Mafia Buzz 2008

Introduction to Mafia Buzz 2008This year sees a change in policy regarding the writing of Mafia Buzz. Topics relevant to:1. Knowledge on portfolio management and financial

analysis will be published in SowB Buzz2. Knowledge on valuations will be published in

Valuations Buzz.3. Knowledge on IFRS will be published in IFRS Buzz.General information on the above topics and other items of general interest will be published in Mafia Buzz.

The workshop material will contain back copies of the relevant Buzzes.

January 2008 (12 Minutes)

AccountancyChris Quick says that a recession in 2008 is by no means a certainty but it would be fair to say that the UK’s economic prospects are at least uncertain. [Do you notice that everybody is trying to talk us into a recession? (Page 1)

Some junior twit at the UK Revenue & Customs sent two CDs with personal and financial details of child benefit claimants through the post, and they disappeared. It is estimated that the information on these discs is worth £1,5 billion. (Page 5)

The CEO of KMPG says that once you have established leadership in an area, you must not stop looking for ways to improve. As soon as you do stop, you become vulnerable. (Page 6)

Audit firms are not happy about the proposed Professional Oversight Board’s plans for scrutiny of their work. E&Y feels that this will result in the most intrusive regime for auditing firms in the world. [He should pay SA a visit to see what intrusions take place here!] (Page 8)

Baby Boomers in the UK who have not made succession plans are having to sell their practices. This is not only a UK problem but a world-wide one. (Page 10)

The shareholders of the Dutch Supermarket group, Ahold, are planning to sue Deloitte for millions of Euro. In 2003 the company overstated its profits by €1 Billion. (Page 13)

Letter from a reader: An article on engagement letters in the December 2007 journal stated: “As an accountant or tax adviser your primary aim must always be to make sure that you don’t get sued.” And there was I foolishly believing that our primary aim had something to do with offering a first class service to our clients! [Love it!] (Page 16)

Sir David Tweedie says that 2007 was a watershed year for IFRS in that it saw the 108th country sign up with countries like Canada, Israel, Chile and Japan waiting in the wings. He says that by 2011, 150 countries will have signed up. [Let’s hope that they have sorted out most of the major issues by then.] (Page 26)

Sir David says that the four tests for a good principle-based standard is:1. Is it written in plain English and can it be easily

translated into other languages?

2. Can it be explained simply in a minute or so to the non-accountant?

3. Does it make intuitive sense?4. Does it describe the underlying economic reality in the

eyes of management?If these are his criteria, which are superb, lots of work still has to be done on his standards. (Page 28)

In the 1950’s a group of researchers asked Harvard Graduates if they had goals. Almost all of them said: “Yes”. They were then asked: “Have you written them down?” Only 3% of the graduates had written them down. A follow-up survey was done 30 years later and it was discovered that the 3% who had written their goals down had amassed as much wealth as the other 97% put together! [This really makes you think! At the age of 18 I was “fortunate” to land in hospital with severe bronchial problems. While there I read a book on personal management and adopted the concepts. I still have the summary of the book in a plaque in my office. Had I also read a book at that age on emotional intelligence, I could really have gone places!] Writing goals down helps you crystallise your thoughts. If you carry them around in your mind, they are little more than dreams. To achieve results one must translate intentions into plans. [I really do enjoy Dr. Rob Yeung’s insights.] Page 64)

The Institute of Chartered Accountants in England and Wales has launched a new assurance service designed to bridge the gap between a voluntary audit and an accounts compilation. With the threshold for audits in the UK to rise to revenue of £6,5m, there should be a market for such a service in the UK. It will also provide work for the many small practitioners who are being left high and dry with the demise of auditing for SMEs in the UK. The objective of this service is to provide a negative form of conclusion on unaudited financial statements saying that nothing has come to their attention to suggest that the financial statements do not give a true and fair view. The work done to enable the reviewer to come to this conclusion will involve making enquiries of management, applying analytical procedures and assessing whether the entity has applied its accounting policies in an appropriate manner. [I seem to remember vaguely that we had something like this in RSA many years ago and it seemed to have died a natural death. I wonder if clients will fall over themselves to make use of such a service? I think it is a poor compromise and I, as a user, would not place much reliance on it.] (Page 96)

“Most experts and observers understand that the US will eventually be converting to IFRS – it is only a matter of time.” (Page 115)

Following on from the above, the Securities Exchange Commission in the US has approved a rule amendment that will allow foreign companies to use IFRS financial statements without reconciling them to US GAAP.

