Mafia Buzz Issue 3

Other Tit Bits

Some pearls of wisdom from Mr Warren Buffett:

1. 
   When being presented with growth rates achieved, be wary of the start point and the terminal points for calculating the growth. Spectacular growth can be achieved if the start points and terminal points are carefully chosen.
   
2. 
   When a company issues its own shares to acquire assets what it is really doing is to give away part of what the existing shareholders own.
   
3. 
   Be nervous about derivatives: they are little understood and pose a serious threat to the global financial system.
   
4. 
   Buy companies that have as their goal customer satisfaction rather than shareholder satisfaction. If you treat your customers with indifference your business will wither.
   
5. 
   Do not take decisions merely to meet short term targets.
   
6. 
   Don’t hand over your hard earned cash to others to invest. The layers of costs going to the intermediaries between you and your assets eat into your returns thereby undermining your wealth. (Citizen)
   

Fun Corner

The following appeared in a trade and industry draft strategy document: “The persistence of partially associated inequalities within national space economies and the varying opportunities and constraints imposed by market forces have made the DTI to reassess issues related to spatial planning and regional development in many countries and in SA in particular.” (Business Day)

US Attorney General John Ashcroft was speaking at an elementary school about rights and freedoms in America. “Any questions?” he asked. A little boy raised his hand. “My name is Billy and I have two questions. First, why are you using the Patriot Act to limit Americans’ civil liberties? Second, why haven’t any weapons of mass destruction been found in Iraq?” Just then the bell rang and Ashcroft stated, “We’ll resume after the recess”. After the recess, Ashcroft again asked: “Are there any questions?” A little girl raised her hand. “My name is Julie and I have four questions. First, why are you using the Patriot Act to limit Americans’ civil liberties? Second, why haven’t any weapons of mass destruction been found in Iraq? Third, why did the recess bell ring 10 minutes early? And fourth, where is Billy?” (Noseweek)

June 2006 (25 Minutes)

Accountancy

A two month audit ban has been imposed on PwC in Japan because of problems in the cosmetics giant Kanebo, one of its audits. The spectre of Andersen must be looming large in the minds of the partners of PwC around the world! (Page 1)

E&Y is taking flack over a report it prepared stating that the non-performing loans in China totalled £911bn. The People’s Bank of China labelled it “ridiculous.” (Page 12)

When we read we tend to filter out information that does not reflect our views. By doing this we perpetuate our view of conventional wisdom. As professionals we should satisfy ourselves that we have not allowed an accumulation of untested conventional wisdom to stifle our critical faculties and our independence. (Page 26)

Increased demand for assurance services in the wake of Sarbanes-Oxley and other regulatory requirements are creating a boom in accounting work for firms across the globe. All four of the big firms are showing solid growth in their fee income. (Page 28)

The threat of litigation is real and potentially devastating and the best protection lies in careful client selection, rigorous procedures and robust quality control. (Page 30)

Going global exposes partners to more risk. The shock of the Andersen failure alerted larger firms to the fact that they are responsible for the integrity of professional skill of people they hardly known in other parts of the world (see the PwC problem in Japan above). (Page 32)

When markets are rising, the envy factor often outweighs the fear of making a loss. When a market is rising, investors will continue to pile in even if their analysis tells them that it is all too good to be true. The embarrassment of losing out outweighs the downside risk. The feeling seems to be that if I lose, we all lose so that’s OK but if I miss out on the general gain, I will suffer alone. Gore Vidal summed up this psychology when he said: “Whenever a friend succeeds, a little something in me dies.” One needs to change one’s mindset that people can amass great wealth by clever investing in equities or real estate and that traditional virtues of thrift and prudence are out of date. (Page 58)

The objective of practice assurance in the UK is not to pass or to fail partners like it is in RSA but to help practitioners develop their practices. They provide members with the know-how to meet standards and develop their businesses. Firms are free to develop their own procedures and their effectiveness is more important than the way in which they are recorded. Firms that have been reviewed can use the legend: “A member of the Practice Assurance Scheme” to demonstrate to the public their commitment to PA standards.

71% of those attending a conference hosted by the Association of Corporate Treasures reported that IAS 39 and IAS 21 make company accounts confusing for everybody. [Have you read my article called “Forex Madness”?] (Page 77)

Some comments by PwC’s feedback on what has been learned from IFRS so far:

1. 
   Investors and analysts are finding comparability difficult because of the increased subjectivity inherent in the application of many rules under IFRS.
   
2. 
   The rules are flexible and with flexibility comes subjectivity.
   
3. 
   The volume of disclosures is rising at an alarming rate. An example is the notes that have to accompany goodwill each year.
   
4. 
   Companies should develop in-house resources and skills to develop IFRS instead of relying on external expertise. [One wonders whether every company should try to reinvent the wheel.] (Page 78)
   

Some comments from senior people on the IFRS implementation so far:

• 
  Martin Cubbon does not think that the numbers being produced are right. He believes that IFRS is inferior and that accounting will come full circle.
  
• 
  Tony Good says that it would have been helpful if the standards platform could have been more stable.
  
• 
  Jon Symonds says that the standards are incomprehensible and that because there is no body of GAAP and no support it is difficult to interpret them.
  
• 
  Robert Koethner says that there is a huge impact on costs in following two sets of standards. He says that he is looking forward to the day when he can dump US GAAP. (Page 80)
  

The meeting between FASB and IASB agreed on two possible approaches to revenue recognition:

• 
  Based on the progress the entity has made in performing its obligations and
  
• 
  The acceptance by the customer.
  

On the leases issue it appears as if they are moving towards capitalising the rights inherent in all leases. Both boards know that they are going to get into a massive fight with the preparers as this will result in trillions of dollars of assets and liabilities being recognised on balance sheets. (Page 85)

The Oscar nominated documentary “Enron: The Smartest Guys in the Room” opened in the UK at the beginning of May to rave reviews and took over £30 000 in the first three days. [Let’s hope that they see fit to bring it to RSA.]