companies and their auditors exercise professional judgement in the public interest (this is where the whole system will fail David – can you rely on the integrity of all concerned?) The intention is to reduce the amount of guidance given and to leave more up to the judgement of the preparers and their auditors. (I wonder if the IASB has done a survey among users to get their feelings on this approach? Based on my limited survey, users want certainty and comparability.) (Page 89)
Andrew Lennard argues that entry values are a sound basis for assets and for liabilities. If an asset is bought for 100, it should be measured at 100. Profit should not be taken before the asset is sold. Only then should profit be recognised. (Logical!) On the other side, if a bank receives a deposit payable on demand from a customer of 100 it should be recorded at 100. If the deposit is available to the bank for a period of time and the bank can make a return from the use of that deposit it does not mean that the bank can reduce the liability to its present value and take the profit before it has been earned. (I like this argument. It all comes down to: “When is value created?”) (Page 90)
Ron Paterson suggests that we should support the move to expense employee share options. (I also think it is the right thing to do but what worries me is that if Ron agrees with David, then something must be wrong!) (Page 92)
The proposals on business combinations are:
1. Only the purchase method will apply in future.
2. A restructuring provision will only be permitted if it meets the definition of a liability at the date of the combination.
3. If a value can be attached to the contingent liabilities of the acquiree at the date of acquisition, a provision can be made.
4. Goodwill will no longer be amortised but will be tested for impairment annually.
5. If any negative goodwill arises, the measurement of the identifiable assets, liabilities and contingent liabilities should be “reassessed” and if there is anything left over after this “reassessment” it should be recognised immediately in profit or loss.
Consequential amendments will be made to the statements on intangible assets and impairment:
1. When impairing a cash-generating unit, one will not automatically assume that goodwill takes the first knock.
2. Reversal of goodwill impairments will be banned.
3. The requirement in the definition of an intangible asset that it be held for use in the production or supply of goods or services or for rental to others or for administrative purposes is to be withdrawn. (I wonder why?)
4. The 20-year rebuttable presumption for the useful life of an intangible asset is to be withdrawn.
5. If the intangible asset is considered to have an indefinite life, it should not be amortised.
(Page 94)
Phase 2 of business combinations contains the following proposals:
1. If less than 100% of a business is acquired, the full 100% goodwill should be raised. (I do not agree with this!)
2. Whichever side of the transaction provides clearer evidence should be used to measure the fair value of the acquired entity (the value of the consideration paid or the value of the entity acquired).
3. Minority interests would now be part of equity, but separately disclosed.
(Page 100)
The IASB considered whether or not defined benefit plans should be consolidated but concluded that this topic was too hot to handle at present! (Page 100)
Accountancy SA
Linda de Beer sets out the plan for the new statements. By 2005, when the EU changes over, the IASB will have completed statements on first time application of GAAP, business combinations, share-based payments, insurance contracts and the statements issued under the improvements-project, which includes financial instruments. The IASB will address SMEs. The project will not be concluded in time for our local needs (the need arose ages ago!). She hints that equity accounting could be scrapped – a scary thought. Will they require us to fair value associates thereby making financial statements even more unreliable than they are at present? (Page 11)
Garth Coppin looks at how the Sarbanes-Oxley Act affects non-USA companies. He believes that this Act was a knee-jerk reaction by politicians and not an act of statesmanship. He also foresees that non-US companies listed in the US could move their listings to European exchanges. (Page 14)
Glen Mouton asks the question: “Are you at risk?” He says that the directors are responsible for identifying the controls that should be in place. He reminds us that most large frauds are perpetrated by the entity’s own staff. He lists theft and false accounting as the two biggies. (Page 17)
Debbie Scheepers discusses the components approach to accounting for property, plant and equipment. I think that she misinterpreted what the statement is trying to achieve. (Page 20)
My article was on whether one should treat a provision for environmental damage as debt or an operating liability when assessing a company’s value. I concluded that it should be treated as an operating liability and that the expense should be treated as an operating cost (after much effort). (Page 20)
Nigel Payne’s article was on compliance with the requirement in the King Report for the directors to maintain a sound system of risk management and internal control to provide reasonable assurance regarding the achievement of organisational objectives. His focus in the article is on IT governance and audit.
Business Day
Recent amendments to the JSE regulations require companies to include in their financial statements an explanation as to why they deviate from any of the principles in the King report. (7th)
Philip Hourquebie of Ernst and Young says that rotation of audits is not the answer to the independence and quality of an audit. He believes that this approach causes more problems than it solves. He says that an auditor has to have a deep understanding of the business to enable an audit to be carried out effectively. This takes time and is costly. Rotation will result in higher costs and reduce the quality of the audit. (29th)
Financial Mail
Consultancy firm Watson Wyatt says that global pension fund assets have shrunk by $2,7 trillion in the past three years to just under $11 trillion. (17th, page 8)
President Bush is considering dropping tax on dividends in the US to make investments in equity more attractive to investors. (17th, page 15)
ABSA’s Dividend Income Fund promises to deliver a high level of income primarily in the form of dividends. In reality, the fund, which has attracted R823 million, had a 100% cash content at the end of both the third and fourth quarters of 2002. For this the investors are paying 1,71% annual management fee. (31st, page 51)
Finance Week
According to a Department of Trade and Industry spokesman changes to the Companies Act should be completed by 2005 (just in time to save SMEs from the burden of having to comply with IFRS statements!!!). (29th, page 8)
More than 70% of pension fund portfolios recorded losses last year. (29th, page 8)
An article encouraging you to invest overseas is called “Giving your money wings” – very appropriate, you will never see it again! (29th, page 46)
Techtalk
The following exposure drafts have been issued:
1. Share based payments (saica.co.za).
2. Reporting on compliance with international financial reporting standards (paab.co.za).
3. Audit risk (paab.co.za).
(2) above deals with, among other things, reporting when the financial statements purport to comply with both IFRS and local accounting standards. (3) is designed to improve the linkage between audit risk and audit procedures, thereby improving the quality of an audit.
The following new pronouncements have been made:
1. Enquiries regarding litigation and claims (SAAS 502).
2. Auditing fair value measurements and disclosures (SAAS 545).
3. The relationship between banking supervisors and banks’ external auditors (SAAS 1004).
4. Audits of the financial statements of banks (SAAS 1006).
The following new circulars have been issued:
1. Subordination agreements (2/2002).
2. Letters of support (3/2002).
3. Reporting on financial information contained in interim reports, preliminary reports and voluntary announcements of annual results (5/2002).
SAICA has been working on various discussion papers following the corporate collapses and audit failures around the world.
February 2003 (30 Minutes)
Accountancy
The Higgs report published in the UK entitled “Review of the role and effectiveness of non-executive directors” recommends for listed companies that:
1. At least half the members of the board, excluding the chairman, should be non-executive independent directors.
2. The chief executive should not be the chairman.
3. When appointed, the chairman should be independent.
4. An independent director should be made available to deal with stakeholder problems.
5. A nomination committee consisting of a majority of independent directors should make board appointments.
6. Non-executive directors should serve for not more than two three-year terms.
7. No individual should chair the board of more than one major company.
(Page 4)
The Financial Reporting Review Panel in the UK, which previously only acted on reference, will now become a proactive investigator. (Expect this to happen in RSA.) (Page 7)
The move to expense share options will result in companies abandoning their share option schemes with a negative impact on share ownership among employees. (Page 8)
Preliminary conclusions emanating from the Department of Trade and Industries report on revisions to the regulatory framework for the UK accounting profession propose that:
1. The role of audit committees should be strengthened.
2. Audit firm rotation would not be enforced.
3. Partner rotation within a firm should take place every 5 years.
4. Accounting firms should be more transparent.
5. The Review Panel should be more proactive.
(These conclusions may affect the work being done in RSA on these matters at present.) (Page 11)
SEC in the US has softened the rules in the Sarbanes-Oxley Act by permitting tax advice to be given by auditors and by reducing the rotation period for partners from seven to five years. (Page 11)
By making non-executives act as corporate policemen, companies may find that they attract box-tickers and not entrepreneurs to their boards. This would ultimately be detrimental to company performance. The full Higgs report is available at .uk/cld/non_exec_review. (Page 13)
The auditors ultimately yielded to management’s view of the accounting treatment to be adopted, which had the effect of overstating profitability and understating liabilities. They were well aware of the risks attending their audit yet failed to respond with appropriate diligence and resolve. (I am not going to reveal the name of the firm they are referring to! How often have you been in this situation?) (Page 17)
Pension funds are in crisis in the UK. The British have long pretended that their pensions are cheaper than they really are. Actuaries have under-priced pensions and not told trustees of the perils of mismatching their assets and liabilities. They have told their clients what they want to hear. Trustees, on average, are not qualified to take on the responsibility of running a pension fund. And the members of pension funds only find out the truth when they retire and the cupboard is bare! (Page 52)
The underlying theory in the Higgs Report is fourfold:
1. Directors must have enough time to spend on the job.
2. They must be smart enough to do the job.
3. They need to be supplied with high quality information.
4. The boardroom atmosphere must encourage contribution.
(Page 73)
The following commentary is provided on the expensing of employee share options:
1. Option pricing models were designed for traded options and are not really applicable to restrictive options.
2. The degree of estimation reduces the quality, transparency and comparability of financial statement information.
3. It is silly expensing something if value has not been delivered, e.g. when the options do not get taken up.
4. The cost of an option is not that of the company but of the shareholders.
5. Larger companies can avoid the cost by buying shares on the market for the employees. (Interest forfeited on loans expensed?)
(Page 97)
Ron Paterson, as usual, hits the nail on the head when he explains that the difference between the UK (IAS) and the US standards is not rules v principles but more v less guidance. It would be a sad day if all the valuable guidance that has been built up at tremendous cost in the past is abandoned on the premise that principles do not need detailed guidance because they then become rules! (The more guidance we have, the better is the comparability of financial statements.) He says that one of the things that the US needs to do is to eliminate exceptions to the principles. However, sometimes exceptions are necessary when the principles result in silly answers! (Page 98)
The IASB has agreed that if an acquirer obtains control of an acquiree in a step transaction, the previous investment must be increased to its fair value, the gain or loss going through the income statement. Any previous revaluation of this investment lying in equity must be re-cycled to income. (So owner-occupied properties and plant are now being revalued through the income statement – madness! And, hey, if you had a bad year just buy another 1% of your 49,5% investment in X at an inflated sum and your can bring a massive profit into income!) (Page 103)
The IASB has agreed that if an acquirer already has control and acquires a further investment in a subsidiary, any gain or loss from re-valuing the interest goes directly to equity. Any gain or loss on disposing of a portion of the subsidiary also goes to equity. However, any gain or loss on disposal where control is lost must go to income. (One must wonder what mind altering drugs these guys are on!) (Page 103)
The IASB agreed that the minority interest in changes in equity should be disclosed in the changes in equity statement. Also, their share of income and expenses should be disclosed, but not on the face of the income statement. (Page 103)
The IASB agreed that the minority share of losses of a subsidiary should not be limited to the share capital. (About time!) (Page 103)
The IASB agreed that goodwill would not be adjusted by any subsequent recognition of deferred tax benefits. (Round and round we go.) (Page 103)
Charlton, the UK football club, writes the cost of players off to income over the period of their contracts and conducts annual impairment studies on its players. (Page 108)
The ICAEW’s Audit and Assurance Faculty has issued new guidance for the additional wording of the audit report following from the Bannerman case in Scotland. The purpose of the guidance is to manage the risk that a third party may inadvertently rely on the audit report. They are concerned that a perception may be created that the audit opinion is being downgraded by the new wording. Guidance is given to try to counter this perception. (I wonder when SAICA is going to pick up on this?) (Page 127)
Peter Wyman reminds us of the core values of our profession (integrity, objectivity, competence, diligence and courtesy) and sets out the nine principles the late Lord Henry Benson set out for the institute:
1. Members should support the governing body of the profession.
2. The governing body should set educational standards and standards of professional competency for entry.
3. The governing body should set ethical rules and professional standards to be observed by the members.
4. The rules and standards in (3) should be for the benefit of the public and not for the benefit of the members.
5. Disciplinary action should be taken if the rules and standards are not adhered to.
6. Audit work should be reserved to the profession to protect the public.
7. Fair and open competition should be encouraged.
8. Members should be independent in thought and outlook and should not allow themselves to be dominated by anyone.
9. Members should give leadership in the field of learning to the public it serves.
(Back to old fashioned sound values.) (Page 128)
Members of the Scottish institute are halfway through the first five-year cycle of practice reviews. Their goal is to give constructive advice rather than destructive criticism. (Page 132)
The technical release on the changes to the wording of the audit report resulting from the Bannerman case suggests the following wording: “This report is made solely to the company’s members, as a body, in accordance with the Companies Act. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an audit report and for no other purpose. To the fullest extent permitted by law we do not accept or assume responsibility for anyone other than the company and the company’s members, as a body, for our audit work for this report or for the options we have formed.” This does not change the responsibility of auditors to their clients. (Page 135)
The UK’s ASB has published a statement on the operating and financial review that should accompany the financial statements of the company. This review should include a discussion on:
1. The nature of the business, its objectives and the strategies adopted to achieve those objectives.
2. The performance of the business for the past period, the main influences on performance and the trends and risks facing the business.
3. The financial position, the capital structure and treasury policy and the factors that could affect that position. (Page 140)
The standard on retirement benefits has been postponed for SMEs in the UK. (Page 143)
Accountancy SA
Douglas Warden and Jennifer Roeleveld believe that it is time for SARS (the tax people, not the virus) to give allowances for goodwill and intangible assets. These assets are now subjected to capital gains tax so why not bring them into the normal tax fold? (One chance!) (Page 6)
Glen Mouton says that you can protect yourself to a certain extent against fraud by ensuring that opportunities do not arise, that fraudsters believe that they will be caught and that they are made aware that the consequences of their actions will be severe. He then goes on to give some procedures that should be in place, e.g. checking references, access controls, reconciliations, dual signatures, segregation, management review, etc. – the stuff of text books. But it is good to be reminded of these things now and again. (Page 11)
Paul Sulcus says that one needs to be prepared for a conversion to a new IT installation. He says that in practice project deadlines are not met, there are cost overruns, anticipated benefits are not achieved, systems don’t work as expected and staff become demoralised. He sets out a checklist for success and gives case studies on how IT can be successfully implemented. (Page 12)
Malcolm Dunn says that CFOs are playing a larger role in the development of strategy for companies because of their analytical skills. (I hope that CFOs are able to live up to the high status given them in this article – a good sales job for CFOs!) (Page 15)
Lance Williams and Rudolf Dreyer discuss the proposals for accounting for share based payments. They say that if Investec had done this, their earnings would have reduced by 4,2%. (From my feedback, it appears as if 5% is the average impact.) Some of the points made are:
1. For employee share based payments, value is determined at grant date and expensed over the period of the services given.
2. For non-employee share based payments, value is determined at the earliest of grant date or delivery date and expensed or capitalised on delivery of the goods or services.
3. Re-measurement on the reporting date of the financial instrument issued is not made if it is a share based payment.
4. Using a trust does not enable one to escape the accounting standards as the ED has catered for this aspect. (Page 16)
Mario Pienaar writes about differential reporting. (I believe that the time has arrived for action and not more surveys and articles. Let’s stop talking the talk and start walking the walk!) (Page 27)
SAICA issued circular 1/2000 on MC CPE, which was based on IFAC’s IEG2. However, IFAC is presently replacing IEG2 with a new CPD programme. The responsibility for CPD has been taken away from SAICA’s CPE department and transferred to the ADU. SAICA’s new CPD committee has been constituted to look into compliance with IFAC’s requirements. (I sincerely hope that the new committee will stop talking in alphabets.) (Page 29)
My article was designed to debunk the PE ratio method of valuing equity investments. (Page 31)
Penelope Webb warns tax cheats to keep their mouths shut. (I heard a lovely story the other day: a tax assessor was on his journey to the coast for a well-deserved break when an expensive car came up behind him. The driver flashed the car’s lights and pulled a finger at him. He took down the car’s number and on returning from holiday investigated the driver. He found that the salary being declared could not justify the car being driven. The driver is now in jail, not for reckless driving but for tax fraud! Don’t you love it! Another idea for Penelope.) (Page 33)
Citizen
Bryan Hirsch asks why investors keep buying high and selling low. His advice is to keep a cool head, don’t allow emotions to rule decision making. Assess the fundamentals. (5th, page 24)
Rudi Giuliani’s book “Leadership” sets out the principles he followed when mayor of New York. They are:
1. Surround yourself with great people
2. Formulate and communicate beliefs
3. See things for yourself
4. Set the tone – set an example
5. Everyone is accountable all the time
6. Under promise and over deliver
7. Prepare relentlessly
8. Loyalty is a vital virtue
9. Don’t assume anything
10. Stand up to bullies
11. Weddings are discretionary, funerals mandatory (17th)
Financial Mail
In the past 10 years the number of companies listed on the JSE has fallen from 670 to 470. Last year alone saw a loss of 80 companies, mainly small ones. About 36% of the shares on the main board trade at less than 100 cents per share. The top 20 shares on the board account for two-thirds of the total market cap. (7th, page 34)
A Japanese hedge fund wiped out $300 million in just seven days of last month after a series of deals that makes Nick Leeson look like an amateur! (14th, page 90)
Trevor Manuel has appointed a panel of 17 people to advise him on matters of auditor independence, corporate governance and the regulation of auditors. The panel is due to report to him by 31 July. (21st, page 30)
Nigel Payne’s report on the Cytech affair states that he was happy that the process followed to arrive at the valuation was acceptable. (But did it meet basic ethical standards required from directors?) (21st, after page 48)
The Woodmead office of SARS handles 8 000 tip-offs per month from anonymous callers or reports made to their offices. Disgruntled businessmen have labelled the 113 qualified forensic investigators “shock troops” but SARS’s attitude is “if the taxpayer does not keep his or her house in order and plays games with us, we have no option but to get aggressive”. (28th, page 19)
Financial Times
Investors are greedy, make stupid decisions and should share part of the blame for their losses. People only see the virtues of diversification once something has fallen. They went haring into technology stocks three years ago and now they want to leave them and go buy larger houses at the top of the property market. (Simon Davies of Threadneedle Investments) (4th)
Finance Week
A circular is expected from the Registrar of Pension Funds stating that they do not have the authority to exempt any pension fund from the requirement to repay surpluses in terms of the Pension Funds Second Amendment Act of 2001. It appears as if there will be a long wait for past members to be paid out and they must not expect to receive anything substantial as markets have been in a downward spiral over the past few years. Past members of pension funds going back to 1 January 1980 should ensure that they notify the pension funds of their contact details. (5th, page 49)
“Your magazine being very positive on indexing and was a great proponent of Satrix 40 about a year ago. May I suggest that you take a look at how that has done over the last year. As you see, it is not only the investment mangers who get it wrong from time to time but also journalists.” (Dig, dig.) (12th, page 7)
Don’t throw your good money after bad. Take your money out of whichever insurance company has it and invest it yourself. For any investor with a good sense of judgement and who is prepared to invest conservatively, there is nothing more satisfying in the investment world than the growth and returns you can obtain yourself. (12th, page 7)
Around $13 trillion has been wiped off global stock markets over the past two years, the worst bear market since World War 2. (12th, page 8)
Afgri is rumoured to be facing an unrealised loss of as much as R200 million. Its trading update admits to a “mismatch” between buying and selling contracts. Thanks to a change in accounting policy, the group is able to reflect this loss directly in equity, rather than to take the hit in the income statement. (Isn’t GAAP just marvellously accommodating?) (12th, page 13)
Switching an appropriate long-term investment strategy because of short-term discomfort is the wrong thing to do. (19th, page 46)
Zimbabwe changed its exchange rate for exporters from Z$55 to Z$800 to the US dollar. (28th, page 8)
Tongaat-Hulett has changed its accounting policy by adopting the statement on agriculture and by valuing maize futures and option contracts. The effects are (R’ millions):
1. An increase in growing crops by 132
2. A reduction in plant and equipment by 84 (?)
3. A reduction in working capital by 89
4. A reduction in deferred tax by 14
5. An increase in derivative assets by 9
6. A reduction in equity by 18
Profits for the current and previous year were adjusted by R9 million. (28th, page 63)
Fortune
The real reason why AOL Time Warner is such a dog is not because of a clash of cultures, not because of accounting irregularities, not because of a drop in revenues but because the price of the deal in the first place was insane. And the painful part is that this was perfectly clear at the time. (So why did no one stand up at the time and say so?) (3rd, Page 15)
A stock is only worth what you can get out of it, i.e. dividends and not earnings. “A cow for her milk, a hen for her eggs. And a stock, by heck, for her dividends. An orchard for her fruit, bees for their honey. And stock, besides, for their dividends.” This was written after the 1929 crash. The stock market and corporate America are again in ill repute. And after years of ignoring dividends, the nation is falling in love with them all over again. Even Microsoft has recognised the “new” understanding of what value really is and has stunned the market by paying its first ever dividend. (It is amazing how it takes a disaster to get people thinking clearly again.) (3rd, page 48)
Techtalk
1. SAICA has issued circular 7/2002 on headline earnings. This circular sets out rules for arriving at the measure.
2. The APC has released an ED on business combinations, the details of which are dealt with elsewhere in Mafia Buzz.
3. The ASC has issued a circular on agreed upon procedures performed for long term insurers.
4. The IAASB has issued three documents that are critical to its operations, namely its terms of reference, its preface and its policy on black lettering.
Ms Sue Ludolph has been appointed the technical director in charge of accounting. I wish her well. This is not a position anyone can handle. I have seen many come and go. One needs to be tough to handle it. I had the pleasure of lunching with her and believe that once she has absorbed some battering and a few knocks that come with the job, she will grow into the position. I think that she has what it takes. Good luck Sue.
March 2003 (35 Minutes)
Accountancy
The share-price of Tenon, the UK’s accountancy consolidator, has crashed. (When they tried to start this in RSA I warned that this would probably happen. Accountancy is a professional personal service, not a commodity that can be sold.) (Page 6)
Deloitte and Touche are under attack by animal rights groups because of their association with a company that tests drugs on animals. (Who wants to be an auditor?) (Page 7)
E&Y are delighted to have won the case against them by Equitable Life over the inadequacy of the annuity rates charged by the company. Where do the directors’ duties end and the auditors’ duties begin and end? For the directors to blame the auditors for not being aware of the risks of the businesses they managed is a joke. This is a major victory for the whole profession. (Page 9)
There is a move to crack down on pro forma information published by companies with the intent to mislead. (Page 12)
In the first few pages of this month’s journal, three of the big four auditing firms are under the whip for something or other! Auditing is not a good place to be at present.
It does not matter how many rules you put in place but the quality of the people and the culture that matter. We need to attract quality people to the profession who have the capacity and courage to distinguish between right and wrong. (Page 19)
Following on from the Bannerman saga, why should financial statements be reliable for the shareholders and not for the lenders? Auditors should have sufficient confidence in their procedures and standards for the financial statements to be useful to all parties. Otherwise, the audit becomes almost valueless. (Page 19)
No degree of regulation will overcome the certainties that corporate failure is inevitable and the auditors will be blamed. The reality is that financial difficulty, financial collapse and the temptation to hide or distort reports of poor financial performance are the natural consequences of the market system. (Page 20)
In the UK 24% of chartered accountant financial directors are alumni of their company’s auditor. (So why is the UK not full of accounting disasters?) Only 7 CFOs in the top 100 companies trained outside the Big Four auditing firms. (Page 29)
General consensus is that the Higgs report does not provide additional responsibility for non-executive directors. It merely describes their role and responsibility. (Page 52)
After a year’s work a 2700 page report on the deceptions of Enron and its advisors spell more uncertainty for the profession. The senators who were responsible for the Sarbanes-Oxley Act have taken the cause up with renewed vigour. More than 5000 Enron employees lost their pensions. Managers tried to fill their pockets before the crash. The scope of the wrongdoing and the complexity of the devices used will strain public perceptions of the ethics of the profession. Tax shelters were designed not only to save $2bn in taxes but to generate $2bn of fictitious profits for Enron. The total taxes evaded in the US alone totalled $50bn. Tax advisors, including banks and audit firms, received $88m in fees. (Page 57)
The ICAEW has decided to postpone practice review for a year because of a failure to persuade practitioners of the benefits to be received. Smaller practitioners were dead against it. (I could never understand why small practitioners in RSA were so passive when they proposed it here.) (Pages 65 and 66)
The cost of employees leaving is between 50% and 250% of their annual salary. The single biggest reason for employees leaving is because of personality clashes or dissatisfaction with their managers. It makes good business sense to hang onto your valuable employees, even during an economic downturn. To keep employees happy, one must understand what drives them. They want:
1. To be managed well.
2. Interesting work.
3. Discretion over how to do the work.
4. To be trained for progression or for retrenchment.
5. A work/life balance, i.e. they do not want to have to work long hours – they want flexibility.
Legislation is to be published in the UK in April that will permit employees to request flexible working hours. Employers will have to have good reasons to refuse this request. (Page 69)
The annual reports of companies say very little about the future plans, stated objectives, strategy or other information that is required for evaluation of future performance. (Page 97)
Ron Paterson (I find it interesting that they publish his articles at the back of the journal – leave the best till last) discusses the new ED on reporting financial performance, which is designed to combine the income statement and STRGL account into one. Some of his criticisms are:
1. He does not agree with presenting the unwinding of the discount on provisions as a financing activity (me neither – see my article in the January 2003 SA Accountancy).