A seller of a business wanted his profits to look good so he boosted sales by fictitious credit card sales. He then borrowed money, which was banked crediting debtors for card sales. The auditor used a tool called Luhn’s Algorithm which can, to a certain extent, validate credit card numbers. He ran it on the credit card numbers at the company. It

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rejected 87% of the numbers. It you are interested in these things you may be able to get the formula by emailing cdims@chetandalal.com – Chetan Dalal was the author of the article. (Page 120)

There is a move in the EU for predecessor auditors to provide their successors with access to their working papers. There is a fear that this will extend the liability of auditors. What do you think? Good idea or bad? It will certainly make for better quality audits. (Page 122)

SAICA News 3 January 2008At last something might happen with accounting for retirement funds. The IFRS standard on this topic is one of the oldest standards in IFRS and it is amazing that it has been left in its present form while the rest of IFRS has developed – a case of not getting priorities right? Let’s see where we go on this initiative.

Business Times 25 January 2008John Mbuya, an executive at the Risk Management Association of SA, says that the kind of fraud that happened at the French bank Societe Generale is common in banks in SA. He says that you do not know what happens behind closed doors. He says that three years ago one of the big four banks in SA lost R16 billion through fraud but it was never reported. It was just swept under the carpet and the employee was fired! If this is true, it is a terrible indictment on the accounting profession in SA!!! How did this statement get ignored by IRBA??? (Page 13)

Guardian on 29 August 2007:The IASB is a highly secretive organisation. It is the offshoot of a private company registered in the US state of Delaware, a place well known for corporate secrecy. It is funded by the big four accounting firms and major corporations. Many accountancy trade associations have signed up to the IASB to advance the narrow interests of their members and keep public accountability at bay. Auditors claim to independently enforce accounting standards but they are in bed with corporate interests and control the production of the standards. To secure its legitimacy, the IASB has covered itself in garbs of pluralism and “due process” which invites interested parties to comment on its proposals. There is no evidence to show that any note is taken of the views of non-corporate respondents. The aim of the IASB is nothing less than global domination and to make the rest of the image of the west. The accounting standards forced on developing countries have already failed. The IASB project is imperialist in nature and a recipe for domestic strife and international conflict. [Wow! And people say that I am controversial!! I would love to see the rebuttal to the above accusations.]

Income Tax ReporterA company reduced its profits by settlement discounts totalling R4,4 million in terms of the circular published by SAICA arguing that this amount only accrues when the purchaser of the goods does not take the settlement discount. SARS added this amount back for tax purposes. It went to the Income Tax Court (case ITC 1815). The

Court ruled in the Commissioner’s favour stating that the amount that accrues is the amount per the invoice and appearing on the statement. Only on settlement does any settlement discount accrue to the customer. I totally agree with this argument and believe that the SAICA circular was wrong. Has the taxpayer taken this to a higher court? (Volume 46, Part 1, 2007)

Guardian 5 September 2007There has been an outcry following the issue of IFRS 8 from NGOs and investors. The problem is that the standard does not require meaningful information to be disclosed about the geographical activities of reporting entities. Major companies do not want to publish this kind of information and the lobbying by interested parties fell on deaf ears. IFRS 8 gives management discretion on whatever they might choose to publish. Some examples of what geographical information could produce:

1. NewsCorp has lots of economic activities in the UK but pays little corporations tax.

2. Microsoft has relatively few employees in Ireland but over $16bn of assets and $9bn of profits. Why? Tax haven?

[Being an analyst, segment information is absolutely vital. I am angry that the new IFRS 8 is going to permit companies to hide industrial information. Another problem I have is that auditors do not appear, from research I have conducted, to treat this statement with the respect it deserves. So I cannot be sure that the information disclosed in it is meaningful.]

