Mafia Buzz Issue 3

FinWeek

A lovely letter written by “Noguru” appeared in this journal complaining about the size of financial statements. I fully support his/her point that if the financial statements of a company are not printed in A4 size and cannot fit into an envelope, they should be disqualified from any competition for the best annual report competition. I am developing a financial analysis service at present and it is a mission designing a filing system to cater for the different sizes and shapes of company financial statements. Accountants have lost the art of communication. It is not necessary to dump the whole accounting system into a set of financial statements. Preparers should identify the needs of the users and then accommodate those needs. I was speaking to one of the top banking analysts recently and he told me that a bank’s financial statements can take up to a week to read! (16^th, page 8)

Fortune

Just when I was about to give up on this journal there appeared some fantastic articles about what makes people excellent. Here we go:

Research shows that it is not a natural gift that makes a Warren Buffett or a Tiger Woods but an enormous amount of hard work over many years. However, the secret is not just any hard work. It is deliberate practice, i.e. going beyond one’s level of competence by setting increasingly tougher targets and, by consistent relentless repetition, achieving the targets through feedback, analysis and continuous improvement. It usually takes 10 years to achieve this level, e.g. Bobby Fischer studied for nine years to become a grandmaster chess player. (Some international chess masters have IQs in the 90s!) Disciplines such as music and literature require 20 to 30 years. The great unanswered question, however, which Fortune does not address, is: “What motivates someone to want to reach these heights?” Researches cannot come up with an answer. No one seems to know why some people are more motivated to become successful than others. The important point is that we can make ourselves what we want. [Is this not the secret – a want, need or desire?]. Greatness is available to anyone who decides to go for it. [See my article called “Stupid or lazy” where I talk about the “Spark”, i.e. the key to opening the path to greatness.] (6^th, Page 32)

At least 120 companies in the US are under investigation for backdating options, and the number is rising weekly. An interesting feature of the scandal is emerging: The companies share directors to a far greater extent than would be in a random sample of US firms. So it appears as if the directors were spreading this practice by word of mouth. (20^th, page 30)

IRBA

The official designation for persons registered with IRBA is now “Registered Auditor” or RA. The old designation of “Registered Accountant and Auditor” has now fallen away.

Noseweek

The Auditor General’s most recent report on the state of the Eastern Cape’s finances revealed that the Eastern Cape provincial administration was unable to account for R30,2 billion out of R34,1 billion it spent during the 2005/2006 financial year. This was double the figure unaccounted for in the previous year. (Issue 85, page 7)

Fun Corner

A psychologist whose discipline is subjective and lacking in precision had a secret desire to be an accountant. She read about a share whose market value was half its book value. Believing accounting to be objective and precise, she bought the share hoping to see the market price rise to book value. Instead the price moved down. She persevered until one day the accountants decided to impair the company’s assets to bring them into line with the market price. She yearns to be an accountant no more. (Michel Pireu, Business Day, 14^th)

Tax Tip

A friend retired a few years ago and was advised to acquire a “living annuity”, the subject of an article I wrote for SAICA called “Your nightmare financial advisor”. Over the years he has been taxed on the full “annuity” received, including the capital portion. A taxpayer challenged this on the basis that part of the receipt was a return of capital and won. See Commissioner for SARS v Higgo, Cape of Good Hope Provincial Division.

December 2006 (25 Minutes)

Accountancy

The Irish government has resurrected the notion that the word “Accountant” should be protected in the same manner as the words “Doctor” and “Lawyer”. The argument is that one should only be able to call oneself an accountant if one belongs to a recognised institute or society. A spokesman for the UK’s DTI is concerned that this would become bureaucratic and anticompetitive. (Pages 1 and 5)

KPMG has signed a 999-year lease [not 99 but 999!] on a building with the Canary Wharf Group. I wonder if they are going to straight-line the rental cost. Assuming an escalation of 2% p.a. and rental of £100 000 in the first year for the land, the first year’s charge to the income statement would be £195,4bn. I wonder if they are going to increase their fees to cover this little additional cost?] (Page 5)

