Mafia Buzz Issue 3

Business Day Management

Tony Balshaw, partner-in-charge of family controlled companies at Grant Thornton Kessel Feinstein compares the family system of running a business (emotion based) with the business system (task based):

Emotion Based Task Based

Inward looking Outward view

Express feelings Unemotional

Caring Reward performance

Protect low achievers Perform or leave

Averse to change Embrace changes

Risk-averse Risk taking

High dividends Reinvest capital

Family leadership succession Best person for the job

Recruit family first Best qualified applicant

Equality Meritocracy

Wealth preservation Wealth creation

(This really strikes a chord!)

Citizen

John Loots, Absa’s economist, says that there is a realistic chance that gold could hit $500 an oz (when?) and that the rand could stay at R6,50 for the next two years. (27^th)

Financial Mail

Raymond Ackerman describes inflation as “A thief in the night.” Jacko Maree says that it is harder to earn a real return of 10% when the inflation is 3% than when it is 20%. (Rhys Summerton of Citigroup suggested to me recently that the systematic risk premium that I use in my discount rate to value shares should not be fixed at 6% but should be a factor of the risk free rate.)

One has to question a statement of GAAP that is so rigid and prescriptive that it makes accounts incomprehensible and interferes with a company’s ability to do business and deliver value to its shareholders. (Three guesses which AC they are talking about?) (28^th, page 12)

Finance Week

Naspers will not disclose its provision for leave pay because management will then have to explain to shareholders how it grew to such large proportions. (So, dear shareholders, you now know what question to ask at the next shareholders’ meeting!) (5^th, page 15)

Investors should ask the following questions to help them identify current and future growth shares:

1. 
   Did the company show strong historical growth?
   
2. 
   Will the company show strong earnings growth in future?
   
3. 
   Is management in charge of income and costs?
   
4. 
   Can management manage the enterprise effectively?
   
5. 
   Is the share price in the buying zone?
   
6. 
   Can the share price double over the next five years without an adjustment in its PE ratio?
   

(Would we not all be wealthy if we could look into the future like this?) (12^th, page 42)

A thought from Vic De Klerk’s story on diluted earnings: Take the difference between headline earnings and diluted headline earnings and multiply this difference by the PE ratio to get the value of the company given away by the directors. (Just a thought that one can develop further.) (19^th, page 20)

Stafford Thomas says that cash flow does not lie and one should look carefully at operating cash flow after tax and working capital but before capital expenditure and dividend payments when assessing a company’s performance. (ST, my mate, did you not follow the Worldcom story? It is the easiest thing in the world to fiddle cash flow: debit plant and credit operating expenses.) (19^th, page 47)

The number of companies listed on the JSE is shrinking. One possible explanation is that the JSE is becoming too strict with their compliance requirements. (I recently advised a company to delist because of the petty attitude of the JSE regarding technical faults in the financial statements of the company.) (26^th, page 4)

In similar vein, Mark Hasenfuss says that the JSE must walk a tightrope between nurturing the entrepreneurial spirit and regulating the market. (They could achieve this by coming down hard on deceit and not harassing companies because of technical contraventions. They should have a policy of educating companies rather than disciplining them at least until the new GAAP has been understood by all.) (26^th, page 17)

Sunday Times

Statistics released by SAICA show that 19 948 of the 21 819 qualified chartered accountants are white. Only 397 are black, 254 coloured and 1 172 Indian. (48 are not sure what they are. Maybe they are South Africans?) (30^th)

Instead of motivating the (Springbok) team and turning them into winners, all the camp did was to reduce them to fumbling psychological wrecks, unfit for anything except public mockery. (Well said Dave.) (While investigating the training methods of the Boks, they should have a look at the preparation of the SA cricket team prior to that world cup – same mindset?) (30^th)

December 2003 (30 Minutes)

Accountancy

The audit threshold in the UK has been increased to ₤5,6 million turnover. This takes 69 000 companies out of the audit system. It will enable SMEs to cut costs, lighten the regulatory burden and get on with the task of making profits (paying more taxes) and creating jobs, and generally being able to be more competitive. (We should be so lucky in RSA!) (Page 5)

KPMG could have cost the US taxpayer $10 billion by selling a product involving tax shelters via telemarketing. (Page 6)

The Association of Corporate Treasurers has slammed the IASB for its stand on financial instruments. It believes that this standard will have a major negative impact on treasury best practice in non-financial sector companies. It says that the IASB is a one way street – it is impossible to get them to respond to comments. (Companies I lecture to are looking for a sponsor to take up the cause in RSA. But, we are a bunch of sheep here and accept anything that anyone in authority throws at us.) (Page 16)

The auditors of the EU have, for the 9^th year, qualified the EU’s financial statements. They say that they can give assurance on less than 10% of the annual budget! (Page 16)

Enron and WorldCom have seriously undermined the reputation of US business, and represent a fundamental betrayal of American investors. The public sees a rigged game of insiders and the privileged. So says the chairman of SEC, which is to boost its enforcement staff from 3 200 to 4 000. (Page 18)