2. He has problems with splitting inventory write-downs into two categories.
3. He does not agree with the fragmentation of the post-retirement employee costs.
4. He believes that the whole statement is wrong as GAAP works on a balance sheet approach with the income statement being the “balancing figure” and they are now trying to make sense out of this “balancing figure”. He believes that this statement merely highlights the flaw in the accounting framework. (In case you do not know Ron, he believes that the income statement should be the prime document based on matching and prudence.) (Page 101)
The US has approved a new standard called consideration of fraud in a financial statement audit. This is in response to restoring investor confidence in US capital markets and in audited financial statements. (One could argue that it is the start of the closing of the expectation gap – something that should have been embarked upon many years ago.) The key points of the new standard are:
1. Understand the characteristics of fraud.
2. Brainstorm how the entity could commit material fraud.
3. Obtain information to assess the risk of material fraud.
4. Identify the risks that may result in misstatements due to fraud.
5. Assess fraud risks in the light of the entity’s programmes and controls
6. Respond to the fraud risk assessment.
7. Evaluate audit test results.
8. Communicate findings to management and the audit committee and others.
9. Document the work done.
(Can you see anything new here? This is what we have always done or should have done.) (Page 103)
Another author who has been relegated to the back of the journal is Dr Trisha Greenhalgh. Her articles are always informative and well written. This month she talks about giving up smoking. She says there is only one effective way to achieve this and that is to just give up. Stop buying the damn cancer sticks. When offered one say: “I have given up”. There are four phases to giving up the “dirty filthy habit” (her words, not mine!):
1. The pre-contemplative phase (no intention of changing).
2. The contemplative phase (thinking about giving up).
3. The action phase (actively trying to change).
4. The maintenance phase (changed and trying to sustain it).
She advises to wait until you really want to give up before seeking help. She does recommend nicotine replacement or buprion. (Page 142)
Accounting SA
Elmar Venter discusses accounting for pre-extraction costs in the mining industry. Some problems I have with this discussion are:
1. The prudence concept, which is mentioned twice, is no longer a concept of GAAP.
2. The deferral of exploration costs will not be a first in GAAP. Go to the leasing statement and you will see examples of deferrals there.
3. I cannot understand why one would expense prospecting costs but capitalise exploration costs under existing GAAP. Both involve searching for knowledge. Prospecting is searching for suitable areas and exploration is searching the areas identified.
Elmar is correct in saying that we need a statement for the mining industry. We needed this statement 50 years ago. My guess is that when all the resources have been mined, we will get our first definitive statement. (Page 2)
Glen Mouton says that there are two actions companies take when faced with fraud: they either hush it up or they take action against the perpetrator. He believes that companies should have a contingency plan in place to handle fraud. The company’s ethics policy should state that it is open and honest in all dealings, internally and externally, valuing integrity and effort, and not merely financial performance. There should be rules such as restricting authority of employees to transact on the company’s behalf, not accepting gifts from customers outside certain limits, maintaining a duty of confidentiality to the company and clients and reporting any suspicion of fraud to enable action to be taken. (Page 7)
Steven Firer asks the question “What are your intellectual assets worth?” I ask “Why do we have to try to measure everything? Why don’t we get on with the job of creating our intellectual assets and putting them to good use? Why do we have to try to measure everything? What is life worth? What is love worth? What is your wife worth?” Some things should be measured to enable us to manage them. But any attempt to measure things like your knowledge serves no purpose. (Page 8)
Willi Coates sets out the work that SAICA is doing to salvage the profession’s reputation after all the accounting scandals that have taken place overseas and in our country. (Page 13)
Annette Heiber says that poor quality data is a concern if the Basel 11 Capital Accord is to be met in four years time. 90% of banks surveyed believe that poor management of credit risk is a real threat to their organisations. (Page 15)
Jan Conradie and Herman Schutte have written an excellent detailed article on the measurement of performance in municipalities. (I would say that one of the first priorities, before trying to measure performance, is to get a system of credit control operative – witness the billions of unpaid debtors that the Johannesburg Municipality had to write off recently.) (Page 17)
My article was on the accounting standard for recognising and measuring employee pension fund costs. (Page 29)
Penelope Webb’s article was on the risk that tax advisors face and how they try to protect themselves against actions by placing limits on their potential liability, whether or not this will be effective. (Page 31)
Citigroup Circular
Warren Buffett does not believe that equities are undervalued generally. Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, he still finds few that interest him. In his view this is testimony to the insanity of the valuations reached during the Great Bubble.
Economist
Royal Ahold, a Netherlands company, the world’s third-largest grocer has admitted to overstating its profits by $500 million. It booked unearned revenue, entered into illegal transactions and consolidated a company it did not control. (Not much of an advert for principle based GAAP!) (2nd)
Financial Mail
Malcolm Segal of the SA Venture Capital and Private Equity Association says that SAICA has lost sight of the fact that private equity companies do not earn their revenues by raising capital and giving advice but by formulating an exit strategy and selling their holdings at a profit. It is, therefore, illogical to equity account private equity investments. (Of course, Malcolm is right. But whenever did GAAP try to be logical? One of the proposed changes to AC110 is that equity account will not apply to such investments. Hang in there Malcolm.) (14th, page 18)
Empowerment players are drawn to the asset management industry because this is where the purchasing power sits. It is a perfect foot in the door to commence building an empire. (This is a terrible thought – use other people’s hard-earned money to serve their own purposes? Another reason to DIY.) (14th, page 45)
Warren Buffett is of the opinion that derivatives are time bombs that could bring Armageddon to the world financial system. (21st, page 8)
Ever expanding regulation is creating an environment in which it is difficult for entrepreneurs and SMEs to survive, let alone flourish. The cost of compliance is high and the regulations numerous and complex. If government is serious about promoting business, it needs to do something about this. (Brian Goodall MPL, leader of the DA, Gauteng) (Great to see this kind of comment last! Maybe there IS hope for baby gaap.) (21st, page 11)
FM is offering an eight-week course for middle, junior and supervisory mangers on risk, ethics and governance – cost R500. (We need this sort of thing in RSA.) (21st, page 12)
Cytech, which was “worth” R5 million in 1999, was valued by an auditing firm at R150 million based on projected future cash flows when it had not achieved anything at that point. It was then valued to R228 million in 2001 through the income statement. The projected cash flows did not materialise so the investment was written down, not through the income statement but directly to reserves as they changed their basis of accounting to equity accounting (the company had a 47% stake in Cytech). (Question: how can one value a company that has achieved nothing – it merely has a business plan – at R150 million? I do not believe that the valuer asked the critical valuation question: “Exactly what am I valuing?”) (21st, page 24)
The Johannesburg city council has hauled its skeletons out of the closet and provided for a R3,9 billion deficit – R1,5 billion unfunded pension plan, unrecoverable debt of R1,5 billion and “unreconcilable items” of R0,9 billion. (The time bomb is being fused!) (21st, page 29)
Merrill Lynch believes that the Rand could be R7 to the $ by the this time next year. (21st, page 31)
Finance Week
Vic De Klerk (I met him in Brits the other day and was impressed by his depth of knowledge of the JSE) quotes Gerhard Loots (whom I have known for years) of the auditing firm GKL. Gerhard points out that if you split your interest generating investments between you and your wife, you will not pay tax (assuming that you are over 65) on the first R120 000 interest received. (12th, page 34)
Sello Mabotja has written an interesting article on whether or not trusts serve any purpose in this day an age. The original purpose of trusts was to preserve wealth and attend to the wellbeing of widows and orphans. However, trusts became the vehicle for avoiding transfer duty and taxes and, as a result, have been targeted by the tax authorities. He concludes that they still, despite the tax disadvantages, have a role to fill, e.g. when the farmer dies there will be no capital gains tax and estate duty payable as the trust is still alive. The capital gain on the farm will only be subjected to CGT when the trust sells the farm. Trusts should be used for the purpose they were designed for, i.e. succession planning and providing for beneficiaries. Most of the tax loopholes have been closed. (19th, page 33)
The Australian stock exchange has launched listed securitised gold bullion for investors who would like to hold gold but not have the inconvenience of insuring, storing and handling it. (Great idea provided the gold is there! In RSA?) (31st, page 12)
The Saccawu National Provident Fund with 60 000 members has been placed in provisional curatorship due to a number of irregularities that have allegedly taken place. (Keep control of your own wealth, I tell you!) (31st, page 54)
Fortune
The US is considering abolishing the (double) tax on dividends, which has been in operation since 1913. This will change the way managers and investors will view their investments. (We have been through this process in RSA) (3rd, page 13)
Since October 2000 companies in the US may not divulge information to analysts without making a press release. This is in terms of SEC’s regulation on fair disclosure. (Taking some of the power away from analysts.) (3rd, page 60)
A federal judge in the US has declined to excuse eight investment banks from a class action in which they are charged with enabling and encouraging fraud at Enron. The feeling is that these actions could run into billions of dollars.(17th, page 15)
Individual investors have an astounding record of buying high and selling low. Investors piled money into stocks three years ago when they were at all-time highs. It is suggested that one should compare the total market capitalisation with the GNP. It usually ranges between 40% and 80%. Just before the great crash in 1929 it was 109%. Three years ago it was 190%! Right now it is 100%. Another overall measure is that at present the S&P 500 PE ratio based on forecast results is 17. Based on actual results it is 30. Wall Street analysts are, therefore, projecting growth in earnings of US companies to be 76% next year! (They have to be bullish to encourage you to part with your cash.) (17th, page 20)
The stock market of the next two decades will not get you to the retirement promised land. Returns in the past 20 years came from increased price earnings ratios and fast growing (real and imaginary) earnings. Market historians are predicting returns of only 10,0% p.a. (or 6,5% p.a. after inflation) for the next 20 years.) Attitudes at present are not to even think of retirement. People are in survival mode – “stay alive, stay healthy and hang onto your job” is all that counts at present. Americans, for the first time in ages, have to choose between golf memberships, the flashy car, overseas trips and education for their children. (17th, page 48)
Pressure to perform is making management reconsider their commitments to their employees to provide for post-retirement benefits. With the fall in interest rates and stock prices, a massive shortfall has accumulated in post-retirement benefit funds. The share prices of companies such as General Motors, Ford, Delta and American Airlines, who are particularly hard hit, have taken major knocks. The various choices facing companies are to:
1. Dump their obligations completely.
2. Change the method of calculating the obligations (increase the discount rate – don’t you love it!).
3. Slash retirement benefits.
4. Convert to defined contribution plans.
5. Retrench staff and pay them out only their contributions.
6. Do not offer new staff the benefits. (17th, page 53)
Warren Buffett says that derivatives are financial weapons of mass destruction. The dangers are now latent but they could be lethal. Unless derivative contracts are collateralised or guaranteed, their ultimate value depends on the creditworthiness of the counter parties to them. Before a penny changes hands, the counter parties record profits and losses – often huge in amount – in their current earnings. Bonuses are often paid based on these earnings, which are a sham. Large amounts of risk are concentrated in the hands of a few derivative dealers. If one goes, it could trigger a serious systematic problem. He says that after reading the footnotes detailing derivative activities of banks, the only thing that he understands is that he does not understand how much risk the institution is running. (17th, page 58)
The average worker now spends more than two hours a day reading, responding to or disposing of e-mail. I sometimes wonder whether I am really being effective in my job spending half the time in e-mail, half the time on the phone and the other half doing real work. (Note that he spends half his non-working time working to make up the other half!) (17th, page 78)
JSE Circular
A letter from the JSE dated 27 March clarifies that it does not endorse the results from a GAAP perspective by reviewing the financial statements prior to publication in SENS and the press.
Star
General Electric’s pension plan lost $5,25bn in 2002. However, because of GAAP, this loss is watered down due to the corridor and the ability to spread it over the future. Commentators complain that the company should tell the truth and not stick strictly to GAAP. (11th)
Tecktalk
The IASB decided to hold round table discussions in London with respondents to the statements of financial instruments. (They lived to regret this decision!)
The IASB agreed to scrap the presentation of “expected return on fund assets” in the employer’s income statement but to include the actual return on plan assets. This means no more smoothing will be permitted in future for changes in the values of plan assets. (And so it should be.)
The IASB has agreed to programme consolidations and special purpose entities for review.
The IASB has confirmed its intention to exclude investments held by venture capital organisations from the scope of the statement on equity accounting.
Fun Corner
A cockroach will live nine days without its head before it starves to death. (Finance Week, 31 March, page 66)
The department of correctional services says it may stop using the word “prisoners”, which is damaging psychologically, and seek a “stigma-free” term for “people under correction”. (Financial Mail, 14 February, page 8)
Rome did not create a great empire by having meetings – Romans did it by killing all those who opposed them. (Finance Week, 5 February, page 66)
Many patients, usually men, come in because their spouse recommended a hearing check. Their hearing is usually fine, the cause appearing to be SHD (selective hearing deficiency) – a person gets used to his spouse’s voice and unintentionally doesn’t respond. In some cases, of course, it may be intentional.
A man goes to a GP and says “I’ve got a sore tongue doctor”. The GP looks into his mouth and exclaims “Gosh, you’ve got a bad case of glossitis”. The man, pleased to know what his problem is, goes home, looks up the dictionary and finds that “glossitis” is the medical term for a sore tongue.
What You Always Wanted to Know But Were Too Afraid to Ask
What is the Difference Between a Value Investment Manager and a Growth Investment Manager?
Value mangers argue that future growth is largely speculative, unpredictable, prone to exaggeration and susceptible to collapse. Intrinsic value is what counts. Growth managers, on the other hand, look to projected growth in earnings to find value. As in all these debates, there is some truth in each argument. One should look at both aspects when valuing an equity share. (Financial Mail, 21 February, page 76)
What is a Hedge Fund? Should I be Investing in One?
Hedge funds do various things but the basic idea is that they hedge by investing to protect the downside in another investment e.g. they could buy Pepsi and short Coke. Another example would to buy the ten best stocks in an index and short the ten worst. However, they are also quite happy to use borrowings to gear their returns. The result is that any superior returns come packaged with high risk - there have been some major hedge fund blow-ups. They tend to be secretive, e.g. when one investor asked a fund manager about his position he was told: “None of your business”! (Sounds like our own Jack Milne?) In the US, hedge funds do not have to report their performance so published results are questionable. Managers of these funds do extremely well, the usual deal being 20% of the profits. When the managers are under pressure to perform, they do a Nick Leeson and pile on the risk to get the returns. (Fortune 31 March, page 70)
What Does that Foreign Exchange Jargon Mean?
Spot rate: What you would pay if you wanted to purchase currency immediately.
Forward contract: An over-the-counter (OTC) agreement to purchase a stipulated amount of currency at an agreed exchange rate at a future date. These contracts, unlike futures, are not traded.
Fixed and optional forward contract: An agreement to purchase currency at any time within a specified period.
Swap: A change in a forward contract.
Forward rate agreements (FRAs): Agreements to fix a lender’s or borrower’s interest rate in future.
Futures contract: A contract to deliver a currency, commodity or financial instrument at some future date at a fixed price. These are traded instruments.
Currency option: A right but not an obligation to buy or sell a currency at a specific price within a predetermined time frame. A call is the right to buy and a put is a right to sell.
Pip: A fraction of a move in the exchange rate.
(Business Report 31 January)
What is Triple Bottom Line Reporting?
1. Environmental sustainability.
2. Positive relationship with stakeholders.
3. Support of universal human rights.
(Citizen 15 April 2003) [Got it wrong!]
April 2003 (30 Minutes)
Accountancy
The Higgs report on corporate governance in the UK is causing waves. Some of the points of disagreement are the proposals to:
• Appoint an independent director to listen to shareholders’ concerns – this could be divisive
• Appoint an independent board member other than the chairman to chair the nomination committee – this could undermine the chairman’s role
It is also felt that the whole thing will become a box ticking exercise. (Page 9)
It has been found that environmental problems emerge in four out of five deals undertaken despite environmental due diligence being undertaken. There is, therefore, a need to improve this aspect of a due diligence investigation. (Page 10)
The UK is fighting the requirement by the US PCAOB to force UK auditors who audit US company branches or subsidiaries to register with it. (Page 13)
Good management is relatively straightforward – known as common sense. It is good solid work done diligently. Fancy management theory and current fads do not really apply. Good management is rather a dull activity. It is much more fun to thrash about destroying value. Financial analysis should be augmented with behavioural analysis. Watch out for deal making that makes no sense other than satisfying investment bankers who demand “corporate activity” to spice up the company’s profile. (Page 21)
Referring to the Higgs report: One cannot make a person prudent or wise by prescribing procedures to be followed. (Page 22)
Deloitte dropped the audit of Huntingdon Life Sciences due to pressure from an animal rights protest group that got hold of the addresses of the audit staff and harassed them. (Who wants to be an auditor?) (Page 24)
The number of auditing firms willing to audit large listed companies could diminish in the future as the risks of such assignments begin to outweigh the fee income. (Page 27)
Regulators in the UK are considering quarterly reporting used in the US. This idea is meeting resistance for the following reasons:
• Additional costs will be incurred
• Will focus on producing figures instead of getting on with the business
• Will encourage short-term approach to running the business
Arguments for include the avoidance of annual surprises and involvement of the auditors during the year (more fee income for them!). (Page 41)
Ahold, the third largest supermarket group in the world and one of the safest investments one could find, has had to restate its published results - $7 billion of equity has disappeared. This scandal is becoming known as the European Enron. (Page 42)
The new Proceeds of Crime Act could result in a UK accountant spending 14 years in jail if he or she assists a client without asking questions about the source of the client’s income. (Page 46)
A detailed survey conducted by the 2020 Consulting Group in the UK found that one third of clients are seriously considering discarding their accounting firms. Most clients are happy with the audit and accounts preparation, tax advice and general business advice. Complaints included the lack of promptness, responsiveness, fresh advice and innovation. And, of course, there are always complaints about the fees. One interesting point is that clients would like to be billed monthly for the fees. (Page 60)
A straw poll at a recent ICAEW forum set up to discuss goodwill and intangible assets preferred the amortisation approach to the impairment only approach. (Page 75)
The IASB is contemplating the publication of an ED on revenue by the end of 2003. The UK, in the meantime, has published an ED covering certain aspects of revenue recognition:
1. Only when a seller performs does it have the right to be paid and it is then when revenue should be recognised.
2. When payment is received in advance, the liability is reduced as performance takes place.
3. If a service is linked and cannot realistically be sold separately, e.g. a software licence linked to maintenance and upgrades, revenue should be spread over the contract period. This is in line with US GAAP.
4. In a bill and hold arrangement, revenue is recognised when the seller has completed its performance obligations (the goods are manufactured and fully ready for delivery).
5. The entry for estimated returns is to reduce sales and cost of sales (if the inventory still has value) and credit a provision.
6. Where the seller acts as principal (exposed to the majority of the risks and rewards associated with the transaction), the gross amount is included in revenue. Where it acts as agent, only the commission is included in revenue. An undisclosed agent will usually be treated as a principle. (Page 76)
Some points from a discussion with IASB members:
1. The US scandals are not necessarily indicative of poor accounting principles; the companies did not follow the rules.
2. There is more in the perception than in reality of principles versus rules-based accounting. Every principle needs guidance (a rule) for there to be consistency of application.
3. A problem in the US was that companies took the position that if you do not have a rule then you can do what you like.
4. The next six months is critical for the EU. If IFRS is not adopted, US GAAP will apply by default.
5. There is an initiative in the IASB to come up with a simplified version of IFRS for emerging countries and SMEs.
6. In most emerging market economies, accounting is heavily tax-based. The financial statements are substantially a tax return. It is necessary to alert people that financial statements do have other uses. (A small private company that has no borrowings?)
7. The IASB has had to decide that its objective is to work primarily on rules for listed companies and possibly to define some of the measurement and recognition criteria for non-listed companies around the world. (The light is slowly dawning!)
8. IAS39 is a botch. Standard setters think that financial statements are to assist users to forecast future cash flows but preparers want to use them for management reporting purposes.
9. Fair value accounting will introduce so much subjectivity into the numbers that they will lose their usefulness.
10. We looked at numerous different models for measuring biological assets at cost. We then realised that the fair value model made sense for the agricultural sector. (Who were “we”?)
11. If we want IFRS to be truly international they must give priority to the SME project. (I do not agree. This has nothing to do with the IASB. They should confine themselves to listed and other economically significant companies.) (Page 78)
The UK will be abandoning some of its own accounting rules in favour of IAS rules, e.g.:
1. Linked presentation will no longer apply (this made a lot of sense – sad to see it go).
2. The gross equity method for joint ventures (good riddance).
3. Use of the “correct” discount rate to measure post-retirement obligations. (This battle will be won some day!)
4. Measuring biological assets at cost. (One day we will be back to cost.) (Page 85)
I do not normally comment on tax matters. However, it is interesting to see that the UK Revenue is attacking schemes where one spouse donates shares to the other to reduce the effect of tax (the recipient is taxed at a lower rate on the dividends received). I hear that SARS is looking into the same form of attack on interest paying investments.) (Page 104)
Accountancy SA
George Papadakis says that the public expects auditors to detect fraud and actively search for it whereas the auditors do not see fraud detection as their responsibility. He suggests that auditors could go a long way to closing this expectation gap if they asked two simple questions:
1. Does the company have an integrated fraud prevention plan?
2. Is the plan fully and effectively operational?
It the answer to both questions is “yes”, the auditor should review the outputs of the plan to find out whether fraud is occurring and attempt to ascertain the extent thereof. If not, the auditor can investigate and report on the deficiencies and conclude and report that it is not possible to provide assurance as to the absence of fraud. He suggests that legislation should be promulgated which makes it obligatory for management to report on fraud and for auditors to express an opinion on management’s representations. (I totally agree! Supply the service that the public wants, for heavens sake!) (Page 6)
Andrew Costa covers some of the aspects of the Competition Act. If you are involved in a take-over or merger, read this article. (Page 10)
Carlos Correia discusses the “just in time” system of inventory control and compares it to the “just in case” system. He looks at what can be done to reduce the risks of the JIT system. (Page 14)
My article was on investment properties and private companies. (It is crazy that private companies have to comply with this statement!) (Page 27)
Penelope Webb’s article, which is truly delightful, looks at the tax situation where a pension fund pays out to the husband and the wife gets half of the amount on the divorce settlement. The husband pays the full amount of the tax despite only getting half of the amount paid out. (Page 31)
In the January journal one advert claimed that nine out of ten accountants recommend Pastel Accounting and another claimed that six out of ten accountants do not recommend any brand of accounting software! (Adverts should be subjected to audits!) (Page 35)
Business Day
Warren Buffett praised for its decision to account for stock options as an expense saying that it took courage to do so. A week later he bought $100 million of junk bonds in the company! (8th)
Len Konar, the head of the review panel set up by the Minister of Finance to review the draft Accounting Profession Bill, says that there is a world wide trend towards more statutory regulation to prevent offences such as where auditors misrepresent the financial statements of a company. (25th)
CFA Digest
Conventional wisdom says that an increase in the dividend pay out ratio signals an increase in future earnings and the share price. However, the alternative argument is that an increase in dividend pay out could signal that the company is entering the maturity phase of its corporate life and does not have further use of the cash. (Pick ‘n Pay is an excellent example of this.) (Vol. 33, No. 1, page 33)
It has been found that where members of defined contribution plans are given a choice between different asset profiles, they choose against their own interests. (I have seen this in RSA where young people choose high-income low-risk asset profiles.) (Vol. 33, No.1, page 68)
Citizen
There have been a number of cases in Europe where investors have been able to claim damages from investment managers where they specified clearly that they wanted low-risk investments and they were given high risk ones. People should not take poor investment service lying down. (I am predicting that such actions will start happening in RSA soon.) (8th)
Financial Analysts Journal
The taxation of capital gains is wrong as it taxes gains from inflation, which is not ethical, and it encourages the government to permit inflation. (Vol. 59, No. 1, Page 4)
It has been found in the US that low dividend pay out ratios precede low earnings growth and high dividend payout ratios precede high earnings growth. (So much for the sustainable growth rate formula!) There could be two reasons for this:
1. Where managers are confident that earnings are going to grow they are happy to pay out higher dividends. Conversely, they would not increase dividends if they cannot foresee an increase in profits.