Accountancy SAI do not summarise this journal as you should read it in full.

CFA’s Continuing Education ProgrammeWhat a pleasure it is to belong to a professional body who respects its members! They are not going to force their members to company with a CE programme but are to encourage compliance. Their programme signals that they have faith in their members and believe that a voluntary programme is the way to go. (CFA Magazine, Nov Dec 2007, page 8)

SAICA PublicationsSAICA issued a document to explain the revision process of the Companies Act. It was handled in two phases, namely, the corporate Law Amendment Act and the Companies Bill.

The Corporate Law Amendment Act came into effect on 14 December 2007. It defines a widely held company and a limited interest company, amended Section 38 to allow companies to fund the acquisition of its own shares subject to certain provisos (special resolution, solvent and can pay debts), amended Section 228 to require a special resolution, set requirements for audit committees for widely held companies, required the formation of a body called the Financial Reporting Standards Council that will set Financial Reporting Standards and requires auditors to attend annual general meetings.

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Widely held companies are required to comply with Statements of “Generally Accepted Accounting Practice (GAAP). [Surely they should have said that listed companies have to comply with IFRS?] Limited interest companies can either comply with GAAP or Statements of Generally Accepted Accounting Practice for SMEs. If they go the latter route, they need to refer to Circular 09/2007 issued by SAICA.

The Companies Bill is expected to be issued for public comment during 2008.

February 2008 (10 Minutes)

AccountancyIn January Société Générale was rocked by the discovery of a €5,5 billion fraud suffered from a rouge trader taking massive fraudulent positions. KPMG has predicted that the UK should brace itself for similar occurrences this year. (Page 6)

Prince Charles is pushing for more green accounting [more red tape!]. (Page 10)

Letter from reader: “We need a campaign to make financial statements more concise and informative to shareholders and investors.” [Now here is a campaign I would be happy to lead.] (Page 16)

Mike Brooks laments that entrepreneurs ignore, at their peril, the advice offered by accountants. [Maybe it is because accountants are not communicating this advice effectively enough.} (Page 22)

The profession in the UK has controversially passed a resolution that the press and the public may be invited to disciplinary hearings. [One advantage of this is that members cannot be abused in private. However, does on really want to be abused in public?] (Page 34)

A survey in the UK showed that over half of the accountancy firms outside the top 50 firms were making an economic loss. Two conclusions were given: Either the clients do not value the services given by the firms or the firms do not properly manage their businesses properly. [I am sure that if this survey were conducted in SA one would find that 75% of firms are not making economic profits.] (Page 47)

More accountants, once qualified, value flexible working as an advantage to working for a firm. (Page 53)

Travelodge suggests that when leaving a hotel room, one should check that all your belongings have been removed. Items left behind include a mayoral chain, an urn of ashes, a blue glass eye, a pet cat, a suitcase full of diamond jewellery and a lucky Buddha charm. Even a child was left in the hotel room! (Page 53)

Sociologists believe that only 20% of a person’s success comes from IQ, the ability to learn, understand and reason. 80% comes from EQ (emotional quotient), the ability to relate to others, to understand oneself and to usefully direct one’s emotions. The emotionally intelligent person understands his or her emotions and is able to control them, a real advantage in dealing with colleagues and clients. Generally speaking, there are five elements of EQ: self-

awareness, self-regulation, motivation, empathy and social skills. [They need to work on this at school before kids get to the workplace.] (Page 56)

There are now almost 5m SMEs in the UK employing nearly 60% of the private sector workforce and contributing over half of the UK’s turnover. They pay a lot of tax, which they spend considerable time in administering and collecting. A consistent message from them is that there is too much change and what they need is a more stable tax system. [They also have their problems.] (Page 111)

IRBA Communications (1 February 2008)And now for something really different: Another initiative to get small gaap up and running by the profession. One wonders how many times such an initiative has, with lots of fanfare, been started only to fizzle out. A new IFAC paper looks at the proposed IFRS for SMEs (which SA has already adopted) and comments that possibly it is too complex for micro-entities. I have now run three workshops on SME IFRS and have concluded that it is irrelevant to 98% of private companies in SA.

