Mafia Buzz Issue 3

Fortune

The fight is on in the US about how much say shareholders should have in the running of companies. The ballots shareholders receive at present are just like Stalin used to distribute – for every position there is exactly one candidate. Companies want free and open elections about as much as Stalin did. The present rules are based on the thinking that shareholders cannot be trusted to act responsibly whereas managers are wise and beneficial stewards who know what is really best for the shareholders. The thinking is that the Sabanes-Oxley Act has not gone far enough to empower the shareholders. (14^th, page 19)

Question: Why would someone pay $7 billion for the Yellow Pages in the US? Because when the sink leaks you do not go to Google and search for a plumber – you pick up the yellow pages. (SAICA must realise that their members would much prefer to have statements like they had in the old days where they can turn a page, find the paragraph, highlight the important words and solve the problem. At present they have to pull the computer out of the case, find the cords, turn it on, etc., etc.) (14^th, Page 22)

The top 10 companies in the world are:

By Revenues By Profits By Employees

Wal-Mart Stores Citigroup Wal-Mart Stores

General Motors General Electric China Petroleum

Exxon Mobil Exxon Mobil Sinopec

Shell Altria Group US Postal Service

BP Shell Agri Bank of China

Ford Bank of America Siemens

Daimler Chrysler Pfizer Mcdonalds

Toyota Wal-Mart Stores Bank of China

General Electric Microsoft Carrefour

Mitsubishi Toyota Compass Group

The RSA companies featuring in the top 500 are (by revenue):

281: BHP Billiton (up from 302 last year)

341: Anglo American (down from 328 last year)

453: Old Mutual (down from 366 last year)

The top 10 money losers were, in $ billions:

Company Company

AOL 99 Mizuho Group 20

Qwest communications 36 Vodafone 15

Deutsche Telekom 23 AT&T 13

Vivendi Universal 22 Lucent 12

France Telecom 20 Tyco 9

Five of the above were involved in high level accounting scandals. (28^th)

Maneo (June 2003)

Claude O’Flaherty says that practitioners should put in place safeguards to overcome fundamental threats to independence. These safeguards should be demonstrable and defendable.

Be aware of the following:

• 
  ED on assurance engagements
  
• 
  ED on the special considerations in the audit of small entities
  
• 
  Statement on reporting by auditors on compliance with IFRS
  
• 
  Guide on money laundering
  

The Auditing Standards Board meetings are now open to the general public. (I really would be fascinated to see who turns up.)

Jillian Bailey sets out common problems found during practice reviews. Get hold of Maneo, if you are an auditor, read carefully and do not fall into these traps. All of the points are second year auditing steps – if you hold yourself out to be an auditor, do these things!

Techtalk

1. 
   The exposure draft on limited purpose financial statements has been published for public comment. (See my website for my thoughts on this feeble attempt.)
   
2. 
   The Implementation Guidance on AC133 is deemed to be part of the statement.
   
3. 
   Improvements to IAS 32 and 39 are expected in March 2004.
   
4. 
   We can expect the ED on performance reporting towards the end of 2003.
   
5. 
   The circular on headline earnings has been further contaminated by the publication of two new issues.
   
6. 
   If you are involved in an SME or SMP and need assistance with managing and operating your computer systems, go to www.ifac.org/store and download controlling computers in business: backup, archive and restore and controlling computers in business: physical security.
   

August 2003 (30 Minutes)

Accountancy

The adoption of IAS 39 is facing French resistance – the French president is encouraging standard setters to think again. (I did not realise that he was an accounting expert!) (Page 9)

The UK companies bill could include:

1. 
   Increased powers to regulate auditors.
   
2. 
   Increased powers for auditors to obtain information.
   
3. 
   Requirements to disclose non-audit services by auditors.
   
4. 
   Increased role of the review panel.
   
5. 
   Empowerment of revenue authorities to pass information to the review panel.
   
6. 
   Requirements to publish a statement on operating and financial review. (We need this thing in RSA.) (Page 13)
   

Michael Howard, shadow chancellor, says that the UK government has introduced, on average, 15 new regulations every working day since its election in 1997. (And we thought we had it bad!) He has promised to cut business regulation if voted in. (Page 19)

Investors should be aware that Higgs (equivalent of King in RSA) is not a solution to badly managed companies. The best safeguard for shareholders is the integrity of the management. Self-regulation should always be the preferred model. (Michael Howard) (Page 19)

Toll roads in Yugoslavia are insisting on dollars from motorists. You know that a country is falling apart when its Government will not accept its own currency! (Page 26)

Lessons to be learned when giving advice that could go wrong:

1. 
   Ensure that the engagement letter spells out exactly what responsibilities are undertaken.
   
2. 
   Judiciously disclaim any projections made.
   
3. 
   Avoid attending meetings if you are ill -prepared.
   
4. 
   Do not make statements merely to placate your client.
   
5. 
   Make notes of discussions and retain these notes.
   
6. 
   Consider placing an agreed cap on your liability for non-audit work.
   
7. 
   Ensure that the narrative in the fee note describes exactly what was done. (Page 58)
   

Sir David Tweedie, chairman of the accounting standards board, says that the future of international accounting standards depends on the professionalism of accountants. He says that if you are going to stick to principles, you need ethics. (The alternative is principles plus rules. Dear Sir, do you really think that principles are going to work without rules? Expecting to rely on the ethics of accountants to ensure that the principles are applied is a big ask.) (Page 77)

The magnificent Ron Paterson tackles the problem of what comprises a subsidiary for consolidation purposes, with special emphasis on special purpose entities (SPEs). Enron got away with selling assets to SPEs at massive profits and not eliminating the profits as the SPEs were not consolidated. He says that one should consolidate an entity if it provides the kind of benefits to the company that would be provided by a subsidiary. In the UK they created a thing called a quasi-subsidiary, which had the effect of stopping the formation of off-balance sheet entities to hide losses, assets and/or liabilities. He believes that the IASB should set out the principle of when control is deemed to be present and avoid detailed guidelines. He suggests that Sir David’s “duck test” should be applied, i.e. “if it looks like a duck, walks like a duck and quacks like a duck, it is a duck.” (Page 78)

Companies with December year ends are supposed to convert their balance sheets to IFRS GAAP on 31 December 2003 (yes, 2003) because 2005 is the first full year of compliance and the opening balance sheet of the 2003 year must be the starting point to get comparative figures for 2004. The problem is that the new statements on the major changes are only due in March 2004, i.e. if they meet their deadline. As we are already IAS32 and IAS39 compliant in RSA, it is vital that we know what changes are going to be made before we can get started on the conversion process. In the meantime, what can you do?

1. 
   Study IFRS 1 (AC138)
   
2. 
   Watch the IASB website to monitor decisions made on share-based payments, business combinations, etc.
   
3. 
   Consider how IFRS will affect staff bonuses, tax calculations, covenants in loan agreements, etc.
   
4. 
   Consider how IFRS will change the way you do business (crazy that we have to change the way we do business because of the standard setters!). (Page 80)
   

There is opposition to the two statements on financial instruments in Europe and the lobbying is in full swing. It is felt that because of this and because of the other projects that the IASB has taken on, the IASB is becoming stretched too thin. It looks like they may have to abandon the insurance statement to meet their other deadlines. (Page 82)

The proposal is that insurance companies arrive at the profit for the year by deducting the net asset value at the beginning of the year from the net asset value at the end of the year, fairly valued. If you have ever seen how insurance companies calculate their embedded values you will realise that the profits of insurance companies in future will be dependant on what management wishes to report. Pity the poor auditors. The author asks: “Surely the aim of accounting principles should not be to influence or change the business model?” (It is the cart leading the horse these days, my friend.) (Page 84)

The IAASB has issued an exposure draft called “Review of interim financial information performed by the auditor of the entity” – it can be downloaded from www.ifac.org. (Page 86)

The UK’s Urgent Issues Task force is working on accounting for emission rights. Say the Government gives the entity the right to emit 100 tonnes of CFCs. If it emits less than 100, it may sell the balance to other polluters. If it emits more than 100 it must either buy rights from another entity or pay a fine. Assume the right to 1 tonne is worth R10 and the company uses 60 tonnes by its half-year:

Emission right asset Dr. 1 000

Deferred income Cr. 1 000

At grant date. (Is this not lovely – create an asset out of fresh air?)
Expenses Dr. 600

Liability Cr. 600

Used.
Deferred income Dr. 500

Expense Cr. 500

Resulting in a net charge of 100 to income.

(Note: I have not yet studied the IFRS E.D so cannot compare the UK proposals with the IASB ones.) (Page 91)

Good news for auditors! Although Delotte & Touche was found to be negligent in relation to its audit of Barings, the judge held that management carried a high level of fault for loses suffered and damages should be apportioned. (Page 105)

The mission of the president of the ICAEW is to bring together business, regulatory and investing communities to examine how they can devise a reporting framework that fulfils market needs for the provision of truly useful information for decision making. (I thought that this was what the IASB was trying to do?)

Business is realising that sick leave is a high cost. Businesses must create a positive climate when people want to come to work. Businesses cannot afford to pay for people who do not turn up to work. Few businesses have accurate attendance records and cannot, therefore, spot absentee trends. The following five reasons are given for staying at home: Cold/flu (93%), food poising/upset stomach (77%), headache/migraine (64%), stress/emotional problems (54%) and back problems (47%). (Page 114)

Want to increase your fertility? Stopping smoking improves it by 20% to 50%, reducing alcohol intake to less than one drink a day improves it by 20% to 50%, and reducing caffeine intake to one cup of coffee per day improves it by 25%. If all else fails, trade your man in for a younger model. (Page 116)