2. Some managers withhold profits to empire build. This seldom results in earnings growth. (Vol. 59, No. 1, Page 12)
The editor, Robert D Arnott, points out that dividends DO count. He shows that over the past 200 years, equities in the US earned a return of 7,9% p.a. A breakdown of this return is:
• From dividends – 5,0%
• From growth – 2,3% (real 0,8% and inflation 1,4%)
• From falling yields – 0,6%
If it were not for dividends, returns would have been negative! (Where are my old students who used to argue that dividends are irrelevant?) (Vol. 59, no.2, page 4)
It has been “discovered” in the US that the AFTER tax yield on T-bills was –1,34% between 1926 and 2000. The notion of a negative equilibrium interest rate may have far-reaching implications for many of our economic institutions and models, most of which assume a positive interest rate. In light of these findings commonly taught concepts such as time value of money should be reconsidered. (I have been trying to explain this for years. One of the large auditing firms fought with me for two years about this concept. Recently I had an ex-merchant banker walk out of a valuation session when I said that one should use an after tax return to discount dividends. His argument was “We don’t do it this way where I come from”. It is amazing that the US is only catching up with the more enlightened South Africans now!) (Vol. 59, No. 2, page 18)
Financial Mail
Later this year, if all goes according to plan, anyone who gives financial advice to clients, or attempts to sell financial products, will have to be licensed by the authorities. Any unlicensed advisor who tries to sell a life insurance policy, or puts together an investment plan for a client, will be operating illegally. (The next step is to target teachers of the subject? I will have to stop writing articles on the subject until I get my licence. What’s next? A licence to make love?) (4th, page 53)
“The rule of thumb is that you hold in bonds your age as a percentage.” (This rule is dumb. One must take into account the amount you have to invest. If you only had R1 million to retire on at the age of 60, you would invest 40% in equities! This rule of thumb needs to be changed.) (4th, page 79)
The ex-CFO of WorldCom has been indicted on a further 11 chargers that carry jail terms of up to 120 years. (25th, page 8)
Finance Week
It is estimated that almost 70% of retirement funds in SA are now DC funds and many members are not aware that they are in charge of their own investments. Lorette du Toit has the following advice for such members:
1. Contribute as much as possible. (Got to be kidding! See this fund as a lost cause. DIY.)
2. Preserve your retirement assets by never withdrawing benefits. (Take your money and run!)
3. Lobby for costs to be kept low.
4. Choose the right option.
5. Save as soon as possible to all the power of compound interest to kick in. (I agree, but DIY!)
(I was stupid enough to invest for about 20 years in a RAF. Every year it cost me a day to get a certificate for tax purposes – without the certificate, no deduction – they never sent me one so I had to go into town to get it. One year I went to get my certificate only to find that the company had disappeared. At least this investment loss I made was tax deductible!) (9th, page 38)
Draw a vertical line. Call the top “Active” and the bottom “Passive”. Cross the vertical line with a horizontal line. Call the left “Positive” and the right “Negative”). Leaders can be described by these characteristics, e.g. Jimmy Carter was active/negative, Lyndon Johnson and Richard Nixon were negative/passive, Ronald Reagan was positive/passive and George Bush is active/positive. (16th, page 16)
Vic de Klerk tries to explain how a FRA (forward rate agreement) works. He gives an example where for one year you can earn 11% p.a. and for two years 10% p.a. He says that the effective second year rate is 9% ((11% + 9%)/2). This is not correct. The second rate is actually 8,11% p.a. (1,11x1,0811 = 1,20). (16th, Page 41)
Bayer and GlaxoSmithKline were fined $258 million by the US Attorney’s office for allegedly defrauding the US healthcare provider Medicaid. (23rd, page 6)
The top six firms world wide by revenue are PwC, D&T, KPMG, E&Y, Grant Thornton and BDO, in that order. PwC’s revenue was R1,6 billion and BDO’s R125 million. (23rd, page 11)
Shaun Harris believes that investors should start nibbling at equities as he feels that the market is under-valued at present. He suggests phasing money in slowly “until the outcome for equities is more clear”. (When is the outcome ever clear?) (23rd, page 42)
Fortune
Prof. Paul Miller, accounting professor at University of Colorado: “Management believed the market was valuing companies based on a multiple of their revenues so they thought ‘Aha’ all we have to do is to get our reported revenue up and we will have a higher stock price. It worked for a while but eventually the market caught on.” (How the market fell for this in the first place is a wonder!) (14th, page 86)
In 2002 AOL Time Warner announced write-offs totalling $98,7 billion, beating the record of $56,1 billion set by JDS Uniphase in 2001. Other goodwill and intangible asset write-offs in 2002 were $40 billion (Quest), $11 billion (Clear Channel) and $6 billion (SFX Entertainment). (14th, page 86)
The top companies in the US based on revenue for 2002 were Wal-Mart Stores, General Motors, Exxon Mobile, Ford Motor, General Electric, Citigroup, Chevrontexaco, IBM, American International Group and Verizon Communications. The top ten when ranked by market capitalisation are Microsoft, General Electric, Exxon Mobil, Wal-Mart Stores, Pfizer, Citigroup, Johnson & Johnson, IBM, American International Group and Merck. (14th)
CEOs give themselves piggy pay packages. An example is Honeywell’s CEO who received a base salary of $1,5 million, a bonus of $1,9 million, make-whole payments of $2,7 million, other payments of 0,9 million and restricted stock and options of $61,5 million. (Now you understand the push for accounting for share based payments!). (28th, page 25)
When Congress legislated against CEO pay abused, the Law of Unintended Compensation kicked in, e.g.:
• They imposed an excise tax on payments above 2,99 times the base salary – companies made 2,99 the new minimum and covered any excise tax.
• They tried to shame CEOs by requiring better disclosure of their pay – CEOs could now see how much others were earning so they tried to beat the other guy.
• They declared salaries of over $1 million to be non-tax deductible – salaries were increased to $1 million and huge stock option grants were given.
With reference to pay packages: “The more troughs a pig feeds from, the fatter it gets!” (28th, page 25)
Managers, who after all are just hired hands, start behaving as if they own the place. Owners, mostly unit trusts and pension funds, behave as if they do not own the place – in fact they vote in accordance with the directions given by the managers of the companies they own! Until the owners start taking control, the pigs will be running the farm. (28th, page 27)
Retirement pay in the form of SERPs is stealth-compensation - hardly anyone knows about it. This compensation takes the form of a percentage of an employee’s pay every year to produce a guaranteed payout on retirement. It is offered by half of public companies to their top dozen or so officers. Due to collapsing stock markets and low interest rates, about 40% of companies are seriously considering cutting pension benefits to ordinary staff. However, SERP give-aways are actually on the increase. This compensation applies even if the executives are fired. (28th, page 31)
AOL Time Warner’s CEO certified the company’s financial statements except for $49 million in revenue. After investigation, this figure has now climbed to $190 million with another $400 million suspect. This, of course, impacts on the bottom line as well. The company has acknowledged that further re-statements might become necessary. (28th, page 57)
Techtalk
SAICA apologises for the “printing error” that appeared in the headline circular. (I am sorry but it is a shambles!)
May 2003 (30 Minutes)
Accountancy
The UK government is to consult during the “summer” on increasing the audit threshold to ₤4,8 million. (Why do northern-hemisphere commentators have to refer to time by seasons? Maybe they are ignorant of the fact that the seasons are different between the Northern and Southern hemispheres!) (Page 17)
Andrew Oswald says that the UK government should work on the small stuff such as fixing public toilets and improving garbage collection and forget about the big stuff. (They could look to RSA for some excellent examples of groundwork improvements, e.g. taps in rural areas with clean water, which make a major impact on the quality of life of people.) (Page 28)
Donald Gordon (CA) (SA) (yes, our very own), chairman of Liberty International, lambasted the Higgs’ proposal that a chief executive should not go on to become chairman of the company as “palpably absurd and unhelpful”. He said that the bulk of Higgs’ recommendations “give no primacy to business judgement”. (That’s telling them Donny – rules can’t stop dishonesty!) (Page 37)
Higgs says that SOX risks dividing the board into two camps – those who run the business and those who are there to stop them from stealing the sweeties. (Page 37)
The SOX Act in the US prevents audit firms from performing internal audit work for external audit clients because of the potential conflict of interests. This affects clients globally that are registered with SEC. Audit committees should think carefully about this conflict when outsourcing internal audit work. (Page 45)
Investment fraud in the UK has risen from ₤244 million in 2001 to ₤717 million in 2002. There are usually two types of fraud:
1. Where you are promised fantastic high yielding investments.
2. Where you pay an advanced fee from some future service.
It is estimated that $100 billion is defrauded world wide using the advanced fee fraud. These frauds have one thing in common – they never come to fruition. (You do not need a checklist to avoid being taken for a ride. Use one simple principle: keep in control of your own investments – DIY. And remember that if it is too good to be true, it is.) (Page 52)
A UK government taskforce is looking at ways to account for human capital in the annual report. (Tried before and failed. Why do you have to account for everything? Why not have a special report in the AFS about your most valuable asset setting out things like training, staff turnover, numbers promoted during the year and, in RSA, a race and sex break-down.) (Page 53)
“I decided to show new products separately so that any potential buyer could quickly see what organic growth was deliverable from the current range without factoring any of these new products into account.” (Now that is valuable user information!) (Page 55)
Moira Hindson of Kingston Smith discusses a “difficult client” case study and what lessons to learn from such an experience. Her description of a difficult client is one that has poor record keeping, places a low priority on financial matters, is not interested in formalities such as engagement letters, will not supply the accountant with basic information, is behind on its tax (need I go on?), etc.) She sets out a checklist of steps to take in such cases such as:
1. Get a signed engagement letter.
2. Send a checklist of documents needed for the assignment.
3. Give, in writing, action to be taken to rectify tax problems.
4. Document actions taken to get information.
5. Bill for fees on a regular basis.
6. If the client does not comply with the requirements, resign.
(Page 68)
Profits have fallen for 14 quarters in a row in the UK. The average return on capital is now 7% p.a. (Page 71)
Executives around the world are still uncertain about what the new IFRS standards will entail and how large and wide-ranging the changes will be. (Join the club.) (Page 89)
Clive Jones asks the question: What is the point of increasing the amount of information companies have to place on the public record (in the UK) if at the same time by raising the audit threshold the quality of that information falls significantly? (Page 92)
Mark Hutchinson asks whether one would take advice from an independent financial advisor who gets commission from the company whose product he recommends. (Got news for you Mark: it happens all the time!) He then goes on to ask why a company should take advice from an auditor on how to organise itself. He suggests a regulated break-up of the industry to enable greater competition and expertise to develop. (I wonder if he has a personal bodyguard?) (Page 93)
The UK is anticipating the cost of converting to IFRS: staff training, updating systems, etc. (The UK will take much pain as they have done their own thing in the past and will in one year have to do a complete changeover.) (Page 94)
If a company is part of a group of companies and its staff contribute to a group defined benefit plan, how does one account for any surplus or shortfall in the group plan in the books of the individual company? One cannot treat this as a defined contribution plan in the books of the company. The pension fund costs, income, surplus or deficit would have to be apportioned to the various companies in the group. (Page 96)
Peter Whyman, president of the ICAEW, makes the following points about the Higgs proposals:
1. He believes that 95% of the proposals are not controversial.
2. He feels that it should be based on a “comply or explain” basis.
3. He believes that principles encourage compliance whereas rules encourage avoidance (in my opinion this is a fallacy!).
4. He feels that there should be fewer provisions and more principles.
5. He believes that it is the world’s best corporate governance model (he is obviously unaware of our King 2 report!) (Page 132)
Dr Trisha Greenhalgh writes that if you are thinking of dying you should have a plan.
1. Get a rough idea of how long you have got to go.
2. Decide on whether or not to enter into a living will, i.e. instructions on what to do if you are not capable of taking decisions towards the end.
3. Get your paper work in order (will, insurance policies, books up to date, etc.).
4. Give instructions to whoever is going to wind up the estate.
5. Decide on what you want done with your body – buried, cremated, donated or recycled (what?).
6. Prepare for whom you are going to meet at the other side (improve your store of good jokes).
7. Set aside time to say your goodbyes to the people close to you. (This woman should have been an accountant, not a medical doctor!) (Page 138)
Thinking of buying a property? Here is a checklist for you:
1. Buy in the right area.
2. Get the right financing.
3. Have a maintenance plan.
4. Keep a reserve fund for unexpected surprises.
5. Decide on who is to manage (keep an eye on) the property.
6. Make the tenant sign a lease agreement.
7. Get proper insurance cover.
8. Sort out the tax implications – losses allowed, CGT, etc.
9. Get the tenant to sign a detailed inventory of the contents before moving in.
10. Get a deposit from the tenant to protect yourself from damages or rental payment defaults.
(And from my experience, visit the potential tenant’s present abode to assess the tenant’s lifestyle, check the financial statements of the body corporate to ensure that it is not insolvent, check the security arrangements and study the resident rules and enquire whether they are enforced.) (Page 139)
Accountancy SA
Mike van Wyk takes a critical look at what can be in store for the profession if the Accountancy Professions’ Act incorporates some of the draconian conditions in the SOX Act. He makes a plea to you to get involved in commenting on the bill but holds out little hope that your submissions will be taken into account. (This is par for the course in our profession! Just look at how 3 500 submissions were ignored in the differential accounting document that was recently published by SAICA.) (Page 2)
Mike Savage says that only one third of staff of companies feel that the use of company hardware or software or the Internet amounts to fraud. (Page 6)
Wilna Steyn and Pieter von Wielligh ask the question: “Can we rely on cash flow statements?” They answer their own question by giving evidence that cash flow statements cannot be relied on. (From my personal experience, very few accountants understand the cash flow statement and, to be quite brutal, neither do the users of the financial statements. The old source and application of funds statement was easy to prepare and far more effective as a user document.) (Page 16)
Beric Croome says that the RSC and SETAs do not have the right to access of the books of companies. (Why even raise the issue? What have you got to hide? I would not object to them checking my books because I pay my levies in full each month. My only problem would be the time wasted.) (Page 19)
My article was about trying to get a ruling on a matter from the standard setters – do not bother to try! (Page 27)
Penelope Webb relates some interesting stories on tax fraud in her article. (Page 31)
Business Day
The auditing profession is dead against the rotation of audit firms. (One must agree that to rotate auditors for the sake of rotating is really dumb.) (6th)
CFA Digest
The three steps to developing, implementing and maintaining an appropriate portfolio are:
1. Asset allocation (deliver the right exposures and level of risk).
2. Purchasing and maintaining reasonably priced representative securities.
3. Verification that the agreed-upon strategy and return are being achieved.
(Instead of focusing only on risks at the allocation stage, should also focus on return.) (Vol. 33, No. 2, page 54)
Myron Scholes says that shares are not unique works of art but abstract rights to an uncertain income stream. (Investors forgot this simple concept during the IT boom.) (Vol. 33, No. 2, page 54)
There is empirical evidence that investments in mutual funds were eight times higher after a bull market than after a bear market. (Greed and emotion govern decisions.) (Vol. 33, No. 2, page 69)
Investor’s tax-sheltered assets are typically valued before deducting taxes. If these assets are to be converted into future retirement income, after-tax values are more appropriate. (Don’t invest in retirement annuities just because they are tax-free: you pay the piper at the end of the day!) (Vol. 33, No. 2, page 81)
Not re-balancing portfolios because of the tax implications could result in sub-optimal portfolio performance. (Vol. 33, No. 2, page 86)
CFA Magazine
During the 1990s, only 2% of recommendations made by sell-side analysts were to sell the stocks due to pressure put on them by the issuers of the stock. (January, page 5)
Some investment advice from the investment gurus:
1. Making wealth is not the answer to human progress or happiness. Spiritual progress is the answer. (John Templeton) (An investment or spiritual guru?)
2. The unthinkable can always happen and you have to run your affairs accordingly. Survival in this game begins with humility. (Peter Bernstein)
3. Look at every stock as part of a business rather than things that go up and down. Have the right attitude to fluctuations. Build a margin of safety into what you pay. Prosper from the actions of the business rather than from the actions of the stock over the short term. The Investment Professionals Industry is the only industry I know where the professional’s efforts subtract value from what the layman can do himself. (Don’t you just love this man?) (Warren Buffett)
4. Focus on long term investment and not on short-term speculation. Base the assessment on a steady, sophisticated enlightened, analytical approach rather than on the public appraisal of the price of the share.(Jack Bogle)
5. Develop your skill set, work at it, hone it and do not follow the crowd. (Gary Brinson)
6. Develop and stick to your own style. (Dean LeBaron) (January, page 20)
The most common financial shenanigans according to “How to Detect Accounting Gimmicks and Fraud in Financial Reports” are:
1. Recording revenue too soon.
2. Recording bogus revenue.
3. Boosting income with one-time gains.
4. Shifting current expenses to a later or earlier period.
5. Failing to disclose all liabilities.
6. Shifting current income to a later period.
7. Shifting future expenses into the current period.
(They should come over to RSA – we can show them a thing or two!) (January, page 45)
To provide clients with accurate, high-quality, independent research, investment analysts must be free of undue influence. Here is what goes on:
1. After analysts lower their view of stock, companies ignored these analysts during conference calls.
2. Companies put pressure on analysts through their bosses.
3. Some companies threaten analysts with court action if their stocks are downgraded. (March, page 2)
The SOX Act bans the following non-audit services by the external auditor:
1. Bookkeeping services.
2. Financial system design and implementation.
3. Valuation of assets and liabilities.
4. Actuarial services.
5. Internal audit.
6. Management services.
7. Brokering, investment advising and investment banking.
8. Most legal services.
9. Expert opinions that support interests in litigation or administrative proceedings.
Auditors can still give tax advice. (March page 18)
Under pressure to meet earnings targets, maintain market capitalisation or retain access to financial markets, companies often resorted to non-GAAP financial measures. A popular one was called “pro-forma earnings” or “earnings before the bad stuff” such as depreciation, amortisation, asset write-downs, restructuring charges, etc. The SOX Act now requires disclosure of a reconciliation between these measures and the GAAP numbers. (March, page 24)
The Financial Accounting Policy Committee believes that in the setting of accounting standards a balance must be struck between broad principles and the inclusion of sufficient interpretation and implementation guidance (rules), which is necessary to ensure that the intent and spirit of the principles are clear. (Agree!) (March, page 24)
The Indiana University found that the following ratios showed promise in revealing the possibility of cooked books:
1. Sales growth.
2. Gross margin.
3. General and administration expenses to sales.
4. Debt to equity.
5. Level of receivables.
6. Level of inventories.
7. Depreciation to cost of assets.
8. Total accruals to total assets. (March, page 32)
Wall Street firms don’t make money by selling research – they make it in investment banking. So one can foresee more independent research firms getting a slice of this business in the future. (March, page 35)
We do not engage in the typical quantitative research of running thousands of back tests and, if you see a relationship, that’s the model. That approach is likely to fail in the real world. We try to make certain that our models all derive from fundamental casual investment relationships. (March, page 39)
The IASB is working on proposals together with the UK standard setting body, the ASB, to capitalise leases. David Tweedie says: “Wait for the squeals when it (the exposure draft) comes out.” (March, 2003)
Citizen
“I must warn the public, the general auditing community and SARS officials that corruption destroys lives. Look at me.” (Grant Ramsay on his way to chookie.) (10th)
Fund managers can’t make money for unit trust investors because of the excessive buying and selling of shares, which chops several percents off returns. (Anthony Ginsberg) (A buy and hold strategy invariably beats a churn strategy. Investment managers need to churn to generate fees.) (29th)
Financial Mail
The pension fund surplus regulations have been published and are still causing confusion. Lawyers and actuaries stand to make a packet out of this confusion, as always, at the expense of the poor members of the post-retirement benefit funds. Some points of interest:
1. If a fund can show the FSB that it does not have a surplus, it will not have to go through the apportionment exercise. (Actuaries just have to reduce their discount rate to get rid of any surplus.)
2. Former members who belonged to a fund on or after 1 January 1980 must register with their former funds to be eligible for a payout.
3. Surpluses may not be used to fund pensioners’ medical aid.
4. Defined contribution funds will have to do the apportionment exercise even though the fund rules dictate that the assets and liabilities must be matched at all times. (More money for the actuaries and less for the members.)
5. Minimum withdrawal benefits from defined benefit funds, the cause of the problem in the past, have now been set. (I find it fascinating that they can use a discount rate of 40% of the earnings yield of the JSE – I wonder if they know what an earnings yield is!)
Warren Buffett says that investors are dreaming if they think they will get the 15% p.a. returns from equities they used to get. He says that they should get used to returns of 6% to 7% p.a. (This is in the US. In the RSA: 9% to 12%?) (23rd, page 52)
The morning after the latest suicide bombings in Saudi Arabia President Bush was quoted as saying: “We will track down the despicable killers who carried out the suicide bombings – they will learn the meaning of American justice.” (Makes you think!) (23rd, page 74)
The JSE regulations now require the offices of the chairman and the CEO to be separated. (30th, page 8)
The Companies Act is in the process of being redrafted and we can expect the process to take between three and five years to complete. (30th, page 17)
Stephen Koseff (CEO of Investec) believes that it could take between four and five years before the equity markets recover. (30th, page 42)
Sekunjalo alleges that Deloitte did not prepare the financial statements of LeisureNet in accordance with GAAP. (Could someone please explain to Sekunjalo that auditors do not prepare financial statements – they audit them!) (30th, page 44)
The average balanced portfolio in the Alexander Forbes global Large Manger Watch has provided a return of 5,6% p.a. over the past three years. (Why do actuaries persist in discounting pension fund obligations at 5% p.a. above the inflation rate and why do standard setters insist on using government bond rates (currently 9% p.a.). Companies are grossly understating their pension fund obligations and no one seems to be able to see this (or they are purposely shutting their eyes to it). History will show that this was the largest all-time accounting fraud perpetrated on employees and investors.) (30th, page 59)
Finance Week
Jack Milne has at last come clean. Anyone who had listened to his feeble stories on the Alec Hogg show in the past would have been able to see right through him. The editor has called for legislation to guard against people like him in the future. (26th, page 4)
Vic de Klerk tells the awful story about an asset manager of the Joint Municipal Pension Fund who lost R1,3 billion of the fund’s assets by speculating in maize futures, i.e. R500 000 per member. Any first year CFA (not the other one) can tell you that agricultural futures are not the kind of “investments” pension funds should be making. The trustees are clearly responsible for the allocation of investments and should be held responsible for this. If it can be shown that the asset manager was not given permission to speculate, the asset manager and his employer should be held responsible. (Give someone else your money to manage and you can kiss it goodbye. I was chatting to a trustee of a listed company’s DC pension fund the other day and he told me that they lost R200 million of the fund’s assets as a result of speculating in financial derivatives! This amount will probably be hidden in the investment income of the fund. Who monitors the trustees?) (25th, page 12)
Mr Deon Basson objects to Corpcapital’s (CRP) accounting for its 47,5% holding in Cytech (C). CRP re-valued its investment in C and credited income, including the amount in headline earnings. When C’s valuation did not materialise, CRP changed its classification of C to an associate and impaired the value of C outside headline earnings. Mr Basson maintains that this was a change in accounting policy. It was not a change in accounting policy. Previously CRP did not have significant influence in C. On acquiring significant influence, the classification change was made. I know that the whole thing stinks but do not blame the fiasco on non-compliance with GAAP, thereby implicating the auditors. If anyone should take the blame it should be the standard setters who permit revaluations of capital assets such as Cytech to be included in headline earnings. (28th, page 37)
Fortune
Who wants to be a director of a listed company with angry shareholders and aggressive regulators breathing down your neck?
