Mafia Buzz Issue 3

Fortune

Quotes from some of the top “Greatest CEOs in the US”:

1. 
   We have a responsibility to our employees to recognise their dignity as human beings and believe that those who help create wealth have a moral right to share in that wealth. (David Packard)
   
2. 
   To opt for assured survival at the cost of the company’s soul would be worse than not surviving. (Katharine Graham)
   
3. 
   You must battle attempts to kill off your ideas. Without creative tension, i.e. freedom vs. discipline, innovation vs. control, all you have is chaos, or worse. (William McKnight)
   
4. 
   We hold these truths to be self-evident, among them a higher duty to all who use our products. (James Burke)
   
5. 
   You must be willing to act boldly. (Darwin Smith)
   
6. 
   Our products are for people, not for profits. (George Merck)
   
7. 
   Set goals just beyond your grasp. Have a hunger for learning. (Sam Walton)
   
8. 
   Have a grand vision. (Bill Allen)
   
9. 
   Create ideologies and mechanisms that will stand the test of time. (Charles Coffin) (18^th, page 65)
   

Techtalk

The amendments to the JSE listing requirements are now complete – can get them from LexisNexis (the old Butterworths). Some of the major changes are:

1. 
   Directors take personal responsibility for compliance.
   
2. 
   Listed companies must have a permanent sponsor (more money out of the shareholders’ pockets into those of the professionals!)
   
3. 
   On the date of issue of the AFS companies have to publish abridged AFS on SENS.
   
4. 
   Auditors must review voluntary preliminary AFS prior to publication on SENS.
   
5. 
   Directors must obtain clearance before they can trade in their company’s shares.
   
6. 
   The GAAP Monitoring Panel will censure and penalise for not complying with Statements of GAAP.
   
7. 
   The threshold for related party transactions has been reduced from 10% to 0,25%.
   

ED162 on emission rights has been exposed. If you want to see GAAP gone mad, read this one!

The IASB is fiddling with the statement on provisions – I think that users and preparers are going to get angry about this constant changing of minds!

The Law Society of SA is not happy with the audit reports being given in respect of trust accounts. They are of the opinion that the cost of the audit report exceeds the benefit derived from them. (What about private company audits?)

IFAC’s Board agreed that it would operate with integrity, transparency, efficiency and simplicity. (What? Have they not been doing so in the past?)

The former Governor of the Bank of Canada is charged with finding out why financial reporting has lost credibility and will try to find ways to restore it. “The report will be released around midyear.” (This was the August Journal. Maybe in Canada they have a different year to us.)

The IAASB has issued an exposure draft on quality control for audit, assurance and related services practices.

September 2003 (30 Minutes)

Accountancy

The IASB has issued:

1. 
   ED 4 on the disposal of non-current assets and presentation of discontinued operations. They have reverted to the original idea of a discontinued operation instead of a discontinuing operation (round and round we go – will it ever stop?)
   
2. 
   ED 5 on insurance contracts. (You don’t want to know what they are proposing!)
   
3. 
   An ED on fair value hedge accounting for a portfolio hedge of interest rate risk. (Page 12)
   

In the UK they have issued a code to enable employees to take action against employers for not protecting them adequately against stress. (What about the stress of the employer caused by the employees?) (Page 13)

The IAASB has issued an exposure draft on the auditor’s responsibility to consider fraud in an audit of financial statements, which suggests that auditors should act with increased professional scepticism. (When are they going to admit that it is the responsibility of the auditors to look positively for fraud?) (Page 13)

It is felt that if liability caps are not permitted on audit responsibilities, we could end up with the big three (two, one, …?) (Page 22)

A good leader understands all the people in the team and treats them as they need to be treated and makes them feel good about themselves and confident. (Page 24)

Auditors (and directors, please) must learn that the full truth must be told, irrespective of the cost. They must not abuse the trust of the readers of financial statements. (Page 26)

In the UK they will be installing a principles-based system of compulsory continued professional development. It will not be necessary to notch up x number of hours or score x number of points. The system will require members to plan their own CDP system to meet their own goals. They will be required to provide a declaration that they have undertaken this process and provide evidence, if required to do so. (The UK professionals really are logical. I hope for our members that something as logical as this will be installed in RSA. Let’s avoid the big stick. Let’s avoid wasting time on things that do not add value. I think it is essential that professionals have a CDP project, but it must be their project, i.e. it should not be forced on them by some bureaucrat.) (Page 49)

