Mafia Buzz Issue 3

Mafia Buzz 2006

January 2006 (45 Minutes)

Accountancy

The UK profession is angry with the Government regarding their decision not to make the proposed operating financial review compulsory (OFR). An enormous amount of effort went into the development of this document, which has major benefits for the users of financial statements. Clearly there is a political motive here. (Page 1)

The suggestion is that the OFR will, despite the Government’s action, become a feature of listed companies’ financial statements – the market will dictate. The Friends of the Earth have claimed that the government’s U-turn is unlawful and may seek a judicial review in the High Court! (Page 6)

The BBC has announced that it is to scrap 340 of its 650 accounting positions. The savings will be pumped into improving its programming. They are to introduce simpler business procedures. [Getting their priorities right?] (Page 11)

Since Enron begat Sarbanes-Oxley, the Securities and Exchange Commission of the US fined more companies in 2002 than in the period from 1934 to 2001! [Where is the money going?] (Page 19)

Robert Bruce explores why people are loyal to one service provider. He concludes that it is because people like belonging – they need warmth, kindness, dependability, energy and wit. [I presume he is not talking about accountants who want a top service at the cheapest price!] (Page 20)

Emile Woolf is worried that people are becoming desensitised to companies restating their results. Previously, there was a stigma attached to restatement. Now, it is common place. Fannie Mae, in the USA, for example, has admitted to misclassifying its mortgages by $6,7bn. The European Commission’s accountants have been qualified by the auditors for the past 11 years. They don’t even bother to restate because they would not know where to start. (Page 23)

Jonathan Russell, president of the UK 200 Group says that the profession should start to sell the audit as a value added service rather than a distressed product to SMEs. [As long as we see an “audit as an audit as an audit”, we will not be able to sell it. What we need to do is to develop a real audit for SMEs, not an Enron/WorldCom type audit that SMEs cannot afford.] (Page 45)

Sir David Tweedie says that there will be no new standards in the next 12 months as the emphasis will be on bedding down the existing standards. He says that there needs to be a move from a set of accounting rules to principles requiring the application of judgement. [Are we capable of applying judgement honestly when the chips are down?] Pensions, leasing, and special purpose entities will take up the time of the IASB in the coming year. (Page 45)

Nigel Jones of E&Y says that the IASB’s proposed new management report is similar to the operating and financial review so could achieve the original aim in the UK. (Page 45)

Peter Wyman of PwC says that 2006 will see a major corporate scandal where auditors will initially be blamed. The test for government and the regulatory community is whether there will be a thoughtful regulatory response or a knee-jerk over-reaction. (Page 46)

Ian Dixon’s excellent article on being prepared for a disaster such as bird flu is a must read if you get this journal. The World Bank estimates that bird flu could cost the global economy $800bn. It could kill between 50 000 and 700 000 in the UK alone. It is essential that scenario planning be done to visualise the possible situations and plan how to cope. The article looks at different industries to evaluate the impact on them, e.g. the female staff will either be down with the flu or will be looking after others that are. Closing shop is not an option as people need food. Opening stalls in the car park to minimise contacts may be a possibility. Lots of thought still has to go into the planning process. (Page 56)

Jon Moon’s article on how to effectively present information is brilliant. [While reading it, my neighbour popped in for assistance with some investment decisions. His portfolio is managed by a bank. He had no idea what investments he had because of the pathetic way in which the portfolio is presented to him. I rearranged his portfolio doing some basic classifications and, for the first time he knew what shares he had.] Jon says that showing information is about communicating and not about computing. He says that one should drop the words and give a table. He says pretty graphs, especially pie graphs, are a pathetic way of communicating facts – he says that the only thing worse than a pie chart is two of them. He says one should focus on improving the way information is presented to save the reader time and to ensure that better decisions are taken. He illustrates this with the report the engineers gave to convince the decision makers to abort the 1986 doomed space shuttle. Because of poor communication of the facts, the decision makers took the wrong decision with disastrous results. Clarity is power. (Page 63)