Citizen 25 February 2008It was reported that FNB restated its headline earnings because of two new rules in the new circular:

1. The circular requires that gains and losses made on the sale of associates and joint ventures held by a private equity entity are now included in headline earnings.

2. Gains and losses on investment property held by long-term insurers are now included in headline earnings.

When you think that price earnings ratios are calculated using headline earnings and the sale of these two items are not of an annuity nature, i.e. you cannot rely on them to generate future earnings, it is another reason to adjust published information to get to fair presentation for the purpose of assessing value.

Finweek 28 Feb 2008Ewald Muller, a recently appointed senior executive at SAICA, wrote an excellent article setting out the challenges in the new Companies Act. Here are some of the points he makes:1. Legal backing for accounting standards could get

preparers and auditors into a lot more trouble than in the past.

2. The standard setting function will be the responsibility of the Financial Reporting Standards Council under the umbrella of the Department of Trade and Industry [where are they going to find standard setters in SA?]

3. New regulations will put pressure on public interest companies and their auditors.

4. Potential hazards await those who manipulate financial statements and “evade” tax or are a party to such actions.

5. Smaller companies will benefit from differential reporting.

6. Skills to cope with the new regulations are likely to be in short supply.

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7. Small practices may find their lifeblood ebb away due to the demise of the audit for SMEs.

8. 50% of the profession’s trainees come from small firms – alternative sources of training grounds will have to be found.

March 2008 (10 Minutes)

Accountancy March 200866 of the 97 FTSE 100 finance chiefs boast at least one big four firm on their CVs. (Page 5)

The profession in the UK is angry that the Government is now expecting it to fund the regulatory body that governs the profession. (Page 5)

Auditors of banks are coming under pressure regarding the losses being taken on the synthetic collateralised debt financial instruments. [I am surprised that we have not heard more about this to date.] (Page 6)

The profession’s watchdog in the UK is proposing that defendants in disciplinary cases will not be able to claim back their costs if they win the case. [This opens the door to abuse!] (Page 8)

The UK has introduced a flat rate of 18% for capital gains tax. [Here is hoping that Mr Manuel does not hear about this.] (Page 10)

The Economic and Monetary Affairs Committee of the EU says that it is not in a position to make its views known to the IASB on an equal footing with other countries and it is of the view that the IASB lacks transparency, legitimacy and accountability. [Gee, these guys can moan!] (Page 13)

The profession in the UK’s application to permit its members to do probate work (the handling of a deceased person’s will and estate, previously done exclusively by solicitors, has been accepted. (Page 15)

Emile Woolf laments the new EU directive that requires an outgoing auditor to make his or her files available to the incoming auditor. The apparent reason for this is that it will make the change over cheaper. He foresees auditors having to sanitise every audit file before signing off. [We do this in SA because of practice review.] Just imagine how this can expose the outgoing auditor to civil action. (Page 22)

The risk of losing customer data is becoming an issue in the UK. The Minister of Defence admitted that details of 600 000 applicants to the armed forces were stolen from a laptop in the boot of a naval officer’s car. Revenue and Customs lost two discs containing details of 25m child benefit recipients. Norwich Union lost £3m of customer money through identity fraud and Nationwide lost a laptop containing 11m customer details. Travellers in the UK lose 8 500 laptops and other mobile divides in UK airports every year. A primary Care Trust recently revealed that it lost the personal medical records of 4 000 patients on a USB stick. [Recently someone was supposed to copy information from my USB stick to his computer. When I checked the stick the next day I found that he had moved the information and

I had lost it! Fortunately I am paranoid about back-ups.] The following advice is given for better data security:1. Classify data according to sensitivity and

confidentiality and take appropriate security measures.2. Perform a formal risk assessment to identify security

vulnerabilities and take appropriate risk measures.3. Make people accountable for data security.4. Employ tools such as encryption and biometrics where

necessary.5. Place information security on the agenda of the audit

committee.6. Get the board to allocate the necessary resources to this

risk.7. Educate and remind staff of the risks. (Page 41)More than 50% of CVs contain lies about employment, academic and professional qualifications, directorships, etc. Research has found that the worst offenders are in the 36 to 40 age group. (Page 51)