1. Analysts focus on quarterly earnings and fail to grasp the company's long term strategies.
2. Accounting costs are increasing due to the new requirements.
3. Audit costs are increasing because of the greater risks the auditors now face.
4. You now have to take strangers onto your board and insure them against potential liabilities. (26th, page 11)
After the scandal broke about investment bankers punting their client’s shares, analysts started asking the question: “Is this company a client of yours?” What analysts did not realise was that some investment bankers were being paid to give favourable reports by other investment bankers! (When will the deceit ever stop?) (26th, page 17)
After Tyco’s spectacular deceptions, its new management announced a microscopic inspection of the books and declared all problems found. Then it went to the public markets for a major debt refinancing. Then – oops! – it announced newly found accounting errors requiring a $1,1 billion charge to earnings. (26th, page 17)
HealthSouth displayed all the red flags for the auditors to see:
• A large increase in profits with flat revenues
• Management with large stock options riding on next quarter’s numbers
• A CEO with a history of playing fast and loose
• An email tip alleging fraud
One must ask: “How did the auditors miss a $2,5 billion accounting fraud?” (26th, page 38)
E&Y is investing heavily in the training of its staff on the new accounting pronouncements, internal controls and financial reporting quality. It is also focusing on its annual “acceptance and continuance” decisions, i.e. whether it will continue to work for a client or walk away because of doubts about management’s integrity and other risks. (26th, page 38)
After the disasters at Enron, Kmart, and Global Crossing where consultants were heavily involved, questions are being asked about the rationale for paying fees of up to $5 000 a day per partner for their so-called wisdom. Clients are looking for small nimble teams of seasoned people who have years of knowledge and experience and not for lofty thinking and giant buzzword filled reports telling executives what they should already know. (26th, page 50)
Ted Turner, who had over 90% of his enormous wealth tied up in AOL and who is now down to his last $1 billion says: “No one should ever concentrate wealth like that, particularly where they don’t have control”. He goes on to say: “You should set goals beyond your reach so you always have something to live for. You never have enough time in life. I am constantly battling to stay ahead. I say to myself: All you have to do is to put one foot in front of the other and just keep walking.” (My personal mantra when I feel overwhelmed is to repeat: “Do one thing at a time – think, plan and focus full concentrated energy.” (26th, page 61)
Stanley Bing asks the question: Why should the regulators get the massive penalties that are being charged to the companies for their actions? Should this cash not be given to those who lost as a result of management’s actions? (26th, page 88)
Sunday Times
There are all kinds of people with high IQs in the investment business and most of them flame out. They don’t do that well over time because they don’t have a base from which to operate. Everything we do is rational. We make mistakes, but we operate rationally and that will take you a long way. (Warren Buffett referring to his investment bible called “The Intelligent Investor” by Ben Graham.) (18th)
Taxgram
In ITC 1745 an auditor valued a company at R190 000, being the net asset value, for donations tax purposes. SARS placed a value on the company at R1 440 500. The taxpayer admitted that the fair market value of the shares was clearly above R190 000. The auditor’s valuation was clearly not reflective of the fair market value of the shares. The auditor was hoping to go for the lowest valuation possible that SARS would, hopefully, accept. (Do not play games like this! An auditor is supposed to have integrity and be independent. SARS does not employ fools. The PAAB needs to make an example of this auditor, especially in the light of the potential problems we are facing with CGT.) (Issue 4, May 2003, page 11)
Time
The US division of Ahold, the Dutch grocery company, overstated its profits by $880 million, 76% higher than initial estimates of the fraud. (19th, page 16)
June 2003 (30 Minutes)
Accountancy
When I received my latest pension fund statement showing that its value is now less than the total payments made into it, I realised that I would have been better off storing banknotes under the bed. (Editor, page 1)
ICAEW members may be subject to mandatory continuing professional development (CDP) if their Council has its way. (Don’t let them do this to you guys!) (Page 6)
The IASB’s controversial project on share based payments has received a surprising amount of support following the 236 comment letters on the exposure draft. (This support should be subject to an external audit!) (Page 10)
The SHAC animal rights protest group has threatened to target any auditor that does the audit of Huntingdon Life Sciences company. (Who wants to be an auditor?) (Page 17)
Chris Swinson warns against using market values in financial statements. He states that markets are, at times, dysfunctional and the prices in these markets are often not reliable. (One day we will go back to historical costing – fair value accounting as a basis for allocating costs and income to the correct periods is totally illogical.) (Page 28)
This issue focuses on the revolt against management remuneration; especially when there is a negative correlation between it and the company’s performance. A study in the UK showed that remuneration increased by 17% p.a. during the period that the FTSE100 dropped from 7000 to 4000. The call is for the incentive portion of management remuneration to be based on performance. (Page 31)
The PCAOB is now up and running and the UK profession is not terribly happy about the prospect of hoards of American inspectors flying over to investigate UK firms who do audits of US companies and their subsidiaries. The costs of such inspections could have the effect that any profit generated from the audits will be dissipated. Either audit fees would have to be increased (to the detriment of the economy) or auditors will have to resign. The UK is pushing for its own reviews to be accepted by the US regulators but do not seem to be winning. (Page 36)
Proposed changes to the Higgs Code have been abandoned in favour of more consultation. A working group has been set up to produce a draft of proposed changes. (It is good to see the consultative process that goes on in the UK and the fact that the constituency’s views are taken into account.) (Page 38)
“The notorious stealth tax on pension funds in 1997 has taken ₤5bn a year out of your pension funds. That adds up to around ₤30bn already.” (Sound familiar?) Gordon Brown’s raid on pension funds has had the effect of reducing the value of millions of people’s pensions and endowments and has made it more costly for companies to provide for its employees. (Page 42)
The new president of the ICAEW, David Illingworth, says that members have to stand up and say: “We have got a brand. We have ethics imbued in us, we have a code, we have objectivity, judgement, integrity and talk straight.” He believes that international accounting standards should be introduced speedily but that they should be sensible and understandable (a big ask!). (Page 72)
Peter Wyman says that there is a real risk that audit firms will abandon clients in high-risk sectors. Due to the litigious nature of society, and the fact that there are now only four big firms, commercial insurance cover is not available. The big firms are considering whether it is worth it to take the risks. (Who wants to be an auditor?) (Page 73)
Moria Hindson gives two case studies where auditors were found to be negligent:
1. A company’s usual monthly sales journal was a page and a half long. In the last month of the year, it was eight pages long. In the first three months of the following year it was six lines in total. The auditor, who followed meticulously a recognised audit programme missed or closed his eyes to the fact that the company had moved its cut-off point. (I thought that analytical review was an audit procedure?)
2. A company factored its debtors. It created false invoices and raised money on these invoices from the factoring company. When the outstanding debtors reached nine months (from a previous norm of three months) the factoring company contacted some of the debtors to identify the problem only to discover that they were fictitious. The auditor had enquired about this problem but was fobbed off by management. They never bothered to do their own investigation. (I thought that confirming debtors is standard audit practice.)
MH gives a checklist of some basic things to look for when doing an audit (second year varsity stuff but I give it here as a gentle reminder):
• Management representations are supportive, not primary evidence.
• Get evidence for journal entries.
• Verify and reconcile inventories.
• Use a practical method to confirm debtors’ balances.
• Reconcile VAT returns to sales and expenses.
• Do not get too familiar with management.
• Be sceptical, especially with management. (Page 74)
The integrity of the banks, brokers and financial advisers is critical to the efficient functioning of the markets. However, motivated by greed, the banks have, in the past, published research favouring their corporate clients. Research must be independent for an investor to be able to rely on it. The US has protections in place whereas the UK relies on the integrity of the market operators. The US, therefore, provides a much better investment environment than does the UK. (Page 80)
A survey done by the Cranfield School of Management found that 61% of UK SMEs are losing an average of two hours productivity per employee per week to Internet and email abuse. The annual cost to UK business is in the region of ₤15bn p.a. (Page 84)
The loss of a laptop can be devastating. Some tips to protect it are:
1. Use a lock to secure it to your desk while in the office.
2. Secure it to an immovable object when at home or in a hotel.
3. Avoid obvious laptop carrying cases.
4. Don’t disengage the internal password or firewall.
5. Engrave your name and telephone number on it (does not work in South Africa!).
6. Keep a record of the description and serial number.
7. Regularly backup the data and keep the backups safe. (Page 86)
With opposition to the principle of expensing stock options decreasing, the focus is now moving towards measuring the cost. (Page 91)
The IAASB has ruled that when financial statements are prepared using IFRS, an unqualified audit report is only possible if the financial statements fully comply. A reconciliation of the results to IFRS does not achieve compliance with IFRS. It is unlikely that one set of financial statements can comply with IFRS and the national accounting framework. (Page 92)
The following proposed statements published by the IAASB can be downloaded from :
1. International framework for assurance engagements.
2. Assurance engagements on subject matters other than historical cost financial information. (Page 92)
The ASB has published a discussion paper on accounting for not-for-profit organisations. It can be accessed at .uk. (Page 94)
Accountancy SA
Martin Prozesky advocates teaching ethics at university. (I have been calling for this for the last 20 years but no one listened. In the 35 years I prepared candidates for the Q.E. I could count the number of ethical questions in the Q.E. on one hand. You try to teach someone a topic that they know will not be asked in the Q.E. In the CFA examinations approximately 20% of the marks are awarded for ethics.) (Page 2)
Alison White sets out the proposals for business combinations (no more goodwill amortisation, no more negative goodwill, detailed guidance on reverse take-overs and tightening up on provisions on acquisitions and subsequent changes. (Page 10)
Graeme Tosen deals with the tainting provisions where a company classifies a financial instrument as a held-to-maturity financial asset. (Page 13)
My article was about a nightmare financial advisor. (Page 23)
A UK commentator made the comment I made in the “Just Pondering” letter in the March journal. It was not my idea. The editor never gave me an opportunity to answer the letter criticising my comment. Willi Coates on the same page was given this opportunity. Why not me? (Page 25)
Business Day
SAICA has published a discussion paper on contingency fees. Ethically, they believe that such fees should not be charged. The banning of contingency fees could result in a loss of work to non-qualified accountants because they will not be subjected to the same rules as us. (10th)
Risk management is management’s responsibility. They should:
1. Understand the risks to the company’s assets.
2. Establish the vulnerability of the company to these risks.
3. Measure the potential effect of risk.
4. Assess controls in place to mitigate the risks.
5. Decide whether to accept, mitigate or transfer those risks.
6. Develop and implement a risk management strategy. (19th)
Only 20% of black candidates passed part 1 of the QE (overall pass rate 45%). SAICA says that they will have to raise more money to throw at the problem. (I wonder if they have done a detailed study of the causes of the problem. Money won’t help. They need to get to the bottom of the problem before throwing money at it. I know what the problem is and have tried to tell SAICA but they will not listen.) (23rd)
A newly created pension fund of Transnet is already in trouble and ways and means of propping it up are being considered, e.g. the issue of a bond. Pensioners have called on the public protector to investigate the state of the fund amid claims that it has sustained losses of R4bn in the past two years. (Again, they are not getting down to the cause of the problem and rectifying the cause. The trustees guaranteed returns of 16,5% on assets. Are they out of their minds? Who is advising these people?) (27th)
A taxpayer may only use the valuation method for the tax base for capital gains tax purposes if a valuation is done within two years of 1 October 2001. If such a value is not done, one of the other two methods will have to be used when the asset is “sold”. (30th)
Citizen
The FSB is suing Deutcsche Securities for R54 million for insider trading. (Be careful what you do with inside information. Mr. Barrow is serious about this misdeed.) (7th)
According to a study done by Harvard, sell-side analysts talk up share prices where they are involved with the company. (Do your own research when taking investment decisions.) (7th)
Andrew Kenny, who has just turned 55, has the following to say regarding the lessons he has learned about money (read this carefully!): “I have allowed various insurance salesmen to make an idiot of me. If I had managed my money better over the last 30 years I would be facing the prospect of a comfortable retirement rather than a precarious one. When I realised what a con my disastrous retirement annuity was I stopped paying in. The insurance company deducted an enormous fee. What is left over has been shrinking ever since. I have lost money on endowment policies, unit trusts and managed investments. It is always the same story: warm smiles to get you to pay your money in and icy contempt when your investment matures and you find that you’ve lost half of it. The lesson I have learnt is to manage your own investments. Pay off your house as soon as you can.” (Shortened) (10th)
Financial Mail
Dutch retailer Ahold, which earlier revealed $880 million in overstated earnings, says it has found further intentional accounting irregularities. (6th, page 8)
A London high court judge ruled that Deloitte and Touche was negligent in auditing Barings Bank and is liable for damages. (20th, page 8)
Maxiprest pays SARS R42,6 million iro tax frauds resulting from advice given by Mr Grant Ramsay. (How many more companies are we going to read about? 399?) (27th, Page 8)
General Motors is to raise $10 billion to plug a $19 billion pension fund hole. (And the other $9 billion?) (27th, page 8)
If we want to attract foreign investment to our country, we should make the environment attractive to the investors and not to the employees. (Letter to editor, 27th, page 10)
The JSE does not give up easily: after failing with its development capital market and its venture capital market, it is trying again under a new banner: ALTx. This Alternative Exchange is designed to promote small, medium BEE enterprises. (Good luck. At my age and risk profile, count me out!) (27th, page 12)
The FM has published its list of top companies. It is based 40% on actual past performance and 60% on the view of the FM. The top 20 are, in order, Impala, Sasol, Pick ‘n Pay, African Bank, Anglo Platinum, MTN, Harmony, Sappi, Energy Africa, Mr. Price, Reunert, Delta, Afrox Health, Chemserve, BHP Billiton, Trnashex, Ceramic Industires, Oceana, Altech, and ABI. From 1 March 2003 to 11 July this portfolio is making a loss of 7,2% compared to a market gain of 5,2%! (27th, page 46)
Finance Week
Ethics should be an essential component of the syllabus at varsity for every discipline. The emphasis must be on what is right rather than teaching the bare necessities. (4th, page 32)
Preference shares should be considered as part of the portfolio of a retiree once the tax on interest kicks in. (4th, page 47)
Mr Mike Lomas, CEO of Group 5, says that the establishment costs of the expanded Everite factory are being amortised over five to 15 years. (I thought that establishment costs couldn’t be capitalised in terms of the statement on intangible assets. An investigation is needed by the JSE into this matter. Maybe they are just using the wrong terminology. I do not have the financials so cannot check.) (11th, page 10)
Deon Basson says that Group 5’s establishment costs should not have been capitalised (see the previous info-byte). He states that R63 million is shown on the balance sheet as deferred closure costs! (If this is true, then Group 5’s managers have some explaining to do.) (11th, page 42)
Should one allocate investments based on risk profiling (group clients into low-risk, medium-risk or high-risk categories) or based on the investor’s lifestyle goals? (Surely the answer is to get a balance between the two, e.g. if you are already retired and have only R1 million, you cannot afford to take risk on board so must adapt your lifestyle.) (11th, page 46)
Investors who have been in equity markets over the past three years now want out. This is due to impatience and unrealistic short-term expectations. Greed and fear are often the driving emotions behind a belief that markets can be timed and often result in investors getting it horribly wrong. It is more important to be in a market than to time the market. Volatility needs to be managed to obtain superior returns over time. Stick to your strategy and stick to your plan. (11th, page 51)
Sir Isaac Newton said that he could predict the motion of planets but not the madness of crowds. The market emotion cycle goes something like this: Optimism, excitement, thrill, euphoria (peak) anxiety, denial, fear, depression, panic, capitulation despondency (trough) depression, hope, relief, optimism (go to start). (11th, Page 57)
The major argument against expensing options is that they are almost impossible to value accurately (GAAP does not require accurate). The Black-Scholes model is dependent on inputs, which are themselves estimates and will overstate the charge to the income statement. (Not true – the Black-Scholes model can be modified to apply to options with vesting rights. The only major estimate in the model is the volatility factor. This is a small part of the total value of an option.) A major problem is that the cost will be expensed even if the options are deeply out of the money and there is no chance that they will be taken up. (This would only happen if the price of the shares has fallen after the award and the expense is being spread over the vesting period. If they were awarded deeply out of the money, they would have little value.) (16th, Page 32)
Freddie Mac, a giant mortgage company in the US has restated its earnings for the past three years by $1,5 billion. The difference here is that the restatement increases the earnings! But the next few years will see earnings lower by $1,5 billion. (30th, page 6)
Fortune
The newly formed PCAOB in the US will soon be a 300 people powerhouse. Its first goal is to investigate and transform virtually every aspect of auditing. Only firms registered with this body will be eligible to perform audits of public companies. The PCAOB will determine how auditors are paid for their services, will set auditing standards and will evaluate audit procedures undertaken by the firms to audit the companies. (Who wants to be an auditor?) (9th, page 19)
Who should be penalised for corporate fraud: the company or the executive who committed the crime? Was it fair to destroy a firm like Arthur Andersen (thousands of innocent employees lost heir jobs and thousands of partners who knew nothing about the crime lost their nest eggs they had been building for years) because of the deeds of a few executives? Why should the company pay, as in the case of WorldCom, a $500 million fine, thereby penalising its shareholders for the misdeeds perpetrated by its executives? Surely the perpetrators should be the ones to pay – sit in jail for 20 years will be a better deterrent to others contemplating fraud. (9th, page 21)
PwC has advised Amerco, the parent of U-Haul, that the special purpose entities that were created seven years before did not meet the criteria for off-balance sheet accounting. PwC had advised the company on these structures and, according to the article, took the entire blame for the mistake. PwC tried to help the company rectify the mistake but things went terribly wrong during this process and PwC is now facing a $2,5 billion lawsuit. (Who wants to be married to an auditor?) (23rd, page 49)
Very skilled, very careful investors can consistently beat the market. They don’t try to hit home runs. They hit lots of singles. They don’t follow hunches; they follow computer models. They don’t believe that markets are efficient but they don’t believe that they are very inefficient either. (23rd, page 58)
The greatest insight into new finance is that investment returns are in part a reward for taking risks. Risk means the possibility that a share or a portfolio will go down more than the overall market. If you earn a higher return by taking a higher risk than the market risk, you haven’t necessarily beaten the market. Since the costs of active trading are more than the cost of the buying and passively holding shares, someone who simply buys the market will invariably do better than the average active investor. (23rd, page 59)
If you don’t read the notes in a company’s financial statements, you are not getting the whole story. Most of the critical details are buried in these notes. Examples:
1. Growth in earnings may be attributable to acquisitions and not organic growth. Find this clue in the notes.
2. Read the note on related party transactions carefully.
3. Study the accounting policy notes carefully, e.g. if a company recognises revenue when goods are shipped, there could be a “stuffing of the channel” problem (goods are ending up in stock of the customers and not being consumed). (23rd, page 78)
Techtalk
The first issue has been dealt with by SAICA on headline earnings. I will cover it in the GAAP update workshops. I disagree with the conclusions.
Revaluations of available-for-sale financial assets (defined as non-trading in AC133) were treated as capital items in the past in the calculation of headline earnings. They are now treated as trading items! (I really would love to know why. The fact that the JSE has not complained about this total destruction of the concept of headline earnings astounds me. Everyone seems to be fast asleep!)
Please note that I am not dealing with proposed changes to GAAP here for two reasons: 1. They could change their minds. 2. Nothing we say will change what they are doing. So it is a total waste of time to even look at these proposals at this stage. We will wait for the final statements to be published.
On page 21 they list the technical staff of SAICA. I think that they are taking affirmative action beyond the pale! There is not, on the technical staff, one male!
Commentary
The Citizen reported that our very own home grown Jack Milne has at last admitted that he was pouring investors’ money into the Tigon black hole (if you could not have foreseen this, you were out of touch with reality). It is amazing that people are quite happy to hand their hard-earned cash to an individual to invest for them. The simple fact is that people who take control of other peoples money cannot be trusted to act in the best interest of the investors. Rule 1 of investing is “Keep in control of your own wealth.”
Prior to the Enron scandal, Arthur Levitt, the former chairman of the US SEC said: “We are witnessing an erosion in the quality of earnings. Managing may be giving way to manipulation. Too many corporate managers, auditors and analysts are participants in a game of nods and winks. Wishful thinking may be winning the day over faithful representation.”
Happiness is being too shallow to realise how miserable you should be. It is cocooning oneself from reality. When displayed wantonly in public, it is the cause of other people’s unhappiness. Happiness is abnormal. (Time Magazine)
From SAICA’s Abridged Financial Statements:
Finance Week, March 2003
The top twenty companies in RSA based on market capitalisation were, in order, Anglo American, BHP Billiton, Richmont, Sasol, Angloplat, Anglogold, SAB, Goldfields, Old Mutual, Standard Bank, First Rand, Implats, Remgro, Nedcor, Sappi, Harmony, LibInt, Absa, MTM and Sanlam. Resources and financials dominate the top twenty.
AIMR Conference Proceedings
Management is giving way to manipulation. Too many corporate managers, auditors and analysts are participants in a game of nods and winks. Earnings reflect the desires of management rather than the underlying financial performance of the company. Too many analysts and portfolio managers take companies’ financial reports at face value.
From SAICA’s Financial Statements
The Financial Reporting Bill will establish a new standard setting body and will hopefully be enacted shortly. It will provide for monitoring compliance with accounting standards. It will address the legal backing issue and will introduce a process for developing accounting standards appropriate to small and medium enterprises. (What does “shortly” mean?)
It was agreed that the discounted rates for certain SAICA seminars would be withdrawn. Unfortunately, the seminars affected by the discounted rates suffered a drop in attendance of about 35% in 2002. (Two mistakes: 1. Never discount a superb product, as users will get suspicious of the quality. 2. Do not conclude that the fall in attendance was due to discounting – look for the real reasons! What I find amazing is that subsequent to this report SAICA announced that certain seminars would be priced at “huge” discounts!)
SAICA is looking into a new system of continuing professional development. This topic needs to be discussed in a straight talking article!
SAICA is investigating Leisurenet and Regal Treasury, which could cost upward of R2 million. SAICA looks upon this cost as an investment in the future because of its deterrent effect. “We have to do it and be seen to be doing it.” (I have a problem with the logic: Why should this effectively be costing the members? The firms that are being investigated should be incurring the cost. To have a “deterrent effect” the culprits should pay!)
Taxgram
The Minister of Finance and SARS are working on regulations to govern tax consultants. To be a tax advisor in future you will probably have to pass certain examinations, join SAITA (the South African Institute of Tax Advisors), be subject to practice review, etc. etc.
SAICA’s Communique
The guidance examples supporting AC133 can be got by going to: .
You can download the circular on headline earnings by going to .
July 2003 (30 Minutes)
Accountancy
The SEC has asked a judge to place a six-month ban on Ernst and Young to prevent them from acquiring new audit clients. (Page 6)
Deloitte and Touche were found to be negligent as auditor of Barings but the penalty was reduced due to the incompetence of Barings itself, i.e. there was an apportionment of blame. (Page 9)
The FRC has caved in to corporate pressure for the Higgs report (equivalent to our King report) to be less prescriptive. (It really is good to see democracy at work in the UK!) (Page 9)
The IASB has issued its first IFRS i.e. number 1, First time adoption of International Reporting Standards. (Page 12)
The proposal to account for share based payments could make companies abandon their share option schemes. This would be a pity as such schemes lead to enhanced productivity, increased returns on capital and better cohesion in the workplace. (This is not what I find.) The author says that the Black-Scholes model is inappropriate for valuing an option on a long-term basis. What should be accounted for is the effective interest free loan to the employee and not the value of the option. (Agreed.) (Page 14)
Deloitte Consulting has developed a software package to identify overblown corporate jargon such as “synergy”, “paradigm”, “extensible repository”, etc. It is called “Bullfighter” and can be downloaded from bullfighter. (Page 16)
It has been estimated that the cost to British business of conversion to IFRS will be some ₤500 million. These costs will include staff training and recruiting, system changes, amending incentive schemes, briefings for boards and audit committees, etc. The benefits to be had are the savings in costs due to consistent and comparable financial statements across borders. This conversion process provides a lucrative opportunity for clever audit firms. On the downside, mistakes could be made, investors could get confused and companies could get spooked and start bending an unclear set of rules to meet expectations. This could result in more confidence busting corporate scandals. (Page 19)
Short-term thinking is losing out to long term strategy. (It is about time this was addressed!). (Page 20)
Here is a nice comparison for you:
‘000 1961 2002
British people getting married for the first time 350 180
British people getting remarried 50 120
British people getting divorced 30 150
Conclusion? There is money to be made in dating agencies! (Page 24)
Following the agreement by the US standard-setter to converge with IFRS, a short-term project has been set up to remove a variety of individual differences between US GAAP and IFRSs. (Page 81)
British companies are experiencing trauma at the thought of converting to IFRS. Here are some of the potential problems:
1. The capitalisation of certain leases could have devastating effects on their debt to equity ratios.
2. Having to recognise derivatives could have a negative effect on the amount of equity they report on the balance sheet.
