Mafia Buzz Issue 3

Financial Mail

Unit Trusts have a host of undisclosed fees that unit trust holders know nothing about (brokerage (from churning), management fees, banking costs, audit fees, etc.). The Chairman of the Association of Collective Investments says that the ACI will be publishing a total expense ratio in the coming months. [The question is: “Who will audit it?” The only true cost is the difference between what an investor could have earned on the ALSI (including in and out costs) and what he or she actually earned on unit trust (including in and out costs). Will we ever know the truth?] (30^th, page 66)

FinWeek

Vic de Klerk introduces us to another fad called the Neff formula. It goes like this: (Dividend yield plus expected growth)/PE ratio. If this is greater than 50% of the average for the market then the share is a buy. [Fads are for people who are too lazy to do their homework; that is why they are so popular – people want something for nothing!] (8^th, page 70)

According to ABSA, a disadvantage of a close corporation is that the owners are taxed twice. [Gee, I did not know this. Maybe SARS better do an audit of my operations because I must be missing something!] (15^th, page 53)

Shaun Harris writes that feedback from retirement fund managers is that presentations made to boards of trustees are often suffered in open boredom. Some trustees couldn’t care less about the performance of the fund and matching assets and liabilities. [When it is not your money, no one cares. That is why you should take responsibility for your own wealth development.] (15^th, page 73)

SAICA Publications

SAICA has withdrawn its circular 3/2006 which gave auditors guidance on how to report where companies did not fully comply with Statements of GAAP. So we are back in a void – what a mess they created for themselves by not being proactive and doing something about differential reporting ages ago!

Other Tit Bits

Mr Rhys Summerton of Citi Group had the pleasure of going to Omaha to meet with Mr Warren Buffett and Mr Charlie Munger in 2004 and summarised some of the words of wisdom he picked up at the conference:

1. 
   Try to buy businesses that do not require huge capex and can price in inflationary increases.
   
2. 
   It is dangerous to project high growth rates. Not many companies can exceed 10% p.a. for any length of time.
   
3. 
   The problem with derivatives is that people do not think of the consequences of the consequences.
   
4. 
   Investing does not require enormous intellect. It requires enormous discipline.
   
5. 
   Diversification is madness. The best way to minimise risk is to think.
   
6. 
   Using brokers to advise you today is equivalent to kings in ancient times using fortune tellers. You will get the same result.
   
7. 
   We do not believe that EVA does anything for a company’s profitability. EVA is one of many fads used by companies (as an excuse for thinking!).
   
8. 
   We calculate all variables fairly conservatively and then make a provision for a margin of safety.
   
9. 
   Some people are very stupid when they know something is wrong but do it anyway. [Like straight lining leases!]
   
10. 
    Stock buy backs are often motivated by management wanting to increase the price of the shares.
    
11. 
    Investing is a life-long game. You keep learning. The two most important ingredients are temperament and common sense.
    

Fun Corner

What is the fastest way to a man’s heart? Through his chest with a sharp knife.

July 2006 (30 Minutes)

Accountancy

The large auditing firms can thank Messrs Sarbanes and Oxley, the bureaucrats at the EU for implementing IFRS and the former Enron chiefs, dearly departed Ken Lay and yet to be incarcerated Jeffrey Skilling, for their good fortune. (Page 1)

The Company Law reform bill of the UK has, after 1 600 amendments, not dropped the criminal offence for reckless auditing to the horror of UK auditors. The jail term has been dropped and the penalty has been reduced to an unlimited fine. This will result in additional costs to clients because of all the box ticking that will take place. (Page 6)

The Audit Inspection Unit of the Professional Oversight Board in the UK is now considering naming and shaming auditors who fail to meet adequate auditing standards. [I told you that it would not be long before they start getting nasty – see a previous MB.] (Page 11)

A coalition of 300 charities and NGOs are lobbing the IASB to drop its proposal to abandon the geographical basis of reporting segments. [The new framework, as far as I can tell, is dropping the “general purpose” objective of financial reporting so I do not think that these people have got a leg to stand on. Financial reporting is for investors, not bunny-huggers.] (Page 14)

iSoft, the healthcare software provider, has been forced to change its revenue recognition policy from accounting for revenue on delivery of the software licences and services to when the software is implemented. This has resulted in a massive reduction in profits. (Page 16)

Another company was forced to restate its financial statements because it valued its shares used as currency to buy a business on the date the deal was signed whereas it should have used the date the deal was completed. (Page 16)

And yet another company was forced to restate its profits because of backdating the sale of land. (Page 16)

The UK government had to go back to the drawing board on trust proposals because of inadequate consultation with affected parties. “Good consultation requires time, thought and consideration. This has to be part of the process.” [Our local authorities should learn from this.] (Page 24)

Robert Bruce says that sceptical and independent minded managers need to be encouraged. Audit committees and accountants ought to provide scepticism and independence. (Page 26)

The highly articulate Emile Woolf makes the point that if routine auditing procedures cannot detect 64 000 phoney insurance policies, $25m in counterfeit bonds and $100m in missing assets, what is the point of audits?” This was in response to the comment by the auditors in the Equity Funding Insurance fraud that “routine audit procedures aren’t designed to detect fraud.” He points out that underwriters had examined the company’s historical record in detail, banks analysed its accounts intensively before making huge loans, lawyers were paid vast fees to prepare prospectuses, external actuaries certified its insurance reserves and auditors passed each year’s accounts without qualification. And yet all these safeguards failed! (Page 27)

A recent survey of FDs in the US has revealed that the vast majority of senior finance officers still felt that the costs of s404 of Sarbox outweigh the benefits. Some of the complaints are:

• 
  We are spending a so much time on value protection that we have stopped creating value.
  
• 
  The absence of a practical top down/risk-based approach is a root cause of Sarbox implementation problems.
  

As a result of consultation, the authorities are working on getting it right. (Page 53)

Recent research has revealed that creative services agencies are spending a growing amount of time justifying their bills and then billing their clients for the time it takes to justify. [Sound familiar?] (Page 64)

Airlines have written off $3,5bn of net assets under the transition to IFRS. [I am very sceptical about this. What a wonderful way to push up future profits – blame IFRS!] (Page 85)

The UK is re-looking at its gaap for SMEs and is considering extending it to larger companies. [Part of a backlash to IFRS?] (Page 87)

Nick Chandler has a go at the IASB proposals to delete the exemption for first time recognition of deferred tax. [See my IFRS Buzz 011where I addressed this issue.] He ends his excellent article by making the following points: “What is of paramount importance is that accounting standards portray faithfully the economic consequences of transactions and do not distort the information content by introducing artificial complexity. If accounting standard fail as a tool to communicate the true economic effect of transitions they will alienate the very community they are intended to serve.” (Page 89)

The IASB has published an exposure draft changing the standard on borrowing costs. It will require that borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset be capitalised as part of the cost of that asset. It is proposed that the alternative be deleted. (Page 93)

According to research conducted by KPMG, audit committee members feel more exposed to litigation than any other members of the board. (Page 119)

According to new research people hit their lowest ebb at 2.16 p.m. and their second lowest at 11.37 a.m. [Ensure that you set your alarms to these two times to wake yourself up!] (Page 133)