Mafia Buzz 2001
January 2001 (20 Minutes)
Accountancy
At present, bond rates in the UK are low. By using bond rates to
value pension fund obligations, pension fund obligations are
overstated as most pension funds have a mix of equities and bonds
in their portfolio. The trend in the UK is, therefore, to convert to
defined contribution plans. The author points out that by doing
this, the company will lose out on the eventual gain due to
overstating the liability. (Does this not tell you that we should use
the investment return to value the obligation? The APC battled
with this concept for ages but were forced into accepting the IAS
standard.) (Page 1)
The UK's version of employee benefits requires that actuarial
gains and losses be recognised immediately in the statement of
total recognised gains and losses. The IAS/AC statement permits
smoothing of actuarial gains and losses. (Page 4)
The UK's version of deferred tax prohibits provision for deferred
tax on revaluations unless the intention is to sell the asset and
permits, but does not require, discounting of deferred tax assets
and liabilities. (Will accountants ever agree?) (Page 4)
The UK has issued a paper on financial instruments. It proposes
that virtually all financial instruments be measured at fair value,
all gains and losses go through the income statement and hedge
accounting be discontinued. (Page 4)
FRED 22 proposes that the profit and loss account and the
statement of recognised gains and losses be combined into a
statement of financial performance.
Financial directors in Europe are starting to adopt IAS standards
prior to the 2005 deadline but there are still complaints that not
enough time is being given to get ready for the change over.
(Page 8)
Many small firms in the UK are deregistering as auditors because
the costs of being registered outweigh the benefits. If the
exemption threshold goes up for an audit, more firms are due to
deregister. (Page 10)
Small firms in the UK are having to reinvent their operations with
the audits of SMEs disappearing. (Page 10)
It is feared that companies that are on the edge of technical
insolvency will use the discounting option in the deferred tax
statement in the UK to reduce their liability for deferred tax to
window dress their balance sheets. (Page 11)
FASB is determined to abolish the pooling method of business
combinations. The senator who opposed this idea lost his seat in
the recent elections in the US. (Page 13)
FASB is considering allowing non-amortisation of goodwill. The
proposal is that goodwill will be kept at cost and impaired if need
be. (Think that they read Peter Wilmot's article in Accountancy
SA on this - sanity is starting to prevail!) (Page 13)
People are complaining that companies in the UK have to comply
with the UK standard on deferred tax now but in 2005 they will
have to change again to comply with IASs. (Page 24)
How to keep your staff: recognise their achievements. (I have
learned to recognise my own achievements, which makes me
independent of others!) (Page 42)
The only people who earn real money from companies today are
the directors and senior employees. Management no longer works
for the benefit of the shareholders; they work for themselves.
(This is referring to the UK - could be referring to RSA - see
Metcash, Nedcor, etc.) (Page 47)
There is now a machine that can reconstruct shredded documents
line by line so use a shredder in conjunction with a scissors!
(Page 51)
Andrew Oswald argues that the world is more dependent on oil
than at any time in the past and shows that when oil prices
increase, the economy goes into recession. (Page 76)
Companies should not underestimate the effort that will be
required to convert to IAS. The planning process should start
now, not in two or three years. Educating the market (and the
staff) on the effects of IAS is crucial to ensure that analysts do not
misinterpret the changes that will result. (They should send their
staff to RSA because we did it (?) in one year!) (Page 87)
The actuaries in the UK are coming around to the accountant's
view of using market values for retirement benefit plan assets
rather than actuarial values. This will result in higher volatility.
The UK tried to get the IASC to understand that it should discount
obligations at the expected return on the assets to counter this
volatility to a certain extent, but failed. The UK has accepted the
IASC view that the plan assets be valued independently of the
plan obligations. (Page 88)
The article entitled "A step closer to harmony" clearly misses that
objective of deferred tax. The UK is still seeing deferred tax as a
liability when, in fact, it really is an impairment provision. The
standard setters made a big mistake by not recognising assets and
liabilities on the balance sheets on an after tax basis. (Page 90)
Ron Paterson explains, for the benefit of the critics of financial
statements, that balance sheets are not supposed to provide a
valuation of a company but should provide information for a
variety of purposes, some of which may feed into a valuation
model. Values should deviate from net asset value. Valuers use
discounted cash flow models to arrive at value. Balance sheets
should not try to reflect these values. (Page 92)
Trevor Pijper questions the use of the acquisitions method for
takeovers. He wants to know why the assets and liabilities of one
company should be valued and added to the historical assets and
liabilities of the other company. He says that this does not make
sense. (Funny, I have been preaching this for years!) (Page 96)
Rental paid while developing a store prior to opening cannot be
capitalised to the costs of the asset. (Page 98)
Relocation costs (moving machinery) cannot be capitalised to the
cost of the machinery. (Page 98)
If a lessor acquires plant on a sale and leaseback for 100 but only
60 (the cost to the lessee) is tax deductible, is the 40 a temporary
difference? Yes, but it is exempt from deferred tax as there was
no tax or accounting consequences on acquisition. (Page 99)
Accountancy SA
EDI is the sending of structured electronic messages from one
business application to another. EDI will have a significant
impact on the business community because of the many benefits
of electronic communications over paper documents. (Ever tried
to get a company or audit firm to pay you based on an electronic
invoice!) (Page 3)
The article on intellectual property states: In essence the statement
(AC129) requires that, where certain criteria are met, the value of
intangible assets be recognised as an asset on the balance sheet
and amortised over the estimated useful life of the asset. The
statement also specifies how to measure the carrying value of the
assets and prescribes certain required disclosures. (This paragraph
gives the impression that one can value and capitalise intellectual
property, which is not correct.) The article then states that some
corporations are now facing large amortisation charges as a
1
Mafia Buzz 2001
consequence of overpaying for companies in the bull market.
(Surely, if they overpaid they should impair the assets?) (Page 7)
Janette Minnaar van Veijeren's article on white collar c(g)rime
prevention is excellent. She makes the following points:

Companies are spending less money on fraud prevention

They are not paying attention to the possibilities of fraud

They have no idea as to what to do in the case of an on line
attack
She offers some solutions:

Fraud prevention should start at the top

Training is essential

Get to know your clients and their personnel

Get the advice of your auditors

Keep the risk department as an independent operation

Develop, advertise and enforce a code of conduct

Prosecute when fraud is discovered
(Page 7)
Christian Cronje looks at companies that are packaged from
different businesses purely to get a listing and why they fail.
(Page 13)
Matthew Gibson looks at the controls that banks should employ to
review their loan assets. (Page 18)
Financial Mail
The editor (Michael Coulson) has a go at Hudaco for publishing
four earnings per share. (Note that GAAP has overtaken the
outdated concept being headline earnings per share. This opinion
should be scrapped and the JSE should accept EPS as calculated in
AC104 to ensure comparability.) (26 January, page 12)
The Basle Committee published new rules in January to control
the lending of banks. It proposes that banks calculate their own
lending risks on the basis that what might work in Europe would
not be applicable in South America (wow, at last our leaders are
realizing that one car does not do the job adequately for all road
conditions - GAAP standard setters, please take note!). Some
pointers that came out of the meeting:

Bankers have become so accustomed to being told what to do
by regulators that they have lost the ability to make sound
credit judgements

Lending decisions are not analysed carefully, they are usually
taken under a barrage of pressures

There is a scramble to get loans written at any price as they
don’t want to be seen to be falling behind the competitors
Bankers must become risk-adverse. Loans should be allocated to
the right borrowers. (We have got to stop this clamour for
instanteous wealth - it does not work like this in real life - witness
all the small bank collapses we have seen in RSA recently.) (26
January, page 18)
Wayne de Nobrega discusses why one should connect to the
Internet. He gives four reasons:
A survey of accounting rules in 53 countries show countries are
converging towards IAS standards. (Just by the way, whoever
sent in RSA's comparison got it totally wrong! Here are the
differences between RSA GAAP and IAS GAAP:
1.
Improve communication (e-mail, discussion groups and chat
rooms).
1.
We do not permit LIFO (I hear that the standard setters are
reconsidering this).
2.
Capitalise on the global knowledge base.
2.
3.
Make a contribution to the global knowledge base.
We do not permit prior year adjustments to be accounted for
in the current year.
4.
Improve business processes.
3.
The commencement dates of our statements are not aligned
to those of the IASC, which is a major difference!)
My article is entitled “Dan, the stationery man”. (Page 23)
(Page 35)
(26 January, page 20)
Business Day
Malawi's reserve bank raised its bank rate from 50,23% to 61,28.
(What fascinates me is the 0,28!) (15 January)
More than 1 000 suspicious transactions have been reported to the
authorities since 1998, yet there has not been one prosecution for
money laundering to date. (26 January, page 42)
Business Week
Sunday Times
The appointment of George W Bush as the president of USA sees
the end of the term of Arthur Levitt as the chairman of the
Securities and Exchange Commission. GW is sure to appoint
someone who is more business friendly than was Arthur Levitt,
who championed the cause of the investors. (29 January 2001)
Extracts from an address given by the chief executive officer of
Coca-Cola, quoted by Ronnie Apteker:

Life is like a game of juggling five balls: work, family,
health, friends and spirit. Only "work" can bounce back if
dropped, the other four are too fragile
Executalk

Ignatius Sehoole is restructuring Saica to make it more efficient
and effective. He, and his team, has divided the Institute into
three divisions:
Don't undermine yourself by comparing yourself to others,
we are all different

Live for the present, not the past or the future, or life will
pass you by

Don't be afraid to encounter risks, by taking chances we learn

Don't be afraid to learn. Knowledge is weightless and a
treasure you can easily carry around

Life is not a race but a journey to be savoured each step of
the way

Strategy: Technical, education, legal and ethical

Services: Small practices, commerce and industry, marketing,
human resources and regional offices

Business: Finance and admin, continuing education,
publications, membership, information services and business
portal
Strategy will focus on the strategic pillars of the profession,
services on providing service to members and business on revenue
generation.

Yesterday is history, tomorrow is a mystery and today is a
gift, that is why it is called "the present"
(14 January)
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Mafia Buzz 2001
Techtalk
1.
The audit standards committee will no longer issue local
exposure drafts and requests members to comment on the
international drafts, addressed to Saica.
2.
The IASC has published SIC D27, which recommends that a
lease and leaseback arrangement be negated, i.e. not treated
as a lease. (Surely this is in conflict with a sale and leaseback
where the concept of substance over form does not apply?)
3.
The IASC has issued revisions to the statements on income
taxes, employee benefits and financial instruments. (These
revisions have been included in the May 2001 updates of the
course material.)
4.
The APC has decided to postpone work on headline earnings
pending the revision being undertaken by the UK.
5.
Suresh Kana, partner at PwC, has been appointed as
chairman of the sub-committee responsible for revising ISAs.
(An honor but a major responsibility – I am sure he will do
SA proud.)
6.
7.
8.
9.
The auditing standards committee has approved statements
on assurance engagements, external confirmations and bank
confirmations and has withdrawn AU0010, AU011, AU015,
AU221 and AU292.
February 2001 (15 Minutes)
Accountancy
The British Bankers' Association is critical of the joint working
group's proposals to measure all financial instruments at fair
(market) value because of the volatility that will result and
because of the subjectivity in arriving at the values. (The fight is
just starting!) (Page 7)
There were 100 responses to the UK's proposal to account for
share-based payments, e.g. employee benefits. 46% disagreed,
33% supported it and 13% gave it qualified support. One of the
complaints was that adopting this standard would result in UK
companies being at a competitive disadvantage. (Page 10)
Andrew Tuckey of Barings has been "excluded" by the ICAEW
for four years for his lack of management in the 830 pound losses
caused by Nick Leeson. He has also been barred from acting as a
director for four years by the High Court. (Page 16)
The Company Law Review Steering Group is looking at
increasing the responsibilities of auditors on the one hand and
offering them more protection on the other hand. (Let's watch
developments here.) (Page 19)
Sir Brian Pitman offers tips on how to lead an organisation to
success:
The ASC has decided to change the name of the auditing
standards from SAAS to SAAPS, being South African
Auditing Practice Statements and to use the same numbering
system as the international statements. As a result, SAAS
730 will now be SAAPS 260.

Agree objectives within the company

Accept radical change

Agree within the company what the key drivers are

Communicate and take decisions quickly
IFAC is to address the problem with SMEs. (I hope Saica
does not use this as an excuse to abandon its project on
limited purpose GAAP!)

Set goals against which performance can be measured

Encourage creativity

Be prepared to take risks and make mistakes (Page 36)
If you're in the risk management game, the Canadian Institute
has published a booklet called "Managing Risks in the New
Economy” – you can order it from www.cica.ca/Order.
Time
What the "new economy" did not realise was that real business is
about day-to-day grind and weekly cash flows, not endless
spreadsheets projecting five years into the future and an obsession
with technology to the exclusion of profitability. (Page 39)
Late last year the highest court of appeals in France ruled in
favour of a young man, who was born deaf, brain-damaged and
nearly blind, who sought damages for the injustice of having been
born. (15 January, page 14)
The following tips are given to improve investor relationships:
German management is having difficulty coming to grips with
transparency in accounting. German companies have been given
the right to use US GAAP or IAS GAAP. The difference between
German and US GAAP became apparent when Daimler-Benz
published its results on both German GAAP and US GAAP in
1993: using German GAAP it made a profit of $102 million
whereas under US GAAP it made a loss of $579 million. German
GAAP allowed secret reserves that were used for smoothing.
Although investors prefer not to be unpleasantly surprised, they do
not trust the results of German GAAP. (Based on a recent study
in Germany, financial directors prefer IAS GAAP to US GAAP
because it is simpler to apply.) (15 January, page 24)
Stephen Cranston says that there are tremendous opportunities to
investors who seek out mispriced equities, both too cheap and too
expensive, who use fundamental research. It is the performance of
individual shares rather than the direction of the overall market
that drives performance of a portfolio. (Easier said than done my
mate.) (12 January, page 51)
At its peak in March 2000, the Nasdaq stood at 5100, with a total
value of $6 trillion. Since then it has halved and still sells for 100
times earnings. Since it is expected that profits on these
companies will drop to between $25 billion and $30 billion, do not
be surprised if it drops to below 1000 towards the end of 2001.
(29 January, page 49)

Take the call from the analyst

Be open and frank, i.e. skip the spin

Discuss the tough issues facing the company

Keep presentations short

Allow for plenty of time for questions

Do not allow individual shareholders with an axe to grind to
take over the meeting (Page 46)
Institutional investors, banks and the media turn everything done
by large public companies into drama. They insist on ridiculous
returns, argue about theoretical shareholder value, shunt the
companies into acquisitions and mergers they can do without and
destroy value. (If you have ever listened to Alec Hogg you will
know what the author is talking about.) Companies are finding
that it is better to become private and move out of the public eye
where they can get on with the job of creating and doing business.
(Page 48)
Sharp practices by otherwise reputable organisations appear to be
on the increase. When confronted by such practices, perpetrators
plead ignorance (why not? - cheats hate to expose their deceitful
natures). It has become a permanent feature of the business world
to put the best gloss on things. (Page 52)
Ideas based on Risk Management for Accountants by Barlow,
Lyde and Gilbert are listed in this article. Some important
pointers are:
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Mafia Buzz 2001

Improving quality control

Avoiding high risk clients

Maintain independence and confidentiality

Formulate carefully the terms of engagements
Citizen

State carefully the nature of the end product (report)