3. The above two problems could have serious repercussions regarding covenants in loan agreements and restrictions on borrowings in the articles of companies. (Page 90)
British accountants do not believe that converting to IFRS will improve their reporting standards (they are probably right). (Page 93)
There is a perception that the UK has too much influence on the IASB. It is based in London, chaired by a British accountant, staffed by UK accountants and five of the board members have British passports. (Page 93)
There is a fear that if IFRS is imposed on SMEs, there could be a backlash, as it is felt that the excessive cost for small companies will not result in any benefits. (Page 93)
IFRS 1, First-time adoption of international financial reporting standards requires disclosures to explain how the transition from previous GAAP to IFRSs affects the reported financial position, financial performance and cash flows (can an accounting policy affect cash flows?). Companies need to start planning “now” (already getting too late). They need to consider how the transition will affect investor relations, what the consequences will be for employee incentive schemes and how it will affect restrictions in contracts based on information in financial statements. (Page 95)
The IAASB has exposed proposals on quality control for audit, assurance and related services practices. Topics covered are leadership responsibilities, ethics, engagement performance, quality control review and monitoring. (Page 96)
The British government has instigated a study into reporting for human capital and measuring performance. The argument is “what is not measured is not properly valued and cannot be effectively managed”. Topics to be covered are:
1. The size and composition of the workforce
2. Employee motivation, staff turnover and absentee rates
3. Staff training and development
4. Remuneration and fair employment practices
(As long as they do not ask accountants to start valuing humans and recognise them on the balance sheet, I am happy with this idea.) (Page 97)
The brilliant and clear thinking Mr Ron Paterson addresses the problem with accounting for decommissioning costs. In the past these costs were charged to income over the life of the asset, with the credit going to a provision. This way a proper charge to income resulted – perfect matching subject to changes in estimates, which is a normal feature of accounting. However, “New-GAAP” requires the full liability to be raised. The problem was whether to take the full cost to income immediately. This would have had a massive impact on income so the debit went to the asset (a future cost is now an asset!). And then came the problem of discounting. As the liability was only going to be incurred in the distant future, it has to be discounted to the reporting date. The unwinding of the interest charge is then charged to income in the pattern of a hockey stick, resulting in over-reporting of profits in early years and taking the pain in later years. His conclusion is that the standard is built on shaky principles and any interpretations of it are likely to be unconvincing and anomalous. He says that when you are in a hole it is unwise to keep digging. (Page 99)
It is clear that there is a need for a strong relationship between internal and external auditors. The two types of audits have distinct roles:
1. Internal audit is a control function helping management to ensure that effective processes are in place to manage risk.
2. External audit provides assurance to shareholders and the board that the financial performance is fairly reported in the financial statements.
The audit committee is the best way to facilitate this relationship. (Page 100)
Accountancy SA
Karin Barac looks at what companies report on their websites:
1. 86% of companies give detailed reports.
2. 77% give their share price information.
Bay Jordan says that the only way to deliver a truly consistent customer service is to ensure that management and employees recognise that the business depends on the customer. They must treat customers as they would expect to be treated if they were customers.
Alison White expresses concern that there will be too much subjectivity in determining the recoverable value of cash generating units when identifying whether or not goodwill has to be impaired in terms of the proposed new statement on business combinations.
IFAC is working on an exposure draft on continuing professional development (CDP). (Just another way for other people to control our lives! We need to make sure that this will not be a waste of our time.)
My article was on how AC133 can be used to deceive the users of financial statements.
Penelope Webb objects to giving criminals amnesty – I am on your side madam – fine them and/or throw them in jail!
Business Day
Companies listed on the JSE will have to disclose all payments made to directors, including directors fees, basic salaries, bonuses, pension schemes, share options, profit-sharing arrangements and other incentive devices as from years ending on after 1 September 2003. (3rd)
Citizen
Jackie Cameron sets out Allan Gray’s stock picking secrets:
1. Stick to the basics.
2. Understand the business you are buying.
3. Ask yourself what you would pay for the business if it were not listed on the JSE.
4. Have a margin of safety between the value and the price paid.
5. Assess the competitive advantage of the business.
6. A business is worth the cash it can pay to its owner. A company that never pays dividends is worthless.
7. Watch for earnings manipulation.
8. Ask yourself why you want to buy the investment.
(If you have every studied Warren Buffett, you will recognise all of the above.) (21st)
Financial Analysts Journal
Maverick risk is the risk of being wrong and alone. When agents work on investing other people’s money, it is more acceptable to fail conventionally than to succeed unconventionally. A contrarian view is not accepted until it has been shown to be correct and has, therefore lost its relevance. It is easier to tell people what they want to hear, even if it is wrong, than to tell people what they do not want to hear, even if it is right. (May/June 2003, page 6)
Investors want to be secure while they aspire to be rich, want to save while they are tempted to spend, want to feel joy and pride and avoid the pain of regret, i.e. human nature is human nature. (May/June 2003, page 13)
Benchmarking allows one to measure the risk one is taking to produce additional return. Sophisticated investors use benchmarks to control their exposure to various markets to add “alpha”. The craze to “beat the market” rather than to meet well thought out investment objectives encourages one to follow the market’s “animal spirits” rather than gauge when such risks are likely to be rewards. (July/August 2003, page 4)
Financial Mail
Andrew NcNulty says that Primedia issued 800 000 options in June 2000 to expire in June 2005 at a subscription price of 275 cents. In June 2000 the share price was 600 cents. Nice way of watering down the value of existing shareholders! (4th, Page 39)
The SEC has alleged that Coronation International Active fund of funds systematically manipulated the month end closing prices of certain securities and provided unfounded and unrealistic valuation opinions to the auditors. (One must wonder how much of this goes on in this industry. It is such a temptation, and so easy, to manipulate valuations.) (18th, page 15)
The US based infrastructure management-company Peregrine Systems restated its revenue of $1,34 billion by $509 million as a result of a SEC investigation. They had allegedly included in revenue non-binding shipments to resellers and revenues that were reciprocal deals for customers’ purchases of software. (I have seen the latter scam working in RSA – software providers buy hardware for the client and charge exactly what they paid for it so that they can include it in revenue.) (18th, page 15)
Micosoft has joined other US company icons such as General Electric, Citigroup, Coca-Cola and Proctor & Gamble in expensing equity based employee compensation through the income statement. Microsoft intends phasing out stock options in favour of issuing actual shares to managers. (8th, page 44)
Hendik du Toit of Investec Asset Management believes that as many as 40% of local asset managers are not trading profitably. (This makes sense – if the market stands still, >50% will not trade profitably – remember the costs of doing a trade?) (18th, page 53)
Finance Week
Ernst & Young agreed to pay the U.S. Revenue Service $15 million to settle an investigation into the marketing of tax shelters, which could be used to evade tax. (9th, Page 6)
An estimated R8 billion is lying unclaimed in various investment vehicles including life insurance policies, unit trusts, shares, dormant accounts and pension fund benefits. (9th, page 35)
The Financial Services Board has reported that many life companies tend to treat policy holders in a cavalier fashion and that many of the bad practices that were found at Fedsure Life were common in other life insurers and the industry as a whole. Among other things it is recommended that there be a clear distinction between policyholders and shareholders’ assets, that the independence of actuaries be revisited and non-executive directors of life companies receive training. (9th, page 38).
In 1990 there were 23 registered asset managers but by last year that had increased to 301. (All chasing the same investments and charging for doing so!) (21st, page 59)
Asset managers spend vast sums on creating brand awareness to attract investment advisors who feel more comfortable with being wrong with a big name player than risk being wrong with a small manager. (30th, page 55)
The top 40 shares account for 88% of the JSE capitalisation, which leaves only R150 billion outside the top 40 in which to invest. (30th, page 55)
A new regulation in the Pensions Fund Act is to replace a regulation dating back to 1956. This regulation will require stricter corporate governance. The new version will require that trustees have an investment strategy in place. (The fact that this has not been in place in the past is really depressing!) A study by Deloitte & Touche found some serious shortcomings in pension fund administration. They found, for example, insufficient trustee dedication, a lack of employer interest, inadequate monitoring of governance, inappropriate investment strategies and a low level of trustee understanding. Considering the value destruction that has taken place in the pension management industry, one can expect litigation on a grand scale. (30th, 58)
Fortune
The fight is on in the US about how much say shareholders should have in the running of companies. The ballots shareholders receive at present are just like Stalin used to distribute – for every position there is exactly one candidate. Companies want free and open elections about as much as Stalin did. The present rules are based on the thinking that shareholders cannot be trusted to act responsibly whereas managers are wise and beneficial stewards who know what is really best for the shareholders. The thinking is that the Sabanes-Oxley Act has not gone far enough to empower the shareholders. (14th, page 19)
Question: Why would someone pay $7 billion for the Yellow Pages in the US? Because when the sink leaks you do not go to Google and search for a plumber – you pick up the yellow pages. (SAICA must realise that their members would much prefer to have statements like they had in the old days where they can turn a page, find the paragraph, highlight the important words and solve the problem. At present they have to pull the computer out of the case, find the cords, turn it on, etc., etc.) (14th, Page 22)
The top 10 companies in the world are:
By Revenues By Profits By Employees
Wal-Mart Stores Citigroup Wal-Mart Stores
General Motors General Electric China Petroleum
Exxon Mobil Exxon Mobil Sinopec
Shell Altria Group US Postal Service
BP Shell Agri Bank of China
Ford Bank of America Siemens
Daimler Chrysler Pfizer Mcdonalds
Toyota Wal-Mart Stores Bank of China
General Electric Microsoft Carrefour
Mitsubishi Toyota Compass Group
The RSA companies featuring in the top 500 are (by revenue):
281: BHP Billiton (up from 302 last year)
341: Anglo American (down from 328 last year)
453: Old Mutual (down from 366 last year)
The top 10 money losers were, in $ billions:
Company Company
AOL 99 Mizuho Group 20
Qwest communications 36 Vodafone 15
Deutsche Telekom 23 AT&T 13
Vivendi Universal 22 Lucent 12
France Telecom 20 Tyco 9
Five of the above were involved in high level accounting scandals. (28th)
Maneo (June 2003)
Claude O’Flaherty says that practitioners should put in place safeguards to overcome fundamental threats to independence. These safeguards should be demonstrable and defendable.
Be aware of the following:
• ED on assurance engagements
• ED on the special considerations in the audit of small entities
• Statement on reporting by auditors on compliance with IFRS
• Guide on money laundering
The Auditing Standards Board meetings are now open to the general public. (I really would be fascinated to see who turns up.)
Jillian Bailey sets out common problems found during practice reviews. Get hold of Maneo, if you are an auditor, read carefully and do not fall into these traps. All of the points are second year auditing steps – if you hold yourself out to be an auditor, do these things!
Techtalk
1. The exposure draft on limited purpose financial statements has been published for public comment. (See my website for my thoughts on this feeble attempt.)
2. The Implementation Guidance on AC133 is deemed to be part of the statement.
3. Improvements to IAS 32 and 39 are expected in March 2004.
4. We can expect the ED on performance reporting towards the end of 2003.
5. The circular on headline earnings has been further contaminated by the publication of two new issues.
6. If you are involved in an SME or SMP and need assistance with managing and operating your computer systems, go to store and download controlling computers in business: backup, archive and restore and controlling computers in business: physical security.
August 2003 (30 Minutes)
Accountancy
The adoption of IAS 39 is facing French resistance – the French president is encouraging standard setters to think again. (I did not realise that he was an accounting expert!) (Page 9)
The UK companies bill could include:
1. Increased powers to regulate auditors.
2. Increased powers for auditors to obtain information.
3. Requirements to disclose non-audit services by auditors.
4. Increased role of the review panel.
5. Empowerment of revenue authorities to pass information to the review panel.
6. Requirements to publish a statement on operating and financial review. (We need this thing in RSA.) (Page 13)
Michael Howard, shadow chancellor, says that the UK government has introduced, on average, 15 new regulations every working day since its election in 1997. (And we thought we had it bad!) He has promised to cut business regulation if voted in. (Page 19)
Investors should be aware that Higgs (equivalent of King in RSA) is not a solution to badly managed companies. The best safeguard for shareholders is the integrity of the management. Self-regulation should always be the preferred model. (Michael Howard) (Page 19)
Toll roads in Yugoslavia are insisting on dollars from motorists. You know that a country is falling apart when its Government will not accept its own currency! (Page 26)
Lessons to be learned when giving advice that could go wrong:
1. Ensure that the engagement letter spells out exactly what responsibilities are undertaken.
2. Judiciously disclaim any projections made.
3. Avoid attending meetings if you are ill -prepared.
4. Do not make statements merely to placate your client.
5. Make notes of discussions and retain these notes.
6. Consider placing an agreed cap on your liability for non-audit work.
7. Ensure that the narrative in the fee note describes exactly what was done. (Page 58)
Sir David Tweedie, chairman of the accounting standards board, says that the future of international accounting standards depends on the professionalism of accountants. He says that if you are going to stick to principles, you need ethics. (The alternative is principles plus rules. Dear Sir, do you really think that principles are going to work without rules? Expecting to rely on the ethics of accountants to ensure that the principles are applied is a big ask.) (Page 77)
The magnificent Ron Paterson tackles the problem of what comprises a subsidiary for consolidation purposes, with special emphasis on special purpose entities (SPEs). Enron got away with selling assets to SPEs at massive profits and not eliminating the profits as the SPEs were not consolidated. He says that one should consolidate an entity if it provides the kind of benefits to the company that would be provided by a subsidiary. In the UK they created a thing called a quasi-subsidiary, which had the effect of stopping the formation of off-balance sheet entities to hide losses, assets and/or liabilities. He believes that the IASB should set out the principle of when control is deemed to be present and avoid detailed guidelines. He suggests that Sir David’s “duck test” should be applied, i.e. “if it looks like a duck, walks like a duck and quacks like a duck, it is a duck.” (Page 78)
Companies with December year ends are supposed to convert their balance sheets to IFRS GAAP on 31 December 2003 (yes, 2003) because 2005 is the first full year of compliance and the opening balance sheet of the 2003 year must be the starting point to get comparative figures for 2004. The problem is that the new statements on the major changes are only due in March 2004, i.e. if they meet their deadline. As we are already IAS32 and IAS39 compliant in RSA, it is vital that we know what changes are going to be made before we can get started on the conversion process. In the meantime, what can you do?
1. Study IFRS 1 (AC138)
2. Watch the IASB website to monitor decisions made on share-based payments, business combinations, etc.
3. Consider how IFRS will affect staff bonuses, tax calculations, covenants in loan agreements, etc.
4. Consider how IFRS will change the way you do business (crazy that we have to change the way we do business because of the standard setters!). (Page 80)
There is opposition to the two statements on financial instruments in Europe and the lobbying is in full swing. It is felt that because of this and because of the other projects that the IASB has taken on, the IASB is becoming stretched too thin. It looks like they may have to abandon the insurance statement to meet their other deadlines. (Page 82)
The proposal is that insurance companies arrive at the profit for the year by deducting the net asset value at the beginning of the year from the net asset value at the end of the year, fairly valued. If you have ever seen how insurance companies calculate their embedded values you will realise that the profits of insurance companies in future will be dependant on what management wishes to report. Pity the poor auditors. The author asks: “Surely the aim of accounting principles should not be to influence or change the business model?” (It is the cart leading the horse these days, my friend.) (Page 84)
The IAASB has issued an exposure draft called “Review of interim financial information performed by the auditor of the entity” – it can be downloaded from . (Page 86)
The UK’s Urgent Issues Task force is working on accounting for emission rights. Say the Government gives the entity the right to emit 100 tonnes of CFCs. If it emits less than 100, it may sell the balance to other polluters. If it emits more than 100 it must either buy rights from another entity or pay a fine. Assume the right to 1 tonne is worth R10 and the company uses 60 tonnes by its half-year:
Emission right asset Dr. 1 000
Deferred income Cr. 1 000
At grant date. (Is this not lovely – create an asset out of fresh air?)
Expenses Dr. 600
Liability Cr. 600
Used.
Deferred income Dr. 500
Expense Cr. 500
Resulting in a net charge of 100 to income.
(Note: I have not yet studied the IFRS E.D so cannot compare the UK proposals with the IASB ones.) (Page 91)
Good news for auditors! Although Delotte & Touche was found to be negligent in relation to its audit of Barings, the judge held that management carried a high level of fault for loses suffered and damages should be apportioned. (Page 105)
The mission of the president of the ICAEW is to bring together business, regulatory and investing communities to examine how they can devise a reporting framework that fulfils market needs for the provision of truly useful information for decision making. (I thought that this was what the IASB was trying to do?)
Business is realising that sick leave is a high cost. Businesses must create a positive climate when people want to come to work. Businesses cannot afford to pay for people who do not turn up to work. Few businesses have accurate attendance records and cannot, therefore, spot absentee trends. The following five reasons are given for staying at home: Cold/flu (93%), food poising/upset stomach (77%), headache/migraine (64%), stress/emotional problems (54%) and back problems (47%). (Page 114)
Want to increase your fertility? Stopping smoking improves it by 20% to 50%, reducing alcohol intake to less than one drink a day improves it by 20% to 50%, and reducing caffeine intake to one cup of coffee per day improves it by 25%. If all else fails, trade your man in for a younger model. (Page 116)
Accountancy SA
Michael Dorfan addresses the problem of accounting for defined benefit plans. His message is to get companies to disclose the true legal liability for defined benefit plans. (Page 4)
Wilna Steyn and Willie Hamman (or is it Pieter von Wielligh?) look at the mistakes companies make when preparing cash flow statements. (From my experience, few preparers, auditors and users understand AC118! Time to throw this cash flow statement out and get something that is more meaningful like the old source and application of funds statement?) Points made in the article are:
1. Only half of the companies have an accounting policy note on what is meant by “cash and cash equivalents”.
2. One company says that bank overdrafts are part of cash and cash equivalents and yet includes increases in bank overdrafts as a financing activity.
3. Some companies included the current portion of long term borrowings in cash and cash equivalents.
4. Some companies have given bonds to the banks in respect of their bank overdrafts and yet show them as part of cash and cash equivalents. (Page 10)
SAICA points out that until the Financial Reporting Bill is approved by Parliament (who knows when) SMEs will have to comply with the existing accounting rules, i.e. do not get too excited about differential reporting just yet. (Page 15)
My article was on agricultural futures – looking at whether or not they could be weapons of mass destruction. (Page 18)
45,3% in total passed part 1 of the 2003 Q.E. with a 20,5% pass rate for black candidates. (The apartheid school system is still being felt? Or are they still penalising candidates for not having perfect English – the typical black candidate is writing in his or her second or third language so is at an automatic disadvantage.) (Page 37)
If you failed part 1 of the examination, get hold of this journal and study the examiners’ comments carefully on pages 46 and 47. The sick thing is that every year the same comments are made and every year candidates fall into the same traps. Why can’t people realise that it is so much cheaper to learn from the mistakes of others? I loved the quote at the end of the article: “There are no shortcuts to anyplace worth going.” Investing in the future seems to be foreign to the “now” generation.
Business Day
The JSE listing rules that have just been published will be a windfall for accountants and merchant bankers. (When will the shareholders start objecting to this redistribution of income away from the true owners of the companies?) (27th)
Business Times
Nigel Scott says that there are two ridiculous myths in the advice game:
1. You can never have too much insurance – you only need enough to settle your liabilities on death. (I have no liabilities so I have no life insurance – and do not try to sell me any!)
2. The ideal equity exposure in an investment portfolio is 100 minus your age – you must take all factors into account when doing the allocation step, not just age. (17th)\
Citizen
Michael Lauer, the fund manager of Lancer Management Group (LMG) was charged by SEC for grossly overstating the assets in the fund, thereby attracting investors (shades of our own Jack Milne). He pumped up values to the amount of over $1 billion. One of the RSA funds has taken a major knock on its investment LMG. (I have been waiting for something like this to happen. Are Jackie and Micky only the tip of the iceberg?) (4th by Shirley Kemp)
Finance Week
Deon Basson states that the large number of exceptional items making up the difference between attributable-profit and headline earnings contributes to a general scepticism about companies’ headline earnings. He states that it is a useless measure on which to calculate the price earnings ratio. (Deon, headline earnings was never meant to be used to assess the real performance of a share. It is merely a measure to compare the trading performances between companies. If you want to value a share using earnings as a basis, you should strive to discover the company’s maintainable earnings, which measure cannot be arrived at by applying a set of rules.) (4th, Page 12)
The following note appears in the financial statements of Aspen: “For hedge accounting purposes relating to transactions with suppliers that are denominated in foreign currency, the settlement of the creditor is now designated as the hedged item as opposed to the import transaction.” (Nice – pretend that a cash flow hedge is really a fair value hedge! I wonder how the auditors felt about this?) (Page 13)
Financial Mail
Andrew McNulty says that AC133 is introducing greater complexity and less predictability for banking groups. For example, First Rand included a R233 million gain from AC133 in its core operational earnings. He says that because short-term earnings are going to be more volatile, more attention will have to be given to net asset value and return on equity. (ROE is earnings divided by equity – how will this help?) (1st, page 65)
A research team reviewed the records of workers on a tea plantation in Kenya over five years and found that during the last three years of life, tea pluckers who died of Aids were absent from work almost twice as often as other tea pluckers. (8th, 43)
Andrew McNulty comments on AC133:
1. It has had a marked influence on balance sheets and income statements.
2. The effect on earnings, growth rates and profitability ratios has been positive (I do not know where he gets this from).
3. The banks have not been consistent with the application of the statement.
4. The current thinking could change.
One inconsistency between banks is the treatment of impairment. Previously, banks used to make two provisions, a specific provision and a general provision. Only a specific provision is now permitted based on a projection of future cash flows expected from debtors. Standard Bank released R499m from general provisions to the opening balance of retained income. Nedcor released R1,72bn of the general provision and created an additional R1,13bn additional specific provision leaving R585 million which was released. (Apparently, the profession is insisting now that these releases go to income and not to the opening balance of retained income. GAAP gone totally mad!) (22nd, page 48)
Fortune
Quotes from some of the top “Greatest CEOs in the US”:
1. We have a responsibility to our employees to recognise their dignity as human beings and believe that those who help create wealth have a moral right to share in that wealth. (David Packard)
2. To opt for assured survival at the cost of the company’s soul would be worse than not surviving. (Katharine Graham)
3. You must battle attempts to kill off your ideas. Without creative tension, i.e. freedom vs. discipline, innovation vs. control, all you have is chaos, or worse. (William McKnight)
4. We hold these truths to be self-evident, among them a higher duty to all who use our products. (James Burke)
5. You must be willing to act boldly. (Darwin Smith)
6. Our products are for people, not for profits. (George Merck)
7. Set goals just beyond your grasp. Have a hunger for learning. (Sam Walton)
8. Have a grand vision. (Bill Allen)
9. Create ideologies and mechanisms that will stand the test of time. (Charles Coffin) (18th, page 65)
Techtalk
The amendments to the JSE listing requirements are now complete – can get them from LexisNexis (the old Butterworths). Some of the major changes are:
1. Directors take personal responsibility for compliance.
2. Listed companies must have a permanent sponsor (more money out of the shareholders’ pockets into those of the professionals!)
3. On the date of issue of the AFS companies have to publish abridged AFS on SENS.
4. Auditors must review voluntary preliminary AFS prior to publication on SENS.
5. Directors must obtain clearance before they can trade in their company’s shares.
6. The GAAP Monitoring Panel will censure and penalise for not complying with Statements of GAAP.
7. The threshold for related party transactions has been reduced from 10% to 0,25%.
ED162 on emission rights has been exposed. If you want to see GAAP gone mad, read this one!