The Global Public Policy Group, comprising the big four auditing firms plus Grant Thornton and BDO have stated that there was a need to recognise that the current structure of company reporting has been set by regulators and not by users and preparers of accounts. [In SA one should recognise that they are set by regulators as interpreted by the auditors! The preparers and users have no power whatsoever to influence them.] (Page 5)

The Pensions Bill in the UK seeks to increase the state pension age from 65 to 68 by 2046. [Now that is what I call planning!] (Page 9)

The fear that smaller international accounting networks may have to be broken up for fear of litigation is growing. So far AGN Shipleys has dropped its prefix on the basis that they could be left open to claims from clients of other member firms with whom they had no involvement. MRI Moores Rowland has taken the decision to dissolve the MRI network by March of next year. (Page 11)

Robert Bruce argues that lawyers prefer a rules-based system because it guarantees that management will have to come running to them for an interpretation of each rule. A principles based system is of no use to them. UK finance directors say that auditing firms in the US are completely under the influence of lawyers. [What Mr Bruce does not say is that by having a principles based system, the auditors have all the power because they dictate how the principles are to be interpreted and have the power to enforce their rulings by threatening qualifications. In any business, the customer is king. It is time to take the power away from the auditors and give it to the preparers and users.] (Page 16)

A professor of finance in Madrid recently calculated betas of 4 000 companies using 60 monthly returns for each day of December 2001 and January 2002. The maximum beta for any given company was on average 16 times its minimum beta, which “is devastating given the importance of beta in arriving at required returns.” [Anybody who uses a mathematically calculated beta based on the past performance of a company without adjustment to value a share is an idiot. An interesting thing in this article was that when calculating WACC he took the pre-tax expected yield to maturity on non-callable, non-convertible debt and multiplied it by (1 – the tax rate). At least the UK has woken up to the fact that one must discount post tax cash flow at a post tax rate. How long before SA wakes up to this fact, if ever?] (Page 43)

Mark Lee offers some tips on how to stay out of trouble when offering tax advice. I have converted this to offering IFRS advice:

1. 
   Ensure that you are fully conversant with every IFRS Standard
   
2. 
   Keep up to date with changes to the Standards
   
3. 
   Stay in touch with future developments
   
4. 
   Get all the information before applying the relevant standard
   
5. 
   Give competent advice using due professional care
   
6. 
   Keep your ethics intact – do not bow to pressure (Page 50)
   

Alex Blyth gives seven qualities of a great business leader:

1. 
   Be genuinely passionate about improvement
   
2. 
   Be congruent, i.e. your actions must support your words
   
3. 
   Be flexible – no one style of leadership is effective in all circumstances
   
4. 
   Provide clarity and purpose
   
5. 
   Possess people skills – be able to get people to do something you want done because they want it done
   
6. 
   Listen and learn – show humility
   
7. 
   Possess the X factor, the emotional attachment to the people you seek to lead (Page 57)
   

Rob Yeung gives ideas on how to motivate people:

1. 
   Understand what motivates them: rational factors such as financial incentives or promotion or emotional factors such as recognition and appreciation
   
2. 
   Communicate business-critical information to them, e.g. how the business works
   
3. 
   Ask them for their input into decisions
   
4. 
   Allow them to contradict you and give alternatives
   
5. 
   Explain to them why certain decisions were taken
   
6. 
   Explain to them the rules of the game
   
7. 
   Explain to them what is in it for them (Page 59)
   

Trisha Greenhalgh (I love her articles) says that 9m out of the 56m people in the UK have some sort of long term health problem (high blood pressure, arthritis, mental health, depression, asthma, diabetes, epilepsy and chronic obstructive lung disease). She says that in most cases it is not doctors who look after the illness but the patients themselves. The Department of Health (UK) has at long last recognised this and developed a self-management programme called the Expert Patients in which people with chronic illness pass on their expert tricks and knowledge to others with the same illness. [Anyone want to know how I have managed my asthma over the past 40 years?] (Page 62)