Identify the information and assumptions on which reliance is
to be placed

Avoid assuming responsibilities to third parties

Create and maintain thorough working papers

Take care in providing access to these working papers
Pravin Gordhan of SARS said that irregularities and revenue
related offences in the IT industry have been uncovered. Certain
SARS officials and ex-employees together with retailers,
importers, SA suppliers, clearing agents, their accounting firms
and lawyers were participants in fraud and corruption.
(Accounting firms? What has Saica done about this?) (2
February)
Wayne de Nobrega discusses how to get connected to the Internet,
e.g. modems, ISDN or leased lines with permanent access. (Page
37)
(Page 70)
Financial Mail
Paul Ebling, a project director at the ASB and a member of the
JWG on financial instruments sets out reasons as to why full fair
value accounting should be supported. He lists the major
objections as being volatility, reliability and relevance and
supports the concept with some sound arguments. I must admit
that he convinced me that valuing held-to-maturity investments is
not as dumb as I thought. Gains and losses on fair value
adjustments are not necessarily what one could realise at the
balance sheet date, but what one expects to realise over the
holding period of the investment. (Page 90)
Ken Andrew says that SA should be simplifying and not
complicating its tax system. It should scrap low yielding taxes
that devour scarce resources and should concentrate on catching
tax evaders, rooting out corruption and improving efficiency, not
trying to deal with another complex new tax when SARS is trying
to get to grips with the NITS system and residence-based tax.
(Well said sir!) (16 February, page 19)
The debate is starting on the proposed new statement on financial
performance. On page 91 Kathryn gives her views, which
generally favour the proposals, whereas on page 94 Ron Paterson,
in his usual articulate manner, feels that it creates a "new and more
insidious manifestation of the old extraordinary items problem".
(Funny, but on attending a lecture in Malaysia given by Sir David
Tweddie on this topic, I mentioned to him that I thought that we
were going back to the old IAS 8 extraordinary item problem.) It
is proposed that the new statement be divided into operating,
financing and treasury and other gains and losses. The debates are
about how to classify items between the first and the third
categories, e.g. a profit on the sale of plant is a what?
The IASC has issued a 412 page issues paper on accounting and
reporting by enterprises in the extractive industries. 155 issues
have been identified and commentary is required before 30 June
2001. (I find it most interesting that they are recommending the
historical cost basis for mines, i.e. they do not want you to
estimate the value of reserves. Is this not a bit of a reversal after
the agriculture and investment property statements?)
Accountancy SA
Strate is ready to revolutionise the recording and handling of share
transactions on the JSE. Paper records will be converted to
electronic records. Investors will receive regular statements of
their holdings. The electronic records are subject to numerous
controls and nothing can go wrong, go wrong, go wrong (joke
Monica!). There will be simultaneous final irrevocable delivery
against payment - both legs of the settlement will occur
simultaneously and transfer of ownership will be immediate.
Principal risk is, therefore, effectively eliminated, which will give
market participants confidence in the South African securities
market. (23 February, page 108)
Financial Times
The price of Old Mutual in Harare, Zimbabwe, compared to the
London Stock Exchange price implies an exchange rate of Z$150
to the pound compared to the official exchange rate of Z$79,50.
(Financial Times 10 February)
Fortune
In the US it is law for institutional investors to vote at shareholder
meetings on behalf of the interests they represent. In the past
institutions used to support management, however, with the
advent of the shareholder-activist movement, they are now voting
in the best interests of the shareholders. (5 February, page 25)
Pieter von Wielligh considers the consequences of SAAPS 620,
using the work of an expert, in regard to insurance companies and
the work of an actuary. Auditors will now have to include, in their
audit opinion, the policy liabilities and related shareholder’s
earnings as the auditor has overall responsibility to report on the
financial statements. This will significantly increase the audit risk
and the audit evidence required. Whether the auditors have the
expertise to cope with these new responsibilities is questionable.
(Page 8)
Until last year, millions of people thought they were crackerjack
stock pickers. The past 11 months have sorted the truly talented
from the fleetingly fortunate. In the economic downturn, being
successful in business is just as much a challenge. The rules are:
Valmond Ghyoot deals with investigating commercial property
finance. There are some interesting pointers here for assessing the
value of commercial property. With the advent of AC135, one
should take note of some of the points made, i.e. when assessing
property one should take into account aspects such as the physical
state of the property, the property rights that exist, an analysis of
the location, the market conditions, the tenants and lease terms,
scenario calculations to assess risk, future changes in conditions
and qualitative information. (Page 15)
My article was on replacement theory. (Page 35)

Maintain a clear-eyed view of reality no matter how
unpleasant it may differ from what you expect

Focus on the quality of your people

Improve productivity, day by day

Evaluate and satisfy the total needs of your customers

Visit customers and suppliers and get creative

Improve your image with the analysts

Improve your service to your customers

Lower your break-even point

Nurture new ideas within the company

Keep investing in infotech

Overhaul the budget and strategic planning process

Develop proper feedback systems to deliver early warnings
4
Mafia Buzz 2001

Watch your pension fund's funding

Keep all stakeholders informed
of the legal experts who wear ties, which cause a lack of oxygen to
the brain. (26 February, page 42)

Act, be bold, move fast, become strong
Some health pointers:
Techtalk
1.
2.
3.
The IASC approved SIC 19, which deals with the
measurement currency to be used by a reporting enterprise suggests should use the currency that reflects the economic
substance of the underlying events and circumstances
relevant to that enterprise. (For example, a hotel operating in
Mozambique, would probably use $.)
The IASC approved SIC 24, which states that if an obligation
can be settled by the payment of financial assets or by the
issue of equity at the option of the issuer or the holder, the
possible issue of the shares is treated as potential ordinary
shares for diluted EPS purposes.
The IASC approved the statement on agriculture. All
biological assets will be measured at fair value, unless fair
value cannot be measured reliably (there is a presumption
that biological assets can be reliably valued). Agricultural
produce will be measured at fair value at point of harvest.
Thereafter, it will be dealt with under AC108.
4.
The IASC has published a paper on accounting by mining
and oil and gas companies.
5.
The IASC has published a draft statement on financial
instruments, which has not been approved by the IASC, but
is to be used as the basis for the next step in the development
of a new statement on the topic.
6.
In terms of the SA Schools Act an audit must be performed
on the financial statements of a public school by a person
registered (with the PAAB) as an accountant and auditor,
unless it is not reasonably practical.
7.
Auditors of enterprises operating under the Medical Schemes
Act need to get an understanding of the provisions of the act
and keep up to date with developments in the industry.
8.
Revision of regulation 28 of the pensions funds act requires:

The adoption of an investment strategy

The appointment of investment managers

Investments to be in accordance with the investment strategy

Monitoring of the investments

Review of investment strategy

Reporting of
requirements

Not to exceed certain laid down investment concentration
levels

To account for investment property in terms of AC135 (FSB
requirement)
performance
in
compliance
with
the
Time
Letter to editor: Yes, we should be concerned about the economy.
However, it's human nature to ignore a problem, no matter how
big, until it hits home. (5 February, page 6)
George Soros says that making money is easy: you do it by
spotting mistakes. (The problem is that spotting mistakes
beforehand is not all that easy Georgie boy.) (5 February, page
25)
Andy Mueller-Maguhn, newly appointed director to the board of
the Internet Corporation for Assigned Names and Numbers
believes that American cultural imperialism is the result of many

A study showed that women who consume as little as 225 g
of fish a week cut their risk of stroke in half

Eating more fruits, vegetables and fibres decreases the risk of
diabetes immediately

Women who start walking for 30 minutes a day four days a
week reduce the risk of heart attack as if they have exercised
all their life

The day you quit smoking the carbon monoxide levels in
your body drops, your blood becomes less sticky and your
risk of dying from a heart attack declines
Undoing a lifetime of bad habits means learning a whole new set
of behaviours and sticking to them. (5 February, page 38)
March 2001 (25 Minutes)
Accountancy
Corporate gossip and misplaced expectations, rather than good
information is starting to dominate the way companies are valued.
Enlightened management, however, are seizing the initiative to
explain better to the marketplace their strategy and activities,
focusing on long-term value. (We need to learn this lesson in SA.)
(Page 1)
Website development costs should be accounted for under the
statement on tangible assets, according to the UITF Abstract 29.
(I would have thought that this was better handled under the
statement on intangible assets!) (Page 4)
The ASB is, again, reviewing FRSSE. (Should scrap it and go
limited purpose GAAP!) (Page 4)
There is criticism about the format of the new IASC’s board.
There is little representation from emerging markets. Most of the
appointments are from larger companies from developed
countries. (There are some very capable people on this board, e.g.
Anthony Cope from FASB (met him, absolutely brilliant), Warren
McGregor (also met him, same story) and Bob Garnertt (met him
while on the APC, same goes here.) (Page 8)
The G4+1 group of accounting standard setters has been
abandoned as the point of this group has fallen away with the new
IASC structure falling into place. (Page 8)
The ICAEW has withdrawn its support for the independent
professional review in the UK. (Time for SA to re-look at practice
review to see if the benefits outweigh the costs?) (Page 12)
When a measure becomes a target it ceases to be a good measure.
This applies to the “deadly ebitda virus”. This measure is
calculated as earnings before interest, tax, depreciation and
amortisation. What we are seeing daily is: “At 12 times ebitda,
company Z is out of line with its peers. Sell Z and buy Y.”
Depreciation is an operating cost and one cannot ignore it in
evaluating companies. Depreciation is a cash cost spread over the
life of the asset. (One must wonder at the level of intelligence of
analysts who make these calculations and comments!) (Page 24)
We should all be joining the fight against money-laundering, i.e.
the process that criminals use to legitimise the money that they
have acquired illegally. The UK legal environment is discussed
and ideas are given for the controls that UK enterprises should put
in place to protect themselves from being used as a laundry
machine. (Lessons for RSA here: we are considered to be an easy
target for this activity.) (Page 36)
The introduction of euro currency at the end of this year will be a
major logistical exercise and will provided counterfeiters with an
5
Mafia Buzz 2001
opportunity to produce and distribute counterfeit currency while
people are becoming used to the new currency. (Page 48)
Knowledge management can be defined as acquiring knowledge
and profiting from it. The process is locating, organising,
transferring and using the information and expertise within an
organisation. (Dear reader, see yourself as an organisation.) The
average person spends 45 minutes a day searching for information.
Knowledge is even harder to come by, i.e. information that has
been interpreted. (You really should develop an information
gathering, capturing, interpreting and storage system. You are
what you know.) (Page 66)
Paul Ebling sets out the arguments for and against substance over
form and the component approaches. The US believes that the
UK’s concept of substance over form is not appropriate for
financial instruments and the UK believes that the components
approach is not appropriate. The new ideas set out for recognition
and derecognition in the proposed statement on financial
instruments is looking for a new approach, i.e. focusing on
control. In determining whether or not control has passed, many
of the criteria in FRS 5 on substance over form will be
incorporated into the new statement. (Page 95)
Ron Paterson asks the question: If a company invests in a five year
bond earning 10% and rates go up to 12%, why must the company
restate the cost of the bond in the income statement and then show
a return on the bond of 12% p.a. in future years? The company is
only earning 10%, so this puts the company in a better light in
future years. Agree with him? The problem is that the standard
setters have given up on the mission to measure performance and
are only focusing on the balance sheet. They really need to scrap
this antiquated concept of a balance sheet and focus on a statement
of assets and liabilities and then start developing GAAP for
measuring performance properly. (Page 105)
Usually I agree with the solutions given in this journal but I do not
agree with the following one: A company provides for
environmental costs, which it will only get as a deduction when
incurred. The debit goes to plant and this portion of the cost of the
plant is not tax deductible. Does one provide for deferred tax on
the temporary differences between the plant and the provision
each year? I say “yes”. The solution given is “no”. (Page 106)
Accountancy SA
Pieter von Wielligh points out the new statement on using the
work of an expert will increase the responsibility of the auditor in
regard to the financial statements of a life insurance company. He
questions whether auditors have the expertise to take on this
additional responsibility. He suggests bringing an actuary into the
audit team. (Page 15)
Andrew Smith says that any company that wants to be around in
future and be in control of its own destiny should recognise the
benefits of an integrated stakeholder approach to strategic
planning and risk management. He suggests that appropriate
performance measurement criteria must be established and should
be a part of the accounting details of financial and operational
performance. (There is a big problem here Andrew: GAAP does
not permit us to develop appropriate performance measurement
systems as GAAP focuses only on the balance sheet. Until the
balance sheet and the income statement are unlatched from each
other, we will have this problem.) (Page 17)
My article was on being seen to be applying statements of GAAP.
(Page 25)
Business Day
Standard Bank forecasts that the Rand will be R8,20 by the end of
2001. Investec's figure is R8,88 by the end of 2004. (Want mine?
R10,50 by the end of 2004!) (8 March)
E&Y's choice of the top 10 best sets of AFSs are, in order,
Stanbic, Iscor, Sappi, Anglo Platinum, Edcon, BoE, Barloworld,
SAB, Absa and Firstrand. (It is interesting that of the top 10, 6
companies have invited me to present in-house GAAP workshops,
an indication of how serious they are about quality and
transparency. (16 March)
For the past few years the superbrats of the investment community
have gorged themselves on fat fees from their successful efforts to
persuade investors that stock prices will continue to rise at 20%
p.a. Fundamentals were ignored and castles were built in the sky
based on irrational valuations. Now they want the Fed to prop
them up with bigger and bigger interest rate cuts so that the
process can start all over again. (23 March)
In the latest draft of the Capital Gains Tax legislation, a provision
has been inserted stating that deemed interest at the official rate
(presently 13%) plus 2% all existing interest free loans will be
deemed donations and taxed as donations. This will have major
implications for taxpayers in RSA. In the past it was quite
legitimate to enter into tax planning schemes involving interest
free loans. This section will result in retrospective legislation and
will make many taxpayers, including me, very, very angry. Can
SARS really afford to anger the taxpayers that pay the major part
of the tax in this country? If this goes through, many taxpayers
will see this action as an excuse to emigrate, stop earning or enter
into illegal schemes to counter the effects. (30 March, page 30,
article by Michael Honiball)
Pepkor gave black Empowerment Company Uhuru-Saccawu (US) a put option in respect of shares in Shoprite acquired by U-S
from Pepkor. The put option price includes the interest paid on
the loan raised by U-S to acquire the shares in Shoprite. The share
price of Shoprite has since collapsed which means that Pepkor is
sitting with one massive obligation. (I have always wondered who
was at risk on these black empowerment deals and this story helps
me understand the situation - invariably the seller of the shares to
the black empowerment company takes the risk through a put
option. One wonders how many undisclosed onerous puts there
are. Scary.)
Financial Mail
Compaq is considering changing the command "press any key" to
"press return key" because of the flood of calls asking where the
"any key" is. (16 March)
The Promotion of Access to Information Act gives consumers,
workers and others the right to obtain access to their records. This
Act could apply, for example, to a bank that turns an application
down for a loan or a medical aid society that turns an application
for membership down. In these cases, the applicant will be able to
access the records held by the institution to obtain reasons for
being rejected. (23 March, page 34)
The Protected Disclosures Act will encourage companies to set up
risk management procedures to ensure that whistle-blowers report
to the company itself instead of reporting to outside parties, where
the media and competitors can benefit from the information. (23
March, page 34)
Judge Heath feels that private companies are in the majority when
it comes to corruption. He says that the trend in the private sector
is not to report crime, thereby promoting it. Saica's view is that
auditors could (should?) resign if they encounter improper conduct
by the client. Saica supports the Protected Disclosures Act as a
tool to promote ethics within the profession. Members are now in
a position to report material irregularities they believe could cause
financial harm to the relevant authorities. (23 March, page 37)
The Myners Review of Institutional Investment, published in the
UK in March, 2001, which includes an analysis of how
6
Mafia Buzz 2001
institutional investment in the UK operates, is relevant to us in
RSA:

Individual holdings have declined from 54% in 1963 to 15%
in 1999

20% is held by pension funds, 21% by insurance companies
and 10% by unit and investment trusts

These concentrations lend themselves to herd-like behaviour

There is no legal requirement for trustees to develop the
necessary skills to carry out their responsibilities as they do
in the US

It recommends that trustees should set investment objectives
for the fund, and try to outperform other funds

It appears as if funds are paying active fees to managers who
are using passive investment techniques

It appears as if the focus is short-term performance rather
than long term performance

It recommends that shareholders become active in the affairs
of the companies to improve investment performance

It recommends that the trustees have an investment plan and
that the performance be properly reported
(Note: We should look to the US where much work has been done
in this area, especially on measuring performance of portfolios.)
There are no good reasons for directors of listed companies
withholding details of their earnings. The fact that they do is
indicative of the level of disclosure and corporate governance in
SA. (Stephen Farber, 30 March, page 11)
Ben Temkin looks back at the days when analysts were trying to
justify share prices of dot.com companies by arguing that the old
fashioned ideas of valuing shares were outdated and new methods
had to be found to support the prices, e.g. RPS (revenue per
share). (Isn’t it amazing how greed can make people lose all sense
of reality!) (30 March, page 81)
When stock markets crash, investors flee. Those who survive bear
markets know that the best time to buy shares is in periods of
weakness (rule 83 of investing - buy at the bottom and sell at the
top). (Jean Temkin) (30 March, page 82)
Stephen Cranston focuses on the broking fee aspect covered by the
Myners Review of Institutional Investment (see above) published
in the UK. Myners believes that commissions paid to brokers
should be accounted for and reported in the same way as fees paid
to fund managers. One should see such commissions as a fee for a
service one gets. One should look at this cost and compare it with
the service received. GAAP hides this fee in value changes, as it
is included in the initial measurement of the transaction but not in
the subsequent measurement. (Capital gains tax will have an
impact here as investors would prefer the fee to be part of the cost
of the asset as it is not deductible for tax purposes. Speculators
would like to treat is as an expense!) (30 March, page 83)
Recently in the Sowetan there were adverts for "marketing
diplomas for those who do not have time to study" and for
"practical one day MBA diplomas"! (30 March, page 106)
Fortune
Jeremy Kahn (JK) took a close look at the financial statements of
General Electric and uncovered all sorts of unexplained
adjustments in a company that prides itself in managing its
business and not its earnings and which has won all sorts of
awards for transparency. On questioning various analysts who
specialise in the company, they could not give any explanation (an
indication of the poor standard of financial analysis in the US of
America!!). On challenging the company itself he was given
explanations such as "there were errors in our methodologies" and
"oh, that was a mistake too". JK asks some very uncomfortable
questions, e.g.: "How is it possible that the best managed company
in the world announces big restructuring charges almost yearly
and by some coincidence makes large "capital" gains against
which these costs are set off?" (One must wonder about the make
up of the "restructuring costs" that appear regularly in the financial
statements of companies: normal-operating costs dressed up as
exceptional items?) (19 March page 59)
Some sound advice: If you apply for a job and turn it down, don't
go on a guilt trip and tell your boss! There is nothing wrong with
trying to improve one's career prospects and there are times when
disclosing the whole truth can be plain silly. (19 March page 87)
Maneo
This month’s issue is quite hefty as it contains the results of the
November 2000 public practice examination. It also details the
disciplinary committee findings on various cases. It was good to
see that prosecutions are now happening as a result of the
Masterbond affair. The first accused received a fine of R10 000
and suspension from practice for two years suspended for three
years. He had to contribute R50 000 towards the cost of the
hearing. The second to fifth accused received varying fines, from
R10 000 to R1 000. (I know that the maximum fine at the time
was R10 000 but one gets the feeling that these auditors got off
lightly. The real penalty they paid was the loss of respect by their
peers.)
Sunday Times
A twenty-year-old who smokes until 70 years of age would be R9
million richer if s/he didn’t. (Andrew Bradley, 11 March)
To retire at 55 one needs an investment of about R5 million to
earn R10 000 p.m. at today's prices until death. (Dave Crawford,
11 March)
Anthony Eedes, a former regional GM of Health and Racquet, had
a go at the "upfronting" of revenue permitted by the auditors and
blames this on the demise of the company. Sorry to disagree with
you Mr Eedes, but one does not go under because of the way one
passes journal entries. It appears to me that the reason for the
demise of the company was that management used cash from
revenue to finance growth, without setting aside cash for meeting
the commitments they had entered into with the members of H&R,
i.e. the demise of the company must be laid at the door of
management and not at the door of the auditors.
Chris McCallum of Momentum Risk Management warns that the
provision required for post-medical obligations, which has not
been provided for in the past but is now required to be provided in
terms of AC116, could result in the technical insolvency of many
companies. He recommends that companies consider funding this
obligation and offers the services of his company for this purpose.
(Funding the obligation won't take the problem away! Chris is
just looking for business.) (22 March)
Techtalk
Saica explains how to account for post-medical costs. They say
that the liability should be measured at the present value of the
expected future contributions. They made the same mistake in
AC305. Why do they not listen to me? Let me try again. AC116
states that an enterprise should use the projected unit credit
method to determine the present value of its defined benefit
obligations and the related current service cost. This method sees
each period of service as giving rise to an additional unit of benefit
entitlement and measures each unit separately to build up the final
obligation. YOU DO NOT JUST PRESENT VALUE THE
FUTURE CASH FLOWS AND PROVIDE FOR THE FULL
AMOUNT!!!! Unfortunately they do not teach time value of
money at many of the universities so there is a tremendous amount
7
Mafia Buzz 2001
of ignorance out there on this topic. Companies are hopelessly
over-providing for post-medical costs because of this kind of
ignorance. I will explain this fully in the update courses in the
second half of the year.
The IASC has published a set of questions and answers on
problems with implementing IAS 39 (AC 133). Saica has
promised to put them on its website. Last time I heard, they were
not yet up.
IFAC sponsored a forum of 23 international accountancy firms to
create a global quality standard for auditing. The main objective
of this forum is to raise the standards of international practice of
auditing to service the interests of the users of audit services.
A circular from the registrar of banks states that the setting up of
trusts for the purchase of preference shares and the procurement of
investments from the general public to invest in such trusts
constitutes banking business. This activity is, therefore, governed
by the Banks Act.
Time
One of the lessons resurrected from the dot.com bubble is that
stocks work their magic only over long periods of time. (26
March, page 50)
April 2001 (20 Minutes)
Accountancy
If you thought I was controversial, read the first article in this
journal. Examples: “Accountants are highly innovative in
thinking up ruses that appear to be in the public interest, but in
reality only serve to boost the profession’s income.” (IAS GAAP
for private companies?) “I adore their pompous self-importance,
their capacity for humbug, which would be the envy of a bishop,
their ability to take everybody to the cleaners - shareholders,
managers, governments – and to complete their work without
incriminating themselves.” Wow! At first I thought that this was
an April fools joke but the guy was serious. (Page 1)
The International Auditing Practices Committee is seeking
endorsement for its standards from IOSCO. (Page 10)
The UK is proposing that the tax laws change to align with SME
GAAP. (Nice, if this happens in RSA we could find farmers
having to pay tax on the enhancement in value of their biological
assets, property companies paying tax on the unrealised increases
in the property values, etc. Another reason to get GAAP for
SMEs sorted out quickly.) (Page 12)
It appears that, in the UK, medium size auditing firms are gaining
at the expense of the “club of five”. (Page 21)
People are resorting to EBITDA (earnings before interest, tax,
depreciation and amortisation) because accounting standards are
too complicated to be understood by analysts and fund managers.
(Well then take time to understand them rather than using silly
measures like this!). (Page 28)
The most common scams on the web are bogus auctions, bills
from unauthorised service providers, “free” web design
promotions, credit card theft, pyramid marketing fraud, fraudulent
“work at home” schemes, fake investment products and fake
insurance policies. (Page 45)
It is only a matter of time before people realise that lower interest
rates and lower share prices seem to go hand in glove. (Page 73)
Dr Richard Barker makes the case for favouring the balance sheet
at the expense of volatility in the income statement. The IAS
standards are not quite there yet (lots of compromises) but the UK
are moving to full balance sheet based standards. An example is
that the UK does not permit smoothing of actuarial gains and
losses. (Page 93)
Ron Paterson argues that it is wrong to abandon hedge accounting.
He gives as an example a simple import situation where the price
is effectively fixed by taking out cover. If hedge accounting is
canned, there will be a profit or loss on the derivative and the asset
will be recognised at the spot rate. (Ronnie my soul-mate, I spent
a year trying to get the standard setters to see the light. We lost
the good fight.) (Page 106)
The UK has published “interpretations” (they call them
“abstracts”) on operating lease incentives (see AC415), website
development costs (see AC432) and date of awarding employees
shares or rights to shares. (Page 153)
Accountancy SA
The cover of this journal caused quite a stir. I know of at least one
CA who sleeps with it under his pillow at night! (NOT me!!)
Danny Naidoo discusses knowledge management (KM);
something every one of us should get involved in. KM should
result in the right information being available at the right time to
the right people so that they can become more efficient and
knowledgeable and make better decisions. The process is to
manage the collation, cleansing, archiving and transformation of
data into information and then into intelligence. (Page 5)
Pieter von Wielligh winds up his trilogy on problems in the
insurance industry regarding the relationship between auditors and
actuaries. (Page 8)
The results for the 2000 QE part 2 examination were published. 1
144 TIPP candidates passed (63% pass rate) and 18 TOPP
candidates passed (67% pass rate). (Page 15)
Garth Coppin deals with the tricky problem of accounting by
Internet firms. His point is that the US is proactive in that they are
addressing the accounting problems whereas RSA is not. He lists
the following as major issues: (Page 17)





The definition of “turnover” (or revenue).
Bartering transactions.
Packaged deals (a combination of sales and services).
Costs of web site development.
Amortisation periods for goodwill and intangibles.
Mercantile Registrars states that, based on their shareholder base
of 2 million, 96% of shareholders represent only 4,5% of the
market. More that 70% of the shareholders hold portfolios of one
counter. (Whatever happened to the 80:20 principle?) (Page 19)
If you want to check whether your pay packet is in line with the
market, go to page 23 where details of salaries in merchant
banking and the IT industry are given. For example, a CA with
five years plus experience earns between R400K and R800K.
My article gives guidance on how to solve GAAP problems (get
the facts, define the problem, define the objectives, identify the
statement/s, research the statement and write out the opinion).
(Page 25)
Penelope Webb writes a delightful article on tax fraud. If you are
defrauding the receiver, better be careful you do not upset your
spouse because this, apparently, is one of the sources of
information SARS thrives on! (Page 35)
Wayne de Nobrega gives guidance on how to surf the web, e.g.
identify your objectives, use the appropriate search engine, remain
focused, experiment, etc. (Page 37)
Business Day
A Big Mac (hamburger) costs $2,54 in the US and $1,19 in RSA
which indicates that the rand is under valued by 53%. (April 24)
8
Mafia Buzz 2001
Business Times
Fortune
Only 18% of actively managed unit trusts in the UK outperformed
the FTSE 100 index over the past 10 years. In the same period
just 11% of actively managed funds in the US beat the S&P index.
In RSA only 7 of the 33 actively managed general equity funds
beat the Alsi index in the past three years. (1 April 2001)
David Rynecki discusses how investors got taken for a ride in the
recent US market crash. Some interesting lessons to learn from
this experience (which, within five years will have been forgotten
because people like to believe in myths!) are:
For financial brokers bear markets do not exist as, if they admit
that the market is going to go down, no one will buy and
commissions will dry up. The name of the game is to talk the
market up, suck the punters in and push the commissions up.
(That is why my buy (after thorough investigation) and hold
strategy works!) (22 April 2001)
Andy Andrews says that if you do not think about the future you
will not have one. Winners see the future as an opportunity and
not as risky or dangerous. Things are changing and assumptions
we believe to be correct could be leading us into the wrong
direction. (Take time off to visualise and stategise.) (22 April
2001)
Executalk
The appointment of Bob Garnett to the IASC is announced (well
done Sir). A report back on progress with the restructuring of
SAICA is given. And a new concept of “Pledge certificates” is
being introduced (you will sign a pledge to be ethical and behave
yourself).
An interesting comment appears at the end of this talk: “SAICA is
aware of the practical difficulties that members are experiencing
in applying Circular 8/99. The Small Practices Committee and the
Technical Department are looking at a workable way forward.”
(See my article in August where Malawi shows RSA the way.)
Financial Mail
Andrew McNulty makes the following points:

Analysts who refused to get sucked into the “Internet rush”
emerged with reputations enhanced.

Few fund managers succeed in beating the All Share Index.

Index funds usually outperform the index.

Fund managers should pay attention to asset allocation, style,
sectors and stocks, in that order.

Be flexible with your strategy and diversify.
(April 13, page 46)
With the advent of AC116, many companies are taking steps to
duck their healthcare obligations to their staff. This is being
achieved by modifying employee contracts to offer higher salaries
or pension benefits in lieu of medical aid cover. Employees are
going to have to take responsibility for their own medical
expenses once they retire. (A friend of mine has just had a bypass operation at a cost of R120 000! You had better make sure
that you either save up for this kind of expense or take the
necessary cover if your employer is not prepared to accept the
risk.) (April 13, page 50)
Sales commissions, transfer duty, legal costs and bond costs can
amount to 22% of the selling price of a residential property, the
highest transaction cost of any investment class. (April 20, page
30)
David Gleason comments that the obligations attached to a listing
on the JSE are so onerous that small companies neglect the
running of their businesses due to having to focus on all the rules
and regulations that they have to comply with. (Not to mention
having to comply with Statements of GAAP!) (April 20, page 57)


Profits drive prices, not revenue.
Actual performance is more reliable than expected future
castles in the sky.

It is not a sound reality check to compare the PE ratio with
expected future growth (the theory of the modern investor
was that one could justify the value of a share as long as the
PE ratio did not exceed the expected future rate of growth).

Even at today’s prices, over 80% of value is dependent on
future unproven growth.

Speculators (note, not investors) were buying shares because
prices were going up whereas the wise investor buys in the
dip.

One cannot assume that if there is liquidity in the economy
that it will automatically end up in equities.
(April 2, page 80)
Restructuring charges should be taken with a pinch of salt.
Companies love the one-time restructuring charge as it can hide all
sorts of blunders made by managers (plus, in my opinion,
legitimate operating expenses to make the profits of the company
look better than they really are). Investors should view a pattern
of restructuring charges as a red flag. (April 2, page 98)
The leading edge looks at the return companies get from training
their staff. Points made in this article are:



Classroom training is inefficient.
The attention span of participants is poor.
Action is important to keep attention alive (e.g. doing
problems and participating in debates).

Staff often do not know what they need to know until they
need to know it.

Training should focus on skills needed for the job at hand.
(Comment: I recently spent four hours chatting with the
accounting staff of a company: We debated the financial
statements and discussed problems related to that company. I left
that meeting knowing that I had achieved more in those four hours
for those people than I could have achieved in a 16 hour
workshop.) (April 2, page 105)
Patricia Sellers warns about not letting your ego get out of control.
One needs self-confidence to seize opportunities but has to be
careful that confidence does not translate into arrogance. Lou
Gerstner of IBM says that a mighty ego is fine as long as talent is
in equal proportion. Jack Welch says that if you are not curious,
you become arrogant, and that is the road to disaster. One does
not need to kill ego: just keep self control. One needs to learn to
lead without being dominating. To do this one has to learn to
listen:

Pause for ten seconds before answering.

Ask a question to clarify intent.

Respond with feelings as well as facts.
If one is really smart, one does not need to flaunt one’s
intelligence. (April 30, page 62)
The Mayo Clinic doctor makes the following suggestions for
living longer and loving it:




Fitness should involve your heart, lungs and aerobic
muscular function.
Stay intellectually challenged to maintain cognitive function
as you age.
Avoid vegetating in front of the TV.
Good nutrition is important, not the type found in pills.
9
Mafia Buzz 2001

Include in your diet lots of vegetables, fruits and whole
grains.

Maintain a good weight.

Stay involved and active and maintain relationships with
others.
(Disappointed to find no mention of sex!) (April 30, page 98)
Techtalk
An exposure draft on the relationship between banking supervisors
and the external auditors has been published by IFAC for
commentary (www.ifac.org).
SAAPS 1100 on bank confirmations has been issued.
IAS 41 on Agriculture has been issued.
The G4+1 has been disbanded.
IFAC’s Public Sector Committee has published the following
ED’s:
ED16 Events after the reporting date.
ED17 Segment reporting.
ED18 Financial instruments: disclosure and presentation.
ED19 Investment property.
A proposed guide to CC’s has been published. At last it has been
publicly stated that CC’s do not have to comply with Statements
of GAAP. (Battle one won! Now for the small private company.)
FRSSE, the financial reporting standard for smaller entities is up
for revision again.
A revised audit and accounting guide on medical funds has been
issued.
SAICA has issued an accounting guide on short-term insurance
which is available on its web site.
The new registration number for companies and close corporations
is YYYY/NNNNNN/NN. Don’t need CK for CC’s anymore.
A guide for auditors and other accredited persons on trade and
industry incentive programmes has been published (on SAICA’s
web site).
If you are into micro lending, go to page 32 for information that
may be important to you.
Monitored compulsory CPE – see the newsletter.
May 2001 (20 Minutes)
Accountancy
A panel on audit effectiveness in the US has issued a report to
show that, although US auditing standards are fundamentally
sound, over 200 changes are necessary. The International
Auditing Practices Committee has set up a working party to
consider changes to its standards with the objective of obtaining
international recognition for its auditing standards. (Page 1)
PwC won its case against Sir Elton John. The court heard, among
other things, that Sir John tore up a report by PwC outlining EJ’s
financial difficulties. (Here is hoping that this is a turning of the
tide – it is about time that people took responsibility for their own
actions.) (Page 8)
IOSCO, the converging of US and IASs Standards, reporting
financial performance, classification of liabilities and equity and
discounting. (Page 10)
The senior partner of the old firm C&L says: “An auditor is not
like a ferret who is pointed at a rabbit warren just to see how many
rabbits he catches – someone is meant to tell him how many
rabbits are down there.” (Who said that auditors are not poetic?)
(Page 21)
A letter to the editor points out that the EBITDA measure favours
companies with high debt. It also points out that plant is a real
cost and should not be taken out of the equation. It makes the
point that PPE and goodwill are merely costs held in suspense.
(Why then not take them as an expense in the year they are paid?
This would really kill EBITDA as a measure!) (Page 29)
Robert Bruce addresses an issue that has been a real problem for
me over the years. My strategic system hardly ever looks at things
that can go wrong because if one dwells on this aspect, one never
achieves anything. This is exactly what he is saying. One cannot
ignore risks completely but if you want to succeed you have to
take risks. The other night on the Alec Hogg show, for example,
they were recommending that you could hedge your bets by
buying shares and put options on those shares. What is the point
other than making the financial houses wealthy? (Page 44)
Ron Paterson takes a look at the debate on FRSSE, the accounting
standard for SMEs in the UK. He makes the point that the full set
of standards has now become so complex that SMEs and their
advisors can no longer cope. His solution is to simplify full
GAAP but admits that there is a fat chance of this happening.
(Page 96)
David Cairns states that poor compliance with IASs is
undermining the IASC’s achievements and companies need to
redouble their efforts to improve. His book is available for a cool
R2 700! (Page 98)
Accountancy SA
Statistics are given on the Aids pandemic, how it will impact on
companies in the near future and ideas on how to reduce the
impact – distribute knowledge about how the virus is transmitted,
improve attitudes and change behaviour patterns. (Pages 2 and 5).
Johan Cloete discusses the benefits of data warehouses (DWs)
(improves competitive advantage) and the important attributes of
sound DWs (grows with the enterprise, contains appropriate detail
to be useful, has the ability to obtain data directly from sources, is
kept up to date and meets the needs of the enterprise). Page 7
Jacqui Hutton (no relative) lists what it takes to be a good CEO
(be able to adapt, high tolerance for risk, vision of the future, cope
with change, customer focus, able to communicate with all and
sundry, able to motivate and inspire and quick to learn). (Page 8)
A survey was done in the financial services industry to see what
clients really want – I could have told you without a survey: low
fees and superior service! (Page 22)
My article was about the need for a second tier accounting system
in RSA (I will keep going on and on until someone listens)! (Page
35)
PwC has introduced a number of new tough internal procedures as
a result of its experience with Robert Maxwell. As a result of new
client acceptance and risk awareness procedures, it has ceased to
do work for a number of clients. (Good stuff – another step
forward in the fight against corruption.) (Page 9)
Wayne de Nobrega gives some advice on preventing infection
against viruses (the computer kind) – the usual preventative
measures such as checking suspicious mail, not opening .exe or
.vbscript files, not clicking on links to an unknown source and not
falling for “I love you” type messages. He makes a plea not to
forward virus alerts to other people as this clutters the Internet.
(Page 41)
The International Accounting Standards Board (IASB), the new
name of the old IASC, has started operating. On the agenda are
items such as obtaining endorsement for all of its standards from
SAICA arranged a survey of accounting designations to assess
awareness and, guess what, CA came out tops! (Page 46)
10
Mafia Buzz 2001
Business Times
If an individual has access to information from a source inside a
company that is likely to have a material impact on a share price,
and s/he trades on this information or passes it on to someone else
who trades, that person as well as the tippee has contravened the
Insider Trading Act. If an analyst has access to market sensitive
news not known to the public s/he should insist that management
make it public. (May 27, 2001)
Financial Mail
Jamie Carr comments on Tigon’s results as follows: “I sometimes
wonder whether Tigon actually exists.” The article goes on to tear
the financial statements apart. (There is a real need for some kind
of legal backing for financial statements in this country!
Regulations without enforcement are a joke.) (May 4. Page 48)
If you are interested in investing in property, Ian Fife gives some
personal stories about how people have made their fortunes (or
plan to make them) by investing in this medium. (My own
experience was not all that great: it may have been because I did
not focus on my investments – too busy trying to get candidates
through exams!) (May 4, page 64)
David Lascelles deals with ethics and share tipping by financial
journalists. A case in the UK recently brought this thorny issue to
the fore. Journalists have the power to move markets and share
prices but are exempt from the controls placed on other operators
in the markets. About 30 years ago I was in a lift club with a
person who worked as a financial journalist. He made so much
money from pushing shares that he bought the newspaper he
worked for! Do your own investigation before making an
investment.) (May 18, page 19)
Ethel Hazelhurst deals with the controversial topic of value v
growth share investments. The question is: does one invest in
companies that pay dividends or in companies that re-invest their
profits in future growth. Some argue that paying dividends is a
sign that management cannot find anything better to do with the
cash. However, shares that do not pay dividends are like
gambling chips and when growth slows they crash. Research has
shown that value stocks in the S&P 500 index have appreciated by
6,5% since 1973 compared with only 2,0% for growth stocks. (I
remember having major fights with my young all knowing
students during my QE preparation days on this topic. They really
thought that my value approach was old fashioned.) (May 18,
page 20)
Fortune
Here are the rules for investing in tech stocks that Mary Meeker
developed but then forgot about:

Buy when no one is interested in them and sell when
everyone is interested in them.

Buy when the fundamentals are intact and sell when they
begin to trade down after large rises.

Don’t fall in love when tech stocks – see them as
investments. (May 14, page 96)
One needs to understand how we behave when undertaking
investments. Here are some problems:





We do not learn from our mistakes.
We become obsessed about arbitrary rules – classic herd
behaviour.
We become fixated on the price we paid for the stock – we
hold onto losers and do not want to sell winners.
We like to convince ourselves that our beliefs are factual,
despite clear evidence to the contrary.
The more often we check the performance of our shares, the
more likely we will do something foolish like sell good
shares in bad times.
(The answer? Develop sound fundamental analysis techniques.)
(May 14, page 104)
Companies are encouraging staff to take leave before the reporting
period end to reduce the impact of leave pay provisions on the
balance sheet! (Learn something new every day!) (May 14, page
112)
The chief executive of Germany’s EM.TV, which made a loss of
$1,3 billion, says: “In our effort to become a global player, we did
not pay enough attention to the operating business.” (Are SA
companies going to be saying the same soon? Some already have
experienced this problem.) (May 28, page 21)
The following are said to be drivers of the PE ratio:

The company’s ability to earn returns on invested capital in
excess of the company’s cost of capital.

Keeping capital costs low.

Keeping earnings growth steady, i.e. keeping volatility of
earnings low.

Maintaining the confidence of investors in the company’s
ability to earn superior returns and find new opportunities.
(May 28, page 92)
Statistics show that fund managers in the US with more
experience trounced those with little experience in the past year
(those with less than four years experience achieved a negative
return of 20,1% whereas those with more than 20 years experience
achieved –5,4%. (Ego alone is not good enough – need
experience as well!) (May 28, page 101)
Techtalk
The Auditing Standards Committee issued ED147
engagements to review financial statements for comment.
on
The UK has issued a bulletin to eliminate the uncertainty
surrounding the publication of financial statements on the web. It
encourages auditors to check that the web version agrees with the
official version.
The APC approved ED426, 427 and 428 for exposure (have since
been withdrawn by the SIC).
The APC has decided to await developments in the UK regarding
headline earnings before taking this matter further.
IFAC has taken the lead in establishing public sector standards to
improve government accountability.
Guidance is given to auditors who have to determine that amount
of professional indemnity and fidelity guarantee insurance that
medical schemes must take out and maintain.
June 2001 (35 Minutes - Sorry!)
Accountancy
The UK is debating whether to continue publishing their own
statements prior to the IASB publishing theirs. The UK standard
setters are of the opinion that by going through the due process,
they can have a more valuable input into the IASB’s standards,
e.g. they have just published FRED 22: Reporting financial
performance. (Page 7)
The IASB is facing a major decision – whether to continue on the
principle based standards approach or change over to the US’s
rules based approach. The IASB is looking to Europe for support
to lend credence to the IAS standards in their existing form. (Page
11)
When there are professional disagreements about the application
of sophisticated accounting standards, what do you do when a
lawsuit is filed against you? Settle. (The more sophisticated the
11
Mafia Buzz 2001
accounting standards get, the higher becomes the risk of being
sued!) (Page 11)
A survey conducted in the US revealed that Revenue Service
officials spend 51% of their time on the web during office hours
surfing for porn, trading shares and gambling. (Page 14)
Paul Volker, chairman of the IASC Foundation, complains that
security analysts and investment companies, who stand to gain the
most from the development of accounting standards, are the least
interested parties. (We found this in RSA as well: could not get
anyone from that industry to sit on the APC.) (Page 26)
Unpaid debts and cash flow problems lead to one third of business
failures in the UK. (Page 39)
The kidnapping industry is alive and well – more than 12 500
foreign travellers are kidnapped p.a. The average kidnapping lasts
for three hours and costs R30 000 in ransom. RSA is in the top
ten countries where this activity takes place. If you are travelling
overseas (or in RSA!), read this article as it sets out a checklist of
ideas to reduce the risks. (Page 44)
Thinking of starting your own business? Last year 400 000
companies folded in the UK. This article gives some guidance;
the most important of which is “It’s tough to be on your own.
You must know how to manage stress and must be really
passionate about your business.” (Page 46)
Stuart Burns looks at the tried and tested ways of defrauding
people, e.g. sending invoices for small amounts for goods or
services that have not been ordered, getting you to pay by debit
order where the amount is not fixed and banks charging
unauthorised bank charges. (Page 49)
Sarah Perrin’s article on how a small auditing firm started from
scratch to grow into a medium firm over seven years is quite
inspiring. Some of the winning strategies used by this firm were:
(a) A high quality service. (b) Attention to detail. (c) Pro-active
marketing. (d) Getting to know the clients and understanding their
needs. (e) Vigorous staff training. (Page 71)
The International Auditing Practices Committee (IASP) has issued
a revised statement on the auditor’s responsibility for fraud and
error. It emphasises that, when planning and performing an audit
procedure, one should consider the risk of material misstatements
resulting from fraud and error. (So what’s new?) (Page 93)
The IASP has also released a new practice statement on auditing
derivative financial instruments held by end users. The statement
addresses management’s responsibility for the various risks
(thought it was an auditing standard?). (Page 93)
John Morely supports separating the hedge transaction from the
operating transaction.
He supports the demise of hedge
accounting. He says that when you take out a derivative, you are
really gambling. He then goes on to state that, if you do not
hedge, you are also gambling! (What logic sir!) (Page 96)
John Dyson’s excellent article supports not accounting for share
options given to staff. He asserts that if staff acquire shares in a
company, all that is happening is that they are becoming partners
with the existing shareholders in the future profits of the company.
(I am happy with this argument provided that the staff pays a fair
price for the shares.) (Page 97)
Ron Paterson deals with the uniting of interests method (pooling
of interest or merger method) of accounting for business
combinations. He believes that this method should not be
withdrawn. (I have been saying this for years.) He suggests that
when the acquisitions method is used, companies under-value the
assets to boost future earnings whereas the uniting of interest
method retains the historical past of the merged companies. (Page
98)
PwC recommends that on a business combination one can provide
for unfavourable lease agreements that are not onerous contracts
under SIC 15. (I would never have thought of this! Brilliant!)
(Page 107)
In the student’s section the controversy on whether or not to pay a
dividend is addressed. Shareholders invest in a company to earn a
return. If you don't give them the return in the form of dividends,
you must be able to show that you can earn higher returns on other
projects. (Page 128)
Accountancy SA
Michael Blain sets out a structured approach to arriving at the
liability for a post-medical obligation:
1.
Understand the nature of the legal obligation.
2.
Understand past actions taken in this respect.
3.
Investigate how the liability can be capped.
4.
Value the liability.
5.
Investigate suitable funding vehicles.
He sets out some sound reasons as to why funding should be
considered, e.g. tax deductibility (?) and protection from creditors
on liquidation. (Page 5)
My article dealt with revenue in the IT industry and Metcash’s
proposal to restructure their share option scheme. (Page 19)
Wayne de Nobrega gives some sound advice on securing your
electronic information. Examples are:
1.
Monitor all communications in and out of the system.
2.
Scan your e-mails for viruses.
3.
Set up firewalls.
4.
Monitor your employees’ use of the Internet (with
permission).
5.
Be vigilant.
Letters to the editor re the April cover made for interesting
reading. I was in the stationery shop the other day, opened my file
and out fell the April journal. (In case you get the wrong
impression, I was reading it to write Mafia Buzz – I do not keep it
to ogle the cover!) The shopkeeper gave me “that” look and I was
embarrassed. (Page 38)
What an excellent idea the “SAICA Briefs” is. I have always
complained that SAICA has meeting after meeting and never
communicates progress being made on various issues. This is an
excellent way of communicating. Well done! Items dealt with
are: (a) New rules for training offices. (b) Requirements for
entering the AGA examination. (c) Disciplinary actions taken. (d)
The appointment of Colin Beggs as SAICA’s new chairman and
Hassen Kajie as his vice chairman. Well done, you two. (Page 40)
Financial Mail
Marina Bidoli deals with the Datatec insider trading saga.
Managers of Datatec met an analyst for breakfast. The analyst
asked whether the company would meet the consensus forecasts.
Management said “no”. This comment resulted in a 50% fall in
Datatec’s share price. According to Mr Rob Barrow of the FSB, if
anyone accesses information from a source inside a company that
could have a material impact on its share price, trading on this
information or tipping others who trade is in contravention of the
Insider Trading Act. This little saga cost the management of the
company big time. It will be interesting to see what happens to
the analyst. A lesson for company managers: study the rules of
insider trading carefully and follow them to the letter. (June 1,
page 46)
12
Mafia Buzz 2001
Since January 1996 the rand has deteriorated 50% against the
dollar. The JSE’s industrial index has fallen by 8%. This has
translated into a loss incurred by off shore investors in RSA
industrials of 60% compared to an increase in the Dow Jones
index during the same period of 115%. (Makes one sick to realise
how one’s wealth is deteriorating in RSA – you only realise this
when travelling outside the country.) (June 1, page 71)
Ben Temkin wants to know why the JSE does not publish a
dividend per share for the Imperial Group. Well Mr Temkin, I can
explain this quite easily: I was on the committees that decided that
if a company has a cap. issue without the option of cash, this
would not be treated as a dividend. For example, Imperial
declared an interim “dividend” in 1999 of 58 cents (1,35 shares for
every 100 held) and a final “dividend” of 67 cents (1,16 shares for
every 100 held). No cash option was given. No portion of the
profit of the company was distributed. The company merely
issued more shares to the shareholders to prove that they still have
exactly the same percentage stake in the company. However,
while walking in the bushveld the other day, I started meditating
on this matter (please do not tell my wife what I think about while
walking with her in the bush!). If you are trying to determine the
return you made by holding shares in Imperial, you cannot ignore
the additional shares you received for no outlay. We need to
rethink this problem – see a reply from Mr Russel Loubser below.
(June 1, page 72)
Clive Robertson, GM of Credit Guarantee, says that SA business
leaders are morally bankrupt. He says that the past three years
have been terrible. He states that directors are in business to
enrich themselves at the expense of the shareholders and the
creditors. Corporate governance and accountability are nonexistent. (How right you are Sir!) (June 8, page 19)
Marc Hasenfuss looks at the poor performance of venture capital
companies since 1999. He chose 20 companies making up the
backbone of the venture capital market. Their combined value fell
from R750 million in October 1999 to R65 million at the time of
writing. He attributes the problem to flashy business plans that
did not translate into profitable business models and shocking
corporate governance. As a result, investors will not be easily
drawn to venture capital projects in the near future, which is sad
for job creation. (June 8, page 85)
The Absa Consultants and Actuaries survey concludes that the
average of 41 balanced pension portfolios just matched inflation in
the year to 1 April 2001. Balanced funds performed better than the
aggressive funds. The higher the risk, the lower the return!
(Studies have been done overseas to show that it is a myth to
believe that the higher the risk, the higher the return.) (June 8,
page 91)
Kevin French of Old Mutual says that one is more likely to lose
money than gain through tactical asset allocation. (June 8 page
95)
Self-confidence in the investment game is a poor substitute for
experience. (June 8, page 102)
The Actuarial Society of SA is of the opinion that Aids will wipe
out between 5 and 6 million South Africans by the end of the
decade. It also predicts that, unless there is a significant change in
sexual behaviour, 45% of the adult population will die of Aids.
(June 15, page 34)
The USA Congress has started investigations into the role that
analysts might have played in the huge losses experienced in
equity markets. Members of the Congress want to know why sell
recommendations were so rare during the period share prices were
collapsing. (I can tell you why: analysts make their money by
encouraging investors to buy.) June 22, page 56)
Stafford Thomas points out the impact that high fees charged by
fund managers have on the returns earned by investors. (They
battle to beat the market and yet charge a fortune for their
services. Time to cut them out of the investment equation?) (June
22, page 72)
Ben Temkin asks the question again: “Why no dividend per share
for Imperial?” (June 22, page 73)
The Monster Raving Loony Party in the UK wants to know why
there is only one Monopolies Commission! (June 22, page 98)
Russell Loubser of the JSE responds to Ben Temkin’s query about
not disclosing Imperial’s dividend per share. He states that the
JSE is looking into this problem. (Time for me to write an article
on the matter!) (June 29, page 11)
Stafford Thomas does a calculation to show that the JSE industrial
index should be standing at 4 500. He makes the obvious mistake
of ignoring tax in his calculation. You cannot take a pre-tax bond
rate and add it to an after-tax risk premium for listed shares to get
a fair rate of return for the market. If he took tax into account, his
calculations would arrive at approximately where the market is
today. (June 29, page 89)
Marina Bidoli points out that three years after the introduction of
the insider trading laws, there has not been a prosecution in SA.
The US leads the way with between 30 and 50 prosecutions p.a.
However, a high profile case has been handed over by the FSB for
prosecution. Watch this space! (June 29, page 90)
Fortune
“Analysts are a corrupt, cowardly bunch. They never say “sell”.
They spend the whole time working on investment-banking
deals”. (Harsh words these, but even in RSA one has to look
carefully at the motives behind the advice given by analysts to
clients.) The article goes on to identify attributes of an all star
analyst:








A high standard of ethics.
Advice based on thorough fundamental research.
Makes no distinction between clients and non-clients.
Makes money for investors.
Free from arrogance.
Forecasts based on fundamentals, not on herd mentality.
Experience.
The courage to go against the trend when fundaments show
this should be done.
(June 11 page 35)
Comments from leading thinkers in the US:

I think that the markets are still on the way down (Robert
Shiller).

