Mafia Buzz Issue 3

Financial Mail

Nkosinathi Mdakane, from deep in Soweto, wanted to be an accountant but his school only offered standard grade maths so he taught himself and obtained a distinction in accounting and a B for higher grade maths in matric. He is now a first year student at the University of Johannesburg and says that he is stronger because he did not depend on teachers. “If I want to do something, it is up to me.” [We need to educate children into this type of thinking. Well done young man – you are a self-starter, which is the main ingredient for being a winner.] (6^th, page 80)

FinWeek

Michael Coulson explains that HEPS (headline earnings per share) assumes that almost any transaction a company undertakes during a period must go through the P&L account. [You would think that before writing something like this a journalist would go and read the circular. He probably assumed that no one would check up on him!] (19^th, page 36)

Fortune

Cash flow generation can be a poor indicator of value where a company is investing in future intangible assets and not capitalising such costs. On the other hand a cash cow could be running itself into the ground as its capital depreciates. (2^nd, page 24)

Commenting on a mistake made by an employee at Google, Larry Page said: “I am glad that you made this mistake. I want to run a company that is moving too quickly and doing too much, not being too cautious and doing too little. If we don’t have any of these mistakes, we’re just not taking enough risk. [Clearly this guy was not trained as an accountant!]. (2^nd, page 36)

How Jeff Pajcin and Gene Plotkin (the court case is on going) got illegal stock tips:

1. 
   They planted a spy at a newspaper to pass on news before it was published.
   
2. 
   They recruited someone at a merchant bank to pass on information about pending takeovers.
   
3. 
   They trained strippers to ask questions about deals going down.
   

[Lazy people look for short cuts with jail consequences. Do not try this at home!] (2^nd page 44)

Sunday Times

The Independent Regulatory Board for Auditors published a statement clarifying that they do not mean to undermine the CA qualification by promoting the RA qualification. (22 October)

Kerry Sutherland of Alexander Forbes wrote a brilliant article to help young people understand the investment game. She gave a list of definitions and one in particular caught my eye: “Liability: Something you owe, which must be repaid.” I have seen at least ten cases in practice where auditors have forced their clients to raise liabilities on their balance sheets that will not be repaid but merely recycled back to income. We need people like Kerry on our standard setting bodies to bring sanity back to GAAP.

Taxgram

The big four auditing firms have objected to a proposal that would prohibit them from providing tax advisory services to their audit clients.

Time

9 October, under “Numbers” on page 14: “25%: Percentage hike in Greece’s GDP last week after recalculating it to include income from prostitution, cigarette smuggling and money laundering. The estimated annual value of Greece’s black market is $76 billion!”

We hope to challenge today’s Europeans to eradicate the most dangerous of all frontiers – that between a closed mind and an open one. (8^th, page 27)

Fun Corner

A blonde goes to her doctor and reports that her body hurts all over. The doctor examiners her and asks he to illustrate. The blond touches various parts of her body and each times yells in pain. The doctor asks her if she is a natural bond to which she replies: “Yes”. He informs her that she has a sprained finger. (Finweek)

The family of a deceased motorcyclist sued a funeral parlour after a cellphone set off a merry jingle inside the dead man’s coffin. Anguished family members fled the room as attendants rummaged in the casket to switch off the phone. (Financial Mail)

November 2006 (25 Minutes)

Accountancy

Top jobs are by their nature tough jobs, but modern society is in danger of making them so tough that we won’t be able to find anyone to do them. The increasingly superhuman qualities demanded of business leaders narrows down the pool of those deemed to have the necessary experience and qualities. And the growing demands of such roles deter many of these deemed to be suitable thereby reducing the pool still further. (Page 1)

The UK is thinking of raising the turnover limit to £6,6m, which will exempt a further 67 000 companies from having to be audited. [How many auditing additional firms will that put out of business?] (Page 8)

Because Kenneth Lay of Enron fame was denied the opportunity of appealing by his untimely (well planned?) death, his conviction has been quashed. This will make it difficult for the prosecutors to claim restoration from his estate. Enron went bankrupt with debts of $32bn. (Page 10)

Because he showed remorse, Andrew Fastow, also of Enron fame, was given a light six-year sentence. (Page 13)

And Mr Bernie Ebbers has started his 25 year jail sentence for his role in the $11bn Worldcom accounting fraud. (Page 13)

Alan Dangerfield writes: “How come the IASB can ignore your views so successfully? The International Accounting Standards Committee Foundation trustees have the duty to drum up cash to finance the IASB, but their constitution prevents them from exercising proper oversight and interfering with the Board’s standard-setting independence by questioning whether its results are actually practically useful, beneficial and worthwhile. So the IASB ends up accountable to, er, well, God for its work.” (Page 15)

Emile Woolf says that when he started writing for Accountancy he noted that the role of accounting is to reflect economic activity. Accounting should objectively record transactions driven by market forces. The role of accounting should be passive. It should not seek to influence the activity it records. However, the principle of accounting neutrality, the bedrock of financial reporting, is being overlooked. He says that any reduction in the usefulness of financial reporting will provide incentives for private alternative systems to appear. [Come and look at Standard Bank’s and Sanlam’s reporting here at the tip of Africa, Emile.] (Page 18)

The conceptual framework debate has started. Here are some of the issues being discussed:

1. 
   The proposed objective is to provide financial information that is useful for making resource allocation decisions. Commentators are asking: “What about the stewardship role?”
   
2. 
   The proposed primary users are investors, creditors and their advisors. Commentators want to broaden the users. [Try to please everybody and you end up pleasing nobody.]
   
3. 
   It is proposed that the scope be broadened to beyond the financial statements, i.e. to financial reporting. The standard setters have yet to define what this will embrace.
   
4. 
   It is proposed that the concept of “reliability” be replaced with “faithful representation”. The complaints here are that this term is too vague to be useful. (Page 20)
   

FASB has opted to fully recognise all defined benefit pension fund assets and obligations at the reporting date of an entity, with the actuarial gains and losses going through comprehensive income. [I have been predicting that the IASB would go this route but FASB has beaten them to it. Will the IASB play catch-up now?] (Page 74)

Some preparers in the Media sector have argued that it is not possible to separate their intangibles from goodwill on the acquisition of businesses. The author of this article says that this attitude is indefensible as many are giving this information. People are recognising items such as customer lists, relationships, technology, trade names and trademarks and are amortising these items over periods between two and 30 years. [This is why they are proposing that the concept of “reliable” be deleted from the framework. How can you possibly, without a smile on your face, value such things as customer relations? I need to go into this business. I will promise not to smile when I present my valuations.] (Page 81)