Mafia Buzz Issue 3

Economist

A new product called multi-strike convertible bonds (MSCBS) is taking Japan by storm ($410m of them issued in 2003). They are convertible into equity when the market price of the shares hits a certain level. Bond holders can make a lot of money on these instruments at the expense of the equity shareholders due to their dilutionary effect. They have been called “toxic”, “floorless” and a “death spiral”. One company’s share price was diluted by 25% and the management apologised publicly to its shareholders for the disaster! (15^th page 76)

A survey in Switzerland found that surgeons performed more operations than were strictly necessary. The more sophisticated the patient, the less scalpel-happy the doctors. Lawyers’ wives had the fewest hysterectomies! Their services are known as “credence goods” as customers take it on faith that the supplier has given them what they need, and no more. [I have had a personal experience with a relative who was dying of cancer. The doctor operated, against my wishes. My relative died a day later. I asked the surgeon what the purpose of the operation was and he said: “To establish the type of cancer.” I asked him what he could have done with this knowledge and he said: “Nothing!”] (15^th, page 78)

In recent years it is hard to find a CEO of a public company that does not complain vehemently about the burdens imposed by SOX. The complaints are getting louder. They say that SOX has been a colossal failure, it was poorly conceived and was hastily enacted during a regulatory panic. It is killing management’s ability to take risks necessary to generate returns and the costs are exorbitant. The accounting firms are being seen as the beneficiaries of SOX, despite the fact that they caused the problem in the first place. Sarbanes-Oxley contains five different reforms intended to protect investors from future Enrons:

1. 
   Improved internal monitoring for potential fraud
   
2. 
   Improved monitoring by outsiders, such as auditors
   
3. 
   More disclosure, e.g. the firms internal control structure
   
4. 
   New rules on the conduct of corporate insiders, e.g. loans to officers
   
5. 
   Requiring security analysts at banks to operate independently from investment banking activities (22^nd, page 59)
   

Financial Mail

Stephen Cranston says that he has heard both hedge funds and private equity described as remuneration packages disguised as investment strategies – practitioners of both these crafts pay themselves extremely well and there will be years when there is little left over for their extremely patient clients. (21^st, page 57)

Unit trusts, provident funds, retirement annuities and all the other hyped “products” out there are pathetic investments in the long run, unable to beat the market’s average. The financially literate have abandoned “products” and their B-grade salesmen who, with government and Financial Services Board consent get to plunder our savings. The smart have abandoned the snake-oil peddlers and tend to manage their own investments more profitably leaving only the ignorant and poor masses as cannon fodder for the income statements of financial institutions. [Whew! He withheld his name!] (28^th, page 10)

Heritage Collection Holdings stated that they have adopted “Internal reporting standards”. [A possible alternative to IFRS?] (28^th, page 82)

FinWeek

Nancy Kline, founder of “Time to Think” says that it is remarkable how changes can come about when staff are forced to think for themselves. She says that the quality of what you do depends on the quality of the thinking that preceded the doing. [If you ever did my Q.E. course you will have remembered how I battled to get candidates to think the answers through before writing them out. Thinking requires too much energy for most people so they are not prepared to do it.] She goes on to define ten components of creating a thinking environment. Some of the more important ones are:

• 
  Listening to people without interruption
  
• 
  Offering them the freedom from internal rush or urgency
  
• 
  Welcoming divergent thinking
  
• 
  Removing assumptions we live by
  
• 
  Creating the right environment
  

[Instead of stopping to smell the roses, stop to think.] (20^th, page 52)

Employers may soon have to accept sick notes from traditional healers when their employees have been off work due to illness. The Traditional Health Practitioners Act, which was passed earlier this year, paves the way for employees to submit sick notes from traditional practitioners to their employers. (27^th, page 62)

Fortune

Stock buyback mania has hit the US. The total amount of repurchases among S&P companies last year totalled $325bn. It is debateable whether buybacks lead to higher stock prices. Some consider that buybacks reflect management’s inability to find new ways to invest. If stocks become under-valued, however, a buyback would make sense. (3^rd, page 70)

The new CEO of Hewlett-Packard says that execution trumps vision. He is obviously taking a swipe at Carly Fiorina, the previous CEO, who was a visionary. [My motto is attitude trumps IQ.] (17^th, page 95)

Maneo

Mr Kariem Hoosain says that the new Independent Regulatory Board for Auditors’ (IRBA, IRBA, IRBA no more PAAB – goodbye to P and welcome to I and R) vision is to be an internationally recognised and respected regulator of the auditing profession in SA. The mission is to protect the financial interest of the SA public and international investors in SA though the effective regulation of audits conducted by registered auditors in accordance with internationally recognised standards and processes. [Does this mean that if there is no public interest in a little private company, the auditors will be left alone? Or does the “financial interest of the SA public” embrace taxpayers who need to be protected from fraudulent under-payment of taxes by little private companies?] The IRBA will comprise no more than 40% registered auditors. [If one has, on a board, 4 out of 10 from one lobby and the other 6 are spread between 6 other lobbies, who will dictate?]

The local auditing regulators have stated that local auditing firms should not early adopt international auditing standards even though the international body encourages it. I have great difficulty with this. Hang onto the old as long as possible and discourage the new? I wonder what the average age of the members on this committee is. They did the same thing with the new accounting standards. Surely if the new standards are better than the old, the quicker we get rid of the old the better. Why do they think that the users will be confused? DON’T UNDERRATE THE USERS, EVER!

A member pleaded with me recently for the standards to be written in English. Don’t you just love this extract from Maneo: “. . . gave rise to conforming amendments to the extant ISA 800, The Auditor’s Report on Special Purpose Engagements, included in appendix 5 of the extant ISA 800. The conforming amendments to the extant ISA 800 are effective for auditor’s reports dated on or after 31 December 2006. The proposed ED ISA 800, The Independent Auditor’s Report on Summary Audited Financial statements, which is yet to be issued as a final pronouncement, will replace the extant ISA 800, The Auditor’s Report on Special Purpose Engagements, including the conforming amendments contained in appendix 5 of the extant ISA 800. Therefore, if the proposed ED ISA 800, The Independent Auditor’s Report on Summary Audited Financial Statements is issued as a final pronouncement before 31 December 2006, the conforming amendments to the extant ISA 800, The Auditors Report on Special Purpose Engagements will also never become effective. [No well, yes fine.]