The IASB is fiddling with the statement on provisions – I think that users and preparers are going to get angry about this constant changing of minds!
The Law Society of SA is not happy with the audit reports being given in respect of trust accounts. They are of the opinion that the cost of the audit report exceeds the benefit derived from them. (What about private company audits?)
IFAC’s Board agreed that it would operate with integrity, transparency, efficiency and simplicity. (What? Have they not been doing so in the past?)
The former Governor of the Bank of Canada is charged with finding out why financial reporting has lost credibility and will try to find ways to restore it. “The report will be released around midyear.” (This was the August Journal. Maybe in Canada they have a different year to us.)
The IAASB has issued an exposure draft on quality control for audit, assurance and related services practices.
September 2003 (30 Minutes)
Accountancy
The IASB has issued:
1. ED 4 on the disposal of non-current assets and presentation of discontinued operations. They have reverted to the original idea of a discontinued operation instead of a discontinuing operation (round and round we go – will it ever stop?)
2. ED 5 on insurance contracts. (You don’t want to know what they are proposing!)
3. An ED on fair value hedge accounting for a portfolio hedge of interest rate risk. (Page 12)
In the UK they have issued a code to enable employees to take action against employers for not protecting them adequately against stress. (What about the stress of the employer caused by the employees?) (Page 13)
The IAASB has issued an exposure draft on the auditor’s responsibility to consider fraud in an audit of financial statements, which suggests that auditors should act with increased professional scepticism. (When are they going to admit that it is the responsibility of the auditors to look positively for fraud?) (Page 13)
It is felt that if liability caps are not permitted on audit responsibilities, we could end up with the big three (two, one, …?) (Page 22)
A good leader understands all the people in the team and treats them as they need to be treated and makes them feel good about themselves and confident. (Page 24)
Auditors (and directors, please) must learn that the full truth must be told, irrespective of the cost. They must not abuse the trust of the readers of financial statements. (Page 26)
In the UK they will be installing a principles-based system of compulsory continued professional development. It will not be necessary to notch up x number of hours or score x number of points. The system will require members to plan their own CDP system to meet their own goals. They will be required to provide a declaration that they have undertaken this process and provide evidence, if required to do so. (The UK professionals really are logical. I hope for our members that something as logical as this will be installed in RSA. Let’s avoid the big stick. Let’s avoid wasting time on things that do not add value. I think it is essential that professionals have a CDP project, but it must be their project, i.e. it should not be forced on them by some bureaucrat.) (Page 49)
When Rafat Bhatia raised concerns about the legality of a stock exchange transaction, the chairman of the company threw his digital diary at him and threatened to destroy him. He was awarded compensation of ₤805 000. PwC says that companies that do not have whistle-blowing policies are missing a trick. (The problem is that this is the last thing crooked management want when they are going to be blown up themselves!) The audit committee should take responsibility for a company’s whistle-blowing policy. However, despite any policy in place, it will still take a brave employee to put house, livelihood, family and reputation on the line by blowing the whistle. (If you were in a situation where you had your whole career ahead of you, would you blow the whistle? I have, on occasions, suggested that employees resign as an alternative. This is what the auditors are paid to do!) (Page 52)
Moores Stephens faces a damages bill of more than ₤190 000 after a high court ruling that it gave negligent tax advice. (Who wants to be a tax advisor?) (Page 73)
An auditor valued a start-up business that had developed a photographic process, which had not started generating income, for an outgoing shareholder at the accumulated cost of the development. It was sold subsequently for eight times the cost. The ex-shareholder sued the auditor for negligence. However, it transpired that the purchaser of the process had discovered that the process was fatally flawed so had scrapped it. So the shareholder did not get damages. (Thank goodness the auditors did not do the due diligence for the purchaser of the process! Doing valuations is a dangerous game.) (Page 75)
The traditional annual budget is a pointless and time-consuming process that piles pressure on people who already have a full time job to do. Many organisations have moved to rolling forecasting. (Page 84)
44% of working adults in the UK do not pay into a pension scheme and 66% have not planned for retirement. There is little consideration for financial survival past working age. Over 90% of those surveyed felt that there should be some form of financial education in the national curriculum. (Really think this will help? I am sure that the situation in RSA is a lot worse than the UK) (Page 89)
The EU has endorsed all IASs except the controversial IAS 32 and IAS 39. (Page 95)
A revised draft on ethics proposes that the code be elevated to a standard to be adopted by national bodies around the world. (Page 95)
IFRS will impact business processes, management reporting, systems and the way shareholders and market analysts view the results of companies. Few companies are considering how to communicate the impact of IFRS on their results. A major awareness education and training programme will be necessary before IFRS is implemented. (This is not going to be a major deal in RSA as we are already compliant with half of the IFRS statements to be published. The major issue is how the big four are going to interpret the new statements and what kind of pressures they are going to exert on their clients. I predict that some clients are going to revolt when they see the costs and the impacts on their results of IFRS.) (Page 96)
Questions companies should be considering in regard to the implementation of IFRS are:
1. Has a needs-analysis for each of the stakeholder groups been performed?
2. Is a training and development plan for management and staff in place?
3. Are the analysts and shareholders aware of the impact of IFRS on the results?
4. Does the company understand how the analysts’ and shareholders’ view about the company will be altered?
5. Has the company installed a system to ensure that the staff will keep abreast with developments?
(That is what I am here for folks!) (Page 97)
The new ED on insurance contracts will put a stop to the following practices:
1. Measuring insurance liabilities on an undiscounted and basis.
2. Measuring insurance liabilities with excessive prudence.
3. Reflecting future investment margins in the measurement of insurance liabilities.
The ED contains proposals that would require the unbundling of deposit components of insurance contracts and limit reporting anomalies when buying reinsurance. (Page 98)
Ron Paterson deals with some of the terms used by standard setters:
• “Highly probable” means “significantly more likely than probable”. “Probable” means “more likely than not”. So “highly probable” is “significantly more likely than more likely than not”. Unfortunately, they do not define what “more likely” means!
• “Possible”, in the definition of a contingent liability, means “less than probable” but in the case of a contingent asset means “less than virtually certain”.
• He asks what “remote” means: is it the obverse of “virtually certain”? (Page 101)
SEC has issued a staff study recommending that accounting-standards be developed using a principles based approach. It proposes that they:
1. Be based on an improved and consistently applied conceptual framework.
2. Clearly state the objective of the standard.
3. Provide sufficient detail and structure so that the standard can be applied on a consistent basis.
4. Minimise the use of exceptions from the standard.
5. Avoid the use of percentage tests that encourage preparers to evade the intent of the standard.
(I read the executive summary of this document. They are recommending a new system based on defining the objective of the standard. The new system will embrace principles and rules. There is no way that the US is going to admit that the ISAB has got the “right” approach!) (Page 104)
Accountancy SA
Bernard Agulhas and Louis de Koker discuss the impact of the money laundering control laws on accountants and auditors, e.g. identify clients, verify certain particulars, keep records, train employees, etc. There is now a duty to report suspicious transactions. If this could affect you, study the full article. (Page 2)
Karin Barac looks at the implications to the auditor of Internet reporting of financial information by companies. The US standards on auditing state that electronic sites are a means of distributing information and not documentation, which has been interpreted to mean that auditors do not have to verify the accuracy of this communication. However, the Auditing Practices Board in their Bulletin published in 2001 stated that the auditor does have a responsibility in this regard. The auditor should, among other things, ensure that the electronic version is identical to the printed version of the financial statements. (This is a tough ask! It is easy to change the information. Must they check every week, month, two months, quarter, etc.?) (Page 10)
The US lawmakers do not trust management, accountants, auditors and lawyers to do the right thing so now require massive duplication of resources and effort to enforce compliance. The costs of compliance will increase astronomically – could average $3 million p.a. for US companies, which could push marginal companies over the edge. (Question: “Who ends up paying for this: the consumers or the shareholders? The other question to ask is who is going to be making money out of all of this?) (Page 13)
Wilna Steyn and Willie Hamman (and now Heidi Smith) continue their discussion on cash flows. The points made are:
1. Companies are netting cash flows instead of showing gross movements.
2. Companies are showing in their cash flows items that are not cash flows. (How can they be sure? If a cheque was received on the issue of shares and a cheque paid to settle the debt, then there was a cash flow!)
3. Companies are not providing information by way of note on their non-cash flow movements.
4. Profits and losses on the sale of investments are not reversed.
5. Minority share of profit was shown as an increase in the financing activities of a company! (How did they balance?)
6. Some companies treat loans to employee trusts as a financing activity. (If the shares were issued to the trust and the loan resulted from the issue, there would be no cash flow.)
7. One company treated the payment for environmental expenditure that had previously been provided for as a financing activity. (The statement on provisions requires the interest on the provision be treated as interest paid. So I can empathise with the company in what they did!)
(My question: If you buy an asset on a finance lease with no cash flowing, neither the asset nor the liability appears in the cash flow statement. How do you then handle the rental payments? An operating activity (it is rent) or a financing activity (the capital repayment is paying off the liability) or an investment activity (you are buying an asset in instalments)? (Page 14)
Graeme Tosen looks at the meaning of VAR (value at risk). From what I can gather from the article (statistics, among other things, has never been my strength) VAR is “the amount of loss relative to a mean return”. The example given in the article states that if the expected return (mean) is R3 million and the standard deviation of this return is R7 million, then:
VAR at a 90% confidence level is 3 – (1,28 x 7) = R6,0 million
VAR at a 95% confidence level is 3 – (1,65 x 7) = R8,6 million
VAR at a 99% confidence level is 3 – (2,33 x 7) = R13,3 million
Or, to put it another way, there is a 10% chance that you can make a loss of R6,0 million, a 5% chance that you can make a loss of R8,6 million and a 1% chance that you can make a loss of R13,3 million. (I would have thought that one could halve these percentages as we are only dealing with one side of the population mean. Can anyone help?)
Let’s try this idea on Pick ‘n Pay’s shares:
I would expect to earn a return (has been achieved) of 1% p.m.
The standard deviation of the monthly returns has been 14% p.m.
This means that I can be 90% confident that I will not incur a loss of more than 16,9% in any one month from my investment in Pick ‘n Pay. Over the past 74 months the actual number of times 16,9% was exceeded was 3 times i.e. 4% of the times. (See why I think the 10% should be halved? Or was this a fluke?)
My article was on the journal entries and tax implications of agricultural futures.
Business Day
IBM was found guilty in the US for tampering with pension fund earnings to boost its own profits. (You can’t even trust the big blue!) (15th)
Sanchia Temkin was clearly brainwashed into publishing an article stating: “In a revolutionary accounting development, SA is to adopt a differential reporting system for SMEs.” She says in the article that SMEs will be able to “tailor their financial reporting to the needs of the users of their financial statements.” (Dream on lady! Maybe when our small practitioners have had their say, and SAICA has accepted their points of view, this may be a reality.)
Finance Week
Deon Basson, (how does he find all these scandals?) tells the story about Corpcap’s accounting for its investment in Cytech. In short, the investment, which was considered to be a long-term strategic investment at the time, was revalued two years in a row to income (and included in headline earnings). When things started going wrong the investment was written down “below the line” (presumably outside headline earnings). What I find intriguing about this whole saga is the note by the audit committee in the financial statements. It read: “In due course the audit committee will consider and make recommendations to the board regarding any write down, which may be required for this investment over and above the monthly amortisation of goodwill in accordance with the company’s accounting policies.” If they were amortising goodwill, this investment could only have been an associate (47,5% holding). How then could the revaluation have gone to headline earnings? A second problem here is that the standard setters have got in wrong by stating that a long-term strategic investment revaluation goes to headline earnings! But then they will never own up to this mistake.) (10th, page 12)
The R300 billion strong Public Investment Commission, which manages the Government employees’ pension funds, wants to harness these funds for empowerment. The PIC feels that it should focus on issues other than returns. (And create poverty for the pensioners of the Government in future years!) (10th, page 15)
One of the best articles I have ever read in a finance journal is: “AC133 is a nightmare, says business”. Some of the points made:
1. The French are the most vociferous critics of IAS39 – the EU has sent it back to the drawing board. (South Africans, with respect, are like a bunch of sheep – we accept anything that is thrown at us. Time to wake up?)
2. RSA has been made the guinea pig for this new accounting standard – can we afford to be the leaders? (Sure – lots of money to be made out of this experiment – remember those making the money out of AC133 are the people who pushed for it to be implemented. Commerce and industry did not fight it so they are now paying the price.)
3. AC133 provides insight into the risk behaviour of companies. (I do not agree. Until companies are stopped from hiding gains and losses on forex in assets imported and in export sales, users will not be able to get insight into risk management policies and their effectiveness.)
4. The cost of implementing AC133 has been about R100 million to the banks. Shareholders have had to foot the bill.
5. AC133 has pushed the disclosure requirements for insurance companies from 2 500 to 6 000 items!
6. Why did we have to take the initiative in RSA when further developments are on the cards? This is not in the best interests of SA. (One bank I lectured to recently said that they would consider suing the profession for the additional costs incurred if major changes are made to the statement requiring further system changes.)
7. SAICA points out that the APB is the standard setting body and not SAICA. (Who pulls the APB strings?)
8. SAICA points out that IAS39 is not new to the world – the US has been using a similar standard for years.
9. Mike Gresty says that he is still unable to make appropriate adjustments to reported results to arrive at comparisons between the various banks.
One good thing about this statement is that it is forcing all of us to try to understand the murky world of hedging and derivatives. (17th, page 8)
Mr Andre Viljoen explains SAA’s AC133 accounting. SAA may only borrow 15% onshore in rand. 85% has to be borrowed offshore in dollars. At any point in time SAA has significant borrowings in the form of loans and leases and its foreign inflows are insufficient to cover all foreign outflows. It protects itself from adverse movements in the rand by covering forward. If the rand depreciates, it benefits from the hedging operations. If the rand strengthens, losses are incurred and the assets are worth a lot less so have to be written down. What happened was that the rand strengthened, assets had to be written down, and a loss was made on the derivatives. This made SAA insolvent at the year-end. However, the very next day SAA started recognising embedded derivatives, which had a value of R4,9 billion. This restored solvency to the company. (What makes you think that accounting has sunk to the level of mumbo jumbo black magic?)
Financial Mail
Frikkie de Villiers of Accenture SA says that innovation in business governance is being suppressed by placing the accent on corporate governance aspects such as accountability and responsibility following the Enron and WorldCom affairs. He says that directors should regularly ask themselves whether their products, services and processes could be better, what the alternatives are and which ones will deliver optimal results. He believes that directors should seek independent professional advice in these matters. (5th, page 15 of innovations)
If you invested in the Alsi in 1960 using a buy and hold strategy, you would have increased your investment by 11,2 times. If you had been out of the market during the best 42 months, you would have increased your investment by 0%. However, if you had been out of the market in the 42 worst months and in the market during the rest of the period, you would have increased your investment by 23 400 times. (If this information is correct (note, if) your strategy for making millions is easy – buy and hold, but anticipate downturns and stay away during the downturn. If anyone knows how to achieve this, please let me know.) (19th, Page 87)
Fortune
It appears as if the improvements in second quarter earnings in the US have got nothing to do with improvements in operating profits but are due to:
1. Postponement of capital expenditure resulting in lower depreciation charges.
2. A declining exchange rate of the dollar.
Due to the scepticism of accounting results users are referring to the tax returns of companies as it is unlikely that companies will overstate their taxable incomes. The gap between accounting profits and taxable profits did widen with all the accounting tricks being used to boost profits. (A good ratio to calculate here would be current tax in the income statement to net profit before tax. If that rate is going down, investigate the causes.) (22nd, Page 19)
Techtalk
The following standards are not scheduled for change until before March 2004, other than for consequential and editorial changes: AC 109, 111, 114, 115, 118, 119, 120, 124, 127, 130, 134, 136 and 137.
The following standards will contain limited changes: AC 101, 103, 104, 105, 107, 108, 110, 112, 123, 126, 132 and 135. We hope that they will meet their October (now November) deadline.
The following standards will be issued by March 2004: AC 119 (they mean 117), 128, 129, 131 (first phase), share based payments and insurance contracts (first phase).
The exposure drafts on the following standards are due by March 2004:
• Employee benefits
• Business combinations (second phase)
• Income taxes
• Reporting performance
• Financial risk disclosures
• Financial instruments (both)
On the auditing side the following should be studied:
• An ED on reviewing interim financial information
• A guideline issued on money laundering by the PAAB
• The IFAC code of ethics
And if you have nothing better to do, remember that you can now attend the Auditing Standards Board meetings as they are now open to the general public. You had better book well in advance as I am sure that the public gallery will be full. They do not say whether or not there will be a charge or whether biscuits and teas will be served?
Maneo
The September issue of Maneo makes for very interesting reading. There are seventeen pages dealing with disciplinary matters – the PAAB is really being seen to be taking tough action! There was one aspect, however, that worried me: a practitioner was found guilty of being unprofessional in trying to extort his fee for work done for a client. Does this mean that I must fire my debt collectors who pull teeth and fingernails and break toes for non-payment of my fees?
Arriving at Maintainable Earnings
One of the major problems one has when performing a valuation is to arrive at a figure that is representative of the long-term maintainable earnings of the entity being valued. An article published by the AIMR® on measuring earnings has the following interesting points:
Alternative measures of earnings encountered out there are operating earnings, normalised earnings, pro forma earnings, normalised/standardised earnings, EBITDA, net income and comprehensive income.
Different rationales for arriving at maintainable income are operating v non-operating, recurring v non-recurring, core v non-core, within management control v outside management control, and in RSA, trading profits and losses v capital gains and losses.
Here are some examples of income statement items seen recently:
1. Restructuring costs (Unilever €1,5 billion, Cisco $1,2 billion)
2. Disposal gains (Unilever €900 million)
3. Intangible asset/goodwill amortisation (Unilver €1,4 billion, Cisco $1,2 billion)
4. Excess inventory charge (Cisco $900 million)
Comprehensive income is the only measure that companies cannot manipulate as it includes all items. (No imagination! Fair value accounting can be manipulated at will, which will impact on comprehensive income.)
Pension fund accounting provides a challenge for the analyst. They argue that the net charge for pension fund costs is misleading and want the interest charge, the return on investments and the current service cost to be separated.
The IASB is developing a new income statement – will it enlighten or confuse the user? Let us wait and see.
Aggressive Accounting
The AIMR® published an article to assist analysts to identify aggressive accounting. Here are some ideas:
1. Compare earnings per share growth with growth in revenue.
2. Compare gross margin growth with EPS growth.
3. Analyse the policy for revenue recognition.
4. Identify the source of growth, e.g. coming from acquisitions?
5. Beware of the cutting of discretionary expenses.
6. Check whether profits are generating cash flows.
7. Ask whether the application of GAAP is resulting in economic reality.
8. Beware of distraction tactics such as focusing on EBITDA.
What you Always Wanted to Know But . . .
A claw-back offer is where a company issues new shares which are taken up by a single shareholder who then grants the other shareholders the right to buy them back (the claw back) from him in the same proportion to their existing shareholding. The reason for going this route is to save the underwriting fee, which is usually about 2% of the total amount. (Could it also be that the single shareholder is looking to pick up some more shares if all of the shares are not clawed back?)
Intaxication is the euphoria at getting a tax refund, which lasts until you realise that it was your money to start with.
Published Financial Statements
Quyn Holdings eliminated the loss on the sale of investments from the calculation of headline earnings. Well done! You’ve got the logic but lack the GAAP.
InfoWave published its financial statements in a language I cannot start to understand. I presume that “Imali eqoqwayo” is “revenue”. I really think that this is taking “politically correct” to extremes. Maybe they just do not want us whities to invest in the company?
“Barloworld said forward exchange contracts taken out by its capital equipment business in SA have resulted in a loss of R292 million due to the rand strengthening against the dollar. The contracts were taken in order to cover the machine parts purchases.” (Press report) (I really do not understand this. Surely this is a cash flow hedge that does not go to income. It really will be interesting to see if large profits will be reported when the rand starts strengthening. Watch this space.)
Titbits
Here are some beautiful quotes from Berkshire Hathaway’s letter to shareholders by the famous Warren Buffett:
1. It is hard to teach a new dog old tricks.
2. My retirement is scheduled for five years after my death.
3. Derivatives and the trading activities that go with them are time bombs, i.e. weapons of mass destruction.
4. Parties to derivatives have enormous incentives to cheat in accounting for them due to the subjectivity that goes into their valuation.
5. Despite three years of falling prices we still find very few stocks that interest us. This is testimony to the insanity of valuations reached during the great bubble.
6. Occasionally successful investing requires inactivity.
7. Accountability and stewardship become qualities deemed of little importance by those caught up in the great bubble.
8. Directors must react as did the chorus-girl bride of an 85-year old multimillionaire when he asked whether she would love him if he lost all his money. “Of course” she replied, “I would miss you but I would still love you.”
9. It is desirable to have independent directors but they must be business-savvy, interested and shareholder oriented.
10. The key job of an audit committee is to get the auditors to divulge what they know.
11. Watch out for companies that display weak accounting standards.
12. If you cannot understand a footnote, management does not want you to understand it.
13. Managers that always promise to make the numbers will at some point be tempted to make up the numbers.
Fun Corner
The best time to get an epidural is when you find out that you are pregnant. (Finance Week, 6 August, page 74)
After a weekend of partying with his mates, a married man returns home to a barrage of abuse from his wife. Eventually she makes him an offer: “How would you like it if you didn’t see me for a couple of days?” He cannot believe his luck so says: “That will suit me just fine.” For the next four days he never saw her. Eventually the swelling did go down and he could see her again out of the corner of his left eye. (Finance Week 20 August, page 82)
The six secrets of a perfect relationship for a woman are:
1. He must have a job.
2. He must help her around the house.
3. He must make her laugh.
4. He must be honest.
5. He must be good in bed.
6. The above five men must not find out about each other.
(Financial Mail, 1 August, page 106)
The art of medicine consists of amusing the patient while nature cures the disease. Voltaire. (A qualified doctor/homeopath said on the radio a few years ago that there are three types of people: those who visit a doctor and get better in three days, those who visit a homeopath and get better in three days and those who carry on working and get better in three days. The latter works for me.)
October 2003 (30 Minutes)
Accountancy
Business in the UK is hostile to quarterly reporting. The concern is that this requirement will add to the burden of operating as a listed company. It will have the effect of encouraging short term thinking in companies and among users. Companies (and their auditors) are relieved that the EC has proposed that no audit review will be required on quarterly reports. (Want to guess what the outcome will be in RSA?) (Page 36)
Chris Frost says that sustainable corporate growth depends on strategic management of volatility – cutting costs with an eye to the future, instead of embarking on knee-jerk slash and burn cost reduction. However, some companies are still confusing short-term shareholder appeasement with effective strategic cost management, and in the process, risk being under-resourced in key areas. During downturns, companies should be prepared to invest in activities that add long term value – and on cutting costs in areas that do not damage the business. Achieving the right balance is a real challenge. (Surely, one should always (not just in downturns) be looking to keep costs under control?) (Page 47)
The EC has decided to adopt 38 of the core 40 IASB standards. They have rejected IAS 32 and IAS 39. The French president, Jacques Chirac, stated that the IASB is writing standards that threaten not only the stability of the European companies but also the stability of the European economy! (Well said sir! We need someone in RSA to stand up and be counted like this. Mr T.M?) (Page 78)
The IAASB has issued an ED on the auditor’s responsibility to consider fraud in an audit of financial statements. It says that the primary responsibility for prevention and detection of fraud is with management. (So what’s new? Auditors need to take on this responsibility to reclaim the high ground.) (Page 82)
Two articles deal with the problem of macro hedging of interest rate risk. As this is now history (the standards have now been published) there is no point debating the problem. (Pages 83 and 84)
Ron Paterson is flogging his favourite dead horse again – arguing that the matching concept should override the balance sheet principle. As much as I agree with him, the battle has been lost and fair presentation of profits is not achievable under IFRS. (Page 88)
Emile Woolf says that the audit function as an affirmation of reporting integrity has become an object of derision (Enron, WorldCom, Xerox, etc.). He says that the audit function has evolved from “if it moves, tick it” through substantive, systems based audits, then risk-based audits, culminating in the latter-day curiosity referred to as “business risks strategic auditing”, which, when the esoteric flannel is peeled away, is basically a licence to do no auditing at all. He believes that more effective corporate governance, more power to audit committees and non-executive directors, rotating audits/audit partners and banning non-audit services is moonshine. He says that we should have another look at how audits are done! (Page 91)
Accountancy SA
Graeme Tosen writes an excellent article explaining how duration and convexity are calculated, what they mean and how they are used. How I wish that such a clear article on the topic was available when I was studying for my CFA examinations! If you are a CFA student, go for this one. For the SME practitioner, it is not for you! (Page 7)
The two ladies from the University of Stellenbosch have written another brilliant article on the cash flow statement. It is quite obvious to me that this statement is not being given the attention it deserves in practice. Here are the cash flow statement issues discussed:
1. How should a share buy-back be treated? I agree with the authors – it should be a financing activity. Examples are given where local companies treat it as an investment activity.
