Mafia Buzz Issue 3

Accountancy SA

Bernard Agulhas and Louis de Koker discuss the impact of the money laundering control laws on accountants and auditors, e.g. identify clients, verify certain particulars, keep records, train employees, etc. There is now a duty to report suspicious transactions. If this could affect you, study the full article. (Page 2)

Karin Barac looks at the implications to the auditor of Internet reporting of financial information by companies. The US standards on auditing state that electronic sites are a means of distributing information and not documentation, which has been interpreted to mean that auditors do not have to verify the accuracy of this communication. However, the Auditing Practices Board in their Bulletin published in 2001 stated that the auditor does have a responsibility in this regard. The auditor should, among other things, ensure that the electronic version is identical to the printed version of the financial statements. (This is a tough ask! It is easy to change the information. Must they check every week, month, two months, quarter, etc.?) (Page 10)

The US lawmakers do not trust management, accountants, auditors and lawyers to do the right thing so now require massive duplication of resources and effort to enforce compliance. The costs of compliance will increase astronomically – could average $3 million p.a. for US companies, which could push marginal companies over the edge. (Question: “Who ends up paying for this: the consumers or the shareholders? The other question to ask is who is going to be making money out of all of this?) (Page 13)

Wilna Steyn and Willie Hamman (and now Heidi Smith) continue their discussion on cash flows. The points made are:

1. 
   Companies are netting cash flows instead of showing gross movements.
   
2. 
   Companies are showing in their cash flows items that are not cash flows. (How can they be sure? If a cheque was received on the issue of shares and a cheque paid to settle the debt, then there was a cash flow!)
   
3. 
   Companies are not providing information by way of note on their non-cash flow movements.
   
4. 
   Profits and losses on the sale of investments are not reversed.
   
5. 
   Minority share of profit was shown as an increase in the financing activities of a company! (How did they balance?)
   
6. 
   Some companies treat loans to employee trusts as a financing activity. (If the shares were issued to the trust and the loan resulted from the issue, there would be no cash flow.)
   
7. 
   One company treated the payment for environmental expenditure that had previously been provided for as a financing activity. (The statement on provisions requires the interest on the provision be treated as interest paid. So I can empathise with the company in what they did!)
   

(My question: If you buy an asset on a finance lease with no cash flowing, neither the asset nor the liability appears in the cash flow statement. How do you then handle the rental payments? An operating activity (it is rent) or a financing activity (the capital repayment is paying off the liability) or an investment activity (you are buying an asset in instalments)? (Page 14)

Graeme Tosen looks at the meaning of VAR (value at risk). From what I can gather from the article (statistics, among other things, has never been my strength) VAR is “the amount of loss relative to a mean return”. The example given in the article states that if the expected return (mean) is R3 million and the standard deviation of this return is R7 million, then:

VAR at a 90% confidence level is 3 – (1,28 x 7) = R6,0 million

VAR at a 95% confidence level is 3 – (1,65 x 7) = R8,6 million

VAR at a 99% confidence level is 3 – (2,33 x 7) = R13,3 million

Or, to put it another way, there is a 10% chance that you can make a loss of R6,0 million, a 5% chance that you can make a loss of R8,6 million and a 1% chance that you can make a loss of R13,3 million. (I would have thought that one could halve these percentages as we are only dealing with one side of the population mean. Can anyone help?)

Let’s try this idea on Pick ‘n Pay’s shares:

I would expect to earn a return (has been achieved) of 1% p.m.

The standard deviation of the monthly returns has been 14% p.m.

This means that I can be 90% confident that I will not incur a loss of more than 16,9% in any one month from my investment in Pick ‘n Pay. Over the past 74 months the actual number of times 16,9% was exceeded was 3 times i.e. 4% of the times. (See why I think the 10% should be halved? Or was this a fluke?)

My article was on the journal entries and tax implications of agricultural futures.

