Mafia Buzz Issue 3

Sunday Times

There are all kinds of people with high IQs in the investment business and most of them flame out. They don’t do that well over time because they don’t have a base from which to operate. Everything we do is rational. We make mistakes, but we operate rationally and that will take you a long way. (Warren Buffett referring to his investment bible called “The Intelligent Investor” by Ben Graham.) (18^th)

Taxgram

In ITC 1745 an auditor valued a company at R190 000, being the net asset value, for donations tax purposes. SARS placed a value on the company at R1 440 500. The taxpayer admitted that the fair market value of the shares was clearly above R190 000. The auditor’s valuation was clearly not reflective of the fair market value of the shares. The auditor was hoping to go for the lowest valuation possible that SARS would, hopefully, accept. (Do not play games like this! An auditor is supposed to have integrity and be independent. SARS does not employ fools. The PAAB needs to make an example of this auditor, especially in the light of the potential problems we are facing with CGT.) (Issue 4, May 2003, page 11)

Time

The US division of Ahold, the Dutch grocery company, overstated its profits by $880 million, 76% higher than initial estimates of the fraud. (19^th, page 16)

June 2003 (30 Minutes)

Accountancy

When I received my latest pension fund statement showing that its value is now less than the total payments made into it, I realised that I would have been better off storing banknotes under the bed. (Editor, page 1)

ICAEW members may be subject to mandatory continuing professional development (CDP) if their Council has its way. (Don’t let them do this to you guys!) (Page 6)

The IASB’s controversial project on share based payments has received a surprising amount of support following the 236 comment letters on the exposure draft. (This support should be subject to an external audit!) (Page 10)

The SHAC animal rights protest group has threatened to target any auditor that does the audit of Huntingdon Life Sciences company. (Who wants to be an auditor?) (Page 17)

Chris Swinson warns against using market values in financial statements. He states that markets are, at times, dysfunctional and the prices in these markets are often not reliable. (One day we will go back to historical costing – fair value accounting as a basis for allocating costs and income to the correct periods is totally illogical.) (Page 28)

This issue focuses on the revolt against management remuneration; especially when there is a negative correlation between it and the company’s performance. A study in the UK showed that remuneration increased by 17% p.a. during the period that the FTSE100 dropped from 7000 to 4000. The call is for the incentive portion of management remuneration to be based on performance. (Page 31)

The PCAOB is now up and running and the UK profession is not terribly happy about the prospect of hoards of American inspectors flying over to investigate UK firms who do audits of US companies and their subsidiaries. The costs of such inspections could have the effect that any profit generated from the audits will be dissipated. Either audit fees would have to be increased (to the detriment of the economy) or auditors will have to resign. The UK is pushing for its own reviews to be accepted by the US regulators but do not seem to be winning. (Page 36)

Proposed changes to the Higgs Code have been abandoned in favour of more consultation. A working group has been set up to produce a draft of proposed changes. (It is good to see the consultative process that goes on in the UK and the fact that the constituency’s views are taken into account.) (Page 38)

“The notorious stealth tax on pension funds in 1997 has taken ₤5bn a year out of your pension funds. That adds up to around ₤30bn already.” (Sound familiar?) Gordon Brown’s raid on pension funds has had the effect of reducing the value of millions of people’s pensions and endowments and has made it more costly for companies to provide for its employees. (Page 42)

The new president of the ICAEW, David Illingworth, says that members have to stand up and say: “We have got a brand. We have ethics imbued in us, we have a code, we have objectivity, judgement, integrity and talk straight.” He believes that international accounting standards should be introduced speedily but that they should be sensible and understandable (a big ask!). (Page 72)

Peter Wyman says that there is a real risk that audit firms will abandon clients in high-risk sectors. Due to the litigious nature of society, and the fact that there are now only four big firms, commercial insurance cover is not available. The big firms are considering whether it is worth it to take the risks. (Who wants to be an auditor?) (Page 73)

Moria Hindson gives two case studies where auditors were found to be negligent:

1. 
   A company’s usual monthly sales journal was a page and a half long. In the last month of the year, it was eight pages long. In the first three months of the following year it was six lines in total. The auditor, who followed meticulously a recognised audit programme missed or closed his eyes to the fact that the company had moved its cut-off point. (I thought that analytical review was an audit procedure?)
   
2. 
   A company factored its debtors. It created false invoices and raised money on these invoices from the factoring company. When the outstanding debtors reached nine months (from a previous norm of three months) the factoring company contacted some of the debtors to identify the problem only to discover that they were fictitious. The auditor had enquired about this problem but was fobbed off by management. They never bothered to do their own investigation. (I thought that confirming debtors is standard audit practice.)
   

MH gives a checklist of some basic things to look for when doing an audit (second year varsity stuff but I give it here as a gentle reminder):

• 
  Management representations are supportive, not primary evidence.
  
• 
  Get evidence for journal entries.
  
• 
  Verify and reconcile inventories.
  
• 
  Use a practical method to confirm debtors’ balances.
  
• 
  Reconcile VAT returns to sales and expenses.
  
• 
  Do not get too familiar with management.
  
• 
  Be sceptical, especially with management. (Page 74)
  

The integrity of the banks, brokers and financial advisers is critical to the efficient functioning of the markets. However, motivated by greed, the banks have, in the past, published research favouring their corporate clients. Research must be independent for an investor to be able to rely on it. The US has protections in place whereas the UK relies on the integrity of the market operators. The US, therefore, provides a much better investment environment than does the UK. (Page 80)

A survey done by the Cranfield School of Management found that 61% of UK SMEs are losing an average of two hours productivity per employee per week to Internet and email abuse. The annual cost to UK business is in the region of ₤15bn p.a. (Page 84)

The loss of a laptop can be devastating. Some tips to protect it are:

1. 
   Use a lock to secure it to your desk while in the office.
   
2. 
   Secure it to an immovable object when at home or in a hotel.
   
3. 
   Avoid obvious laptop carrying cases.
   
4. 
   Don’t disengage the internal password or firewall.
   
5. 
   Engrave your name and telephone number on it (does not work in South Africa!).
   
6. 
   Keep a record of the description and serial number.
   
7. 
   Regularly backup the data and keep the backups safe. (Page 86)
   

With opposition to the principle of expensing stock options decreasing, the focus is now moving towards measuring the cost. (Page 91)

The IAASB has ruled that when financial statements are prepared using IFRS, an unqualified audit report is only possible if the financial statements fully comply. A reconciliation of the results to IFRS does not achieve compliance with IFRS. It is unlikely that one set of financial statements can comply with IFRS and the national accounting framework. (Page 92)

The following proposed statements published by the IAASB can be downloaded from www.ifac.org:

1. 
   International framework for assurance engagements.
   
2. 
   Assurance engagements on subject matters other than historical cost financial information. (Page 92)
   

The ASB has published a discussion paper on accounting for not-for-profit organisations. It can be accessed at www.asb.org.uk. (Page 94)