Most audit practitioners of SMEs do not feel threatened by the move to increase the turnover threshold to ₤5,6 million. They say that the audit element in professional fees is not material to their practices. The feeling in Government is that the new regulations on money laundering will reduce the need for audits. The problem is that accountants will now have to report fraud and not get paid for doing so. (Page 22)

Robert Bruce says that due process in the US rids business of innovation and imagination. He feels that such processes spawn corporate scandals. (Not sure about the link here!) He is sad to see that the EC has insisted that they need a system of due process to endorse the IASB accounting rules before enforcing them. This slows down the process and leaves everyone in limbo. (SMEs in RSA can empathise with this – differential reporting.) (Page 23)

Chris Swinson asks “if shareholders are prepared to neglect their role as owners, who is there externally to hold the boards to account?” He says that legislation cannot ensure that shareholders act seriously as owners. (Page 26)

If you are involved in Charities, get hold of the articles from pages 28 to 36 (not from me - SAICA’s library will help). There are some excellent ideas in these pages.

Ian Livingston, hot shot FD of BT, says that success is one part strategy and nine parts execution. He says that lots of people are good strategists but they don’t do the execution very well. (Page 37)

People think that corporate scandals are exclusive to the US and that US GAAP is to blame. They seem to forget the UK’s Maxwell, Polly Peck, BCCI, Caparo, etc. And, now, wait for it, SSL International, the makers of Durex, overstated sales and profits by ₤25m for the two years ended March 2000. There is a worry that the company may not be able to meet its debt repayments of ₤400m. (Page 46)

Almost half of SMEs surveyed admitted to having only a few honest persons in their employ. The potential risk areas are staff (45%), purchases (19%), sales (13%) and financial reporting (10%). (Page 73)

The ICAEW is on another mission to improve business reporting. They want to examine how a reporting framework can be created that fulfils market needs for truly useful information. Although financial accounting was invented to be useful, this objective has largely been forgotten. The Corporate Report was published in 1975 (a brilliant document). Much of what it recommended was never followed up. The value-added statement did catch on but has been largely abandoned today. One of the downfalls of previous attempts has been to try to satisfy a wide range of users. However, they should realise that only investors count and the focus should be on meeting their needs. Other users can interpret this information to satisfy their own needs. (Page 79)

The ICAEW has published the first and second reports in a series to encourage improved information reporting:

1. 
   Prospective financial information: guidance for UK directors.
   
2. 
   New reporting models for business.
   

Reformers believe that financial reporting information is both misleading and inadequate. They want extensive disclosures of non-financial, qualitative and forward-looking information. Go to www.icaew.co.uk/bettermarkets where you can get further information. Issues covered in the second report are:

1. 
   Whose needs should be addressed?
   
2. 
   What decisions are being made based on these reports.
   
3. 
   Whether the market will reward good disclosure.
   
4. 
   Whether the conceptual framework is valid.
   
5. 
   What to do with intangibles.
   
6. 
   What level of transparency is applicable? (Page 80)
   

The IAASB has released the following new standards:

1. 
   Objective and general principles governing an audit of financial statements. (ISA200)
   
2. 
   Understanding the entity and its environment and assessing the risks of material misstatement. (ISA315)
   
3. 
   The auditor’s procedures in response to assessed risks. (ISA330)
   
4. 
   Audit evidence. (ISA500)
   

These standards replace the existing ISA 200, 310, 400, 401 and 500. They can be downloaded from www.ifac.org/store. (Page 81)

PwC discusses the implications of IFRS 1 (first-time adoption of International Financial Reporting Standards) regarding financial instruments. This should not be a major problem in RSA as we adopted AC133/IAS39 last year. However, we will need to study the new version of IAS39 to see what first-time adoption consequences there will be. (Page 82)

Ron Paterson considers the new publication of the official text of accounting standards for 2003-2004. It weighs 1,75kg and runs into 2 534 pages. He says that it has become so voluminous and complex that it will leave much of the profession behind. Many accountants do not get round to reading the standards. Those who do tend to find the language impenetrable and the concepts elusive and counter-intuitive. He ends by stating that if we need thousands of pages of dense verbiage, it shows that the standard-setting process has gone off the rails. (Page 84)

The IASB is considering the “wholesale approach” for the recognition of revenue. This will involve valuing a sales contract at what you can get someone else to perform it for and taking the difference to income immediately! (This will truly be the final nail in the coffin of IRFSs!!) The ASB prefers the “retail approach” where the profit is only taken when the seller has performed in terms of the contract. (Page 87)

Here are some ideas for developing leadership traits:

1. 
   Develop intuition – gut feel.
   
2. 
   Think creatively – seek experiences to trigger it.
   
3. 
   Act decisively and consistently.
   
4. 
   Pay attention to others – listen intently.
   
5. 
   Ask open powerful questions.
   
6. 
   Hold others accountable.
   
7. 
   Create and communicate a vision.
   
8. 
   Provide meaning for people.
   
9. 
   Express things in simple clear ways.
   

To achieve the above, adopt a cyclical process of plan-do-review. (My cyclical process is facts-think-plan-do-review.) (Page 112)