Business Day

IBM was found guilty in the US for tampering with pension fund earnings to boost its own profits. (You can’t even trust the big blue!) (15^th)

Sanchia Temkin was clearly brainwashed into publishing an article stating: “In a revolutionary accounting development, SA is to adopt a differential reporting system for SMEs.” She says in the article that SMEs will be able to “tailor their financial reporting to the needs of the users of their financial statements.” (Dream on lady! Maybe when our small practitioners have had their say, and SAICA has accepted their points of view, this may be a reality.)

Finance Week

Deon Basson, (how does he find all these scandals?) tells the story about Corpcap’s accounting for its investment in Cytech. In short, the investment, which was considered to be a long-term strategic investment at the time, was revalued two years in a row to income (and included in headline earnings). When things started going wrong the investment was written down “below the line” (presumably outside headline earnings). What I find intriguing about this whole saga is the note by the audit committee in the financial statements. It read: “In due course the audit committee will consider and make recommendations to the board regarding any write down, which may be required for this investment over and above the monthly amortisation of goodwill in accordance with the company’s accounting policies.” If they were amortising goodwill, this investment could only have been an associate (47,5% holding). How then could the revaluation have gone to headline earnings? A second problem here is that the standard setters have got in wrong by stating that a long-term strategic investment revaluation goes to headline earnings! But then they will never own up to this mistake.) (10^th, page 12)

The R300 billion strong Public Investment Commission, which manages the Government employees’ pension funds, wants to harness these funds for empowerment. The PIC feels that it should focus on issues other than returns. (And create poverty for the pensioners of the Government in future years!) (10^th, page 15)

One of the best articles I have ever read in a finance journal is: “AC133 is a nightmare, says business”. Some of the points made:

1. 
   The French are the most vociferous critics of IAS39 – the EU has sent it back to the drawing board. (South Africans, with respect, are like a bunch of sheep – we accept anything that is thrown at us. Time to wake up?)
   
2. 
   RSA has been made the guinea pig for this new accounting standard – can we afford to be the leaders? (Sure – lots of money to be made out of this experiment – remember those making the money out of AC133 are the people who pushed for it to be implemented. Commerce and industry did not fight it so they are now paying the price.)
   
3. 
   AC133 provides insight into the risk behaviour of companies. (I do not agree. Until companies are stopped from hiding gains and losses on forex in assets imported and in export sales, users will not be able to get insight into risk management policies and their effectiveness.)
   
4. 
   The cost of implementing AC133 has been about R100 million to the banks. Shareholders have had to foot the bill.
   
5. 
   AC133 has pushed the disclosure requirements for insurance companies from 2 500 to 6 000 items!
   
6. 
   Why did we have to take the initiative in RSA when further developments are on the cards? This is not in the best interests of SA. (One bank I lectured to recently said that they would consider suing the profession for the additional costs incurred if major changes are made to the statement requiring further system changes.)
   
7. 
   SAICA points out that the APB is the standard setting body and not SAICA. (Who pulls the APB strings?)
   
8. 
   SAICA points out that IAS39 is not new to the world – the US has been using a similar standard for years.
   
9. 
   Mike Gresty says that he is still unable to make appropriate adjustments to reported results to arrive at comparisons between the various banks.
   

One good thing about this statement is that it is forcing all of us to try to understand the murky world of hedging and derivatives. (17^th, page 8)

Mr Andre Viljoen explains SAA’s AC133 accounting. SAA may only borrow 15% onshore in rand. 85% has to be borrowed offshore in dollars. At any point in time SAA has significant borrowings in the form of loans and leases and its foreign inflows are insufficient to cover all foreign outflows. It protects itself from adverse movements in the rand by covering forward. If the rand depreciates, it benefits from the hedging operations. If the rand strengthens, losses are incurred and the assets are worth a lot less so have to be written down. What happened was that the rand strengthened, assets had to be written down, and a loss was made on the derivatives. This made SAA insolvent at the year-end. However, the very next day SAA started recognising embedded derivatives, which had a value of R4,9 billion. This restored solvency to the company. (What makes you think that accounting has sunk to the level of mumbo jumbo black magic?)