Mafia Buzz Issue 3

Finance Week

A circular is expected from the Registrar of Pension Funds stating that they do not have the authority to exempt any pension fund from the requirement to repay surpluses in terms of the Pension Funds Second Amendment Act of 2001. It appears as if there will be a long wait for past members to be paid out and they must not expect to receive anything substantial as markets have been in a downward spiral over the past few years. Past members of pension funds going back to 1 January 1980 should ensure that they notify the pension funds of their contact details. (5^th, page 49)

“Your magazine being very positive on indexing and was a great proponent of Satrix 40 about a year ago. May I suggest that you take a look at how that has done over the last year. As you see, it is not only the investment mangers who get it wrong from time to time but also journalists.” (Dig, dig.) (12^th, page 7)

Don’t throw your good money after bad. Take your money out of whichever insurance company has it and invest it yourself. For any investor with a good sense of judgement and who is prepared to invest conservatively, there is nothing more satisfying in the investment world than the growth and returns you can obtain yourself. (12^th, page 7)

Around $13 trillion has been wiped off global stock markets over the past two years, the worst bear market since World War 2. (12^th, page 8)

Afgri is rumoured to be facing an unrealised loss of as much as R200 million. Its trading update admits to a “mismatch” between buying and selling contracts. Thanks to a change in accounting policy, the group is able to reflect this loss directly in equity, rather than to take the hit in the income statement. (Isn’t GAAP just marvellously accommodating?) (12^th, page 13)

Switching an appropriate long-term investment strategy because of short-term discomfort is the wrong thing to do. (19^th, page 46)

Zimbabwe changed its exchange rate for exporters from Z$55 to Z$800 to the US dollar. (28^th, page 8)

Tongaat-Hulett has changed its accounting policy by adopting the statement on agriculture and by valuing maize futures and option contracts. The effects are (R’ millions):

1. 
   An increase in growing crops by 132
   
2. 
   A reduction in plant and equipment by 84 (?)
   
3. 
   A reduction in working capital by 89
   
4. 
   A reduction in deferred tax by 14
   
5. 
   An increase in derivative assets by 9
   
6. 
   A reduction in equity by 18
   

Profits for the current and previous year were adjusted by R9 million. (28^th, page 63)

Fortune

The real reason why AOL Time Warner is such a dog is not because of a clash of cultures, not because of accounting irregularities, not because of a drop in revenues but because the price of the deal in the first place was insane. And the painful part is that this was perfectly clear at the time. (So why did no one stand up at the time and say so?) (3^rd, Page 15)

A stock is only worth what you can get out of it, i.e. dividends and not earnings. “A cow for her milk, a hen for her eggs. And a stock, by heck, for her dividends. An orchard for her fruit, bees for their honey. And stock, besides, for their dividends.” This was written after the 1929 crash. The stock market and corporate America are again in ill repute. And after years of ignoring dividends, the nation is falling in love with them all over again. Even Microsoft has recognised the “new” understanding of what value really is and has stunned the market by paying its first ever dividend. (It is amazing how it takes a disaster to get people thinking clearly again.) (3^rd, page 48)

Techtalk

1. 
   SAICA has issued circular 7/2002 on headline earnings. This circular sets out rules for arriving at the measure.
   
2. 
   The APC has released an ED on business combinations, the details of which are dealt with elsewhere in Mafia Buzz.
   
3. 
   The ASC has issued a circular on agreed upon procedures performed for long term insurers.
   
4. 
   The IAASB has issued three documents that are critical to its operations, namely its terms of reference, its preface and its policy on black lettering.
   

Ms Sue Ludolph has been appointed the technical director in charge of accounting. I wish her well. This is not a position anyone can handle. I have seen many come and go. One needs to be tough to handle it. I had the pleasure of lunching with her and believe that once she has absorbed some battering and a few knocks that come with the job, she will grow into the position. I think that she has what it takes. Good luck Sue.

March 2003 (35 Minutes)

Accountancy

The share-price of Tenon, the UK’s accountancy consolidator, has crashed. (When they tried to start this in RSA I warned that this would probably happen. Accountancy is a professional personal service, not a commodity that can be sold.) (Page 6)

Deloitte and Touche are under attack by animal rights groups because of their association with a company that tests drugs on animals. (Who wants to be an auditor?) (Page 7)

E&Y are delighted to have won the case against them by Equitable Life over the inadequacy of the annuity rates charged by the company. Where do the directors’ duties end and the auditors’ duties begin and end? For the directors to blame the auditors for not being aware of the risks of the businesses they managed is a joke. This is a major victory for the whole profession. (Page 9)

There is a move to crack down on pro forma information published by companies with the intent to mislead. (Page 12)

In the first few pages of this month’s journal, three of the big four auditing firms are under the whip for something or other! Auditing is not a good place to be at present.