The leasing project (bad news!) of the IASB will be running parallel to the Conceptual Framework project. (Page 79)

It appears as if the IASB will drop the whole idea of recycling. [Resurrect the ban on reserve accounting? Well not quite as we do have IFRS 2.] (Page 79)

Statement FIN 48, Accounting for Uncertainty in Income Taxes, has been published in the US. The objective of this statement is to provide guidance on the recognition and measurement of tax risks. It will require companies to look at its tax positions and decide whether each position, if material, is more likely than not correct in the view of a hypothetical court. Such positions will have to be measured and disclosed in the financial statements. Tax positions that have not been resolved will have to be measured and recognised as a liability. The hope is that the IASB does not adopt this standard. [Of course it will!] (Page 81)

The biggest impacts on UK profits as a result of converting to IFRS were not amortising goodwill and recognising revaluations of investment properties through profit or loss. The other changes were immaterial. (Page 83)

Three years ago the UK increased the threshold of companies requiring audits from a turnover of £1m to £5,6m. This resulted in the demise of 1 500 auditing firms. The group representing small business is fully in support of raising this threshold further. Some are arguing that this would increase the risk of fraud and error. Others are saying that the threshold should be based on ownership rather than on turnover. The institute tested small business to see if another form of assurance report would be welcome but found no interest. (Page 85)

Accountancy SA

Note: I do not summarise these articles because you should read them yourself.

Ignatius Sehoole talks about the corporate social investment programme of the Institute and the profession. (Page 3)

See the step by step approach to completing your CPD points. (Page 4)

See the report-back on the IASB’s initiative on SME GAAP. (Page 4)

SAICA has posted a sample letter for practitioners to make their clients aware of the reporting requirements of the Auditing Profession Act relating to reportable irregularities. (Page 5)

The IFRIC has released a draft interpretation on customer loyalty programmes. (Page 7)

If the IFRIC states that it is not prepared to consider an issue because it is obvious, this amounts to an “informal opinion”. (Page 7)

The IFRIC approved Service concession arrangements and Group and treasury share transactions. (Page 7)

Elmar Venter discusses the two approaches to accounting for loyalty programmes. (Page 13)

Fifteen people were contacted to put together a long rambling article on private equity. One interesting point made was that 99% of venture capital applicants are turned down in SA. (Page 16)

Ilse French explains how third party cell facilities provided by insurers are accounted for. If you are not involved in these things, give it a skip. (Page 26)

Lester Rogers and Mike Gardner have written a “must read” article on taking a good look at what it is that you really do. Read it! Give it a break then read it again. Then think. (Page 30)

Cheryl James emphasises the importance of mentoring in the job situation, e.g. aspects such as time management, dress code, office etiquette, etc. (Page 32)

Linda de Beer takes a look at obtaining confirmations in auditing, what the risks of not obtaining them are, whether or not they are mandatory and what the alternatives are, with specific reference to bank confirmations. (Page 34)

Linda de Beer gives us a rundown on the “Clarity project” of the Auditing and Assurance Standards Board. [Damn! They are trying to put me out of business? My mission in the past has been to clarify complexities, the “cc” after my corporation’s name. I will have to find a new occupation.] (Page 35)

Günter Hoppe describes what it is like to work in a country like Malawi. (Page 37)

Carol Butcher writes about “investing” in motor cars. [My bakkie is the best “investment” I have ever made!] (Page 38)

Business Day

Piet Viljoen, the founder of Capital Management, has decided to close his fund to new investors as he is of the opinion that the JSE has become expensive. However, there are opposing views out there as to how expensive the market has become. Jeremy Gardiner of Investec Asset Management says that the JSE is not cheap but it is not in dangerous territory. [There seems to be more downside potential at present than upside potential. But, hey, was this not the view this time last year? We will have to wait and see whose view is right.] (19^th)

Business Report

Linda de Beer says that without action, we are in danger of making the auditing profession so unattractive that it becomes devoid of people willing to provide an audit service. Too late: we should have taken action ages ago.

