Mafia Buzz Issue 3

Accountancy SA

Bay Jordan says that people in an organisation are important. (Wow!) (Page 4)

Harmke Immink and Donnė Sephton summarise the practical problems with emission rights (e.g. the Kyoto Protocol) and give a good summary of the ED on the topic (which I think is crazy-mad). (Page 7)

Izėl du Plessis discusses the proposed regulation of tax practitioners. (I don’t know about you but I am getting very irritated about big daddy taking control of every aspect of our lives! My dear Godfather has asked me to wind up his estate (he is thinking of dying). Are they going to make me join a special society and take special examinations to help a relative out? Soon I will risk jail time if I give my wife investment advice!) (Page 9)

Graeme Tosen summarises the formulas and measures for call and put options. (If you did my valuation workshop you will find the formulas and measures in the last valuation model on Excel.) I have another stupid question Graeme: Why is the projected dividend not part of the formula? This could make quite a difference when the time period is long. (Page 10)

Tom Theron deals with the financial management problems in the public sector and what can be done about them. (Page 14)

My article (please read it) deals with horror valuations I have seen in practice. (Page 26)

Citizen

Saddam Hussein has told coalition forces of the whereabouts of some $40 billion (R280 million) he stashed abroad. (Whew, the Rand really has improved this month!) (30^th, page 9)

Finance Week

Deon Basson, criticised Investec/Fedsure for not separating the policyholder investments from those of the investors. He implies that the policyholders lost out to the shareholders. In the same journal Investec counters with a statement saying “Not true.” Who knows where the truth lies? Maybe this is a lesson for the insurance companies to better explain their results in their financial statements. (3^rd, page 8)

Financial Mail

Freddie Mac, the second largest US mortgage financier, was fined $125 million for inflating reported earnings for the past three years and Parmalat, the Italian food giant, overstated its cash and cash equivalents on its balance sheet by over 4 billion Euros. (When, if ever, will this stop?) (19^th, page 8)

Fortune

When analysts join Vanguard, a US mutual fund, they receive a mouse-pad with a message: “Serve as a role model for the industry by adhering to the highest standards of ethical behaviour and fiduciary responsibility.” Even Senator Peter Fitzgerald, who called the mutual fund industry the world’s largest skimming operation, endorses this fund. (The problem with ethical behaviour is that it is much more difficult to make money – this is why the easy route to riches is to be a cheat.) (8^th, page 24)

Robert Rubin, former Treasury Secretary in the US, has an interesting philosophy. He says that everything is open to analysis. There are no provable absolutes, no givens. One needs to assemble every available fact and then weigh the odds before taking decisions. He calls this “probabilistic thinking”. (8^th, page 44)

The questions you should ask before buying equities are:

1. 
   How does the company REALLY make its money?
   
2. 
   Are sales and growth therein real:
   

• 
  How aggressive is the accounting policy for revenue?
  
• 
  How is service revenue recognised?
  
• 
  What is the relationship between cash from customers and sales?
  

3. 
   How is the company doing relative to its competitors?
   

• 
  Are the post-retirement obligations killing the company?
  

4. 
   What is the impact of the broader economy on the company?
   

• 
  Effect of interest rates, foreign exchange rates, GDP, etc.?
  

5. 
   What could really hurt or kill the company over the next few years?
   

• 
  Type of business a problem?
  
• 
  Financial strength (liquidity and solvency)?
  

6. 
   Is management sweeping expenses under the carpet?
   

• 
  Restructuring charges occur regularly?
  
• 
  Expenses are capitalised to assets?
  
• 
  Irregular costs occurring regularly?
  
• 
  Stock options issued regularly undermining wealth?
  

7. 
   Is the company living within its means?
   

• 
  Is the debt/equity ratio within norms?
  

8. 
   Who is running the company?
   

• 
  Does management change its policies regularly?
  
• 
  Does management have stock excuses for poor results?
  
• 
  Does the company sport spanking new offices with lifts going through fishponds?
  

9. 
   What is the stock really worth?
   

• 
  Use CPH’s wonderful valuation models!
  

10. 
    Do you really need to own this stock? (Page 58)
    

Maneo

A summary of the main recommendations coming from the Review Panel on the Draft Accountancy Professional Bill is:

1. 
   The legislation should focus on auditors and not the broader accountancy profession.
   
2. 
   A new body should replace the PAAB, which should have a particular public interest perspective and focus.
   
3. 
   The members of the new body should include all relevant interested parties.
   
4. 
   Funding for the new body should come from Government.
   
5. 
   The functions of the new body will be similar to those of the PAAB, but with more independence.
   
6. 
   The disciplinary powers of the new body would be enhanced.
   

IFAC has issued two EDs, Fraud in audit and Audit planning.

The ASB has issued SAAPS1014 Reporting by auditors on compliance with International Financial Reporting Standards.

SAICA has issued the following:

1. 
   Guidance for auditors: reporting on attorney’s trust accounts.
   
2. 
   Corporate governance guide: audit committees for medical schemes.
   
3. 
   Guidance for auditors reporting in terms of the immigration act.
   

The IAASB has issued the following:

1. 
   ISA315: Understanding the entity and its environment and assessing the risks of material misstatement.
   
2. 
   ISA330: The auditor’s procedures in response to assessed risks.
   
3. 
   ISA200: Objective and general principles governing an audit of financial statements.
   
4. 
   IAPS1005: The special considerations in the audit of small entities.
   

Practice review is moving into its third review cycle, which will focus on placing greater emphasis on high risk assignments in order to address the concerns of the public interests. Jillian sets out details of the programme, which commences in January 2005 (time to get your act together). It is good to see that priority rating is part of practice review’s strategic thinking.

The disciplinary committee has been extremely busy taking practitioners to task. Here are some of the naughty things that were attacked:

1. 
   Using a refund from SARS to set-off the practitioner’s outstanding fees (what a great idea!) (Joking!).
   
2. 
   Not supervising staff.
   
3. 
   Not responding to correspondence (GOOD – see below).
   
4. 
   Not obtaining an engagement letter.
   
5. 
   Not reporting a material irregularity.
   
6. 
   Saying they did not do an audit when they did.
   
7. 
   Inadequate planning documentation.
   
8. 
   Inadequate documentation to indicate that risk was assessed.
   
9. 
   No proper evaluation of internal control.
   
10. 
    Various examples of insufficient audit evidence obtained.
    
11. 
    Failure to submit income tax returns, to deal with tax queries and to inform the client of tax arrears.
    
12. 
    Not notifying a client to stop paying debit orders once the outstanding fee was settled and refusing to repay the excess received immediately in full.
    
13. 
    Not informing the executrix of an estate of progress being made in the winding up of the estate.
    

I am really pleased about number 3. South Africans need to be more polite. You will not believe how often I go the extra mile for someone only to be rewarded with silence.