Mafia Buzz Issue 3

What you Always Wanted to Know But . . .

A claw-back offer is where a company issues new shares which are taken up by a single shareholder who then grants the other shareholders the right to buy them back (the claw back) from him in the same proportion to their existing shareholding. The reason for going this route is to save the underwriting fee, which is usually about 2% of the total amount. (Could it also be that the single shareholder is looking to pick up some more shares if all of the shares are not clawed back?)

Intaxication is the euphoria at getting a tax refund, which lasts until you realise that it was your money to start with.

Published Financial Statements

Quyn Holdings eliminated the loss on the sale of investments from the calculation of headline earnings. Well done! You’ve got the logic but lack the GAAP.

InfoWave published its financial statements in a language I cannot start to understand. I presume that “Imali eqoqwayo” is “revenue”. I really think that this is taking “politically correct” to extremes. Maybe they just do not want us whities to invest in the company?

“Barloworld said forward exchange contracts taken out by its capital equipment business in SA have resulted in a loss of R292 million due to the rand strengthening against the dollar. The contracts were taken in order to cover the machine parts purchases.” (Press report) (I really do not understand this. Surely this is a cash flow hedge that does not go to income. It really will be interesting to see if large profits will be reported when the rand starts strengthening. Watch this space.)

Titbits

Here are some beautiful quotes from Berkshire Hathaway’s letter to shareholders by the famous Warren Buffett:

1. 
   It is hard to teach a new dog old tricks.
   
2. 
   My retirement is scheduled for five years after my death.
   
3. 
   Derivatives and the trading activities that go with them are time bombs, i.e. weapons of mass destruction.
   
4. 
   Parties to derivatives have enormous incentives to cheat in accounting for them due to the subjectivity that goes into their valuation.
   
5. 
   Despite three years of falling prices we still find very few stocks that interest us. This is testimony to the insanity of valuations reached during the great bubble.
   
6. 
   Occasionally successful investing requires inactivity.
   
7. 
   Accountability and stewardship become qualities deemed of little importance by those caught up in the great bubble.
   
8. 
   Directors must react as did the chorus-girl bride of an 85-year old multimillionaire when he asked whether she would love him if he lost all his money. “Of course” she replied, “I would miss you but I would still love you.”
   
9. 
   It is desirable to have independent directors but they must be business-savvy, interested and shareholder oriented.
   
10. 
    The key job of an audit committee is to get the auditors to divulge what they know.
    
11. 
    Watch out for companies that display weak accounting standards.
    
12. 
    If you cannot understand a footnote, management does not want you to understand it.
    
13. 
    Managers that always promise to make the numbers will at some point be tempted to make up the numbers.
    

Fun Corner

The best time to get an epidural is when you find out that you are pregnant. (Finance Week, 6 August, page 74)

After a weekend of partying with his mates, a married man returns home to a barrage of abuse from his wife. Eventually she makes him an offer: “How would you like it if you didn’t see me for a couple of days?” He cannot believe his luck so says: “That will suit me just fine.” For the next four days he never saw her. Eventually the swelling did go down and he could see her again out of the corner of his left eye. (Finance Week 20 August, page 82)

The six secrets of a perfect relationship for a woman are:

1. 
   He must have a job.
   
2. 
   He must help her around the house.
   
3. 
   He must make her laugh.
   
4. 
   He must be honest.
   
5. 
   He must be good in bed.
   
6. 
   The above five men must not find out about each other.
   

(Financial Mail, 1 August, page 106)

The art of medicine consists of amusing the patient while nature cures the disease. Voltaire. (A qualified doctor/homeopath said on the radio a few years ago that there are three types of people: those who visit a doctor and get better in three days, those who visit a homeopath and get better in three days and those who carry on working and get better in three days. The latter works for me.)

October 2003 (30 Minutes)

Accountancy

Business in the UK is hostile to quarterly reporting. The concern is that this requirement will add to the burden of operating as a listed company. It will have the effect of encouraging short term thinking in companies and among users. Companies (and their auditors) are relieved that the EC has proposed that no audit review will be required on quarterly reports. (Want to guess what the outcome will be in RSA?) (Page 36)

Chris Frost says that sustainable corporate growth depends on strategic management of volatility – cutting costs with an eye to the future, instead of embarking on knee-jerk slash and burn cost reduction. However, some companies are still confusing short-term shareholder appeasement with effective strategic cost management, and in the process, risk being under-resourced in key areas. During downturns, companies should be prepared to invest in activities that add long term value – and on cutting costs in areas that do not damage the business. Achieving the right balance is a real challenge. (Surely, one should always (not just in downturns) be looking to keep costs under control?) (Page 47)

The EC has decided to adopt 38 of the core 40 IASB standards. They have rejected IAS 32 and IAS 39. The French president, Jacques Chirac, stated that the IASB is writing standards that threaten not only the stability of the European companies but also the stability of the European economy! (Well said sir! We need someone in RSA to stand up and be counted like this. Mr T.M?) (Page 78)

The IAASB has issued an ED on the auditor’s responsibility to consider fraud in an audit of financial statements. It says that the primary responsibility for prevention and detection of fraud is with management. (So what’s new? Auditors need to take on this responsibility to reclaim the high ground.) (Page 82)

Two articles deal with the problem of macro hedging of interest rate risk. As this is now history (the standards have now been published) there is no point debating the problem. (Pages 83 and 84)

Ron Paterson is flogging his favourite dead horse again – arguing that the matching concept should override the balance sheet principle. As much as I agree with him, the battle has been lost and fair presentation of profits is not achievable under IFRS. (Page 88)

Emile Woolf says that the audit function as an affirmation of reporting integrity has become an object of derision (Enron, WorldCom, Xerox, etc.). He says that the audit function has evolved from “if it moves, tick it” through substantive, systems based audits, then risk-based audits, culminating in the latter-day curiosity referred to as “business risks strategic auditing”, which, when the esoteric flannel is peeled away, is basically a licence to do no auditing at all. He believes that more effective corporate governance, more power to audit committees and non-executive directors, rotating audits/audit partners and banning non-audit services is moonshine. He says that we should have another look at how audits are done! (Page 91)