The auditors of the top 100 FTSE companies are PwC 41, KPMG 21, Deloitte 19 and Ernst and Young 19. (Page 70)

A recent survey by software providers Mind Your Own Business found that 32% of entrepreneurs regularly turn to their accountants for strategic business advice, which sounds impressive until you find out that 28% take advice from friends and 25% from their family. Entrepreneurs are sales people – they have an idea they passionately believe in and it is important that accountants who work with them are as enthusiastic about their business as they are. They do not always make good bosses as they tend to be task focused rather than people focused. (Page 72)

When hurricane Katrina hit the cost of North America it put a number of CPAs out of business – they had not planned for such an event. (Page 77)

Only 47% of analysts now believe that IFRS will provide a greater insight into a company’s true financial position. (Page 83)

Previously if the same partner and senior staff dealt with the same audit client over a number of years, this would have been seen as a benefit to the client due to the sound advice that was able to be given. This situation is now seen as a threat and auditors are rearranging their relationships with their clients. (Page 84)

ISA240 (the auditor’s responsibility to consider fraud in an audit of financial statements) states that although it is a basic premise that management is responsible for the prevention and detection of fraud, the auditor has a duty to consider the matter as a central part of the planning of the audit. Where the assignment is a pure audit, the extra resources spent on planning can produce a more tailored approach to the audit. However, where the auditor spends a significant amount of time on the preparation of the financial statements, that extra time will be of little benefit. Safeguards will need to be introduced to ensure that doing accountancy work and audit work does not threaten the audit opinion or the independence of the firm. Maintaining a first class service means that costs will increase resulting in SME clients looking for cheaper alternatives, provoking more debate on auditing standards. [There is a need for a differential auditing service, i.e. get out of this box of “an audit is an audit is an audit”!] (Page 85)

Tim Harris of PwC says that the quality, clarity and credibility of disclosure have become as much a competitive as a compliance issue, with implications for share prices and cost of capital. He recommends that reliance on ad hoc project teams have been needed to get over the first hurdle but a more sustainable approach is now required. Better training and organisation can achieve real improvements. People at group and business unit levels should be identified to run with IFRS responsibilities. [This is all very well for the large listed companies that can afford the luxury of in-house IFRS expertise. But for the small listed company it would, surely, be better to outsource this and let the staff get on with the job of running the company?] (Page 87)

UK travel company Go-Ahead considers that it is inappropriate to apply the requirements of IAS19 to rail industry pension schemes as on the expiry of the rail franchise it has no further rights or obligations in relation to pensions. [Nice people – just walk away from their obligations after promising them pensions?] (Page 92)

The IASB has published a discussion paper on measurement bases for financial accounting – measurement on initial recognition. It is calling for comments. The deadline for commentary is 19 May 2005. [They did not give us much time to comment!] (Page 93)

Ian Morris, the ICAEW president, says that the profession needs to encourage market leaders to adopt the operating and finance review best practices despite the government not supporting this initiative. (Page 117)

There are currently some 600 disciplinary cases open at any one time in the UK with a case manager handing 50 cases. [This is an indication of just how small we really are in little RSA!] (Page 119)

Here is a familiar story: “No matter how hard I work, there are always more emails, more files, more events to attend to. I know I should be doing more strategic stuff, but I never get around to it. I know I should be delegating more but I first need to spend time with my staff to help them take on the work. I already know the solutions but do not have the capacity to implement them. My to-do list grows faster than I can tick items as done.” What was the personal coach’s solution to this poor guy’s problem? List only three things and do and tick them and you will feel good about what you achieved. [Got to be kidding – dreamland. If I achieve 40 things in a day, I feel that I had a good day. My email list got down to only one item during December (Deon J, I just never got to your problem – sorry!!) and is now back to the normal 20 to 40 items (about 25 come in per day of which at least 10 are accounting or valuation problems requiring solutions.) (Page 120)