One of the great losers of the Enron affair was the reputation of the audit. The world does not understand what an audit is for and the profession is looking to do a selling job. One suggestion is that a special qualification for auditors be launched to show the world that auditors have special training and expertise. The suggestion is to have a college of auditors. Most big firms have their own specialist training so this is not a solution for the big firms. (Maybe the smaller firms should pool their resources to give their staff the necessary training. They need our Henk Heymans in the UK!) (Page 7)
PwC caught the profession by surprise when they changed the wording of their audit opinion as a result of the judge’s comments in the Bannerman case in Glasgow. A bank relied on the audit opinion given by the auditors of Bannerman in making a loan. (See later for action taken by the UK in this regard.) (Page 9)
MyTravel has caused the UK profession an embarrassment – they were smugly saying “It can’t happen here in the UK”. Accounting irregularities ranging from aggressive revenue recognition to misallocation of costs took place. (Why couldn’t they take the knock and blame 9/11? Why do they have to try to deceive their shareholders and loan holders?) (Page 9)
John Shuttleworth lists the following lessons to be learnt from 2002:
Investors should see pension funds for what they really are and that is collateralised debt.
Equities do have a higher expected return than bonds – maybe this is why they give a lower return!
We re-learnt the universal truth that equities are risky. One must remember it is not what can go wrong that is important but how badly it can go wrong.
Pension funds in the UK are in serious trouble. (Page 46)
Are your really prepared for a catastrophe? Have you got sound business continuity management plans in place? You can’t wait for it to happen. You have to prepare for the worst. The IT function is obviously important but one must have a holistic approach to the problem. One should look at the four P’s: people, processes, premises and providers. Not only should the plan be in place; it should be tested. Small businesses need to ask a series of “what if” questions. Examples are: “What if there is a break-in?” “What if my hard drive blows?” “What if there is a lightening strike?” “What if my car gets stolen with my client’s files in the boot?” “What if I get seriously ill?” If you haven’t done it yet, it is time to plan. (If you plan, it tends not to happen!) (Page 49)
The Enron affair has made auditors look not so much at what has happened in the past but as to what can trip you up in the future. (Page 52)
Business travellers need to take precautions to reduce their vulnerability to danger. Some ideas are:
Stand or sit where you can see what is going on.
Take note of emergency exits.
Walk in well-lit heavily travelled streets – avoid short cuts.
Face the traffic when walking.
Stand near the control panel in a lift and check the hallway before exiting.
Beware of scams to separate you from your luggage.
Keep a dummy wallet with some money in it.
Use a door wedge for extra security in your hotel room.
Don’t hang a “Make up room” sign on your door. (Page 57)
PwC audit chief Glyn Barker says that Enron has made all the players realise what they should have known all along and that is a good audit is not an imposition to be tolerated but an asset worth paying for. (Page 78)
Sir David Tweedie says that the IASB favours an approach that requires the company and its auditor to take a step back and consider whether the accounting suggested is consistent with the underlying principle. This approach requires that companies and their auditors exercise professional judgement in the public interest (this is where the whole system will fail David – can you rely on the integrity of all concerned?) The intention is to reduce the amount of guidance given and to leave more up to the judgement of the preparers and their auditors. (I wonder if the IASB has done a survey among users to get their feelings on this approach? Based on my limited survey, users want certainty and comparability.) (Page 89)
Andrew Lennard argues that entry values are a sound basis for assets and for liabilities. If an asset is bought for 100, it should be measured at 100. Profit should not be taken before the asset is sold. Only then should profit be recognised. (Logical!) On the other side, if a bank receives a deposit payable on demand from a customer of 100 it should be recorded at 100. If the deposit is available to the bank for a period of time and the bank can make a return from the use of that deposit it does not mean that the bank can reduce the liability to its present value and take the profit before it has been earned. (I like this argument. It all comes down to: “When is value created?”) (Page 90)
Ron Paterson suggests that we should support the move to expense employee share options. (I also think it is the right thing to do but what worries me is that if Ron agrees with David, then something must be wrong!) (Page 92)
The proposals on business combinations are:
Only the purchase method will apply in future.
A restructuring provision will only be permitted if it meets the definition of a liability at the date of the combination.
Goodwill will no longer be amortised but will be tested for impairment annually.
If any negative goodwill arises, the measurement of the identifiable assets, liabilities and contingent liabilities should be “reassessed” and if there is anything left over after this “reassessment” it should be recognised immediately in profit or loss.
Consequential amendments will be made to the statements on intangible assets and impairment:
When impairing a cash-generating unit, one will not automatically assume that goodwill takes the first knock.
Reversal of goodwill impairments will be banned.
The requirement in the definition of an intangible asset that it be held for use in the production or supply of goods or services or for rental to others or for administrative purposes is to be withdrawn. (I wonder why?)
The 20-year rebuttable presumption for the useful life of an intangible asset is to be withdrawn.
If the intangible asset is considered to have an indefinite life, it should not be amortised.
Phase 2 of business combinations contains the following proposals: