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