Phillip E Tetlock, a professor at Berkeley, has written a book on how good experts are at making judgement calls. Over seven years he collected 82 361 forecasts. He found that experts were no better at making forecasts than non-experts. The only thing that separates experts from non-experts is the level of confidence they have when making their projections. He also found that the more famous the experts, the worse they performed! (6th, page 24)
The frauds perpetrated by Takafumi Horie at Livedoor in Japan were so basic that any freshman accounting major would have spotted them. Some examples were trumpeting plans to acquire companies he already owned, falsifying financial statements by reporting stock gains as operating income and diverting money illegally to secret Swiss bank accounts. [They could learn a thing or two from our Financial Services Board!] (20th, page 10)
I could not believe my eyes when I started reading the article in the 13th of February issue of this journal. I had written the article called “Stupid or Lazy” asking the question “What sparks different people to become successful” and along comes this article. The author starts off by saying: “A fire in the belly doesn’t light itself. Does the spark of ambition lie in genes, family, culture or even in your own hands? Science has answers.” You then read the article and there are no answers! Here are some ideas from the article:
It is possible for the non-ambitious to jump-start their drive provided the right jolt comes along. [Stating the obvious! What is the jolt?]
Two of the biggest influences on your level of ambition are the family that produced you and the culture that produced your family.
Parents who set tough but realistic challenges, applaud success and go easy on failures produce kids with the greatest self-confidence.
It is the upper middle class that produces the greatest proportion of ambitious people, mostly because it also produces the greatest proportion of anxious people. (13th, page 22)
A farmer has two fields of sheep. He asks an actuary how many sheep he thinks are on the farm. The actuary says “1 007”. The astonished farmer asks him how he arrived at this figure. The actuary says that there are seven sheep in the one field and about 1 000 in the other. (Economist, 28th January, page 67)
March 2006 (35 Minutes)
There is chaos, confusion and anger in the UK as a result of the government’s initial rejection of the operating and financial review standard proposed by the accounting profession and then its u-turn announcement in which it said that it will reconsider giving the OFR legal backing. [Was the one lobby (business) out-muscled by the other lobby (environmentalists, users and the accounting profession)?] (Page 5)
There is also anger at the government’s proposals in the Company Law Bill which has introduced a new criminal offence described as “reckless auditing”. The profession believes that there is no need for this. And yet more anger: the profession negotiated over a long period with the government about the idea of proportional liability and it appeared as if the government accepted this idea. However, the bill contains a liability cap in its place. (Page 6)
The US Free Enterprise Fund has launched a challenge to the Sarbanes-Oxley Act arguing that it is unconstitutional. Of over 700 cases brought against corporate executives since August 2002, only one was under SOX and that case was dismissed. It has been estimated that the stock value of American companies has been reduced by $1,4 trillion as a result of SOX. [This is called KJORL, or knee jerk over reaction legislation.] (Page 11)
Due to the increased attention auditors will have to devote to meetings and planning under the new international auditing standards, auditors will take over 40% longer to carry out an audit. Almost 75% of clients are going to have to pay more for their audits and they do not know why. Some 22% of professionals are reconsidering whether to continue doing audits. (Page 18)
A horror story appears in this journal about how over zealous regulators destroyed 50% of the value of an IT company in the US. [See the story about the bully boys and bully girls of the GMP in RSA.] An IT company with sales of $20m booked a $750 000 sale as a sale when it should have been deferred income – management were not informed that there was a contingency clause in the sale. The SEC climbed into the company accusing it of fraud. Management were forced to defend themselves at massive legal costs. Because of the uncertainty created by the investigation, the company was not able to meet its filing requirements for the NASDAQ and lost its listing. Eventually the company settled with SEC but only after people lost their jobs and massive value was destroyed. [Why could the company not be requested to restate its results and pay a fine? Because the regulators want to be “seen to be doing their jobs – like our local Scorpions who stage-manage raids for the media on suspects’ houses before they are found guilty by the courts. We need to become more gentle and polite and listen to the other person’s story before over-reacting.] (Page 48)
Be careful with emails. An email has an informality and flippancy to it. You are inclined to dash off an email without thinking and years down the line when you are subject to an investigation, you will need to explain certain nuances and words that can misrepresent your intention at the time. (Page 49)
The Enron trial has commenced. The intrigue, the personalities, the grandstanding, etc. will make for superb TV. I would love to be in Texas with time to spare to witness this event. I will have to wait for the book to be published. Unfortunately, because of the level of education of the 12 jurors, they are going to keep it simple (you lied – no, we did not). At the start of the trial one of the jurors was overcome by the defence attorney’s cologne and an adjournment was requested for him to go and wash himself! [If you’ve ever smelt a corpse, you will also react adversely to this vile sweet smell.] (Page 51)
Mike Brooks continues with his advice on what to do when fraud happens in an organisation. He says that one must restrict knowledge of the fraud to only those who need to know, check policies for insurance cover, follow the correct procedures, avoid any bad publicity and learn from the experience. (Page 53)
Luke Ahern writes an interesting thesis on how to react as an investor to directors buying and selling their investments. These dealings send conflicting signals. Here are a few:
When you see directors buying:
Do they know something you don’t?
