Mafia Buzz Issue 3

Techtalk

SAICA apologises for the “printing error” that appeared in the headline circular. (I am sorry but it is a shambles!)

May 2003 (30 Minutes)

Accountancy

The UK government is to consult during the “summer” on increasing the audit threshold to ₤4,8 million. (Why do northern-hemisphere commentators have to refer to time by seasons? Maybe they are ignorant of the fact that the seasons are different between the Northern and Southern hemispheres!) (Page 17)

Andrew Oswald says that the UK government should work on the small stuff such as fixing public toilets and improving garbage collection and forget about the big stuff. (They could look to RSA for some excellent examples of groundwork improvements, e.g. taps in rural areas with clean water, which make a major impact on the quality of life of people.) (Page 28)

Donald Gordon (CA) (SA) (yes, our very own), chairman of Liberty International, lambasted the Higgs’ proposal that a chief executive should not go on to become chairman of the company as “palpably absurd and unhelpful”. He said that the bulk of Higgs’ recommendations “give no primacy to business judgement”. (That’s telling them Donny – rules can’t stop dishonesty!) (Page 37)

Higgs says that SOX risks dividing the board into two camps – those who run the business and those who are there to stop them from stealing the sweeties. (Page 37)

The SOX Act in the US prevents audit firms from performing internal audit work for external audit clients because of the potential conflict of interests. This affects clients globally that are registered with SEC. Audit committees should think carefully about this conflict when outsourcing internal audit work. (Page 45)

Investment fraud in the UK has risen from ₤244 million in 2001 to ₤717 million in 2002. There are usually two types of fraud:

1. 
   Where you are promised fantastic high yielding investments.
   
2. 
   Where you pay an advanced fee from some future service.
   

It is estimated that $100 billion is defrauded world wide using the advanced fee fraud. These frauds have one thing in common – they never come to fruition. (You do not need a checklist to avoid being taken for a ride. Use one simple principle: keep in control of your own investments – DIY. And remember that if it is too good to be true, it is.) (Page 52)

A UK government taskforce is looking at ways to account for human capital in the annual report. (Tried before and failed. Why do you have to account for everything? Why not have a special report in the AFS about your most valuable asset setting out things like training, staff turnover, numbers promoted during the year and, in RSA, a race and sex break-down.) (Page 53)

“I decided to show new products separately so that any potential buyer could quickly see what organic growth was deliverable from the current range without factoring any of these new products into account.” (Now that is valuable user information!) (Page 55)

Moira Hindson of Kingston Smith discusses a “difficult client” case study and what lessons to learn from such an experience. Her description of a difficult client is one that has poor record keeping, places a low priority on financial matters, is not interested in formalities such as engagement letters, will not supply the accountant with basic information, is behind on its tax (need I go on?), etc.) She sets out a checklist of steps to take in such cases such as:

1. 
   Get a signed engagement letter.
   
2. 
   Send a checklist of documents needed for the assignment.
   
3. 
   Give, in writing, action to be taken to rectify tax problems.
   
4. 
   Document actions taken to get information.
   
5. 
   Bill for fees on a regular basis.
   
6. 
   If the client does not comply with the requirements, resign.
   

(Page 68)

Profits have fallen for 14 quarters in a row in the UK. The average return on capital is now 7% p.a. (Page 71)

Executives around the world are still uncertain about what the new IFRS standards will entail and how large and wide-ranging the changes will be. (Join the club.) (Page 89)

Clive Jones asks the question: What is the point of increasing the amount of information companies have to place on the public record (in the UK) if at the same time by raising the audit threshold the quality of that information falls significantly? (Page 92)

Mark Hutchinson asks whether one would take advice from an independent financial advisor who gets commission from the company whose product he recommends. (Got news for you Mark: it happens all the time!) He then goes on to ask why a company should take advice from an auditor on how to organise itself. He suggests a regulated break-up of the industry to enable greater competition and expertise to develop. (I wonder if he has a personal bodyguard?) (Page 93)

The UK is anticipating the cost of converting to IFRS: staff training, updating systems, etc. (The UK will take much pain as they have done their own thing in the past and will in one year have to do a complete changeover.) (Page 94)

If a company is part of a group of companies and its staff contribute to a group defined benefit plan, how does one account for any surplus or shortfall in the group plan in the books of the individual company? One cannot treat this as a defined contribution plan in the books of the company. The pension fund costs, income, surplus or deficit would have to be apportioned to the various companies in the group. (Page 96)

Peter Whyman, president of the ICAEW, makes the following points about the Higgs proposals:

1. 
   He believes that 95% of the proposals are not controversial.
   
2. 
   He feels that it should be based on a “comply or explain” basis.
   
3. 
   He believes that principles encourage compliance whereas rules encourage avoidance (in my opinion this is a fallacy!).
   
4. 
   He feels that there should be fewer provisions and more principles.
   
5. 
   He believes that it is the world’s best corporate governance model (he is obviously unaware of our King 2 report!) (Page 132)
   

Dr Trisha Greenhalgh writes that if you are thinking of dying you should have a plan.

1. 
   Get a rough idea of how long you have got to go.
   
2. 
   Decide on whether or not to enter into a living will, i.e. instructions on what to do if you are not capable of taking decisions towards the end.
   
3. 
   Get your paper work in order (will, insurance policies, books up to date, etc.).
   
4. 
   Give instructions to whoever is going to wind up the estate.
   
5. 
   Decide on what you want done with your body – buried, cremated, donated or recycled (what?).
   
6. 
   Prepare for whom you are going to meet at the other side (improve your store of good jokes).
   
7. 
   Set aside time to say your goodbyes to the people close to you. (This woman should have been an accountant, not a medical doctor!) (Page 138)
   

Thinking of buying a property? Here is a checklist for you:

1. 
   Buy in the right area.
   
2. 
   Get the right financing.
   
3. 
   Have a maintenance plan.
   
4. 
   Keep a reserve fund for unexpected surprises.
   
5. 
   Decide on who is to manage (keep an eye on) the property.
   
6. 
   Make the tenant sign a lease agreement.
   
7. 
   Get proper insurance cover.
   
8. 
   Sort out the tax implications – losses allowed, CGT, etc.
   
9. 
   Get the tenant to sign a detailed inventory of the contents before moving in.
   
10. 
    Get a deposit from the tenant to protect yourself from damages or rental payment defaults.
    

(And from my experience, visit the potential tenant’s present abode to assess the tenant’s lifestyle, check the financial statements of the body corporate to ensure that it is not insolvent, check the security arrangements and study the resident rules and enquire whether they are enforced.) (Page 139)