Mafia Buzz Issue 3

Accountancy SA

Karin Barac looks at what companies report on their websites:

1. 
   86% of companies give detailed reports.
   
2. 
   77% give their share price information.
   

Bay Jordan says that the only way to deliver a truly consistent customer service is to ensure that management and employees recognise that the business depends on the customer. They must treat customers as they would expect to be treated if they were customers.

Alison White expresses concern that there will be too much subjectivity in determining the recoverable value of cash generating units when identifying whether or not goodwill has to be impaired in terms of the proposed new statement on business combinations.

IFAC is working on an exposure draft on continuing professional development (CDP). (Just another way for other people to control our lives! We need to make sure that this will not be a waste of our time.)

My article was on how AC133 can be used to deceive the users of financial statements.

Penelope Webb objects to giving criminals amnesty – I am on your side madam – fine them and/or throw them in jail!

Business Day

Companies listed on the JSE will have to disclose all payments made to directors, including directors fees, basic salaries, bonuses, pension schemes, share options, profit-sharing arrangements and other incentive devices as from years ending on after 1 September 2003. (3^rd)

Citizen

Jackie Cameron sets out Allan Gray’s stock picking secrets:

1. 
   Stick to the basics.
   
2. 
   Understand the business you are buying.
   
3. 
   Ask yourself what you would pay for the business if it were not listed on the JSE.
   
4. 
   Have a margin of safety between the value and the price paid.
   
5. 
   Assess the competitive advantage of the business.
   
6. 
   A business is worth the cash it can pay to its owner. A company that never pays dividends is worthless.
   
7. 
   Watch for earnings manipulation.
   
8. 
   Ask yourself why you want to buy the investment.
   

(If you have every studied Warren Buffett, you will recognise all of the above.) (21^st)

Financial Analysts Journal

Maverick risk is the risk of being wrong and alone. When agents work on investing other people’s money, it is more acceptable to fail conventionally than to succeed unconventionally. A contrarian view is not accepted until it has been shown to be correct and has, therefore lost its relevance. It is easier to tell people what they want to hear, even if it is wrong, than to tell people what they do not want to hear, even if it is right. (May/June 2003, page 6)

Investors want to be secure while they aspire to be rich, want to save while they are tempted to spend, want to feel joy and pride and avoid the pain of regret, i.e. human nature is human nature. (May/June 2003, page 13)

Benchmarking allows one to measure the risk one is taking to produce additional return. Sophisticated investors use benchmarks to control their exposure to various markets to add “alpha”. The craze to “beat the market” rather than to meet well thought out investment objectives encourages one to follow the market’s “animal spirits” rather than gauge when such risks are likely to be rewards. (July/August 2003, page 4)

Financial Mail

Andrew NcNulty says that Primedia issued 800 000 options in June 2000 to expire in June 2005 at a subscription price of 275 cents. In June 2000 the share price was 600 cents. Nice way of watering down the value of existing shareholders! (4^th, Page 39)

The SEC has alleged that Coronation International Active fund of funds systematically manipulated the month end closing prices of certain securities and provided unfounded and unrealistic valuation opinions to the auditors. (One must wonder how much of this goes on in this industry. It is such a temptation, and so easy, to manipulate valuations.) (18^th, page 15)

The US based infrastructure management-company Peregrine Systems restated its revenue of $1,34 billion by $509 million as a result of a SEC investigation. They had allegedly included in revenue non-binding shipments to resellers and revenues that were reciprocal deals for customers’ purchases of software. (I have seen the latter scam working in RSA – software providers buy hardware for the client and charge exactly what they paid for it so that they can include it in revenue.) (18^th, page 15)

Micosoft has joined other US company icons such as General Electric, Citigroup, Coca-Cola and Proctor & Gamble in expensing equity based employee compensation through the income statement. Microsoft intends phasing out stock options in favour of issuing actual shares to managers. (8th, page 44)

Hendik du Toit of Investec Asset Management believes that as many as 40% of local asset managers are not trading profitably. (This makes sense – if the market stands still, >50% will not trade profitably – remember the costs of doing a trade?) (18^th, page 53)

Finance Week

Ernst & Young agreed to pay the U.S. Revenue Service $15 million to settle an investigation into the marketing of tax shelters, which could be used to evade tax. (9^th, Page 6)

An estimated R8 billion is lying unclaimed in various investment vehicles including life insurance policies, unit trusts, shares, dormant accounts and pension fund benefits. (9^th, page 35)

The Financial Services Board has reported that many life companies tend to treat policy holders in a cavalier fashion and that many of the bad practices that were found at Fedsure Life were common in other life insurers and the industry as a whole. Among other things it is recommended that there be a clear distinction between policyholders and shareholders’ assets, that the independence of actuaries be revisited and non-executive directors of life companies receive training. (9^th, page 38).

In 1990 there were 23 registered asset managers but by last year that had increased to 301. (All chasing the same investments and charging for doing so!) (21^st, page 59)

Asset managers spend vast sums on creating brand awareness to attract investment advisors who feel more comfortable with being wrong with a big name player than risk being wrong with a small manager. (30^th, page 55)

The top 40 shares account for 88% of the JSE capitalisation, which leaves only R150 billion outside the top 40 in which to invest. (30^th, page 55)

A new regulation in the Pensions Fund Act is to replace a regulation dating back to 1956. This regulation will require stricter corporate governance. The new version will require that trustees have an investment strategy in place. (The fact that this has not been in place in the past is really depressing!) A study by Deloitte & Touche found some serious shortcomings in pension fund administration. They found, for example, insufficient trustee dedication, a lack of employer interest, inadequate monitoring of governance, inappropriate investment strategies and a low level of trustee understanding. Considering the value destruction that has taken place in the pension management industry, one can expect litigation on a grand scale. (30t^h, 58)