Canadian companies will have to convert to IFRS for years commencing on or after 1 January 2011. [I have already had an invite to go there to run IFRS workshops! No chance.] (Page 70)

The IASB has said that is does not foresee further extensive use of fair value accounting as either necessary or desirable. [They need to get rid of fair value for agriculture – you do not make a profit when the sheep grows, you make it when the sheep is sold.] (Page 71)

The UK has started an initiative to improve accounting for pension plans. Here are the suggestions:1. The full liability should be presented on the balance

sheet of the company, i.e. the plan should be consolidated. [The final nail in the coffin of defined benefit plans.]

2. The liability should be discounted at a risk free rate. [At present one can use corporate bond rates.]

3. The actual return on assets should replace the expected return in the income statement. [Volatility, here we come.]

4. All actuarial gains and losses to be recognised immediately, i.e. no more smoothing corridors. {Good!] (Page 75)

Some user groups are requesting that the audit report be more meaningful, e.g. it should give information on estimates, judgements, sufficiency of evidence and uncertainties. The Auditing Practices Board in the UK has published a discussion paper on this issue. (Page 76)

Samantha Collins says that it is important to balance works and life responsibilities. [Please, Sam, tell me how!] She has developed a three stage model:1. Vision and direction: think about the problem.2. Choose: learn to say no.3. Manage energy: Look at what gives us energy and

what takes it away.She gives the following tips to improve balance:1. Focus on outcomes rather on what has to be done.

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2. Don’t do everything: use the 80:20 rule.3. Schedule time for preparation and planning.4. Take time before accepting assignments.5. Schedule open time to allow for the unexpected.6. If you decide to take it on, do it well.7. Create a “not to do list” and tick them off when you do

not do them. [Too complex for me.]8. Deal with emails twice a day (mid morning and mid

afternoon)[Wow: That was easy. But I thought that she was talking about getting balance into life like taking time off for whatever normal (non-accountants) people do.] (Page 111)

The former CFO of hedge fund Bayou Group was sentenced to 20 years for his role in a scheme that cheated investors out of more than $400m.

Financial Mail 14 March 2008The FSB is probing the manipulation of share prices by those who placed the share game called Make-a-Million sponsored by Galileo Capital, PSG and Moneyweb. [How would the public react if a casino sponsored a game to see who could win the most at gambling to get people hooked so that the casinos could improve their profits from their newly found addicts?]

Finweek: The Top 200This journal published the top 200 companies on the JSE. In the introduction they state:1. Taxed profit is before extraordinary items.2. Adjustments have been made for the LIFO reserve3. Excluded are items such as “cost of control”This is their 2008 survey!!! Someone should wake these dinosaurs up.

What you always wanted to know about sin but were too afraid to askDuring the past 15 centuries the seven deadly sins, as catalogued by Pope Gregory the Great were:

Pride, gluttony, sloth, lust, greed, envy and anger.

Mohandas Gandhi’s version was:

Wealth without work, pleasure without conscience, science without humanity, knowledge without character, politics without principle, commerce without morality and worship without sacrifice.

The Vatican says that today they are:

Genetic modification, human experiments such as cloning, polluting the environment, causing social injustice, causing poverty, becoming obscenely wealth and taking drugs.

Clearly, these are not as poetic and effective as the first and second versions.

April 2008 (10 Minutes)

AccountancySociete General backdated the loss it incurred in January 2008 because of the actions of rogue trader Jerome Kerviel

to its 2007 financial statements using the fair presentation override in IFRS. This action was supported by the regulators in France and E&Y. Past head of the SEC, Lynn Turner expressed her objections and stated that the override in IFRS should be withdrawn. [Question: Was Jerome’s action an extremely rare circumstance as visualised by IAS 1.19 in this day and age?] (Page 6)

There is still much to be done to meet the needs of investors and other stakeholders in financial reporting despite all the work done in this area. Respondents to a survey raised concerns about the reduced usefulness of financial reports due to complexity and the increased focus by companies on compliance instead of reporting on the essence of the business. (Page 73)