2. How should a reissue of shares bought back be treated? I agree with the authors – it should be treated as a financing activity. Again, examples are given where this is treated as an investment activity.
3. How should contributions to a defined benefit plan be treated? This is clearly an operating cash flow. I cannot understand why the authors want Afrox to deal with these contributions separately in their cash flow statement. They say that Rainbow Chicken showed this as a financing activity!
Hopefully this series of articles will make preparers and auditors more aware of the pitfalls of the cash flow statement. I was looking at a company the other day and found the cash flow statement to be a disaster. I checked on the auditing firm and found it to be a firm that I lecture to on a regular basis. The partners seem to be quite blasé about the fact that the cash flow statement is not in accordance with AC118. They are probably not aware of the viciousness of the JSE review panel! (Page 18)
Taxable income derived from a permanent establishment outside RSA must be calculated using the average exchange rate for that year of assessment. The taxpayer has a choice as to how this rate is calculated. Whatever choice is made, it must be applied consistently. GAAP requires a suitable average rate to be used in accounting for foreign income so there should not be a deferred tax problem here provided GAAP and the tax choice are the same. There would need to be clarification on how to calculate depreciation/wear and tear in this situation. I have never quite grasped the principle of depreciation in a foreign entity – the balance sheet is translated at closing rate but the depreciation at? We probably need to clarify this situation. (Page 17)
My article was on embedded derivatives in import supply contracts. (Page 32)
Business Day
In a study done some years ago, the Economist found that refuse collectors were consistently the best forecasters of the economy due to their knowledge of what people throw away. (2nd)
The new Postal Services Amendment Act makes it illegal for a private company to deliver a bunch of flowers, a bottle of pills or a pizza. (You had better clear your car of anything weighing less than 1 kg in case you get stopped and searched!) (2nd)
The Pension and Provident Action group, under the guidance of SAICA has proposed a new accounting standard for retirement funds. (About time too.) (3rd)
The third largest retailer behind Wal-Mart Stores of the US and Carrefour of France has turned over a new leaf after losing 63% of its value in one day due to an accounting scandal. The managers are now going to focus their attention on the business! (3rd)
WJ Morgan, the derivative dealer who was responsible for losing R1,3 billion of a pension fund’s assets, was fined R2 million. It was concluded that they had “cheated, defrauded and deceived a client and committed acts, which were considered to be dishonest, fraudulent or dishonourable.” (Who gets the benefit of the fine? The JSE? Surely the pensioners should benefit?) (3rd)
Following on from the previous paragraph, the FSB is probing whether the pension fund may have acted criminally by taking kickbacks from WJM. The pension fund had contravened the pension Funds Act by investing more than 2,5% of its assets in derivatives. (8th)
Albert Grey, former president of the Prudential Insurance Company spent his life searching for one quality that all successful people share. His conclusion was that successful people do things that failures don’t like to do. (Like being at the office at 4 a.m. on Christmas Day writing Mafia Buzz.) (20th)
Jigsaw Holdings had two interesting adjustments to arrive at headline earnings:
• Intangible asset (not goodwill) amortisation
• Impairment of loan to share incentive scheme (I agree with this but SAICA says they are wrong)
The JSE is trying to force companies to consolidate their share incentive schemes. I have no idea where this comes from. (20th)
Proposals have been made to make company directors, bankers, advisers and lawyers personally liable if they give auditors false information relating to a company’s financial statements. (20th)
Citizen
Jackie Cameron gives seven ways to boost your savings: (13th)
1. Set aside money for your retirement.
2. Save first and then spend.
3. Bale out of your poor investments.
4. Build a mix of investments (diversify).
5. Use Rand cost averaging to build your portfolio.
6. Do not gamble with your savings.
7. Make use of legal tax breaks.
Financial Mail
David Alcock of the Broll Property Group sounds a warning that valuers should have a duty of care to investors but questions whether this exists and whether they have access to the requisite market intelligence to do their jobs properly. (As soon as financial statements are based on valuations, their reliability plummets. One must ask the question whether their relevance improves. One asset manager recently commented to me that companies should give all the information and let the asset managers do their job in arriving at value. There was general consensus on this point within the group.) (10th, page 10)
Following on from the previous story, the net asset value of Arnold Property Fund fell by 75% due to a new method of valuing its properties (and liabilities). They changed over from a “simple capitalisation model” to the “discounted cash flow method” of valuing properties. (I thought you had to use market value!) Fair value accounting is undermining the reliability of financial statements. The standard setters have no idea of the monster they have created by insisting on fair value accounting. (10th, page 84)
Government and regulatory authorities need to take a step back and come up with reporting requirements that do not impose unnecessary burdens on companies. It would be self-defeating if economic transformation ran aground because costs became prohibitive. Complicated regulations and compliance requirements kill businesses and stifle entrepreneurship. (Does anyone take note of such comments?) (24th, page 14)
A summary of the recommendations of the panel appointed to examine legislation affecting accountants and auditors is:
Yes to:
• A new regulatory body to subsume the PAAB
• Mandatory deregistration of auditors for fraud or serious dishonesty
• Statutory offence for executive management or their advisers to lie to the auditor
• Mandatory audit committee of non-executive directors at all listed and large companies
• Audit committee to have power to appoint auditors and deal with issues of auditor independence
• Auditor obliged to meet the full board of listed or large companies at least once a year
• Establishment of a fund to compensate parties who lose from an audit failure (It will have to be a BIG fund!)
No to:
• Statutory limitation on non-audit services an audit firm may perform for a client
• Compulsory rotation of audit firms or audit partners at a client
• Auditors having a financial interest in a client (Don’t agree)
• Legislation on internal audit
(24th, page 46)
The labour court in Durban has ruled that if an employee is dismissed and has not been allowed to take his/her full leave, he/she must be paid out in full for the accrued leave, even if it is in excess of the statutory minimum. (31st, page 46)
The Small Business Project has called on government to ease the tax burden for small businesses. (Last month I took my one cheque covering PAYE, Skills levy, UIF and VAT to be deposited and was informed that FNB will no longer accept one cheque for four invoices to be paid to SARS. Just work out how much additional bank charges the banks are going to earn because of this action, and what the SMEs are going to lose. You can’t win!) (31st, page 46)
Finance Week
Britain’s Financial Services Authority fined Lloyds R22 million and ordered it to pay R1 billion in compensation for selling a failed financial product. (1st, page 6)
“One of my most important tasks is to make each of our 16 700 employees realise that the more innovative and entrepreneurial they are, the more successful we will be.” (Mark Lamberti of Massmart) (1st, page 59)
Robert Shiller’s book “Irrational Exuberance” explains that humans punish themselves for doing the wrong thing so tend to sell winning stocks too soon to avoid the pain of losing later and hold onto losing stocks to avoid making paper losses real. Investors do not learn from their mistakes as they do not want to admit that they made them in the first place. (The answer is to base investment decisions on well-researched facts using a scientific model that crystallises value from the views formed.) (15th, page 38)
With reference to the Hefer commission, if journalists allow themselves to be unduly influenced, they lose the right to protect their sources. (The view of the editor.) (22nd, page 4)
Mark Shuttleworth says that it is ironic that entrepreneurship, regarded by Government as the solution for the creation of much-needed jobs – is hampered by red tape. (Anybody out there listening?) (22nd, page 4)
And talking about red tape, the JSE is to embark on a sustainable development-reporting project that will result in a sustainable reporting index (SRI). This index will provide a scorecard for the three elements of the triple bottom-line, environmental, social and financial sustainability. The levels of compliance will be policy and strategy, management systems and performance reporting. The work in collecting the data will be outsourced and to qualify for the index a company must achieve an overall score of at least 70. (One day we will realise that a successful business is one that is allowed to focus on satisfying its customer needs without all the surrounding garbage that goes with being listed or being a company – my comment!) (22nd, page 17)
The labour court in Durban ruled that employees are entitled to accumulate leave if the employer does not insist that the employee take leave. (This has repercussions on the leave pay provision. If it affects you, get hold of the details. I was told that there were special circumstances in this case that lead to this judgement.) (29th, page 8)
Fortune
Sir Richard Branson’s five rules for success are: (6th, page 30)
1. Follow your passions.
2. Keep it simple – it keeps you focused.
3. Get the best people to help you.
4. Re-create yourself.
5. Play (and does he know how to do this!).
“The key thing I’ve learned is to listen. You don’t have to have the last word. You don’t have to get credit for anything. I’ve always led people around a table when discussing issues. But now I hold back what I think. I say to myself ‘not now, not now! Wait, wait!’ This new approach has changed my life. I avoid publicity like the plague. I am trying to live in the here and now instead of wondering what the next job will be. That is a very freeing thing.” (Debby Hopkins, who was forced out of Lucent as CFO) (13th, page 62)
“The big four auditing firms have been fighting off one public-relations crisis after another. There’s a good reason: They keep starting them.” The article goes on to list the problems PwC are having with MicroStrategy and Tyco, E&Y’s destruction of documents relating to the audit of a consumer loan company, KPMG for problems at Xerox and D&T for failing to notice that the founders of Adelphia were looting the company of Billions of dollars. And all four are facing litigation from wealthy clients who bought into complex and possibly illegal tax shelters. The auditing profession has been complaining that it cannot make money from auditing. They have the best franchise in the world, clients have to buy their services and no one else can offer them. How much better can it get? (When greed surfaces, professionalism drowns.) (13th, page 81)
When it comes to saving for your retirement, it’s not what you know but rather what you do with what you know. Retirement planning is an action sport. Your portfolio requires hands-on, disciplined and very regular maintenance to grow as it is supposed to. The problem is that most people are either paralysed by the sheer number of options or too intimidated by the market to engage. (How true. Do not neglect this aspect of your life.) (27th, page 79)
Noseweek
Dear Noseweek, I am a small-town chap that tends to get to the truth. I am often drawn into messy confrontations. Whom do you use for legal support? I’d also be interested to know how you handle the reactions emotionally. Telling the truth can be draining. El Cid
Dear El Cid, Do you want to sue or are you being sued? Are you rich? Whichever, my best all-purpose advice is to stay away from lawyers. Talk/negotiate your way out of the mess yourself. You know the facts better than they do. You know what you can afford. Be humble. Even take a loss – it will be smaller and less humiliating than the loss you will most certainly suffer at the hands of your own, let alone your opponent’s, lawyers. You owe us a lunch. Noseweek
Dear Noseweek, You did not answer the second part of his question. CPH.
Techtalk
The following two EDs have been issued for comment:
164: Disposal of non-current assets and presentation of discontinued operations.
165: Insurance contracts.
The IASB is getting involved in accounting for SMEs. They should stick to what they know, and that is focus on setting standards for general-purpose financial statements. I am going to guess that RSA will follow whatever they say and we will be burdened with complex accounting standards for private companies. It is really time for the Government to step in and put a stop to this madness.
Auditing EDs on (1) The auditor’s responsibility to consider fraud in an audit of financial statements (ISA240) and (2) Planning an audit (ISA300) were published for comment – see the PAAB’s website.
IFAC has recommended changes to its code of ethics and is suggesting that the code becomes a standard.
IFAC has published a document called “Rebuilding public confidence in financial reporting: an international perspective.”
If you are into public sector accounting, read pages 26 and 27.
The August issue of Integritax looks informative. Do you download and read this on a regular basis? I must admit that I have been neglecting this aspect of my education. You can get it on saicacolleges.co.za. (Who would have thought that this is where to find it!) By now they should have their tax website up and running.
November 2003 (30 Minutes)
Accountancy
BDO Stoy Hayward’s former Nottingham office, now Tenon, was given the largest ever fine by the ICAEW for signing an unqualified audit report for Princedale Group plc. Part of the problem was to do with derivatives. (Page 5)
E&Y are being sued because they did not warn a life company about the consequences of offering guaranteed pensions! (Add to your audit programme: “Evaluate every management decision for stupidity!”) (Page 10)
Sir David Tweedie says that practitioners must not ask questions of the standard setters because this will reduce the standards to a rules-based system as happened with IAS39. (How can one apply wishy-washy principles without guidance? The result will be that everybody will do his/her own thing and GAAP will become a joke.) (Page 16)
When involved in a turnaround, one needs to think carefully and slowly but act fast. Instead of taking the easy route of cost cutting, one should work on revenue enhancing measures. The trick is not to get caught up in the crisis. (Page 25)
The professional institutes, which were once seen as authoritative, are now being seen as mouthpieces for the large audit firms. The Economist believes that US regulators are too ready to listen to auditors and are therefore not taking the action that should be taken to rectify the abuses that have been taking place. (Page 26)
The ICAEW is considering a plan to force all members to make the effort to think through what continuing professional development (CPD) activities they should be carrying out. They expect to finalise the plan by next summer. (Mr. Editor, do you not know that there are people in the Southern Hemisphere that read your journal? Or do you think that summer happens in both hemispheres at the same time?) (Page 49)
Internal auditing should not operate on the fringes of an organisation but should be risk-focused, evaluating the enterprise-wide risk management (ERM) of the organisation. However, internal auditors should be careful not to cross over to a management decision implementation role. (Page 50)
Dennis Oswald and Steven Young did a survey to discover what motivates companies to buy back their shares:
1. To pay out cash surplus to the company’s needs.
2. To buy the shares when the price is low.
3. To optimise gearing (in RSA if you borrow to buy back shares you may not get the interest paid as a deduction).
4. To counter the dilutive effect of issuing options to staff.
5. To boost the company’s earnings per share.
6. To not be seen as empire building.
7. To improve the return on equity (this is my point).
(Page 54)
Deloitte Touche Tohmatsu, and all the other names this firm goes by, has re-branded itself as Deloitte☻(without the face in the black dot. And please also note that the colour of the dot is not black either, it is green.) (Page 64)
99,2% of companies in the UK are not listed. And IFRSs are primarily designed for quoted companies! (Now we can’t let all this hard work be used for only 0,8% of the market, can we? So let’s see if we can’t apply it to SMEs as well!) The IASB has formed an SME division. (The mistake that they are making is that they think that SME managers use financial statements to make decisions. They don’t. Financial statements are usually prepared long after any decision has to be finalised. Managers use internal financial reports to make decisions that do not have to comply with screeds of accounting and disclosure standards. The IASB should focus on preparing standards for general-purpose financial statements and leave over-regulated SMEs alone.) (Page 80)
Ron Paterson debates the ED on discontinued operations, i.e. the problems of:
1. When to make the provision for any loss on closure.
2. The conditions for disclosing discontinued operations.
He concludes that it is not necessary to have a statement on this topic as other standards, such as impairment, deal with the first problem and the second problem can be dealt with in segment reporting. (Page 87)
The ICAEW has published guidance on prospective financial information (PFI) disclosure by companies. The guidance emphasises that markets and investors will find PFI useful if it follows the principles of (Page 89):
1. Reasonable disclosure – understandable to the general user.
2. Business analysis - faithfully present actual strategies, plans and risks.
3. Subsequent validation – can be compared with outcomes.
Roger Smith believes that the increased turnover threshold of ₤5,6 million is a huge leap in the dark. He says that auditors do not seek to block a reduction in regulatory costs for SMEs because of self-interest. They support the retention of statutory audits where there is a public interest and where the benefits outweigh the costs. He feels, however, that this move will increase the risk of companies not complying with various laws. (Page 91)
The objective of analytical review is to answer the question: “Do the numbers make sense?” AR is done at the planning, substantive testing and review stages of the audit. The objectives of the tests, methods used, results and conclusions reached should be documented. The procedure should embrace the following stages:
1. Predict – what result is expected from the test
2. Calculate various ratios and relationships
3. Compare actual results with predicted results
4. Enquire – get explanations for deviations
5. Corroborate with management explanations
(All straight out of SAS410.) (Page 92)
Accountancy SA
See December.
Business Day
The first successful conviction in a criminal prosecution for insider share dealing has taken place. The fine was R100 000! (The message sent by this sentence is that crime definitely does pay in RSA.) (6th)
Two interesting adjustments to headline earnings appeared in the unaudited accounts of Beige:
• Recovery of restraint undertaking payment
• Liquidation dividend
In his book “Good to Great” Jim Collins describes the “doom loop”. This is when a company implements big programmes and radical changes, restructures, looks for a miracle moment or new saviour, tries to align and motivate people to its new vision, sells the future to compensate for a lack of results and embarks on a new radical path. (Sounds like some companies you know? SA Rugby Incorporated?) (25th)
Trustees of pension funds, with the assistance of investment advisors, should set the allocation and risk policies of the funds they administer. Tactical asset allocation, which is the up weighting or down-weighting of asset classes, is a function of asset managers. Many trustees are not suitably qualified to set strategic asset allocation. They need to educate themselves and seek advice. (30th)
A fight has broken out between SAICA and the ministerial panel reviewing the accounting profession regarding the examinations. The review panel is suggesting that we go back to writing part 1 and part 2 of the QE soon after qualifying at university. SAICA says that this will reduce the standard of the CA (SA) qualification. (31st)
Business Day Management
Tony Balshaw, partner-in-charge of family controlled companies at Grant Thornton Kessel Feinstein compares the family system of running a business (emotion based) with the business system (task based):
Emotion Based Task Based
Inward looking Outward view
Express feelings Unemotional
Caring Reward performance
Protect low achievers Perform or leave
Averse to change Embrace changes
Risk-averse Risk taking
High dividends Reinvest capital
Family leadership succession Best person for the job
Recruit family first Best qualified applicant
Equality Meritocracy
Wealth preservation Wealth creation
(This really strikes a chord!)
Citizen
John Loots, Absa’s economist, says that there is a realistic chance that gold could hit $500 an oz (when?) and that the rand could stay at R6,50 for the next two years. (27th)
Financial Mail
Raymond Ackerman describes inflation as “A thief in the night.” Jacko Maree says that it is harder to earn a real return of 10% when the inflation is 3% than when it is 20%. (Rhys Summerton of Citigroup suggested to me recently that the systematic risk premium that I use in my discount rate to value shares should not be fixed at 6% but should be a factor of the risk free rate.)
One has to question a statement of GAAP that is so rigid and prescriptive that it makes accounts incomprehensible and interferes with a company’s ability to do business and deliver value to its shareholders. (Three guesses which AC they are talking about?) (28th, page 12)
Finance Week
Naspers will not disclose its provision for leave pay because management will then have to explain to shareholders how it grew to such large proportions. (So, dear shareholders, you now know what question to ask at the next shareholders’ meeting!) (5th, page 15)
Investors should ask the following questions to help them identify current and future growth shares:
1. Did the company show strong historical growth?
2. Will the company show strong earnings growth in future?
3. Is management in charge of income and costs?
4. Can management manage the enterprise effectively?
5. Is the share price in the buying zone?
6. Can the share price double over the next five years without an adjustment in its PE ratio?
(Would we not all be wealthy if we could look into the future like this?) (12th, page 42)
A thought from Vic De Klerk’s story on diluted earnings: Take the difference between headline earnings and diluted headline earnings and multiply this difference by the PE ratio to get the value of the company given away by the directors. (Just a thought that one can develop further.) (19th, page 20)
Stafford Thomas says that cash flow does not lie and one should look carefully at operating cash flow after tax and working capital but before capital expenditure and dividend payments when assessing a company’s performance. (ST, my mate, did you not follow the Worldcom story? It is the easiest thing in the world to fiddle cash flow: debit plant and credit operating expenses.) (19th, page 47)
The number of companies listed on the JSE is shrinking. One possible explanation is that the JSE is becoming too strict with their compliance requirements. (I recently advised a company to delist because of the petty attitude of the JSE regarding technical faults in the financial statements of the company.) (26th, page 4)
In similar vein, Mark Hasenfuss says that the JSE must walk a tightrope between nurturing the entrepreneurial spirit and regulating the market. (They could achieve this by coming down hard on deceit and not harassing companies because of technical contraventions. They should have a policy of educating companies rather than disciplining them at least until the new GAAP has been understood by all.) (26th, page 17)
Sunday Times
Statistics released by SAICA show that 19 948 of the 21 819 qualified chartered accountants are white. Only 397 are black, 254 coloured and 1 172 Indian. (48 are not sure what they are. Maybe they are South Africans?) (30th)
Instead of motivating the (Springbok) team and turning them into winners, all the camp did was to reduce them to fumbling psychological wrecks, unfit for anything except public mockery. (Well said Dave.) (While investigating the training methods of the Boks, they should have a look at the preparation of the SA cricket team prior to that world cup – same mindset?) (30th)
December 2003 (30 Minutes)
Accountancy
The audit threshold in the UK has been increased to ₤5,6 million turnover. This takes 69 000 companies out of the audit system. It will enable SMEs to cut costs, lighten the regulatory burden and get on with the task of making profits (paying more taxes) and creating jobs, and generally being able to be more competitive. (We should be so lucky in RSA!) (Page 5)
KPMG could have cost the US taxpayer $10 billion by selling a product involving tax shelters via telemarketing. (Page 6)
The Association of Corporate Treasurers has slammed the IASB for its stand on financial instruments. It believes that this standard will have a major negative impact on treasury best practice in non-financial sector companies. It says that the IASB is a one way street – it is impossible to get them to respond to comments. (Companies I lecture to are looking for a sponsor to take up the cause in RSA. But, we are a bunch of sheep here and accept anything that anyone in authority throws at us.) (Page 16)
The auditors of the EU have, for the 9th year, qualified the EU’s financial statements. They say that they can give assurance on less than 10% of the annual budget! (Page 16)
Enron and WorldCom have seriously undermined the reputation of US business, and represent a fundamental betrayal of American investors. The public sees a rigged game of insiders and the privileged. So says the chairman of SEC, which is to boost its enforcement staff from 3 200 to 4 000. (Page 18)
Most audit practitioners of SMEs do not feel threatened by the move to increase the turnover threshold to ₤5,6 million. They say that the audit element in professional fees is not material to their practices. The feeling in Government is that the new regulations on money laundering will reduce the need for audits. The problem is that accountants will now have to report fraud and not get paid for doing so. (Page 22)
Robert Bruce says that due process in the US rids business of innovation and imagination. He feels that such processes spawn corporate scandals. (Not sure about the link here!) He is sad to see that the EC has insisted that they need a system of due process to endorse the IASB accounting rules before enforcing them. This slows down the process and leaves everyone in limbo. (SMEs in RSA can empathise with this – differential reporting.) (Page 23)
Chris Swinson asks “if shareholders are prepared to neglect their role as owners, who is there externally to hold the boards to account?” He says that legislation cannot ensure that shareholders act seriously as owners. (Page 26)
If you are involved in Charities, get hold of the articles from pages 28 to 36 (not from me - SAICA’s library will help). There are some excellent ideas in these pages.