Companies should return to their core business and stop
diversifying (Chris Zook).

Technology will keep getting cheaper, more powerful and
more used (Hal Varian).

The most important thing that creates economic value is
profitability (Michael Porter).

I think that the recovery from this bubble will be short
(Michael Porter).
(June 11, page 64)
The secret to successful fund managers is their fixation on the
fundamentals. They go beyond PE ratios. They do not follow the
crowd because the crowd, who follow the crowd, are often wrong.
Here are some of the things they do:





Focus on the underlying business of the company.
Find shares that are trading below their business value.
Look for companies where the managers have a stake.
Hold investments for long periods.
Look for solid balance sheets and high returns on assets.
13
Mafia Buzz 2001

Look for defendable franchises that will grow despite the
economy.
(June 25, page 69)
The age-old argument of whether companies should or should not
pay dividends is tackled again. Those for argue that the objective
of investing in a company is to get paid out part of the profits of
the company. Those against argue that it is tax inefficient to pay
dividends (in the US dividends are taxed as we would tax interest).
In 2000 non-paying dividend shares in the S&P 500 fell on
average by 2,2% whereas dividend paying shares increased by
15,7%. (In RSA the argument is going to become interesting
when CGT comes in: there is no tax on dividends received by the
investors, there will be CGT in the investor’s hands on sale, but
STC is payable on the dividends by the company.) The other
argument is always: “If the company cannot re-invest the profits at
the cost of capital or more, the profits should be paid out by way
of dividend.” (June 25, page 71)
The annual report is irreplaceable. If you know how to read it,
you can gain insight into a company’s operations. The article
gives some very basic ideas:

Study the notes to the financial statements carefully. You
will often find the dirty, dark secrets hidden in them.

Study the accounting policies and changes in them.
Changing these policies is a way to massage the profits.

Check out the share options given to management: these are
given at a cost to the other shareholders.

Read the note on the pension plans of the company. Hidden
strengths and weaknesses can often be found in this note.

Understand how earnings were converted into cash flows to
evaluate the quality of the earnings.

Evaluate the debt to equity ratio. It is interesting to note that
the author says that 2:1 is reasonable! (In RSA you are
looking at an average of 0,3:1.)
(Very basic stuff: we as CAs go into a lot more detail, don’t we?)
(June 25, page 72)
A reminder that it is not a matter of ‘if’, but of ‘when’ your hard
drive will die. This article gives ideas on how to protect oneself
against this from happening; e.g. backups and surge protector
plugs. (Always good to remind one that this aspect is vital to your
effectiveness in your job and in your private life.) (June 25, page
75)
The rules about staying healthy are basic: Don’t smoke, keep
physically and mentally active and eat well. They are obvious and
they work. (June 25, page 92)
Techtalk
The IAPC is proposing changes to the audit report to state clearly
what financial reporting framework is being used to prepare the
financial statements. (This should speed up the second tier GAAP
system in RSA.)
The APB approved interpretations AC419 and AC424.
The APB approved statement AC136: Accounting and reporting
by retirement benefit plans.
The APB approved revisions to AC102, 116, 133 and 111.
The problem with debit loan accounts in private companies is
dealt with. Backdating dividends is no longer an option under
AC107. What if the company decides not to comply with
Statements of GAAP? We keep on forgetting that GAAP is
optional for non-listed companies in RSA. As long as you comply
with paragraph 5 and have an emphasis of matter in the audit
report, non-compliance is quite acceptable. The tax law, however,
does not permit backdating of the accrual of a dividend.
SAICA is calling for commentary on its new exposure draft
dealing with independence under the code on ethics.
Quarter’s Tidbits
Noseweek did a survey that concluded that BMW drivers are the
most impolite of all motorists. (I have a theory that BMW has
concluded a secret deal with the traffic department. On my travels
around the country I find that BMW drivers have absolutely no
respect for speed limits and yet never seem to get caught in speed
traps! Makes you think, doesn't it?)
“Leisurenet followed a controversial accounting practice of
recognising membership fees based on estimated usage of
facilities instead of recognising them as they are received.”
(Business Day, August 3, 2001, page 16) (Ja well, no fine.)
A former NBS manager was sentenced to 1 620 years
imprisonment for 108 charges of fraud totalling R350 million!
(This guy obviously believes in the concept “whatever you do, do
well”) He is likely to become eligible for parole after 24 years –
he is 50 now. (Sowetan, 19 June)
Rooibos tea boosts the immune system and improves energy. It
contains 50 times more antioxidant power than green tea, which
helps to minimise cholesterol build-up and prevents blood clots.
One of the tea’s compounds is rutin, which helps to regulate blood
pressure and is a good source of iron, zinc, calcium and potassium.
(Good advert for RSA!) (Chicago Sunday Times, March 25)
The acting chairman of SEC says that a study of 563 companies in
the US showed that non-audit fees amount to 73% of total fees,
which implies that the independence problem is greater than
originally thought. (KPMG Insider Alert)
I have just finished reading a book called “Hearing Grasshoppers
Jump”. It is about Mr Raymond Ackerman. He has a real passion
for life and is guided by some simple but powerful ideas (his four
legged table with the customer on top and the legs being people,
merchandise, administration and sales promotion). He places the
customer first in all his dealings but is not afraid to make a profit.
He has an inherent knowledge about what is right and wrong and
is not prepared to give up the fight for right. For me, this was a
really inspiring read, especially having come from his era and
having been a shareholder in Pick ‘n Pay for many years. Thanks
Keith for recommending it.
Noseweek 33 contains an article about a large listed company that
bought the shares from the shareholders of an associate. The
auditors of the large listed company valued the shares in terms of
the shareholder’s agreement for the purpose of the sale. The
shareholders, who were bought out, are now accusing the auditors
of favouritism. Lesson: never use the auditors of a company to
act as arbitrator in a take-over. The level of the conflict of interest
is just far too high.
July 2001 (10 Minutes)
Accountancy
“When I joined Coopers, being a partner in a big firm was a career
for life, well-paid and with good status. There used to be
retirement parties! Clients rarely queried bills or changed auditors
and a partner’s opinion had considerable status. Performance
appraisal was non-existent and efforts to maximise profitability
invisible.” (How things have changed!) (Page 1)
The scheme by American vulture funds, which bought out Barings
creditors in order to make a profit from suing the auditors, was
defeated. The negligence case against C&L for $1 billion is still
ongoing. (Page 8)
14
Mafia Buzz 2001
Only listed companies in the EU will have to recognise fair values
of financial instruments. (Nice to see common sense in Europe.)
(Page 11)
KPMG in the UK is concerned that the tax authorities are keen to
base tax laws on GAAP. They explain that there are different
ways to interpret GAAP. (Page 15)
70% of security breaches in the UK come from malicious
employees. (Page 15)
According to accounting firms, SMEs need their own standards
based on IASC standards. (RSA is ahead of the game here! Or
are we going to let our initiative slip away by non-action?) (Page
21)

Consideration should be given to widening the responsibility
of auditors in regard to fraud and error and the reporting on
internal controls.

There is controversy regarding the limitation of audit
liability. (Page 98)
Julie Butler asks the question whether the UK is ready for the
statement on agriculture. It will be a major mindset problem to
convert from historical accounting to fair value accounting for the
agricultural industry. (Page 99)
Red tape is a serious concern for Britain’s small businesses.
SMEs do not have the dedicated staff to deal with administration.
The average cost of compliance with regulation is about 5% of
turnover for small businesses. (Page 42)
Ron Patterson questions why taking out a fixed interest loan is
risky whereas taking out a variable rate loan is not risky. This is
the message that the new statement on financial instruments is
sending (not IAS 39 but the one that is going to replace IAS 39).
He is trying to point out that by not permitting hedge accounting,
cash flow hedge gains and losses will go to income so the effect of
taking out hedges will have the opposite effect on reported profits.
(As usual, I agree fully with this genius!) (Page 100)
Stuart Burns advises that when faced with the awkward moment
when an auditor has to tell a client that s/he is obliged to qualify
the financial statements, the auditor must stick to her/his guns.
(Page 44)
Jeffery Chesters asks when the standard setters are going to
consider setting accounting standards for Africa. (Should we not
be doing this ourselves? Why do we have to rely on the UK or the
US to do this for us?) (Page 108)
The article on “Take us to your leader” sets out the changes
needed to develop leadership. It suggests the following:
On the IASB’s plate for the future are:

Focus should be directed to managing by projects, i.e. turning
routine tasks into special projects.

Management should encourage, challenge and promote free
thought.

Management should encourage reflective learning. Learning
from mistakes is a powerful process. Making mistakes
should be seen in a positive light if something can be learned
therefrom. A mechanism should be set up to turn mistakes
into a learning mechanism.

Management should encourage, support, guide and help
employees.
(Page 46)
The EU has amended the fourth, seventh and banking account
directives to allow companies to measure certain financial
instruments at fair value. (Page 92)
Only 50% of countries have some form of enforcement of
accounting standards. The security market regulators have a
significant role to plan in this regard (JSE please note). (Page 92)
Canadian standard setters have set a goal to harmonise with the
US accounting standards. (The battle is on between IAS and US
GAAP and jockeying for position is starting to take place.) (Page
92)
Standard setters in Japan are proposing that larger companies
should prepare consolidated financial statements! (Page 92)
The Russians have announced that transition to IAS will be
completed by 1 January 2004. (Page 95)
FASB is considering cancelling the pooling of interests method
and no longer requiring the amortisation of goodwill. (Page 95)
The following points are made in the article on bridging the
expectation gap:



There are several dimensions to the expectation gap:
independence, responsibilities and liability of auditors and
quality of the audit work.
Independence is linked to objectivity. One needs to question
whether auditors can be independent when they provide nonaudit services.
Quality of audit work could be jeopardised and auditor
independence compromised if audit appointments are costdriven.

Convergence with other national accounting standards.

Financial instruments revised (full fair value accounting).

Share based payments.

Improvements project.
It will be some time before the new Board finds its feet so it
should be quiet for a while. (Page 110)
Being called upon as auditor to value a share for the purpose of a
transfer could result in claims being made against the auditor for
negligence. (A company should not make the auditor the arbitrator
in these situations as there will be an automatic conflict of
interest!) (Page 119)
The UK’s FRS 17 requires employers (other than SMEs) to:


Value retirement benefit scheme assets and liabilities.
Recognise the surplus or deficit in the company’s financial
statements.

Analyse the change in surplus in the notes.
(Page 123)
A paper titled “Aggressive earnings management” deals with the
potential threat brought about by the deterioration in economic
conditions and managing published earnings. The paper:


Explains that there is no right or wrong answer in some cases.
Demonstrates how legitimate business practices can develop
into unacceptable financial reporting.

Identifies some of the warning signs of aggressive earnings
management.

Explores some of the steps that auditors can take.
(Page 123)
The journal contains ten pages of amendments to FRSSE. If RSA
goes the FRSSE route, we will need to employ fulltime standard
setters just to keep SME GAAP up to date! (Page 144)
Accountancy SA
Danie du Plessis describes the work of a forensic accountant. He
suggests that accreditation be given to forensic accountants, that
standards and codes of conduct be developed and that formal
education and training programmes be developed to encourage
new entrants to this discipline. (Page 4)
The article on Colin Beggs really annoyed me: it is not polite to
call someone by his or her surname without prefacing it with a
15
Mafia Buzz 2001
first name or Mr. or Ms.! I do not care that this is the way
journalists write. Let’s show more respect in our journal! (Page 8)
My article was based on the talk I was supposed to give in
Swaziland had I not been cut short. (Page 13)
Executalk
1.
2.
3.
4.
5.
6.
It has been agreed to stop profiteering out of CPE courses –
from now on these courses will break even.
Ignatius is determined to stamp out corruption and has
instituted a system of pledge certificates.
Consideration is being given to merging with the CFAs.
(Think they will want us?)
SAICA’s board is keen to keep its place in the international
accounting arena.
SARS’s NITS system is causing members headaches.
The next world congress will be held in Hong Kong and will
be on the knowledge-based economy and the accountant.
Financial Mail
The second King Report makes the following recommendations:


The role of the chairman and the CEO should be separated.
An effective deterrent could be to name and shame
companies that fail to comply.

Investors would be prepared to pay up to 18% more for
companies with good corporate governance.

The role of the auditor and that of the consultant should be
split.

There should be simultaneous disclosure to all shareholders.

Investors should take a greater interest in the governance of
companies.
(20th, page 40)
Techtalk
1.
2.
3.
4.
The fifth batch of examples on IAS 39 has been issued.
IFAC are considering plans to improve the competency of
accountants.
Chartered accountants are being called upon to take the lead
in fighting corruption.
Research in Canada shows that the audited financial
statements are the second most important source of
information for making investment decisions (first comes
advice from brokers!).
August 2001 (15 Minutes)
Accountancy
Accounting standards on revenue recognition need to be revised
urgently. The ASB has published a discussion paper on the
matter. The US has rules for different situations. The UK is
aiming to develop general principles to cover all situations. (One
day the Brits and the IASB will realise that rules are more
effective in arriving at standardisation. Each industry needs a set
of rules that fairly report the results of its operations.) (Page 7)
E&Y, Barings Bank’s liquidators, have expressed their intention
to cut the ₤1 billion claim against Deloittes to ₤200 million if a
settlement can be reached out of court with C&L, the group’s
previous auditors. D&T have indicated that they will not settle.
(Page 15)
The Australian Shareholders’ Association has recommended that
auditors discontinue providing non-audit services to clients and
that former partners of audit firms should be prevented from
becoming directors of companies that are audit clients. (Page 15)
Brian Singleton-Green is of the opinion that accounting standards
should affect company decisions. (In my opinion this is wrong.
Accountants should report on management’s actions, not affect
them. When accounting standards dictate, management do not
take decisions that will create value but take decisions that show
the best picture to the users.) (Page 27)
Robert Bruce discusses the pressure that management can put
itself under to aggressively manage earnings. The key reason for
this is incentive based remuneration, e.g. share options. Such
massaging of earnings often starts with accelerating deliveries
before the end of the year. The next year, this bounces back at the
company so bad debt provisions are reduced. In the following
year cut-off dates are changed. Then fictitious sales are recorded.
The auditors and non-executive directors need to put procedures in
place to detect and take action against such deceits. (Page 41)
If you are involved in a project to reduce staff, study the article
called “We have to let you go.” (Page 46)
The following ideas are given to SMEs for dealing with late
payers:


You will find some sample letters on www.payontime.co.uk.
Monitor the 20% of customers that account for the 80% of
the revenue.

Do thorough credit checks on the high amount accounts.

Get to know the staff of the customers who are responsible
for making out the cheques.

Visit the people in (04) above periodically to become known
(box of chocolates?).

Make use of the telephone or the fax rather than standard
letters.
Remember that cash flow is the life-blood of one’s business so
protect it. (Page 48)
Accountants could, one day, be sued because they did not advise
their clients to plan in advance for possible incapacitation. A
power of attorney should be put in place to administer the affairs
should this happen. (Page 58)
Firms specialising in a selected aspect of an accountant’s practice,
e.g. submitting tax returns, are acquiring the rights to perform
these activities from the accountants. These firms are called
“consolidators” and are able to offer cheaper and more efficient
services due to their specialisation – they turn the service into a
commodity. (Page 64)
The first accounting firm to offer accounting services online in the
UK has been wound up. (Page 70)
Accounting practices can expand their services by offering
strategic planning services and benchmarking (comparison with
similar company results for searching for improvements in
performance.) (Page 71)
The author asks: “How did it happen that actuaries ceded thought
leadership to accountants?” UK actuaries have, in the past,
ignored market values and gave no value to equities that did not
pay any dividends in arriving at the value of the plan assets. They
are now coming around to the accountant’s view on this issue. In
the past actuaries discounted the obligations using a rate that
included a risk premium for equities resulting in obligations being
understated. They have now changed to the accountant’s view
that bond rates should be used to calculate the obligation. (I need
to think this through. I would have thought that the actuaries were
correct.) (Page 80)
The author gives ideas for surviving in a downswing.
suggestions made are:



Some
Monitor debtors and creditors levels.
Watch the state of the order books.
Watch the financial position of the major customers.
16
Mafia Buzz 2001

Keep the lenders informed – they do not like unpleasant
surprises.
(Page 81)
FASB has approved FAS 140 which deals with derecognition of
financial assets and liabilities. The standard sticks to the
components-approach that focuses on control. A distinction is
made between sales of assets and secured borrowings. (I wonder
if the US has a statement on SPEs that could nullify the effects of
securitisations of assets?) (Page 92)
FASB has approved FAS 141, which prohibits the use of the
pooling-of-interests method. Under this statement, goodwill is
recognised as an asset and is not amortised but is tested for
impairment periodically. Negative goodwill is allocated to the
assets and any negative goodwill left after reducing the assets to
zero is recognised in income as an extraordinary item. (Wow!
They got it right at last!) Intangible assets with an indefinite useful
life should not be amortised but should be tested for impairment
periodically and impaired if necessary. (Page 92)
The author discusses the impact of reducing bond rates on pension
fund obligations – as bond rates fall, so pension fund obligations
soar. (If the fund only had bonds as assets, there would be no
impact as the assets would also increase. But if the fund contained
predominantly equity assets, there would be a problem.) (Page 95)
The ASB has issued a 154-page discussion paper on revenue
recognition. There is clearly a need for a revised standard on this
topic. An example given is where a product is sold subject to the
customer being able to return it. Has a sale taken place? The
other major issue is how to recognise revenue for services. (Page
96)
The author discusses whether or not the granting of options results
in an expense. He believes that it is an expense and should be
recognised when the option is granted. He makes the following
points:

The charge should be made in addition to calculating diluted
earnings per share.