The IASB is looking into the problem with classifying various types of instruments as equity. For example, I have always had a problem with classifying as equity cumulative redeemable preference shares where the date of redemption has still to be fixed by the issuer. It looks as if this may, at last, change. (Page 83)

FinweekThe financial director of a SA top 40 company told the editor that his profession has gone crazy and that he has asked his children to study something other than accounting. The editor writes: “Obviously, the IFRS – an attempt to entrench auditing standards worldwide – have merits, such as tighter regulation of the profession after several corporate scandals.” You wonder who edits the editor’s column! (17th, Page 6)

FortuneThe April 14 issue of this journal contained an excellent article describing the demise of the 85 year-old Bear Stearns. The company had $11,1 billion of equity supporting $395 billion of assets. Rumours did the rounds that the bank was in a liquidity squeeze. Clients starting withdrawing deposits from the bank. When the bank requested a $2 billion short term loan to cover its liquidity deficit from another bank, the request was turned down and the bank imploded. J P Morgan stepped in to acquire the bank. So much for all the sophisticated risk management systems that banks are supposed to have installed. (Page 40)

Nassim Taleb, the author of The Black Swan, states that we have replaced experience and common sense with models that work worse than astrology because we assume that the unlikely event does not exist. He blames business schools for promoting models and devaluing common sense. He argues that the use of these models will get in the way of transmitting experience to the next generation. He says that the Nobel committee who award prizes for these models should be taken to task for doing so. He says that banking is a treacherous business and one does not realise how risky it is until it is too late. [I have bought his book and am busy reading it – will report back in a later Mafia Buzz. This needs to be a lesson to our profession which has got rules for everything and has and has abandoned common sense in the process.] (April 14, page 44)

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TimeIn the US girls are outstripping boys in the intellectual game. It is getting so bad that universities are starting to apply affirmative action, rejecting girls in favour of boys to keep the balance between males and females per the population proportion. [My experience in our profession is that women are overtaking the men at an exciting pace. Do we try to artificially rectify this by excluding deserving women from the selection process? My answer, if I had a say, would be a definite “NO”. Let natural selection take its course. If women deserve the job, they must get it. Eventually men will realise that the only way they can compete is to become as diligent as women. This will raise the whole standard of our profession instead of limiting the standard to the stupidest male!] (14 April 2008)

JSE ProposalThe JSE is proposing that audits of JSE listed companies be restricted to auditing firms with at least three partners and with an IFRS in-house expert or IFRS expert contracted to the firm. I must admit that as an investor, I limit my investments to companies audited by the big four. But I have serious concerns about this kind of control. If management want a small firm, why not let them have one? They have a choice of paying more audit fees or increasing the cost of their capital. I am against legislating choice. But this seems to be what those in ivory towers are doing these days. It is called “ Power”.

Fortune 28 April 2008The CEOs of Countrywide, Citigroup and Merrill Lynch, under whose tenure the sub-prime scandal broke, were retrenched with packages of over $100 million each. [Nice work if you can get it.]

The internal controls at Societe Generale allowed Jerome Kerviel to create open positions of $75 billion. The CEO became aware of this position on 20 January 2008, a Sunday afternoon, while preparing for a board meeting. He took a courageous step, which probably saved the bank. He hid the position from the board to avoid a stampede on the bank. Over a three day period he and his team unwound the position and persuaded two US banks to guarantee $8,8 billion of new capital. Only when the situation was stabilised, did he call a meeting of the board and reveal all. He took major flack from the board but ended up saving the bank.

TaxationIf companies want to use their STC credits they will have to do so by declaring dividends before withholding tax is implemented in 2009.

It appears as if companies that declare dividends will have to check the tax status of their shareholders before withholding tax on dividends. [More red tape!]

