Mafia Buzz Issue 3

November 2003 (30 Minutes)

Accountancy

BDO Stoy Hayward’s former Nottingham office, now Tenon, was given the largest ever fine by the ICAEW for signing an unqualified audit report for Princedale Group plc. Part of the problem was to do with derivatives. (Page 5)

E&Y are being sued because they did not warn a life company about the consequences of offering guaranteed pensions! (Add to your audit programme: “Evaluate every management decision for stupidity!”) (Page 10)

Sir David Tweedie says that practitioners must not ask questions of the standard setters because this will reduce the standards to a rules-based system as happened with IAS39. (How can one apply wishy-washy principles without guidance? The result will be that everybody will do his/her own thing and GAAP will become a joke.) (Page 16)

When involved in a turnaround, one needs to think carefully and slowly but act fast. Instead of taking the easy route of cost cutting, one should work on revenue enhancing measures. The trick is not to get caught up in the crisis. (Page 25)

The professional institutes, which were once seen as authoritative, are now being seen as mouthpieces for the large audit firms. The Economist believes that US regulators are too ready to listen to auditors and are therefore not taking the action that should be taken to rectify the abuses that have been taking place. (Page 26)

The ICAEW is considering a plan to force all members to make the effort to think through what continuing professional development (CPD) activities they should be carrying out. They expect to finalise the plan by next summer. (Mr. Editor, do you not know that there are people in the Southern Hemisphere that read your journal? Or do you think that summer happens in both hemispheres at the same time?) (Page 49)

Internal auditing should not operate on the fringes of an organisation but should be risk-focused, evaluating the enterprise-wide risk management (ERM) of the organisation. However, internal auditors should be careful not to cross over to a management decision implementation role. (Page 50)

Dennis Oswald and Steven Young did a survey to discover what motivates companies to buy back their shares:

1. 
   To pay out cash surplus to the company’s needs.
   
2. 
   To buy the shares when the price is low.
   
3. 
   To optimise gearing (in RSA if you borrow to buy back shares you may not get the interest paid as a deduction).
   
4. 
   To counter the dilutive effect of issuing options to staff.
   
5. 
   To boost the company’s earnings per share.
   
6. 
   To not be seen as empire building.
   
7. 
   To improve the return on equity (this is my point).
   

(Page 54)

Deloitte Touche Tohmatsu, and all the other names this firm goes by, has re-branded itself as Deloitte☻(without the face in the black dot. And please also note that the colour of the dot is not black either, it is green.) (Page 64)

99,2% of companies in the UK are not listed. And IFRSs are primarily designed for quoted companies! (Now we can’t let all this hard work be used for only 0,8% of the market, can we? So let’s see if we can’t apply it to SMEs as well!) The IASB has formed an SME division. (The mistake that they are making is that they think that SME managers use financial statements to make decisions. They don’t. Financial statements are usually prepared long after any decision has to be finalised. Managers use internal financial reports to make decisions that do not have to comply with screeds of accounting and disclosure standards. The IASB should focus on preparing standards for general-purpose financial statements and leave over-regulated SMEs alone.) (Page 80)

Ron Paterson debates the ED on discontinued operations, i.e. the problems of:

1. 
   When to make the provision for any loss on closure.
   
2. 
   The conditions for disclosing discontinued operations.
   

He concludes that it is not necessary to have a statement on this topic as other standards, such as impairment, deal with the first problem and the second problem can be dealt with in segment reporting. (Page 87)

The ICAEW has published guidance on prospective financial information (PFI) disclosure by companies. The guidance emphasises that markets and investors will find PFI useful if it follows the principles of (Page 89):

1. 
   Reasonable disclosure – understandable to the general user.
   
2. 
   Business analysis - faithfully present actual strategies, plans and risks.
   
3. 
   Subsequent validation – can be compared with outcomes.
   

Roger Smith believes that the increased turnover threshold of ₤5,6 million is a huge leap in the dark. He says that auditors do not seek to block a reduction in regulatory costs for SMEs because of self-interest. They support the retention of statutory audits where there is a public interest and where the benefits outweigh the costs. He feels, however, that this move will increase the risk of companies not complying with various laws. (Page 91)

The objective of analytical review is to answer the question: “Do the numbers make sense?” AR is done at the planning, substantive testing and review stages of the audit. The objectives of the tests, methods used, results and conclusions reached should be documented. The procedure should embrace the following stages:

1. 
   Predict – what result is expected from the test
   
2. 
   Calculate various ratios and relationships
   
3. 
   Compare actual results with predicted results
   
4. 
   Enquire – get explanations for deviations
   
5. 
   Corroborate with management explanations
   

(All straight out of SAS410.) (Page 92)

Accountancy SA

See December.

Business Day

The first successful conviction in a criminal prosecution for insider share dealing has taken place. The fine was R100 000! (The message sent by this sentence is that crime definitely does pay in RSA.) (6^th)

Two interesting adjustments to headline earnings appeared in the unaudited accounts of Beige:

• 
  Recovery of restraint undertaking payment
  
• 
  Liquidation dividend
  

In his book “Good to Great” Jim Collins describes the “doom loop”. This is when a company implements big programmes and radical changes, restructures, looks for a miracle moment or new saviour, tries to align and motivate people to its new vision, sells the future to compensate for a lack of results and embarks on a new radical path. (Sounds like some companies you know? SA Rugby Incorporated?) (25^th)

Trustees of pension funds, with the assistance of investment advisors, should set the allocation and risk policies of the funds they administer. Tactical asset allocation, which is the up weighting or down-weighting of asset classes, is a function of asset managers. Many trustees are not suitably qualified to set strategic asset allocation. They need to educate themselves and seek advice. (30^th)

A fight has broken out between SAICA and the ministerial panel reviewing the accounting profession regarding the examinations. The review panel is suggesting that we go back to writing part 1 and part 2 of the QE soon after qualifying at university. SAICA says that this will reduce the standard of the CA (SA) qualification. (31^st)