The argument that this is not a cost of the company but that
of the shareholders is not acceptable as the company
represents the interests of the shareholders.

The argument that it is not a cash flow is invalid as many
events do not result in cash flows but are recorded as they
have economic consequences (the acquisition of a business
by the issue of shares).

To argue that the value of the option is subjective so should
not be accounted for is not a valid argument as many items
are valued and recognised in AFSs today.

To argue that the issue of options will result in future value is
not valid as one should account for the cost and the value, not
only one side of the equation.
(Page 97)
The accountants in the UK have just published a new guide on
professional ethics. It deals with changes in professional
appointments, agencies, names and letterheads of practising firms
and giving second opinions. Each aspect is dealt with taking into
account the five fundamental principles of ethics: integrity,
objectivity, competence, performance and courtesy. (Page 131)
The UK has published a standard on communication of audit
matters to those charged with governance, which sets out, among
other things, factors to be taken into account when planning the
communication, matters to be communicated and limits placed on
distribution of the communication.
Accountancy SA
Pat Smit calls for a mechanism to enforce compliance with
accounting standards. He calls on all players to do their bit, i.e.
preparers, auditors, the JSE, SAICA, the press and the
Government. (What we really need is leadership to get the
Companies Act changed pronto and a review panel in place like
they have in the UK.) (Page 9)
Mike Henderson questions whether companies should link
remuneration packages of management to share prices. Share
prices are dictated to by many factors that have nothing to do with
the actions of middle management so he believes that a more
stable method of motivating management should be found. (Page
13)
My article discussed the problem with interpreting the definition
of revenue and Malawi’s solution to RSA’s differential accounting
problem. I listed a sample of items that could be excluded or
adjusted for SMEs. A page later contains an interesting letter from
Bob Garnet and my reply thereto. On that page is also a hilarious
new form audit report. (Pages 27 to 29)
Financial Analyst Journal
Evidence has been found in the USA that activism by institutions
does have an impact on the performance of management. (Page
21)
A factor that seems to have a positive influence on the
performance of a bank is where the remuneration of CEOs is
sensitive to the performance of the shares of the company. (Page
27)
In the past, international equity management has been structured
based on country asset allocation.
However, with the
globalisation of companies, the logic for this basis is breaking
down. (Page 37)
At the market peak, the average P.E. ratio for profitable Nasdaq
100 stocks was 228. By 30 March 2001 it had fallen to 72, still
incredibly high. (Page 48)
The proposals being made in the replacement to IAS 39 are:
Classic models specify a stochastic process for the instantaneous
short rate and a functional form for the market price risk. These
models and their multifactor extensions depict an interest rate
process that to its long-run mean, which may itself be a stochastic
variable. The affine structure (signified by the linearity of the
expected changes in interest rates and the variance of the rate
changes in the state variables) allows near-analytic formulas for
option prices. (Ja, well, no fine.) (Page 60)

Financial Mail
Ron Paterson questions the benefits to the users of moving away
from the historical cost system to fair value accounting. He states
that the framework does not support full fair value accounting and
questions the reliability of subjective values being recognised in
the balance sheet. (Page 101)
All financial assets and liabilities will be fairly valued
through income.

Interest costs and income will be based on fair values in the
income statement.

Hedge accounting will be banned.
The standard setters are in for a major fight so it is expected that
this new statement will take a good ten years before it is brought
into effect. (Page 102)
King 2 is going to require that the boards of companies disclose,
among other things, the continuity plans in place should IT and
other systems fail. (24th, page 69)
Deloittes did a survey into pension fund governance and made
some startling discoveries:

Trustees of pension funds get little training for carrying out
their responsibilities
17
Mafia Buzz 2001

There is a lack of good governance procedures in the
administration of pension funds

In the majority of cases, the chairmen of defined contribution
funds were employer representatives

In 52% of the cases, there was no measurement of
performance against suitable benchmarks
(Note: If you are a member of a defined contribution fund, get
involved – it is your money they are managing.) (31st, page 87)
September 2001 (25 Minutes)
Fortune
RSA has become the first country to formally announce that it is
to adopt the International Public Sector accounting Standards as
the basis for developing Generally Recognised Accounting
Practice, otherwise known as GRAP, the Afrikaans word for
…?(Page 8)
Some basic questions one should ask when preparing a retirement
plan are:

How long will you live? You can’t afford to live too long or
you will become a burden on society! Smoking, a poor diet
and a lack of exercise will come in handy here.

When will you retire? Can you really afford to take early
retirement?

What investment returns will you generate? Your best
investment is the skills you possess: don’t lose your income
earning capacity!

What will inflation be? With the rand deteriorating as it is,
what chance have we got?

What are your expenses? Keep your costs down; you don’t
really need that flashy car, do you?
(27th, page 41)
Accountancy
The International Accounting Standards Board (IASB) was
formed with a clear mandate to promote convergence on a single
set of high-quality understandable and enforceable global
accounting standards. It has confirmed that it will tackle the
controversial project on share-based payments. (Page 7)
ACAs in the UK can expect to earn around ₤65 000 p.a. (Page 19)
A study done by the MIT Sloan School of Business showed that
the provision of non-audit serves leads to impairment of auditors’
independence. They found that companies with a high ratio of
non-audit fees to total fees were more likely to meet or beat the
three earnings benchmarks - analyst’s expectations, prior year
earnings and zero earnings. (Page 22)
We must, sad to say, expect managers to massage the published
results to meet market expectations and to present them to reflect
the most favourable picture. (Accept that deceit is part of human
nature.) (Page 29)
Sunday Times
Australia has denied that it is about to adopt IAS 39. (Page 29)
Ronnie Apteker states that when pursuing your purpose, seek out
those who share your vision and work together as a team as
nothing that is done alone is as much fun as when it is done as a
team with people you care about. (12th, page 16)
There is a major debate fermenting in the UK about the impact of
the new statement on retirement benefits. Two issues are:
Techtalk
1.
2.
3.
4.
5.
6.
The Standard Advisory Council (SAC) has been formed (49
members appointed of which our own Peter Wilmot is vicechairman).
The SIC is looking into lease and lease-backs, barter
transactions, web-site costs, service concession disclosures,
special purpose entities, classification of preference shares,
potential voting rights, derecognition and earnings per share,
among other issues.
The International Auditing Practices Committee approved for
release changes to the audit report, which will state the
accounting framework on which the financial statements are
based and four revised statements on CIS environments. It
agreed to withdraw IAPS 1007 on communication with
management and discussed a range of other matters.
The APC issued SAAS 240 on fraud and error, SAAPS 1012
on auditing derivatives and SAAPS 1000 on inter-bank
confirmations. It withdrew circulars 1/98 and 4/98 and
agreed to withdraw the audit guide on small entities, the audit
guide on derivatives in a corporate environment and SAAPS
1012 on auditing derivative financial instruments.
The APC recommends that if electronic confirmations are
received for balances, it is appropriate to confirm them by
telephoning the sender to confirm the source.
The public sector committee has issued statements on
revenue
from
exchange
transactions,
inventories,
construction contracts, reporting in hyperinflationary
economies, leases, related party disclosures and provisions
and contingencies.

What do staff really want: defined benefit or defined
contribution plans.

Whether retirement funds should be investing in equities or
bonds. The new standard seems to encourage bonds.
(Page 31)
The following points are made in the article dealing with
outsourcing financial functions such as payroll, debtors, creditors,
cash payments, tax compliance, internal audit, etc.:

It removes distractions to enable the company to focus on its
core activities.

It can improve quality of service delivery.

It can save costs.

Confidentiality could be a concern.

The transfer of staff may meet resistance.

It deprives the company of home-grown expertise.

Cost savings often do not result.

Some managers see the financial function as part of the core
activity.
(Page 32)
E&Y have carried out a survey that shows that 84 out of 100
frauds detected in commercial organisations are committed by an
employee. To reduce this risk they recommend pre-employment
screening of qualifications and background, checking references,
credit history, etc. Other checks should include lifestyle, credit
worthiness and possible conflicts of interest. (Page 39)
The article on brand aid suggests that we should see ourselves as
brands and re-position ourselves much like we would a product:
identify how you would like to be seen, do market research and
launch your new brand. (What is the world coming to?) (Page 42)
Shareholders seem to be pressurising companies to be more
responsible in social and environmental matters. Companies are
recognising this trend and are incorporating actions taken in their
AFSs. (Page 44)
18
Mafia Buzz 2001
We all should be getting involved in knowledge management,
which can be defined as “the strategic and all-pervasive capability
of an organisation to bring all of its relevant experience to any
particular point of action”. (I was lecturing at Andersen the other
day and mentioned a court case on some breeders association and
PW. Within 10 minutes I had a copy of case 95/26187 in my
hands. This is impressive!) The following ideas are given:



Capture your experience where it won’t be lost.
Develop a system that enables you to retrieve it when needed.
There are packages available to assist in this process.
(I need to get a system going, e.g. when I write an opinion I
should index it and store it for future retrieval.) (Page 52)
The article entitled “Splendid isolation” discusses the pros and
cons of teleworking, i.e. allowing staff to work from home. Some
advantages are a saving of office space/costs, reduction in
travelling time/cost, ability to focus without interruptions, flexible
starting and finishing times, etc. The major disadvantage is a lack
of supervision. To be successful, the company must have hot-desk
and meeting room facilities and the staff must be self-starters,
motivated, organised and good time managers. (Page 56)
Dot.com companies can be successful if they show investors a
clear path to profitability, hit targets and make the numbers stick
without running on excuses. (Page 60)
Skilled and experienced accountants are spending too much time
processing invoices to meet customer deadlines becoming
distracted from what they do best, such as analysis, business
development, strategic planning and high-level client consultancy.
To free up time, some are outsourcing these tasks to other less
developed countries using modern communication facilities and
technology to transfer data quickly. (Page 74)
Smaller accountancy firms should consider starting a web-site to:

Open their business to a wider audience.

Make it easier for people to find out what they have on offer.

Convey their business image.

Provide up to date details on products and services.

Reduce mailing literature to customers.

Save time answering queries by phone or letter.
The article states that gimmicks work and suggests linking up with
other sites. (Page 77)
The IASB has agreed on its initial agenda and has assigned
priorities to the projects. Its leadership and convergence projects
include insurance contracts, business combinations, performance
reporting and share based payments. In addition it has identified
16 topics for attention (covers most of the IASC standards!). (Page
99)
The Association of Corporate Treasurers (ACT) is not happy that
the JWG on financial instruments did not consulted with them.
They are of the opinion that using fair value accounting for cash
flow hedges without allowing the gains or losses to go to equity
will undermine the work of treasurers. They say that taking gains
and losses on cash flow hedges to income will result in the
opposite of what the treasurers are trying to achieve. (I stand by
my comment that banning hedge accounting will be the biggest
mistake the IASB will make.) (Page 102)
John Morley criticises FRSSE (having to change it every time a
new standard comes out). (The Malawi society has the best
solution to SMEs – simple, short, no need to learn two GAAP
systems and effective!) (Page 104)
Ron Paterson pleads for the return of deferred income. He is
having a bit of fun in his monthly contribution by asking: “Why
do you need to have a statement on revenue recognition when you
have a balance sheet based system?" He has always pushed for
matching and prudence as the prime concepts of accounting. (Page
108)
The IASB has decided that it will tackle IAS 39 in two stages: a
limited scope programme to make it workable in the short term
(what an admission to make!) followed by a comprehensive
project to replace the existing standard. (Page 113)
The article “Counting more than numbers” sets out a nice
checklist of historical and forward looking information that
companies should present in their annual report. (Page 114)
Phil Barden discusses the discussion paper by the ASB on
revenue. The ideas in this discussion paper are quite radical –
going to be interesting to see where they go on this. (You don’t
want to know what they are suggesting just yet!) (Page 120)
The company law review in the UK has come up with some
interesting ideas for reform for private companies:

They should not have to hold AGMs, lay accounts at GMs or
appoint auditors annually.

They should not have to appoint a company secretary.

They should have access to a simpler constitution.

The content and format requirements should be simplified.

The capital maintenance rules should be simplified.
(This will help make the UK a lot more competitive.)
Some proposals for public companies are:


They should publish an operating and financial review.
Quoted companies should make their report available on the
web.

Auditors should be able to limit their liability contractually
with the company and in tort with third parties, within
appropriate limits.
(Page 132)
The Review Panel in the UK instructed Wiggins Limited to restate
its results for the past six years. Each year the company had
published profits. The restatement resulted in losses being
published in each of the six years. (Is this an indication of what to
expect in RSA when we get legal backing?) (Page 152)
It appears as if investors react positively to the news of research
and development expenditure by a company. (Page 154)
Accountancy SA
Roger Sinclair’s hobbyhorse is to get brands on the books. It
won’t happen my friend – give it up. (Page 7)
My article gave a list of out the box solutions to GAAP problems
compared to in the box solutions. It resulted in 93 e-mails being
sent to me. (Page 15)
Executalk
1.
2.
The government is keen to get professionals who had the
advantage of a university education in RSA to put something
back into the community. Doctors were the first – next CAs
doing the books of rural farmers?
Details are given of the first indication that SAICA supports
differential accounting – thank you Ignatius! The scary
thing, however, is bringing all these bodies on board. Ten
years before we see anything tangible from this process?
What do companies do in the meantime?
Financial Mail
To pay or not to pay dividends is the question. If decide to pay,
how much to pay is the other question. Points made are:

By ploughing back profits, managers gain through their
incentive schemes.
19
Mafia Buzz 2001

Dividends are tax exempt whereas CGT is payable on
increases in share values.

Dividend returns are an important part of an investor’s
returns.

Consistent dividend payments lend stability to the share’s
returns.

The receipt of cash dividends is the only certainty in a
company’s AFSs (my point!).
(7th, page 106)
Dave Fishwick and others of Prudential M&G make the following
comments regarding their investment philosophy:


Prices are often driven by people’s emotions
Many times the true underlying value of shares is not
reflected in the share prices

Money can be made by unemotionally using rigorous and
disciplined approaches to finding value

One should resist the temptation of short-term forecasting by
trying to time the market

Analysts typically overestimate earnings by 20% to 30%

Insider trading rules make it difficult to sustain a competitive
edge

It is critical to understand the fundamentals of each stock, the
macro and micro-economic variables that drive it, the
market’s perceptions of the stock and the underlying risks
before taking a decision
(21st, Prudential M&G survey)
David Gleason complains that the wording used in fair and
reasonable valuation certificates given by auditors when there is a
take-over of minority interests renders the certificates worthless. I
agree: of what use is an opinion when the certificate states that the
facts were not verified or when the auditors state that they do not
assume any responsibility for the information on which the
opinion was based? (21st, page 58)
Tom Lawless says that debt is now cheaper than equity, which
makes it attractive as a means of reducing the weighted-average
cost of capital and enhancing the return on equity. (Comment: I
would have thought that debt is always cheaper than equity. If it
is not then equity is overvalued! And how do you reduce WACC
AND increase the return on equity?) (21st, page 58)
R115 billion has been wiped off the market capitalisation of IT
shares in the past three years. Didata alone, accounts for R70
billion. (28th, page 50)

Forget what you paid for the shares. The question is, would
you pay today’s price to buy the shares.

Be alert to fundamental shifts; i.e. recognise when the story
has changed.

Check the fundamentals. A fall in the price of a share does
not mean that the share has lost real value.

Ignore the day to day swings in the share price. Technical
analysis should not replace fundamentals if one is a longterm investor.