Are they setting you up to believing that the shares are undervalued only to dump them on the market when the price increases?
Are they merely meeting their qualification requirements to be a director?
Are they trying to support the value?
When you see directors selling:
Do they know something you don’t?
Are they just cashing in their salary alternative?
Do they want to diversify their portfolio?
Are they merely providing liquidity to the market?
Is the director moving onto greener pastures?
Other aspects to watch are:
Who is doing the buying or selling – the CEO or non-executive director?
What is the number of shares and what is the value of the transaction?
Is the deal inside or outside the closed period for trading?
David Beer lists the true nature of jargon used in business plans:
IFRSs are written for the world’s capital markets. We need GAAP applicable to the UK.
IFRS is too complex for us in the UK.
Our markets have worked perfectly well without IFRS in the past. Why fix something if it is not broken?
IFRS should only be imposed on large listed companies.
Do the users of financial statements really want IFRS?
Why do we need standards for non-publicly accountable entities at all? It works in the US.
Recognise these arguments? No one listens to them! (Page 50)
The first draft of SME GAAP written by the IASB’s Paul Pacter has not been received well by commentators. It still needs lots of work on it. The EU members have asked Paul to reconsider the way he is going about the project. The EU has said that if the SME standards are not simplified, they will stick with the directives presently in force in the EU. The UK says that the SME standards should at least meet the FRSSE standards, i.e. the existing standards in the UK designed for SMEs. The banks say that they do not need consolidated accounts for SMEs but some IASB members feel that their absence is an invitation to fraud. [Will accountants ever agree on these things?] (Page 92)
The UK auditing standard setters have issued an eight point plan to give guidance on how to approach group audits:
Get organised (Always a good start!).
Analyse the group structure.
Focus on the quality of the other auditors.
Focus on high audit risk areas.
Understand the internal controls across the group.
Understand the technical complexities of group audits.
Review the other auditors’ working papers.
Review and update procedures, training and tools.
According to Brian Singleton-Green, fair value in accounting is making in-roads without much debate. [I would have thought that the “fair value option” was the start of a move away from fair value accounting through profit or loss.] He says that, for example, there is a proposal that all assets and liabilities be fairly valued on initial recognition. [So if you buy plant on a sale, you will take a profit on the purchase of the plant. Was value created by merely buying plant? Surely value is only created when products manufactured by the plant are sold? I agree with Brian – we do need to debate at the highest level this move very seriously.] (Page 97)
The IASB has issued an exposure draft on segmental reporting. It moves away from the risks and rewards approach of the IASC to the method management uses internally to assess the performance of the segments. There will have to be reconciliations to the published information and certain disclosures made. [Sounds logical.] (Page 102)
An exposure draft modifying IFRS 2 has been issued. It proposes to limit the vesting period to service conditions and performance conditions. [Also sounds logical.] (Page 102)
The operating and financial review (OFR) should reflect the directors’ view of the business to enable the investors to assess their strategies. It should be forward looking, complement and supplement the financial statements, comprehensive, understandable, balanced, neutral and comparable over time. It should contain the nature, objectives and strategies of the business, the development and performance of the business, the resources, risks and uncertainties and relationships that may affect the long term value and the position of the business including the capital structure, treasury policies and objectives and liquidity. (Page 106)