Ian Livingston, hot shot FD of BT, says that success is one part strategy and nine parts execution. He says that lots of people are good strategists but they don’t do the execution very well. (Page 37)
People think that corporate scandals are exclusive to the US and that US GAAP is to blame. They seem to forget the UK’s Maxwell, Polly Peck, BCCI, Caparo, etc. And, now, wait for it, SSL International, the makers of Durex, overstated sales and profits by ₤25m for the two years ended March 2000. There is a worry that the company may not be able to meet its debt repayments of ₤400m. (Page 46)
Almost half of SMEs surveyed admitted to having only a few honest persons in their employ. The potential risk areas are staff (45%), purchases (19%), sales (13%) and financial reporting (10%). (Page 73)
The ICAEW is on another mission to improve business reporting. They want to examine how a reporting framework can be created that fulfils market needs for truly useful information. Although financial accounting was invented to be useful, this objective has largely been forgotten. The Corporate Report was published in 1975 (a brilliant document). Much of what it recommended was never followed up. The value-added statement did catch on but has been largely abandoned today. One of the downfalls of previous attempts has been to try to satisfy a wide range of users. However, they should realise that only investors count and the focus should be on meeting their needs. Other users can interpret this information to satisfy their own needs. (Page 79)
The ICAEW has published the first and second reports in a series to encourage improved information reporting:
1. Prospective financial information: guidance for UK directors.
2. New reporting models for business.
Reformers believe that financial reporting information is both misleading and inadequate. They want extensive disclosures of non-financial, qualitative and forward-looking information. Go to icaew.co.uk/bettermarkets where you can get further information. Issues covered in the second report are:
1. Whose needs should be addressed?
2. What decisions are being made based on these reports.
3. Whether the market will reward good disclosure.
4. Whether the conceptual framework is valid.
5. What to do with intangibles.
6. What level of transparency is applicable? (Page 80)
The IAASB has released the following new standards:
1. Objective and general principles governing an audit of financial statements. (ISA200)
2. Understanding the entity and its environment and assessing the risks of material misstatement. (ISA315)
3. The auditor’s procedures in response to assessed risks. (ISA330)
4. Audit evidence. (ISA500)
These standards replace the existing ISA 200, 310, 400, 401 and 500. They can be downloaded from store. (Page 81)
PwC discusses the implications of IFRS 1 (first-time adoption of International Financial Reporting Standards) regarding financial instruments. This should not be a major problem in RSA as we adopted AC133/IAS39 last year. However, we will need to study the new version of IAS39 to see what first-time adoption consequences there will be. (Page 82)
Ron Paterson considers the new publication of the official text of accounting standards for 2003-2004. It weighs 1,75kg and runs into 2 534 pages. He says that it has become so voluminous and complex that it will leave much of the profession behind. Many accountants do not get round to reading the standards. Those who do tend to find the language impenetrable and the concepts elusive and counter-intuitive. He ends by stating that if we need thousands of pages of dense verbiage, it shows that the standard-setting process has gone off the rails. (Page 84)
The IASB is considering the “wholesale approach” for the recognition of revenue. This will involve valuing a sales contract at what you can get someone else to perform it for and taking the difference to income immediately! (This will truly be the final nail in the coffin of IRFSs!!) The ASB prefers the “retail approach” where the profit is only taken when the seller has performed in terms of the contract. (Page 87)
Here are some ideas for developing leadership traits:
1. Develop intuition – gut feel.
2. Think creatively – seek experiences to trigger it.
3. Act decisively and consistently.
4. Pay attention to others – listen intently.
5. Ask open powerful questions.
6. Hold others accountable.
7. Create and communicate a vision.
8. Provide meaning for people.
9. Express things in simple clear ways.
To achieve the above, adopt a cyclical process of plan-do-review. (My cyclical process is facts-think-plan-do-review.) (Page 112)
Accountancy SA
Bay Jordan says that people in an organisation are important. (Wow!) (Page 4)
Harmke Immink and Donnė Sephton summarise the practical problems with emission rights (e.g. the Kyoto Protocol) and give a good summary of the ED on the topic (which I think is crazy-mad). (Page 7)
Izėl du Plessis discusses the proposed regulation of tax practitioners. (I don’t know about you but I am getting very irritated about big daddy taking control of every aspect of our lives! My dear Godfather has asked me to wind up his estate (he is thinking of dying). Are they going to make me join a special society and take special examinations to help a relative out? Soon I will risk jail time if I give my wife investment advice!) (Page 9)
Graeme Tosen summarises the formulas and measures for call and put options. (If you did my valuation workshop you will find the formulas and measures in the last valuation model on Excel.) I have another stupid question Graeme: Why is the projected dividend not part of the formula? This could make quite a difference when the time period is long. (Page 10)
Tom Theron deals with the financial management problems in the public sector and what can be done about them. (Page 14)
My article (please read it) deals with horror valuations I have seen in practice. (Page 26)
Citizen
Saddam Hussein has told coalition forces of the whereabouts of some $40 billion (R280 million) he stashed abroad. (Whew, the Rand really has improved this month!) (30th, page 9)
Finance Week
Deon Basson, criticised Investec/Fedsure for not separating the policyholder investments from those of the investors. He implies that the policyholders lost out to the shareholders. In the same journal Investec counters with a statement saying “Not true.” Who knows where the truth lies? Maybe this is a lesson for the insurance companies to better explain their results in their financial statements. (3rd, page 8)
Financial Mail
Freddie Mac, the second largest US mortgage financier, was fined $125 million for inflating reported earnings for the past three years and Parmalat, the Italian food giant, overstated its cash and cash equivalents on its balance sheet by over 4 billion Euros. (When, if ever, will this stop?) (19th, page 8)
Fortune
When analysts join Vanguard, a US mutual fund, they receive a mouse-pad with a message: “Serve as a role model for the industry by adhering to the highest standards of ethical behaviour and fiduciary responsibility.” Even Senator Peter Fitzgerald, who called the mutual fund industry the world’s largest skimming operation, endorses this fund. (The problem with ethical behaviour is that it is much more difficult to make money – this is why the easy route to riches is to be a cheat.) (8th, page 24)
Robert Rubin, former Treasury Secretary in the US, has an interesting philosophy. He says that everything is open to analysis. There are no provable absolutes, no givens. One needs to assemble every available fact and then weigh the odds before taking decisions. He calls this “probabilistic thinking”. (8th, page 44)
The questions you should ask before buying equities are:
1. How does the company REALLY make its money?
2. Are sales and growth therein real:
• How aggressive is the accounting policy for revenue?
• How is service revenue recognised?
• What is the relationship between cash from customers and sales?
3. How is the company doing relative to its competitors?
• Are the post-retirement obligations killing the company?
4. What is the impact of the broader economy on the company?
• Effect of interest rates, foreign exchange rates, GDP, etc.?
5. What could really hurt or kill the company over the next few years?
• Type of business a problem?
• Financial strength (liquidity and solvency)?
6. Is management sweeping expenses under the carpet?
• Restructuring charges occur regularly?
• Expenses are capitalised to assets?
• Irregular costs occurring regularly?
• Stock options issued regularly undermining wealth?
7. Is the company living within its means?
• Is the debt/equity ratio within norms?
8. Who is running the company?
• Does management change its policies regularly?
• Does management have stock excuses for poor results?
• Does the company sport spanking new offices with lifts going through fishponds?
9. What is the stock really worth?
• Use CPH’s wonderful valuation models!
10. Do you really need to own this stock? (Page 58)
Maneo
A summary of the main recommendations coming from the Review Panel on the Draft Accountancy Professional Bill is:
1. The legislation should focus on auditors and not the broader accountancy profession.
2. A new body should replace the PAAB, which should have a particular public interest perspective and focus.
3. The members of the new body should include all relevant interested parties.
4. Funding for the new body should come from Government.
5. The functions of the new body will be similar to those of the PAAB, but with more independence.
6. The disciplinary powers of the new body would be enhanced.
IFAC has issued two EDs, Fraud in audit and Audit planning.
The ASB has issued SAAPS1014 Reporting by auditors on compliance with International Financial Reporting Standards.
SAICA has issued the following:
1. Guidance for auditors: reporting on attorney’s trust accounts.
2. Corporate governance guide: audit committees for medical schemes.
3. Guidance for auditors reporting in terms of the immigration act.
The IAASB has issued the following:
1. ISA315: Understanding the entity and its environment and assessing the risks of material misstatement.
2. ISA330: The auditor’s procedures in response to assessed risks.
3. ISA200: Objective and general principles governing an audit of financial statements.
4. IAPS1005: The special considerations in the audit of small entities.
Practice review is moving into its third review cycle, which will focus on placing greater emphasis on high risk assignments in order to address the concerns of the public interests. Jillian sets out details of the programme, which commences in January 2005 (time to get your act together). It is good to see that priority rating is part of practice review’s strategic thinking.
The disciplinary committee has been extremely busy taking practitioners to task. Here are some of the naughty things that were attacked:
1. Using a refund from SARS to set-off the practitioner’s outstanding fees (what a great idea!) (Joking!).
2. Not supervising staff.
3. Not responding to correspondence (GOOD – see below).
4. Not obtaining an engagement letter.
5. Not reporting a material irregularity.
6. Saying they did not do an audit when they did.
7. Inadequate planning documentation.
8. Inadequate documentation to indicate that risk was assessed.
9. No proper evaluation of internal control.
10. Various examples of insufficient audit evidence obtained.
11. Failure to submit income tax returns, to deal with tax queries and to inform the client of tax arrears.
12. Not notifying a client to stop paying debit orders once the outstanding fee was settled and refusing to repay the excess received immediately in full.
13. Not informing the executrix of an estate of progress being made in the winding up of the estate.
I am really pleased about number 3. South Africans need to be more polite. You will not believe how often I go the extra mile for someone only to be rewarded with silence.
Techtalk
The objective of ED167 is to convert the following AC statements to IAS standards (I suggested this seven years ago!): AC 000, 100, 102, 109, 111, 114, 115, 116, 118, 119, 120, 121, 124, 127, 130, 134, 136 and 137. (Note that there is no IAS equivalent to AC121 at present. They are busy working on insurance contracts.)
AC138/IFRS1, first time adoption of IFRSs, has been published.
ED166, which dealt with hedge accounting for a portfolio hedge of interest rate risk, was published. It is now part of IAS39.
ED168, which dealt with the transitional provisions for impairment of loans and receivables on the initial adoption of AC133 was published. (They got it wrong!)
ED169, dealing with changes in decommissioning, restoration and similar liabilities was published for comment.
On the auditing side the following have been published:
SAAPS1014: Reporting by auditors on compliance with international financial reporting standards.
A new preface to international standards on quality control, auditing, assurance and related services by the IAASB.
An ED on ISA300 – planning the audit
Other matters covered are developments in the public sector, tax, exchange control amnesty and the reporting by CAs in terms of the Immigration Act. (How in heaven’s name does a small practitioner keep up with all this every month and still try to give clients a service? In the last month, two of my friends in public practice have sold up because they can’t keep up!)
Tax
Taxgram
The Supreme Court of Appeal in the Warner Lambert case held that the Sullivan Code expenses are incurred in the performance of the taxpayer’s income producing operation and are, therefore, deductible expenses. (September 2003, issue 8)
If an amount owing to creditors is not claimed and transferred to profits, this amount will be included in taxable income. If the creditor makes a successful claim at a later date, then the amount will be allowed as a deduction. (September 2003, issue 8)
SA Tax Cases Reports
Two brothers sold their shareholding in a trading company to a trust for R380 000, as valued by the auditors. SARS placed a valuation of R3,3 million on these shares and hit the brothers for donations tax on the difference. The judge’s comments on the valuation were: “The auditor’s valuation was patently not reflective of the fair market value, of which fact he could not but have been aware. His claim that he was instructed to determine the fair market value and in fact did so, simply did not wash and he resorted, for obvious reasons, to the lowest possible valuation that he thought would pass muster.” (Two questions: Does this not amount to bringing the profession into disrepute? Is this what we can expect when CGT becomes payable? The answer to both questions is clearly “yes”.) (Volume 65, part 4, 2003)
Noseweek
In the past I have been terrified of being sued if I quoted from this source but there is an important lesson to learn in the article on page 28 of the November issue. A company received a large payment in error. The owner claims to have asked his lawyer what to do and was told to place it on call. He was told that any interest earned would be his to keep until the money was claimed back. The money never ended up in a call account but was used to pay the company’s creditors. The company has now been placed in liquidation. Question: “Why did the owner have to ask his lawyer what to do?” Clearly if you receive something that does not belong to you, you go out of your way to give it back. If you don’t, you are a thief.
CFA Magazine
The AIMR has commenced the publication of a bi-monthly magazine from which I will be quoting in future.
May/June 2003
Tom Bowman, AIMR President and CEO (they know nothing about the King Report!) says that the standard setters are now (after the Enron and WorldCom affairs) keen to entertain the perspectives of the users of financial statements. (With respect, my friend, the users have never been interested in standard setting in the past – they have been too busy making money!) He is encouraging users to get involved. (Page 3)
The following criticisms have been raised against expensing options:
1. The cost that never was gets cancelled out by crediting equity.
2. Options affect the number of shares and not the economic income of the entity.
3. Diluted EPS accounts for options already – no need to duplicate.
4. Analysts’ models already account for options in the valuations. (Page 4)
The original concept of a hedge fund was to go long on under-valued securities and to go short on over-valued securities. They funded their long positions by borrowing, hence the name. 14% of hedge funds in the US closed down last year compared to 4% of mutual funds. When investing in a hedge fund, one is really investing in the management of the fund. (They should differentiate between “investing” and “speculating”. Note: “long” means “hold” and “short” means sell something you don’t own.)
At last investment performance in the US is now being measured on an after tax basis. (We just need to get the standard setters to understand that tax is an expense in their standards.) This becomes complicated in the US as different states have different tax rates, e.g. tax in California is 9% compared to 3% in Illinois. (Page 13)
The AIMR supports fair valuing of financial instruments in the financial statements of companies as this makes the financial statements more transparent and relevant. (But does it make them more reliable? I have seen many cases in RSA where management have a field day attaching values to financial instruments to meet their own agendas. Note that the concept of value is “exit value”, i.e. what the company could get for the asset if it sold it at the balance sheet date. (Why then ignore selling costs?) (Page 17)
A fund manager questions whether the threat of being audited by SEC will stop fraud in the hedge fund industry. “I haven’t seen how the threat of audit by the IRS has stopped tax cheating!” (Page 25)
Fair value accounting becomes a joke when you have to place a value on an OTC (over the counter) path determinant binary option! (Page 43)
When one evaluates returns it is instructive to measure the Risk Adjusted Return of Capital (RAROC) of that investment. A corporate bond may, for example, give a return of 4% p.a. whereas an investment in a hedge fund may give a return of 20%. However, if the value-at-risk (VAR) at a confidence level of 95% for the bond is 10% and that of the hedge fund is 80%, the RAROC of the bond would be 40% (4%/10%) and that of the hedge fund only 25% (20%/80%). This might make one think twice about going for the hedge fund “investment”. (Page 43)
July/August
There is a massive investigation going on at present in the UK on soft commissions. The way it works is: The broker gets orders from the fund manager, executes the orders, charges brokerage for the service and then passes as much as 40% of the brokerage over to the fund manager in a disguised form, e.g. buying computer or computer supplies for the fund manager. The fee charged to the client is therefore not a true reflection of what the fund manager earns. This has real potential for fund managers to churn portfolios to generate soft fee income. The practice is, at last, under attack by the authorities. (Pages 3 and 19)
Should one invest in under-performing markets purely to reduce portfolio risk? I have always believed that the focus should be on maximising returns. Agreed, you must look at the risk but it seems crazy to invest in a falling investment merely to reduce portfolio risk. (Page 5)
The debate is heating up on quarterly reporting at the EC. The main argument for quarterly reporting is to align with US reporting. The main argument against is that it will encourage short-term thinking and actions by management. No one seems to have looked at the disruption in the companies themselves. No sooner have you got the last quarterly financials out, you will be working on getting the next lot out. What compensation will there be for the company for the additional costs incurred? (Page 18)
Three aspects of SOX are discussed:
1. The Act calls for full details of all off-balance sheet transactions, arrangements, obligations and other relationships of the issuer that could have a material impact on the company.
2. Non-GAAP disclosures, such as EBITDA, must be tied back to a GAAP measure and a statement by management explaining why such disclosures are beneficial to investors. Companies will not be able to label obvious recurring write-offs as “non-recurring”.
3. Directors with a 10% or higher holding in the company must disclose within 2 business days of the transaction, details of any purchases or sales in the shares of the company.
4. Companies and their subsidiaries may no longer make loans to directors or top managers. (Page 20)
The problem with the US approach to standard setting is that they write as many rules as they can and demand that accountants don’t break them. The glaring deficiency is that if it’s not prohibited, it’s okay. What sets the US apart is their strict enforcement. (I wonder if this is not why we get more scandals in the US? They find them. Other countries allow them to go on undetected.) (Page 23)
September/October
Malaysia supports little gaap for little companies. The AIMR is against having a two-tiered approach. They want big GAAP to apply to all companies. (Why would they want a butcher to pass eight journal entries when she imports meat from the US when two would do? Let’s keep big GAAP for general-purpose financial statements and let’s leave small companies to get on with the task of creating jobs, making profits and paying taxes.) (Page 19)
The rest of this bi-monthly journal is devoted to the behavioural aspects of investing. Here are some ideas I captured:
1. Keynes said that picking stocks is like a beauty contest – the judges must decide on not only who is the most beautiful but whom everyone else will think is most beautiful.
2. Cognitive bias is the tendency of intelligent, well-informed people to do the wrong thing.
3. Attention grabbing stocks do not outperform the market.
4. Know the intrinsic value of a share. This way one can determine to what extent behavioural factors are built into its price.
5. There is no evidence that behavioural finance techniques can enable an investor to make money on stocks. (But I believe that a knowledge of this technique can reduce the risks of losses.)
6. A stock is not necessarily a good buy just because the company is sound. The price of the stock may be inflated.
7. Just because you know that the market is undervalued you can’t make money on it right away – you can’t trade against sentiment. (Ever tried waiting?)
8. Familiarity bias is where we believe that things that are familiar to us are better and less risky – this is why so many people put so much of their money into the stock of the company they work for, e.g. the poor staff of Enron.
9. The brain uses shortcut methods to make financial decisions without having to do the full analysis.
10. We tend to hold onto loss making shares as we do not want to admit that we made a mistake.
11. We tend not to like boring companies when they can make sound investments.
12. We tend to be overconfident in our decisions (overconfident bias).
13. We focus on information that confirms our beliefs and ignore inconsistent information (confirmation bias).
14. We tend to place too much emphasis on similarities (representative bias).
15. We tend to anchor estimates to salient numbers even if the figures have little or no relevance to the estimates (anchoring bias).
According to Kenneth Fisher, category picking is far more important than stock picking. (Page 43)
To expect people to make wise decisions in their defined contribution plans is asking too much. Participants usually lack investment education, display all the wrong behaviour patterns, do not have enough time (or incentive) to allocate to the problem and are too busy in their jobs to think about it anyway. They do not save enough to cater for their retirement. An interesting idea is the Save More Tomorrow Plan (SMTP) where participants commit in advance to allocate a portion of their future salary increases toward retirement savings. Inertia takes over and participants tend to stick to the plan. (Page 45)
One of the most effective means for dealing with poor behaviour patterns is to write out a thorough investment policy statement and stick to it. The statement should be specific, i.e.: Why are you saving this money? What do you want to buy? When do you want to acquire it? (Page 51)
November/December
The total sum of all the advisory fees, marketing expenditures, sales commissions, brokerage commissions, transaction costs, custody and legal fees and securities processing expenses (and audit fees?) come to $300 billion a year in the US. This is nearly 3% of the total capitalised market value of $12 trillion. So the mutual fund industry confiscates nearly 50% of the historical real rate of return earned on the market. (It would be interesting to compare this in RSA were we do not have the same economy of scale as in the US.)
75% of analysts worldwide say that financial information provided by companies is extremely or very important to their investment decisions. Those who use this information are disappointed by the quality of it. Companies should distinguish themselves by improving the disclosures they provide. (Page 10)
Every company wants to establish a strong track record earnings-wise. However, it becomes messy when companies start over-managing expectations. (Page 11)
Burton Malkiel of A Random Walk Down Wall Street fame says that 66% of professionally managed portfolios are beaten by low-cost index funds. The third that beat the index in some particular period are not the same as those that beat the index the next period. (Page 29)
Professionals act not to make the most efficient risk-adjusted return but to protect their careers. (Page 31)
The equity risk-premium is not a fixed number but varies through time with market conditions, with demographics and with all sorts of phenomena that are determined by evolutionary forces. (Rhys, you will like this!) (Page 38)
The valuation evolution started at earnings, marched up the income statement to EBITDA (which ignores some expenses) and finally ended at revenue, thereby ignoring all expenses! EBITDA, pro forma earnings, eyeballs and hits have largely been discredited. The raw materials of valuation models still depend on the quality of the financial statements. The problem is that creative accounting makes it difficult to value companies. There are, however, methods to catch this sort of thing, (Page 40)
Standard and Poor have found that over one and three year periods ending 312 March 2003 18 out of 26 active managers did not beat the corresponding indexes. (69%, which correlates to the other survey above.) Some active managers beat the market because they take outlandish risks. (Page 44)
Mellon Capital Management uses enhanced indexing to manage its portfolios. It is well diversified across various economic sectors and over weights stocks that it believes will do well, based on fundamental analysis. (A sound approach.) (Page 45)
Stephen Dillenburg of Summit Investment Partners says that it is not fraud that causes inefficient pricing but the market’s failure to detect it. He uses the cockroach theory that says: “If you find one cockroach in your home, you know there are more.” The signs at Enron were:
1. Excessive CEO compensation.
2. Excessive dilution of shareholder value through staff options.
3. Dominant inside directors on the board.
4. Pandering to the financial analysts.
Many knew that Enron had problems but chose to ignore them. Even though information is knowable and solid, it does not mean that people will take notice. Even insiders, who were party to the deceit, ignored the events and maintained their holdings in their pension fund portfolios! (Page 52)
What You Always Wanted to Know But …
The Shady Side of Fund Management
The following terms are used in describing the shenanigans that go on in fund management:
Market timing: Trading in and out of mutual funds to make a quick profit.
Late trading: Buying or selling shares of a fund at a given day’s price after the usual close to enable to allow investors to act on after hours developments that could move prices.
Front-running: Trading stocks or bonds ahead of a mutual fund when you have information that the fund is about to buy or sell a particular counter.
Scalping: When a portfolio manager uses mutual fund assets to buy a stock to jack up its price when he already owns it in his personal account.
Cloning: Setting up a special brokerage account to conceal an investor’s identity thus helping him avoid detection by mutual funds that are trying to prevent market timing activity. (Fortune, November 24, page 92)
Value at Risk
In Mafia Buzz 13 I commented on an article written by Graeme Tosen on VAR. I said: “I would have thought that one could halve these percentages as we are only dealing with one half of the population mean.” He replied the day MB was published – I now have evidence that at least one person reads this publication! Here is his reply: “The fact that you only deal with one half of the population has already been factored in. The standard deviations used in the example (1,28, 1,65 and 2,33) are for one-tailed tests. If you performed a two-tailed test you would use 1,53, 1,75 and 2,67.” Thanks Graeme, you are a star.
Gross Domestic Product
GDP is a measure of total economic activity. It measures total production of goods and services within an economy that are not then used in producing other goods and services. It can be expressed in three ways:
1. The sum of value added for all those involved in productive activity.
2. The sum of all expenditures on goods and services, less imports.
3. The sum of incomes generated by domestic production.
(Accountancy, December, 2003, page 52)
Fun Corner
Donald Rumsfeld won the foot in mouth award for the following utterance: “Reports that say that something hasn’t happened are always interesting to me because, as we know, there are things we know we know. We also know there are known unknowns, that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.” (Now you know!) Second prize went to Arnold Schwarzenegger who said: “I think gay marriage is something that should be between a man and a woman.” (Citizen, 2 December 2003)
A young person asked Charlie Munger, vice-chairman of Berkshire Hathaway (of Warren Buffett fame), how he can become rich like him but faster. His reply was: “Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you will get ahead, but not necessarily in fast spurts. You build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day, if you live long enough, most people get what they deserve.” (Charlie, the guy wanted to know “faster”!) Other advice given was: “You need to read, and read and read.” And: “The idea of caring that someone is making money faster than you are is one of the deadly sins. Envy is a stupid sin because it’s the only one you can’t have fun at.”
Suggested motto for SARS: We have what it takes to take what you have. (Finance Week, 10 December, page 62)
Honest criticism is hard to take, particularly from a relative, a friend, an acquaintance or a stranger. (Franklin P Jones)
How does one account for Mr. Claus’s fleet of nine reindeer? Well these are biological assets but Mr. Claus does not carry on an agricultural activity so they are dealt with under property, plant and equipment (cost or value and depreciate). (Accountancy, Dec. 2003, page 86)
Websites to Visit
Here are some websites you could visit:
for international accounting issues.
icaew.co.uk for news items in the UK.
for auditing standards.
saica.co.za for all sorts of professional matters.
paab.co.za also for all sorts of professional matters.
for information on CFA.
for . . . sies!
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