Consider the tax benefits of taking a loss. If you have built
up a tax gain, you could reduce the CGT by realising a tax
loss (sell at the present price and buy back at the lower price).

Consider selling down gradually (the opposite of Rand cost
averaging).

Don’t look back when you sell a share. You have not made a
loss when then price rises after you have sold the share!
(17th, page 83)
Many companies have had to take massive write-downs on their
investments, e.g. Amazon took $71 million in the past three
quarters, Washington Post $26 million, Compaq $514 million and
Microsoft $1,2 billion (last quarter $3,9 billion). (12th, page 15)
Polaroid has filed for bankruptcy (the end of an era!). (12th, page
22)
Sunday Times
Ronnie Apteker (I never miss his articles) makes the following
points in his article called “Switch off that cellphone and invest a
little more time”:

Make your business a labour of love and your customers will
love coming back.

If you don’t stand for something you will fall for anything.

Be enthusiastic about what you do, offer quality and strive to
make a difference.

Quality takes time – you cannot cheat nature.

If you find a job you love, you will never have to work again.
(I have not worked for the past 35 years!)
(30th, page 20)
Techtalk
1.
The implementation date of AC 133 has been postponed to 1
July 2002.
2.
The Standing Interpretations Committee issued exposure
drafts 28, 29, 30, 31 and 32, which were dealt with in
SAICA’s annual update seminars.
3.
Proposals have been submitted to government to form an
Accounting Standards Board for the purpose of setting
standards for the public sector. These standards will be
called Generally Recognised Accounting Practice (GRAP).
Bernard Agulhas has been appointed to head up this section
of the activities at SAICA.
Fortune
When one is looking for value in a company one usually looks for
things like customer loyalty, employee satisfaction and long-term
focus. However, this article suggests that not placing a cap on the
bonuses paid to managers could be a key to success, i.e. by
aligning the management returns with the company returns,
management will make the right long term decisions. (17th, page
22)
Jack Welch gives his recipe for building a successful company:
Book of the Quarter

Differentiate your employees into the top 20%, the vital 70%
and the bottom 10%. Reward the top 20% by giving them
three times the bonuses given to the 70%. The 70% should
get solid increases every year. The bottom 10% should be
fired. Over time the team you create will be tops.

Your employees must relish change.