Business Times

Want a quick way to find out how long it will take to double your money? Divide 72 by the rate. For example:

If rate is	72/Rate	=	Actual
5%	72/5	14,4 years	14,2 years
8%	72/8	9,0 years	9,0 years
12%	72/12	6,0 years	6,1 years
15%	72/15	4,8 years	5,0 years
20%	72/20	3,6 years	3,8 years

Just as easy to do it using a calculator!

Citizen

It is not like David Carte, an excellent journalist, to get something as wrong as he did in his article on 6^th December. Here are his words: “The private-equity players have done their multibillion-dollar deals there and are still awash with cash looking for that magical “alpha” – or return in excess of the risk-free rate, …” David, my mate, alpha is the a in the formula for a straight line: y = a + bx. In portfolio theory, y = the expected return on the share, x = the expected return on the market, b = the slope of the line and a is where the line of best fit cuts the y axis. For example, if the market is expected to return 12,5% p.a. and the share’s beta is 0,8 one would expect the share to return 12,5% x 0,8 = 10,0% p.a. However, if the share is expected to return 15% p.a., it is said to have an alpha of 5% p.a. (6^th)

David Carte gives his checklist for evaluating a new listing:

1. 
   How long has the company been in business?
   
2. 
   Does the company have sound products/services?
   
3. 
   Is the company competitive?
   
4. 
   Is the company cashing in on a fashionable trend?
   
5. 
   How does the Rand affect the company?
   
6. 
   How bullish are the prospects communicated?
   
7. 
   What is to happen to the money raised from the listing?
   
8. 
   Who are the legal advisors, auditors, etc.?
   
9. 
   What adjustments were made to the pro forma info?
   
10. 
    Have institutions supported the listing?
    
11. 
    Is there a reasonable free float?
    
12. 
    How does the issue price compare to NAV?
    
13. 
    What is the historical price earnings ratio?
    
14. 
    Is there a margin of safety in the price? (13^th)
    

Financial Mail

How the JSE has changed:

	Apr 2003	Nov 2006
Alsi index	7 361	23 950
Companies listed	457	394
Market cap	R1 303bn	R4 866bn

(15^th page 26)

Enterprises with revenue of less than R5m have been completely exempted from the BEE regulations. [So please stop sending me these 30 page documents to complete!] (15^th, page 47)

FinWeek

If you are involved in anyway in providing and charging for credit, whether as a bank or a supplier of goods, or on the receiving end of credit, you had better get hold of the National Credit Act and evaluate how it will affect you. The act kicks in on 1 June 2007. Finweek sets out an excellent summary of the various provisions and their possible consequences. (14^th, page 50)

IRBA

The following three proposed standards have been redrafted following the new drafting conventions.

• 
  ISA 320 Materiality in planning and performing an audit
  
• 
  ISA 450 Evaluation of misstatements identified during an audit
  
• 
  ISA 260 Communication with those charged with governance (6^th)
  

IRBA has provided guidance on its website on the application of the revised ISA 700 standard on the independent auditor’s report on a complete set of general purpose financial statements issued in South Africa. (12^th)

IRBA’s Committee for auditing standards has released the following exposure drafts:

1. 
   Reporting on donor funding engagements – comments required by 5 March 2007.
   
2. 
   Guidance on how to define and develop an effective code of conduct – comments required by 16 February 2007
   

SAICA Publications

The board of SAICA has agreed not to object to the removal of the audit requirement for a certain group of smaller companies where the cost of an audit outweighs the benefit obtained. 75% of the respondents concurred with this view.