It does not matter how many rules you put in place but the quality of the people and the culture that matter. We need to attract quality people to the profession who have the capacity and courage to distinguish between right and wrong. (Page 19)

Following on from the Bannerman saga, why should financial statements be reliable for the shareholders and not for the lenders? Auditors should have sufficient confidence in their procedures and standards for the financial statements to be useful to all parties. Otherwise, the audit becomes almost valueless. (Page 19)

No degree of regulation will overcome the certainties that corporate failure is inevitable and the auditors will be blamed. The reality is that financial difficulty, financial collapse and the temptation to hide or distort reports of poor financial performance are the natural consequences of the market system. (Page 20)

In the UK 24% of chartered accountant financial directors are alumni of their company’s auditor. (So why is the UK not full of accounting disasters?) Only 7 CFOs in the top 100 companies trained outside the Big Four auditing firms. (Page 29)

General consensus is that the Higgs report does not provide additional responsibility for non-executive directors. It merely describes their role and responsibility. (Page 52)

After a year’s work a 2700 page report on the deceptions of Enron and its advisors spell more uncertainty for the profession. The senators who were responsible for the Sarbanes-Oxley Act have taken the cause up with renewed vigour. More than 5000 Enron employees lost their pensions. Managers tried to fill their pockets before the crash. The scope of the wrongdoing and the complexity of the devices used will strain public perceptions of the ethics of the profession. Tax shelters were designed not only to save $2bn in taxes but to generate $2bn of fictitious profits for Enron. The total taxes evaded in the US alone totalled $50bn. Tax advisors, including banks and audit firms, received $88m in fees. (Page 57)

The ICAEW has decided to postpone practice review for a year because of a failure to persuade practitioners of the benefits to be received. Smaller practitioners were dead against it. (I could never understand why small practitioners in RSA were so passive when they proposed it here.) (Pages 65 and 66)

The cost of employees leaving is between 50% and 250% of their annual salary. The single biggest reason for employees leaving is because of personality clashes or dissatisfaction with their managers. It makes good business sense to hang onto your valuable employees, even during an economic downturn. To keep employees happy, one must understand what drives them. They want:

1. 
   To be managed well.
   
2. 
   Interesting work.
   
3. 
   Discretion over how to do the work.
   
4. 
   To be trained for progression or for retrenchment.
   
5. 
   A work/life balance, i.e. they do not want to have to work long hours – they want flexibility.
   

Legislation is to be published in the UK in April that will permit employees to request flexible working hours. Employers will have to have good reasons to refuse this request. (Page 69)

The annual reports of companies say very little about the future plans, stated objectives, strategy or other information that is required for evaluation of future performance. (Page 97)

Ron Paterson (I find it interesting that they publish his articles at the back of the journal – leave the best till last) discusses the new ED on reporting financial performance, which is designed to combine the income statement and STRGL account into one. Some of his criticisms are:

1. 
   He does not agree with presenting the unwinding of the discount on provisions as a financing activity (me neither – see my article in the January 2003 SA Accountancy).
   
2. 
   He has problems with splitting inventory write-downs into two categories.
   
3. 
   He does not agree with the fragmentation of the post-retirement employee costs.
   
4. 
   He believes that the whole statement is wrong as GAAP works on a balance sheet approach with the income statement being the “balancing figure” and they are now trying to make sense out of this “balancing figure”. He believes that this statement merely highlights the flaw in the accounting framework. (In case you do not know Ron, he believes that the income statement should be the prime document based on matching and prudence.) (Page 101)
   

The US has approved a new standard called consideration of fraud in a financial statement audit. This is in response to restoring investor confidence in US capital markets and in audited financial statements. (One could argue that it is the start of the closing of the expectation gap – something that should have been embarked upon many years ago.) The key points of the new standard are:

1. 
   Understand the characteristics of fraud.
   
2. 
   Brainstorm how the entity could commit material fraud.
   
3. 
   Obtain information to assess the risk of material fraud.
   
4. 
   Identify the risks that may result in misstatements due to fraud.
   
5. 
   Assess fraud risks in the light of the entity’s programmes and controls
   
6. 
   Respond to the fraud risk assessment.
   
7. 
   Evaluate audit test results.
   
8. 
   Communicate findings to management and the audit committee and others.
   
9. 
   Document the work done.
   

(Can you see anything new here? This is what we have always done or should have done.) (Page 103)

Another author who has been relegated to the back of the journal is Dr Trisha Greenhalgh. Her articles are always informative and well written. This month she talks about giving up smoking. She says there is only one effective way to achieve this and that is to just give up. Stop buying the damn cancer sticks. When offered one say: “I have given up”. There are four phases to giving up the “dirty filthy habit” (her words, not mine!):

1. 
   The pre-contemplative phase (no intention of changing).
   
2. 
   The contemplative phase (thinking about giving up).
   
3. 
   The action phase (actively trying to change).
   
4. 
   The maintenance phase (changed and trying to sustain it).
   

She advises to wait until you really want to give up before seeking help. She does recommend nicotine replacement or buprion. (Page 142)