They must face reality on a daily basis and perform.
(17th, page 35)
I have read many a book on personal management but “The power
of focus” by Canfield, Hansen and Hewitt must rank in the top
best three I have ever read. Here are the ideas I got from it – to
get the full benefit from this book read it!
The mistake investors often make (I am one of them) is not
knowing when to sell. Here are some pointers:
3.
1.
2.
Identify habits that inhibit success, choose to change, create
an action plan (affirmations) and work on changing.
Focus on what you are brilliant at and dump, delegate or
defer other activities.
Develop a clear vision of what you want to achieve –
specific, personal, meaningful, challenging and realistic goals
that can be measured – and get your priorities right.
20
Mafia Buzz 2001
Create an optimum balance – make time to think, plan, act,
learn, exercise and relax.
5. Build excellent relationships – avoid toxic people, focus on
core clients and build strategic alliances.
6. Develop winning attitudes – a confident belief in yourself.
7. Ask for help when needed.
8. Consistently and persistently pursue your goal with total
integrity.
9. Take decisive action – think, get facts, consider options,
priority rate, visualise outcome and focus on performance.
10. Create a purpose for being and live that purpose.
4.
October 2001 (15 Minutes)
Accountancy
A new Companies bill is being debated in the UK, which will
contain deregulatory measures for smaller companies and tighter
rules for larger companies. The challenge is to maintain focus on
better and not just more regulation. One cannot stop the
determined rogue. The rest deserve enough freedom to prosper.
(Page 1)
The Barings Bank case could well end up as the most expensive
trial in British history – expected to top ₤100 million. (Page 8)
The fight is on at the IASB over accounting for share based
payments. No E.D. is expected until 2002. (Page 9)
The IASB is looking for ways of converging its troubled IAS39
(financial instruments) with FASB’s FAS133. (One day the IASB
will become a subcommittee of the FASB?) (Page 9)
FASB has banned the “pooling of interests” method of accounting
for business combinations. It also does not require goodwill to be
amortised. The German national standard setting board is
unhappy about not being consulted, as German companies that
want to comply with US standards will now contravene the EU
directive on goodwill! (Page 9)
Some of Britain’s leading companies are not ready for the new
standard on pension fund accounting. 91% are not aware of the
changes that FRS 17 will bring and 53% have so far done nothing
to determine its effects. (If 91% are not aware how is it possible
that 47% have determined its effects? Am I losing it?) (Note that
RSA is also battling to come to grips with AC116.) (Page 14)
Opposition is starting to pour in regarding the proposed demise of
hedge accounting in IAS 39. The JWG is determined to cancel
hedge accounting as it is not in line with the balance sheet concept
of GAAP (they object to the cash flow hedge going to equity) and
because it relies on management intent. Watch this space! (Page
15)
Greed and a false sense of security are behind most frauds. Stuart
Burns suggests that one should not lead thieves into temptation
and one must make regular checks so as to send the message that
they are being watched. He suggests that valuable information
can often be gained from conversations with those lower down the
command chain. (Page 42)
Studies have found that during 9 a.m. to 5 p.m. 70% of all internet
porn traffic occurs, 30% to 40% of non-business surfing takes
place and 37% of e-mails are personal. More that 60% of online
purchases are made during this period. When drafting office
policy it is vital to set out guidelines on the use of the Internet and
the consequences of misuse of these facilities. (Page 62)
Service organisations have, in the past, not been brand conscious.
Liz Fisher feels that this is changing and that service organisations
should be focusing on differentiating themselves in the
competitive market place. She suggests that employees should be
encouraged to promote the firm’s brand. To do this they need to
understand the brand’s core values. “All the branding in the world
can be undone in an instant by poor service.” (Page 79)
Writing about defined benefit funds: “The company has to meet
any ongoing deficit in full and thus carries this risk, but without
the quid pro quo on surpluses. Lower interest rates, lower
inflation, increased longevity and the loss of some of the taxation
advantages have added to the company’s burden.” Sound like
RSA? No it is the UK! Because of the change to the accounting
rules for pension funds (measuring the obligation at the bond rate)
many pension funds are looking to investments in bonds to reduce
the company risk. This is to the detriment of the company, as, in
the long term, equities should perform better than bonds. (Page
80)
Accountancy SA
Bruce Mackenzie writes about XBRL, a freely available electronic
language for financial reporting. It will allow for easier
communication of financial statements on line.
Further
information is available at www.xbrl.org. (Page 3)
Danie Coetsee writes about the change in recognition standards.
There is a conflict in IAS between recognising transactions when
the risks and rewards of ownership pass and recognising financial
instruments at the date of the contract. (Page 5)
Jerry Schuitema raves on about the benefits of the value-added
statement and believes that there is much to gain from its study.
He promises to expose flaws in the statement in a follow up
article. (Page 9)
Brian Norton and Dr Dirk Grobler suggest that project times can
be improved by using a system published in 1994 by Dr Eli
Goldratt called “Critical Chain”. (Page 12)
Paul Roper and Julian Ware discuss a concept of Asset Protection
Trusts, a way of protecting one’s assets from overzealous
creditors. (I pay my creditors so I have no need to “hide” my
assets!) (Page 15)
Page 35 contains my first play. See also the letters to the editor on
SME gaap.
Citizen
The British Government is considering linking the pay of directors
to the performance of companies. (Can you just imagine the
pressure that will be put on auditors to accept inflated profits in
FSs.) (October 20)
Financial Mail
Mettle defends the structures that it helped Regal Treasury create.
They blame the accounting standards used to account for the
structures saying that the deposits should have been set-off against
the preference share assets. The Registrar of Banks says that
Regal’s balance sheet was “smoke and mirrors” and wonders
whether there are other banks with similar structures. (Scary
thought.) (October 12, page 52)
Evidence is mounting that LeisureNet was nothing but a clever
pyramid scheme. Investors and analysts seem to have been taken
in by the directors. (October 12, page 52)
Charl Kock of CA Ratings admits that Regal Bank fooled them.
(What chance have analysts got if rating analysts, who have access
to the books of the company, are being fooled?) (October 12,
page 56)
“The usefulness of auditors’ reports is diminishing in inverse
proportion to surging audit fees. They are so hedged around by
qualifications and provisos that they give no more protection than
21
Mafia Buzz 2001
the little piece of paper that Neville Chamberlain got that nice Mr
Hitler to sign in 1938.” (October 19, page 10)
2.
The Accounting Issues Task Force met to discuss the
problem with set-off in South African law. They agreed that
the right of set-off could be created by means of a contract.
If the contract provides for set-off between the parties to the
contract and the second criterion of set-off is met, set-off can
take place. (I cannot see any value added to the statement
from this pronouncement!)
3.
The PAAB has published some guidance on matters that may
be included in engagement letters. This guidance includes
matters such as responsibility for events after the issue of the
finance statements, reporting to third parties, distributing the
audit report, electronic communication and working for other
clients. Karen Lauf of the PAAB is available to assist in this
regard. (It is super to see that the PAAB is being proactive!
Well done Karen – setting a new standard of leadership.)
4.
SAAPS 1012 has replaced the Audit Guide on Derivatives in
a Corporate Environment.
5.
To improve governance over IT-related activities, risks and
security, IFAC has published two guides for use by directors.
They can be downloaded from IFAC’s web site (Board
Briefing on IT Governance and Information Security
Governance for Boards of Directors and Executive
Management)
The LeisureNet fiasco has sent a message to investors,
commentators and financial advisors that they must be more
sceptical regarding corporate SA. (When the Hodes report is
finalised, there will be much pressure on the profession, as there
was (and still is) from the Nel report.) (October 19, page 44)
ABSA writes off the NNP’s R6 million overdraft. (Incurring
obligations without the intention of settling them is the ultimate
form of corruption! Politicians need to set an example.) (October,
26, page 6)
The theme of this issue was law enforcement. Some points made
are:
1.
The formation of the Scorpions investigative unit and the
Special Commercial Crime Unit has increased the
government’s capacity to fight white-collar crime.
2.
The policy must be to throw the book at criminals so that
they think twice before ignoring the law.
3.
Corporate deception, self-enrichment and reckless trading
must be targeted. (October 26, page 38)
Legislation is in the pipeline on pension fund surpluses. It is
expected to target unfair apportionments made when funds were
converted from defined benefit to defined contribution funds and
underpayments to members on resignation. The proposal is to
compensate past members retrospectively (back to 1980) and to
lay down rules for the future. (October 26, page 42)
Fortune
It seems as if companies in the US are climbing on the 11
September bandwagon and taking big bath write-downs blaming
this event. (15th, page 20)
Geoffrey Colvin warns that one must not assume that because
stock prices are suddenly a lot lower they are a lot cheaper. He
says that, unlike in dreamland, in the real world stocks are worth
the sum of their future cash flows discounted at an appropriate
rate. (15th, page 22)
The following comments are made regarding the mutual fund
wipe out that has just taken place:
1.
2.
“Fund managers are supposed to keep your money safe and
make you rich no matter how rough the waters. So how does
one explain the wipe-out that 2001 is turning out to be?” Big
name funds are down by around 20% in the US this year.
“I have got clients wondering why they should give money to
some portfolio manager who will lose 60% when they could
do that all on their own and still have time to mow the lawn.”
“Most portfolio managers were in nappies the last time we
saw anything like a bear market.”
4. “Managers are paid based on the size of their portfolios. This
creates a clear incentive for them to give investors what they
want, i.e. whatever style of investing works at the moment.”
(29th, page 81)
3.
FASB has declared that losses incurred because of the 11
September events are not to be classified as extraordinary items.
Clearly this is designed to stop companies from using these events
as an excuse to take major write-offs below the line. (29th, page
83)
Techtalk
1.
A list of the IASB projects is given (I have already given you
this list).
November 2001 (20 Minutes)
Accountancy
Karel van Huller, of the European Commission, says that a full
fair value model for financial instruments raises many questions
about both the reliability and the understandability of the
information. Information that is not reliable is not relevant and
information that is not understandable is not useful. He feels that
if we go for conceptual purity we may end up destroying the
fundamental objective of comparability in financial reporting.
(Page 1)
The UK’s ASB’s Urgent Issues Task Force has decided that the
costs of terrorist actions are not an extraordinary item. (Page 9)
The UK’s liaison member of the IASB feels that too many people
being involved in international standard setting leads to negative
returns. (From my experience of sitting on the IASC, I must agree
with this statement.) (Page 10)
It will be three to five years before the IASB will have a standard
for financial instruments. They intend to repair IAS39 as an
interim measure. (Page 10)
Despite the fact that investors are the ultimate users of financial
statements, they are not fully represented within the IASB
framework. Investors are not concerned by volatility but are
concerned about transparency and disclosure.
(The writer
admitted at the end of the article that her team does not look at
financial statements!) (Page 10)
The IASB has tentatively agreed that, when accounting for a
business combination, one should only provide for terminating or
reducing an acquiree’s activities if, at the date, of acquisition an
existing liability per the statement on provisions, etc. was in place.
(Note at the time of AC131’s development, this point of view lost
out – different committee, different decisions.) (Page 15)
Five former government officials in China have been sentenced to
death on corruption charges (Enron officials, thank your lucky
stars you operated in the USA!) (Page 16)
The ICAEW Council has voted to reduce the number of its
meetings from 10 to 6 a year. (Scrap the lot, I tell you!) (Page 20)
The failure of the ASB to consider what earnings figures are
important to investors has led to selective manipulation. Directors
22
Mafia Buzz 2001
are giving the wider investing public the figures that analysts will
calculate for their clients. (Note: Intelligent investors will make
up their own minds as to a company’s maintainable income.)
(Page 30 – letter to editor.)
with more transparent and comparable accounting and disclosure,
more informed investment decisions can be taken. (Page 108)
Risk management is increasingly being recognised as key to
business strategy and survival. However, too few companies are
giving this information in their annual reports. Strategic risks are
important as, if not properly managed, the impact could bring a
company to its knees, e.g. “We have cut our activities by 20% as
this is what is needed to bring the size of our company down in
order to meet the market needs.” Some ideas are:
Jens Kock and Markus Warg write about a back office processing
system for banks called OSKAR (online strategic position keeping
and reporting – the P is missing!). This system promises to make
banks more efficient. (Page 3)
1.
Write it down and share it. This will make it a lot more
powerful than if you carry it around in your head.
2.
Identify and categorise the risks. A matrix assessing impact
(high, low and medium) and probability (high, low and
medium) is useful in analysing risks.
3.
Create an action plan to manage the risks identified.
4.
Address issues such as the nature and extent of the risks, the
likelihood of occurrence, whether to accept those risks and
mitigating measures that can be taken to reduce those risks.
(Page 45)
When buying a business, be sceptical and take nothing at face
value. New owners are particularly vulnerable to sharp practices,
e.g. when suppliers send invoices, see the paper work before
paying, follow up complaints from customers who object to
paying for work done, etc. (Page 55)
A successful professional partnership is a business where people
share a common vision, get on with each other and each make
effective contributions to a profitable practice. Where this is not
the case, leadership needs to change. (Page 71)
The South African government is concerned that there is
widespread tax avoidance in the financial services area and
intends:
1.
To increase investigations into tax avoidance transactions.
2.
Legislate new anti-avoidance provisions.
3.
Look into a minimum tax on companies.
(Page 95)
Ron Paterson discusses the new statement on agriculture. He sets
out the requirements of the statement and comments that few
farmers will comply, as they are not subject to IASs. (He does not
realise that a pig farmer in RSA operating through a little private
company will have to comply or the auditors will be threatened
with continuous practice reviews!)
Accountancy SA
Mark Herdman writes about assessing investment risk, i.e. the
possibility of losing money in nominal and real terms. He states
that paying too high a price in relation to the underlying business
increases the risk of loss. He gives SAB as an example – he says
that earnings per share have grown by 14,4% p.a. over the past 40
years and yet the share price has not moved over the past seven
years. (He should look at all the losses that bypassed the income
statement over the years!) His solution to not losing money is to
buy when prices are low and sell when prices are high. (Because
of the interplay of fear and greed, humans do exactly the opposite.
(I will de-humanise you in our portfolio management workshops!)
(Page 8)
Danie Coetsee writes about how to classify financial assets into
the four basic types. (I use six basic types in my sessions). (Page
13)
Paul Sulcas (well here is a character from the past!) writes about
handling retrenchment. Tear this article out and if you ever have
to retrench someone or if you are ever in the unfortunate position
of having to be retrenched, read it – it contains excellent advice
for both parties. (Page 15)
Jerry Schyitema’s follow up article on value added statements
gives some ideas on how to improve the statement. He feels, for
example, that interest paid should be shown as an outside cost and
not be shown under “providers of capital”. (I do not agree). He
believes that “car purchases” meant as a staff perk should not be
included under “outside suppliers” but should be under
“employees”. (Car purchases?) He believes that PAYE should be
included in “employees”. (Funny, but I merely act as an agent and
collect PAYE from my staff and pay it over. Am I being mean?
Should I be paying PAYE for my staff?) He has a problem with
depreciation being shown as a reinvestment (me too). (I agree
with JS that this is an important statement. There are many other
problems with it, which I do not want to raise now (one example
is bad debts being treated as outside suppliers). I do agree that it
should be looked at again. (Page 21)
My article was called “Where have all the Sages gone?” –
flogging a dead horse. (Page 37)
Business Day
The US’s FASB has eliminated the pooling of interests method
and now requires only the acquisitions method to be used.
Goodwill no longer has to be amortised but should be impaired (at
the operating level and not at the company level) when necessary.
Intangible assets should not be hidden in the goodwill amount but
should be separately accounted for. (Page 101)
Unilever is suing Merrill Lynch Investment Managers for ₤110
million for negligence in managing the pension fund assets. (I
wonder if they have insurance cover like the auditors do?) (6
November)
The IASB has prioritised the project on accounting for insurance
contracts. There is currently great diversity of accounting
practices in accounting for insurance contracts, significant
subjectivity in arriving at the obligations and little disclosure to
users of the financial statements. The IASB can expect major
opposition to any standards it comes up with as this industry has
had a “leave us alone” attitude for years! (I am sure that we all
wish the IASB the best of luck in its endeavours.) (Page 105)
Mr Manuel’s inflation target remains between 3% and 6% until
2003. This should allow the Reserve Bank to cut interest rates
further. (Got to be kidding! With the Rand falling like it is
pressure is on the inflation rate like never before and interest rates
must increase to save the wealth of the nation from further
deterioration. People who had the good sense to save in the past
are being robbed of their hard-earned savings.) (2nd, page 40)
With the EU gearing up to change over to IASs in 2005, questions
are being asked by investors whether the new accounting
standards and disclosures will have an impact on the valuations of
the share investments in these companies. The real issue is that
Financial Mail
Andy Andrews reviews Jack Welch’s book. See the summary of
the Fortune review for some pointers from this book. (2nd, page
42)
23
Mafia Buzz 2001
The National Treasury Department has raised its prediction for
GDP from 2,6% to 2,8% in 2002. (16th, page 35)
11 of the top 100 US companies would have no net earnings if the
cost of employee share options were accounted for as an expense.
(16th, page 74)
The Government is considering legislation that will block a
sectional title holder from selling a unit unless the body corporate
has paid all outstanding rates and taxes, lights and water, etc.
(Whew, I sold my unit in the centre of Johannesburg just in time!
Or are they going to make it retrospective to 1980??) (16th, page
90)
Investec has converted to AC133 thereby bringing its trading
derivatives onto balance sheet. This resulted in an increase of
R1,6 billion in assets and in liabilities in their 2000 financials. (I
did not realise that it would have such an impact.) (10th, page 60)
Fortune
Companies in the US are taking massive write-downs on their
outside investments, e.g. Amazon $71 million, Washington Post
$26 million, Compaq $514 million and Microsoft $1,2 billion (the
latter always has to be better than anyone else!) (12th page 14)
Polaroid has filed for bankruptcy. (The end of an era.) (12 th, page
22)
Techtalk
1.
The IASB tentatively agreed that share based payments
should be recognised. (They will have to change their
framework before this is possible!)
2.
Drafts of SICs 33 (potential voting rights – this caused major
problems in our update sessions) and 34 (instruments or
rights redeemable by the holder) are available for comment
(www.iasb.org.uk).
3.
The IASB is working on business combinations. (Details are
already published in MB.)
4.
SAICA defends its work on the audit of attorneys’ trust
accounts. (The Provincial Law Societies are lobbying to drop
audits of trust accounts.)
are really being honest – it suits the company to use bonds based
on the new statement. The standard setters must re-look at this
statement: they got it wrong!) (Page 7)
From research conducted in the UK it was found that the most
frequent threat to auditors is intimidation through bullying and
threats of dismissal. (Page 8)
The APB’s paper on revenue seems to be receiving favourable
comment. (Page 8)
“We are moving towards a US model just as surely in this field as
we are in the entertainment or fast food industries. This is not a
bad thing as US financial markets are, on the whole, ‘successful,
efficient, liquid and honest’” (Page 11)
SEC has undertaken to take a friendlier approach to the accounting
profession in future! (Page 12)
In a study conducted in Europe it was found that 43 companies out
of 47 had defined benefit plans but only 24 disclosed how
actuarial gains and losses were accounted for. (Page 12)
Michael Oxley, chairman of the US House of Representatives
Committee on Financial Services has threatened the IASB if it
does not follow US thinking on accounting for stock options!
(Page 21)
“It looks like the independent professional review will go the way
of its predecessor, the compilation report, and be consigned to the
dustbin of accounting history.” (Referring to the field-tests on the
IPR being conducted in the UK.) (Page 21)
Liz Fisher believes that the newest generation of workers are, in
the nicest possible way, a generation of slackers. They believe
that there is more to life than work and responsibility. Young CAs
are not interested in going into partnership, which requires long
hours, stress and financial risk. (The hunger is missing!) She
gives a checklist of things to look for before buying into a
partnership and states that good partners have four characteristics:
1.
The ability to develop people.
2.
The ability to develop client services.
3.
The ability to enhance the firm’s reputation.
4.
The ability to market and sell the firm.
5.
GAAP for the public sector is taking off with three new
statements being adopted and one being proposed.
(Page 68)
6.
The World Bank and the IFAC are working on an exposure
draft on Financial Reporting under the Cash Basis of
Accounting for developing and transitional economies.
A decade after the Cadbury report on corporate governance, Ian
Hay Davison takes a look at how things have changed. He says
that the five fundamental principles of the code are:
7.
SAICA is working on guidance for auditors who report to the
Registrar of Banks in terms of the Regulations to the Banks
Act.
1.
The board runs the company and is accountable.
2.
The duties of the chairman and the chief executive are
separated.
If you are involved in public sector auditing, go to Techtalk
for information on IFAC’s releases on auditing handbooks
and free guidance you can download from their web.
3.
The fiduciary role of the non-executive directors is
facilitated.
4.
The remuneration of the executive directors is dealt with by
an independent committee.
5.
Communication between the board and the auditors is
through an audit committee.
8.
Time
IT company Lermout & Hauspie, worth $9 billion in early 2000 is
in bankruptcy after the auditors discovered that 45% of revenue
reported was fictitious. (November, 5, page 15)
December 2001 (20 Minutes)
Accountancy
A major pension fund in the UK has just shifted its entire
investment portfolio of ₤2,3 billion into bonds. The trustees agree
that this eliminates volatility and stress that this has nothing to do
with the new statement on employee benefits. (I wonder if they
Boards are, today, smaller, more focused and better run. Nonexecutive directors are expected to make a contribution to the
company. (Page 71)
News from the IASB:
1.
A revised draft preface is on the way. It states that IFRSs are
intended to apply to general purpose financial statements of
all profit-orientated enterprises. They do not apply to private
or published sector not-for-profit entities. (Tell this to our
local standard setters.)
24
Mafia Buzz 2001
2.
It is proposed to do away with the bold and grey lettering in
the standards. (A pity.)
The author feels that the UK standard could serve as a model for
less developed economies. (Page 92)
3.
The definition of "provision" in the business combinations
statement is to be tightened up.
4.
They propose deleting the benchmark treatment of minorities
in the business combination statement. (I fought to get this
changed at the time but was told that I was wrong – nice to
see common sense prevailing here.)
Robert Willott feels that the new idea of incorporating all gains
and losses into the income statement will result in total confusion.
I tend to agree with him. It is time to split the profit and loss
account from the balance sheet and have another statement that
reconciles the two. (Page 93)
5.
They are re-looking at the controversial treatment in the
statement of negative goodwill – some more common sense
raising its head. They plan to allocate negative goodwill to
assets that do not have ascertainable market values and then
to take the balance to income.
6.
They are proposing a new approach to impairing goodwill.
7.
The LIFO method of accounting for inventories could go.
8.
The thorny issue of dismantling costs of plant at the end of its
life is to be addressed.
9.
They are thinking of deleting the distinction between similar
and dissimilar assets in recognition of revenue.
10. The statement on related party transactions is to be amended.
(Page 87)
The International Auditing Practices Committee has issued an
exposure draft on auditing fair value measurements and
disclosures:
1.
Obtain sufficient appropriate audit evidence that fair value
measurements are in accordance with the entity’s identified
financial reporting framework.
Ron Paterson addresses the problem with transitional rules and the
lack of comparability between current results and prior results
when these rules are applied. The IASB is looking into the
problem on how to account for the EU’s change over in 2005.
(Page 96)
The Audit Practices Board in the UK points out that management
has to do the calculations to arrive at the information required by
the statement on employees benefits – post retirement benefits –
for the auditors to audit. It is not the duty of the auditors to arrive
at the amounts. (A little obvious, I would have thought.) (Page
113)
Business Day
“The things we got right are often thanks to our candour and
insight while our failures can often be attributed to our tendency to
jump to conclusions without enough research. “ (Beautifully said
Tim Cohen) 14 December)
Fortune
Some advice is given to CEOs who are finding it difficult to cope
in the present tough environment:
1.
Speedy action is important. “Unless you are moving faster
than the water around you, you cannot control your
direction.”
2.
Assess the evidence in (1) above.
3.
Evaluate whether the basis of the measurement is reasonable
and applied consistently.
2.
You have to take responsibility – be accountable – for your
actions.
4.
Review and test the management process.
3.
5.
Obtain management representations.
CEOs often fail because of their inability to get done what
they planned to do. (17th Page 32)
6.
If necessary, follow the statement on using the work of an
expert.
(Gee, I could have written this! The real issue is not addressed:
How can the auditor assess fair presentation when s/he has no idea
as to the fair value of the assets in the balance sheet?) (Page 88)
Allister Wilson (brilliant man this!) sets out the implications for
the EU of changing over to IASs. He states that management will
have to address:
1.
How key performance indicators are affected.
2.
How to communicate performance to the markets.
3.
How to make the financial data more accessible to the
markets.
4.
How to organise the financial function.
5.
How this will change employee remuneration calculations.
EU companies will now have to capitalise leases, charge to
income share based employee benefits, recognise gains and losses
on financial instruments in income, cancel hedge accounting, etc.
(Page 90)
FRSSE, the UK’s GAAP for SMEs is defended:
1.
The financial statements are easier and cheaper to produce.
2.
The standards are less complex.
3.
The information produced is more useful and understandable.
Mr Warren Buffet gives a brilliant and simple analysis of the US
markets. He explains why the markets perform like they do. For
example, he states that at the end of December 1964 the Dow was
at 874. 17 years later it was at 875 during which period the GNP
increased by 373%. However, at the end of December 1964
interest rates were 4,2% whereas on 31 December 1981 interest
rates were 13,7%. So the increase in the discount rate used to
present value future cash flows wiped out the gain that should
have been made due to GNP increasing. He then does a similar
study from 31 December 1981 to 31 December 1998: The Dow
went from 875 to 9181, GNP increased by 177% and interest rates
fell from 13,7% to 5,1%. The share prices, therefore, reacted to
the increase in GNP and the fall in the interest rate, hence the
massive climb in the Dow. He warns that people tend to project
the future based on the past. What will happen to interest rates in
the future and what will happen to GNP? Can we foresee the
same kind of increases in the Dow that happened over the 17 years
surveyed?
He points out that in 1971 91% of private pension funds were
invested in equities. After the market crashed, they took
investments out of equities leaving only 13% invested in equities
when equities were extremely cheap! He makes the point that not
even he can predict what markets are going to do in the short term
but in the long term the markets are predictable. (Remember that
he is taking about US conditions.) (10th page 45)
Ideas for keeping your job (or getting promoted when things get
better):
25
Mafia Buzz 2001
1.
Maintain visibility, speak up at meetings, join task forces –
don’t hide behind your computer.
3.
When extremely profitable companies need to borrow lots of
money, something does not add up.
2.
Build a circle of allies.
4.
3.
Acquire new expertise.
4.
Take the initiative – look beyond your job description (we
called it “go the extra mile" in the old days).
When auditors get too cosy with the company they may lose
their independence and then less reliance can be placed on
their opinion.
5.
5.
Be seen to be winning – manage your own PR.
6.
Be creative; look for better ways of doing things.
7.
Be proactive and take responsibility for your own success.
8.
Get your mindset right – become positive. (17th page 111)
US standards are being blamed for much of the problem as
these standards are rules based and the feeling is that rules
are easier to break than principles, on which IASs are based.
(A crook has principles? In my view substance over form is
in the eye of the beholder and is much easier to “contravene”
than a rule. The real problem in the US seems to be FASB’s
delay in publishing a statement on SPEs. Had this come out
and stated clearly that SPEs must be put back on the balance
sheet, part of the problem would have gone away – an earlier
demise of Enron?)
6.
When mangers have a high stake in the company, there is
motive to fiddle the figures to improve their wealth.
7.
Audit committees need to be much more independent.
8.
Some of the blame is put on the rating agencies for not
picking up the problem quicker (hey, someone other than the
auditors to blame!).
9.
Analysts and banks are not asking the right questions – the
real tough ones. (Analysts need to be bullish to generate
trading and banks are looking for business so both have
conflicts of interests in this regard.)
Maneo (An excellent issue!)
The Nel report on the Masterbond affair recommends sweeping
changes to legislation including that relating to auditors to
increase public investor protection. The King commission is
trying to clarify the roles of the directors and the auditors. And
the auditing profession is taking flack throughout the world due to
various corporate failures. Not a happy time for our profession!
The PAAB has taken over the responsibility of setting auditing
standards.
SAAS 910, Engagements to Review Financial
Statements, and SAAS 700, The auditor’s report on financial
statements, have been approved for issue. In addition various IT
SAAPSs have been approved (stand-alone personal computers,
on-line computer systems, database systems, computer based audit
techniques and a glossary of terms).
As SAAS 240 no longer gives guidance on material irregularities,
a new circular has been issued giving this guidance.
10. When you resort to destroying evidence, you are admitting
guilt, maybe not in law, but in the eyes of the public.
The IAPC has approved a statement on the audit of the financial
statements of banks and an exposure draft on auditing fair value
measurements and disclosures. With the move towards fair value
accounting in the accounting arena, the auditors need to play
catch-up very quickly.
One interesting comment that came out of all this is the position of
the rating agencies. A rating agency can, by giving a downgrade,
cause the demise of a company. By giving an upgrade, the
company can borrow and survive, or at least postpone death. This
is a similar position that auditors often find themselves in when
contemplating whether or not to qualify an audit report because of
a going concern problem.
The IAPC has released an exposure draft of a practice statement
on the impact on audits of electronic commerce using the Internet
- still more catch-up happening.
Book of the Quarter
Due to excellent feedback being received on the King Report,
finalisation of the report has been delayed to 1 March 2002.
A copy of the summary of the Nel report can be found at
www.paab.co.za.
I have read many a book on personal management but “The power
of focus” by Canfield, Hansen and Hewitt must rank in the top
best three I have ever read. Here are the ideas I got from it – to
get the full benefit read it!
1.
Identify habits that inhibit success, choose to change, create
an action plan (affirmations) and work on changing.
2.
Focus on what you are brilliant at and dump, delegate or
defer other activities.
3.
Develop a clear vision of what you want to achieve –
specific, personal, meaningful, challenging and realistic goals
that can be measured – and get your priorities right.
4.
Create an optimum balance – make time to think, plan, act,
learn, exercise and relax.
5.
Build excellent relationships – avoid toxic people, focus on
core clients and build strategic alliances.
The Enron Affair
6.
Develop winning attitudes – a confident belief in yourself.
Much has been written about this is Fortune, Time, Sunday Times,
Business Day, on the Web, etc. What follows are some points of
interest:
7.
Ask for help when needed.
8.
Consistently, persistently pursue your goal with integrity.
9.
Take decisive action – think, get facts, consider options,
priority rate, visualise outcome and focus on performance.
If you are an auditor of a small private company or a body
corporate, it is worthwhile to read the list of charges brought
against such auditors and the fines that were imposed. Do not
compromise on your auditing standards!
The practice review department has set out a list of 17 items that
are being neglected during the audit process. A good wake-up call
if you are an auditor. Read them (pages 15 and 16). Jillian’s main
concern is that auditors seem to be using the balance sheet
approach to audits and neglecting to audit the validity of expenses
and completeness of income. Also, planning, risk assessment and
documentation need to be improved.
1.
When managers get offended by questioning from analysts,
smell a rat!
2.
When management make use of “murky accounting”
(structured finance, off balance sheet funding, SPEs, etc.,
smell more rats!
10. Create a purpose for being and live that purpose.
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