When Rafat Bhatia raised concerns about the legality of a stock exchange transaction, the chairman of the company threw his digital diary at him and threatened to destroy him. He was awarded compensation of ₤805 000. PwC says that companies that do not have whistle-blowing policies are missing a trick. (The problem is that this is the last thing crooked management want when they are going to be blown up themselves!) The audit committee should take responsibility for a company’s whistle-blowing policy. However, despite any policy in place, it will still take a brave employee to put house, livelihood, family and reputation on the line by blowing the whistle. (If you were in a situation where you had your whole career ahead of you, would you blow the whistle? I have, on occasions, suggested that employees resign as an alternative. This is what the auditors are paid to do!) (Page 52)

Moores Stephens faces a damages bill of more than ₤190 000 after a high court ruling that it gave negligent tax advice. (Who wants to be a tax advisor?) (Page 73)

An auditor valued a start-up business that had developed a photographic process, which had not started generating income, for an outgoing shareholder at the accumulated cost of the development. It was sold subsequently for eight times the cost. The ex-shareholder sued the auditor for negligence. However, it transpired that the purchaser of the process had discovered that the process was fatally flawed so had scrapped it. So the shareholder did not get damages. (Thank goodness the auditors did not do the due diligence for the purchaser of the process! Doing valuations is a dangerous game.) (Page 75)

The traditional annual budget is a pointless and time-consuming process that piles pressure on people who already have a full time job to do. Many organisations have moved to rolling forecasting. (Page 84)

44% of working adults in the UK do not pay into a pension scheme and 66% have not planned for retirement. There is little consideration for financial survival past working age. Over 90% of those surveyed felt that there should be some form of financial education in the national curriculum. (Really think this will help? I am sure that the situation in RSA is a lot worse than the UK) (Page 89)

The EU has endorsed all IASs except the controversial IAS 32 and IAS 39. (Page 95)

A revised draft on ethics proposes that the code be elevated to a standard to be adopted by national bodies around the world. (Page 95)

IFRS will impact business processes, management reporting, systems and the way shareholders and market analysts view the results of companies. Few companies are considering how to communicate the impact of IFRS on their results. A major awareness education and training programme will be necessary before IFRS is implemented. (This is not going to be a major deal in RSA as we are already compliant with half of the IFRS statements to be published. The major issue is how the big four are going to interpret the new statements and what kind of pressures they are going to exert on their clients. I predict that some clients are going to revolt when they see the costs and the impacts on their results of IFRS.) (Page 96)

Questions companies should be considering in regard to the implementation of IFRS are:

1. 
   Has a needs-analysis for each of the stakeholder groups been performed?
   
2. 
   Is a training and development plan for management and staff in place?
   
3. 
   Are the analysts and shareholders aware of the impact of IFRS on the results?
   
4. 
   Does the company understand how the analysts’ and shareholders’ view about the company will be altered?
   
5. 
   Has the company installed a system to ensure that the staff will keep abreast with developments?
   

(That is what I am here for folks!) (Page 97)

The new ED on insurance contracts will put a stop to the following practices:

1. 
   Measuring insurance liabilities on an undiscounted and basis.
   
2. 
   Measuring insurance liabilities with excessive prudence.
   
3. 
   Reflecting future investment margins in the measurement of insurance liabilities.
   

The ED contains proposals that would require the unbundling of deposit components of insurance contracts and limit reporting anomalies when buying reinsurance. (Page 98)

Ron Paterson deals with some of the terms used by standard setters:

• 
  “Highly probable” means “significantly more likely than probable”. “Probable” means “more likely than not”. So “highly probable” is “significantly more likely than more likely than not”. Unfortunately, they do not define what “more likely” means!
  
• 
  “Possible”, in the definition of a contingent liability, means “less than probable” but in the case of a contingent asset means “less than virtually certain”.
  
• 
  He asks what “remote” means: is it the obverse of “virtually certain”? (Page 101)
  

SEC has issued a staff study recommending that accounting-standards be developed using a principles based approach. It proposes that they:

1. 
   Be based on an improved and consistently applied conceptual framework.
   
2. 
   Clearly state the objective of the standard.
   
3. 
   Provide sufficient detail and structure so that the standard can be applied on a consistent basis.
   
4. 
   Minimise the use of exceptions from the standard.
   
5. 
   Avoid the use of percentage tests that encourage preparers to evade the intent of the standard.
   

(I read the executive summary of this document. They are recommending a new system based on defining the objective of the standard. The new system will embrace principles and rules. There is no way that the US is going to admit that the ISAB has got the “right” approach!) (Page 104)