Mafia Buzz Issue 3

Accounting Scandals

A CA in the UK set up an insider scam with three ex-school friends in which they placed spread bets on share price movements often minutes before major financial announcements. He received a two year jail sentence, was kicked out of the profession and was fined £4 500. They also relieved him of the profits he made from the scam. (Accountancy page 176)

AIG, a large insurance company, agreed to pay a fine of $1,64bn to settle SEC charges relating to “deceptive accounting practices”. (Accountancy, page 176)

Fun Corner

Paddy, who has an important meeting, is driving around in a sweat trying to find parking. He looks up to heaven and says: “Lord, take pity on me. If you find me a parking place I will go to Mass every Sunday for the rest of me life and give up me Irish whiskey.” Miraculously, a parking place appears. Says Paddy, looking up again: “Never mind Lord, I found one.” (Financial Mail, 31 March, page 98)

April 2006 (35 Minutes)

Compulsory Professional Development

I keep on receiving calls saying: “Are your workshops CPD certified?” It is usually the poor secretary of the boss who is enquiring because the boss knows that I will ask him if he has read SAICA’s policy statement, which he obviously hasn’t. Well in case you have not bothered to read this document, which is on SAICA’s website, here are some critical quotes:

1. CPD refers to learning activities that develop and maintain capabilities to enable members and associates to perform competently within their professional environments.

2. The primary responsibility for competence lies with the member or associate and all members and associates have an obligation to develop and maintain their professional competence, relevant to the nature of their work and professional responsibilities.

3. CPD is compulsory and is applicable to all members and associates within public practice, industry, commerce, education, the public sector or any other field.

4. The first reporting cycle starts on 1 January 2006.

5. Members will be required to complete 120 hours of relevant CPD activity in a three-year period, of which 60 hours should be verifiable. A minimum of 20 hours must be completed each year.

6. SAICA will not prescribe specific courses, programmes, journals or other forms of learning or training material. Members are free to choose relevant CPD activities based on their identified learning and development needs and SAICA will rely on the professional judgement of members in this regard. [So there you have it boss. One wonders for how long though? Because of the paranoid need to control others, we will soon see that people will have to apply to be accredited suppliers of CPD training. That is when favouritism and all the other horrors that go with power will kick in. BUT WE ARE THANKFULLY NOT THERE YET!]

7. Members bear primary responsibility for documenting compliance with CPD activities. Members have to log CPD activities using the on-line CPD log of SAICA (this is the start of Big Brother is Watching You). You will be required to explain how you planned the activities, identified your learning needs, what activities you performed, what the source was of your leaning activities and the number of learning hours spent. [Dear SAICA, I identified Noseweek as a valuable source of knowledge as I am the accountant of a media company so I spent 10 hours during the year studying this journal.]

8. Not completing your annual CPD tasks is punishable by a three year jail sentence in the Maximum Security Facilities in Kroonstad. [Not quite yet but the next step?]

I spent two months studying the new IFRS standards, on average 5 hours a day, i.e. 300 hours. From reading Mafia Buzz you will see that I spend at least another 20 hours a month reading. 40 hours a year is a bit of a joke is it not?

Accountancy

A Glasgow accountant was apparently kidnapped by two men posing as fraud detectives in February and has not been seen since. He was due to appear in court as a witness in a VAT fraud case with possible links to terrorist activity. A few weeks earlier, the chief accountant of the Scottish Law Society was stabbed outside his home. He believes that it was the work of a corrupt lawyer whom he was investigating. Once you get into the criminal courts and give evidence as a witness, the threats are very frightening. [A similar thing happened to me. This is why I will not act as an expert witness in a court.] (Page 5)

Emile Woolf questions whether the cost (in excess of $25bn) of applying the Sarbanes-Oxley legislation is giving the investing community value for money. Of the 700 cases against corporate executives since August 2002, only one was brought under SOX and it was dismissed. This law is now being challenged as being unconstitutional. 1 300 listed companies out of 15 000 reported material internal control weaknesses in terms of SOX. Emile says: “So what?” (Page 26)

Companies that have delisted from the Nasdaq or New York Stock Exchange because of the costs of complying with SOX include the Rank Organisation and Cable and Wireless. Others have been put off listing such as Porsche. Discontent with the regulatory regime post-SOX is growing. The enforcement programme is becoming increasingly punitive and adversarial in nature which can have serious consequences for companies and personal careers. A study has been undertaken which shows that SOX has had the effect of reducing stock values of US companies by $1,4 trillion. Audit fees have increased by between 35% and 40% because of the new pressures. London is becoming the international financial centre because of the increased US regulations. (Page 52)

Directors of smaller companies are unclear over the role of accountants and the various financial accounting and reporting options available to them. The Professional Oversight Board in the UK, the equivalent of Practice Review in RSA, has recommended that the constituents should get together to provide clarity. James Barbour, director of accounting and auditing at the Institute, says that as it stands, they believe that the documentation requirements for audits of SMEs are disproportionate. [This is why the UK is such a business friendly environment in which to operate!] (Page 81)

Companies are being warned to negotiate more flexible lease arrangements with landlords because of the pending GAAP on leases which will be requiring lease liabilities to be recognised on the balance sheet. [This is another case of GAAP dictating how business is done.] (Page 81)

There is awareness at the IASB that local interpretations of IFRS standards will diminish the benefits of having a single set of global standards. The problem is that the standards have progressed too fast and issues are discovered after a standard has been produced. The need for guidance on how IFRS should be interpreted is becoming more and more important. IFRSs are principle-based standards, which, unlike rule-based standards, require the preparer to use professional judgement in applying the standards. There is a call for a dispute resolution mechanism. There is even talk of appointing an arbitrator to settle issues. There are major disputes between the companies and their auditors or the companies and the investors. This is likely to be an obstacle to the EU companies listing on US stock exchanges, even if the US SEC lifts its reconciliation requirement for IFRS. Everyone will have their own interpretation of the standards which will lead to chaos. [Boy, oh boy, is this an issue in RSA. I had already taken a decision to start lobbying for something to be done before I read this article. Some of the convoluted interpretations by auditors are becoming ludicrous in RSA.] (Page 82)

The International Auditing Standards are being revamped or “clarified”. [It is my opinion that instead of re-writing what is already there, we need a completely new approach to auditing. The reason auditing is failing around the world is because auditors are looking to cover their backsides all the time instead of identifying what the audit objectives are and developing sound strategic methodologies to achieve these objectives.] From a reading of this article by Jon Grant, we may be lucky and find that in the re-writing of the standards they may look at the whole approach and change it to being more objective and principles based, instead of a box ticking operation. As long as the regulatory bodies are able to adapt, it may work. (Page 84)

The standard on presentation of financial statements standard is being revised (yet again). They are thinking of killing the changes in equity statement and renaming the balance sheet a “statement of financial position”. Surely, if they are going to do that they should rename the income statement a “statement of financial performance”. Either this or change the balance sheet to “statement of assets and liabilities”. [One has to ask the question: “Why are they messing around with cosmetics when there are other major issues to address such as leases, revenue, business combinations, insurance, and mining?”] (Page 86)

The IASB and FASB are seeking the views of users regarding information they need regarding fair value accounting. [Isn’t it nice that they recognise that they need the views of the users and do not just impose standards without consultation?] (Page 86)

An entity is now prohibited from reclassifying an embedded derivative unless there is a change in the terms of the contract that significantly modifies the cash flows. (IFRIC 9) (Page 86)

H guarantees the debt of its subsidiary. IFRS requires the guarantee to be fairly valued (assuming there was no explicit statement that it would be treated as an insurance policy – stupid). According to PwC the journal entry is to credit the liability (no problem) and to debit the investment in the subsidiary (help). Surely this is a loss? By doing this, this “loss” ends up in goodwill. Can anybody out there please enlighten me? I normally understand these things but am flummoxed by this one. (Page 89)

According to BDO Stoy Hayward, fraud in the UK shot up by nearly 30% in 2005. 65% of frauds were motivated by greed and desire to lead a lavish lifestyle. 11% were linked to gambling and 10% to pay off debts. (Page 109)

General Motors, whose financial statements are under investigation by SEC, has revised its losses upwards by $2bn to $10,6bn. It still has to restate its previous five years financial statements after uncovering accounting “errors”. There are mounting fears that the company is heading for bankruptcy. (Page 176)