Mafia Buzz Issue 3

Citizen

“I must warn the public, the general auditing community and SARS officials that corruption destroys lives. Look at me.” (Grant Ramsay on his way to chookie.) (10^th)

Fund managers can’t make money for unit trust investors because of the excessive buying and selling of shares, which chops several percents off returns. (Anthony Ginsberg) (A buy and hold strategy invariably beats a churn strategy. Investment managers need to churn to generate fees.) (29^th)

Financial Mail

The pension fund surplus regulations have been published and are still causing confusion. Lawyers and actuaries stand to make a packet out of this confusion, as always, at the expense of the poor members of the post-retirement benefit funds. Some points of interest:

1. 
   If a fund can show the FSB that it does not have a surplus, it will not have to go through the apportionment exercise. (Actuaries just have to reduce their discount rate to get rid of any surplus.)
   
2. 
   Former members who belonged to a fund on or after 1 January 1980 must register with their former funds to be eligible for a payout.
   
3. 
   Surpluses may not be used to fund pensioners’ medical aid.
   
4. 
   Defined contribution funds will have to do the apportionment exercise even though the fund rules dictate that the assets and liabilities must be matched at all times. (More money for the actuaries and less for the members.)
   
5. 
   Minimum withdrawal benefits from defined benefit funds, the cause of the problem in the past, have now been set. (I find it fascinating that they can use a discount rate of 40% of the earnings yield of the JSE – I wonder if they know what an earnings yield is!)
   

Warren Buffett says that investors are dreaming if they think they will get the 15% p.a. returns from equities they used to get. He says that they should get used to returns of 6% to 7% p.a. (This is in the US. In the RSA: 9% to 12%?) (23^rd, page 52)

The morning after the latest suicide bombings in Saudi Arabia President Bush was quoted as saying: “We will track down the despicable killers who carried out the suicide bombings – they will learn the meaning of American justice.” (Makes you think!) (23^rd, page 74)

The JSE regulations now require the offices of the chairman and the CEO to be separated. (30^th, page 8)

The Companies Act is in the process of being redrafted and we can expect the process to take between three and five years to complete. (30^th, page 17)

Stephen Koseff (CEO of Investec) believes that it could take between four and five years before the equity markets recover. (30^th, page 42)

Sekunjalo alleges that Deloitte did not prepare the financial statements of LeisureNet in accordance with GAAP. (Could someone please explain to Sekunjalo that auditors do not prepare financial statements – they audit them!) (30^th, page 44)

The average balanced portfolio in the Alexander Forbes global Large Manger Watch has provided a return of 5,6% p.a. over the past three years. (Why do actuaries persist in discounting pension fund obligations at 5% p.a. above the inflation rate and why do standard setters insist on using government bond rates (currently 9% p.a.). Companies are grossly understating their pension fund obligations and no one seems to be able to see this (or they are purposely shutting their eyes to it). History will show that this was the largest all-time accounting fraud perpetrated on employees and investors.) (30^th, page 59)

Finance Week

Jack Milne has at last come clean. Anyone who had listened to his feeble stories on the Alec Hogg show in the past would have been able to see right through him. The editor has called for legislation to guard against people like him in the future. (26^th, page 4)

Vic de Klerk tells the awful story about an asset manager of the Joint Municipal Pension Fund who lost R1,3 billion of the fund’s assets by speculating in maize futures, i.e. R500 000 per member. Any first year CFA (not the other one) can tell you that agricultural futures are not the kind of “investments” pension funds should be making. The trustees are clearly responsible for the allocation of investments and should be held responsible for this. If it can be shown that the asset manager was not given permission to speculate, the asset manager and his employer should be held responsible. (Give someone else your money to manage and you can kiss it goodbye. I was chatting to a trustee of a listed company’s DC pension fund the other day and he told me that they lost R200 million of the fund’s assets as a result of speculating in financial derivatives! This amount will probably be hidden in the investment income of the fund. Who monitors the trustees?) (25^th, page 12)

Mr Deon Basson objects to Corpcapital’s (CRP) accounting for its 47,5% holding in Cytech (C). CRP re-valued its investment in C and credited income, including the amount in headline earnings. When C’s valuation did not materialise, CRP changed its classification of C to an associate and impaired the value of C outside headline earnings. Mr Basson maintains that this was a change in accounting policy. It was not a change in accounting policy. Previously CRP did not have significant influence in C. On acquiring significant influence, the classification change was made. I know that the whole thing stinks but do not blame the fiasco on non-compliance with GAAP, thereby implicating the auditors. If anyone should take the blame it should be the standard setters who permit revaluations of capital assets such as Cytech to be included in headline earnings. (28^th, page 37)

Fortune

Who wants to be a director of a listed company with angry shareholders and aggressive regulators breathing down your neck?

1. 
   Analysts focus on quarterly earnings and fail to grasp the company's long term strategies.
   
2. 
   Accounting costs are increasing due to the new requirements.
   
3. 
   Audit costs are increasing because of the greater risks the auditors now face.
   
4. 
   You now have to take strangers onto your board and insure them against potential liabilities. (26^th, page 11)
   

After the scandal broke about investment bankers punting their client’s shares, analysts started asking the question: “Is this company a client of yours?” What analysts did not realise was that some investment bankers were being paid to give favourable reports by other investment bankers! (When will the deceit ever stop?) (26^th, page 17)

After Tyco’s spectacular deceptions, its new management announced a microscopic inspection of the books and declared all problems found. Then it went to the public markets for a major debt refinancing. Then – oops! – it announced newly found accounting errors requiring a $1,1 billion charge to earnings. (26^th, page 17)

HealthSouth displayed all the red flags for the auditors to see:

• 
  A large increase in profits with flat revenues
  
• 
  Management with large stock options riding on next quarter’s numbers
  
• 
  A CEO with a history of playing fast and loose
  
• 
  An email tip alleging fraud
  

One must ask: “How did the auditors miss a $2,5 billion accounting fraud?” (26^th, page 38)

E&Y is investing heavily in the training of its staff on the new accounting pronouncements, internal controls and financial reporting quality. It is also focusing on its annual “acceptance and continuance” decisions, i.e. whether it will continue to work for a client or walk away because of doubts about management’s integrity and other risks. (26^th, page 38)

After the disasters at Enron, Kmart, and Global Crossing where consultants were heavily involved, questions are being asked about the rationale for paying fees of up to $5 000 a day per partner for their so-called wisdom. Clients are looking for small nimble teams of seasoned people who have years of knowledge and experience and not for lofty thinking and giant buzzword filled reports telling executives what they should already know. (26^th, page 50)

Ted Turner, who had over 90% of his enormous wealth tied up in AOL and who is now down to his last $1 billion says: “No one should ever concentrate wealth like that, particularly where they don’t have control”. He goes on to say: “You should set goals beyond your reach so you always have something to live for. You never have enough time in life. I am constantly battling to stay ahead. I say to myself: All you have to do is to put one foot in front of the other and just keep walking.” (My personal mantra when I feel overwhelmed is to repeat: “Do one thing at a time – think, plan and focus full concentrated energy.” (26^th, page 61)

Stanley Bing asks the question: Why should the regulators get the massive penalties that are being charged to the companies for their actions? Should this cash not be given to those who lost as a result of management’s actions? (26^th, page 88)