May 2008 (10 Minutes)

AccountancyThe UK’s Financial Services Authority has admitted that it fell short in its administration duties in regard to Northern Rock, the failed mortgage bank. [Good to see someone take responsibility for a change.] (Page 6)

Members of the European Financial Reporting Advisory Group caused an outcry when they said that fair value had a role to play in the credit crunch. The suggestion they made was that fair value should not be based on market prices at the year end but should be based on an average price over a representative period, e.g. the past six months. [I don’t have a problem with this. It will put a stop to manipulating markets at year ends.] (Page 6)

The Parmalat trial gets underway with 55 defendants facing charges of bankruptcy fraud, false accounting and criminal association. All deny the charges against them. (Page 15)

Emile Woolf writes that if the distress and devastation of recent months has one serious message it is that incentives based on single-year performance of earnings per share must be abandoned and remuneration should be contingent on results over several years, and in that way be released more gradually. (Page 20)

This issue dealt with Islamic finance. The concept of this form of finance is that all forms of interest are forbidden. It works on a principle of risk-sharing, i.e. the customer and the bank share the risk of any investment on agreed terms and any profits are divided between them. (Page 23)

A survey conducted among 1 073 finance chiefs around the world revealed that 75% saw a US recession starting in 2008 and almost half felt that it will last for at least 15 months. 35% said that their companies had been hurt by the reduced availability of credit and 60% were putting off expansion plans due to the credit market conditions in general. A former CFO of IMB and Chrysler said that he was expecting the coming recession in the US to be the worst he has seen in his 46 year career. (Page 34)

Michael Goddard, former finance director of Concorde Express Transport says that executives given share options get rewarded when there is a bull market, which has nothing to do with their performance. By giving options to management, one is encouraging them to take high risks because they gain on the upside but do not lose on the downside. He says that managers with limited areas of responsibility should not be granted share options but should be given incentives that pay off in relation to results under their control. (Page 45)

The IASB is looking to revise accounting for pensions. Criticisms of the existing standard are that the statement of financial position does not recognise the full asset or liability and the various options do not result in comparability between entities. The elimination of income smoothing would be a step in the right direction and the blurring of the contribution-based and defined benefit promises is to be addressed. (Pages 77 and 78)

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Now that IFRS 2 has been in operation for some time, people are starting to realise that it makes no sense. Matthew Curtis of E&Y is of the opinion that serous consideration should be given to moving away from the grant date approach to accounting for the intrinsic value. He feels that the benefit the employee receives should be the cost to the company at vesting date. [There are other serious problems with this standard that need to be addressed.] (Page 80)

Richard Bennison of KPMG says that audit reports have become too lengthy and obscurely complex and perhaps even turgid. He says that a change needs to be made by writing them in a fashion that conveys clearly and unambiguously the auditor’s opinion. (Page 82)

The IASB has recognised that the standards on financial instruments are far too complex and has published a paper to simplify them. Suggestions are to do away with financial assets held to maturity and available for sale financial assets and to reduce or eliminate the hedge requirements. (Page 84)

Robert Bruce interviewed the SEC commissioner, Kathleen Casey, who made the following observations:1. She stressed that people who prepare and audit

financial statements should be vigilant and transparent.2. She accepts that there are problems with fair value

accounting but feels that this is the best option.3. She is sympathetic towards the notion of a principles-

based accounting system but believes that such a movement would require changes to be made to the US legal and regulatory culture.

4. She states that using a principle-based system will increase the risk of poor judgements, which could foster more litigation when judgements are challenged.

5. She would like to see more than the big four auditing firms competing for audits and is concerned about the demise of one to be left with the big three.

6. She accepts that IFRS will become the global standard, and not US GAAP.

7. She is bullish about the concept of Extensible Business Reporting Language (XBRL). (Page 110)

The most recent estimate by the International Monetary Fund is that the losses or write-downs worldwide iro collateralised debt obligations is likely to reach $500bn. Fingers are now being pointed at the credit rating agencies whose ratings were relied upon by investors. (Page 114)

FortuneEvery year the CEO of Seagate Technology spends $2 million taking 200 of its employees on a week of hiking, kayaking, and adventure racing in the mountains of New Zealand. The idea is to build team spirit and modify behaviour. Employees have to apply for a position in this experience and have to train for months before the event. At the beginning of the trip, Bill Watkins tells his employees that they are all going to die at some point and that they should face important choices about where they want to work, what they want to believe in – choices about change and ultimately happiness. He asks: “Are you doing

what you want to do in your life? Or are you just blowing through?” He says: “I am challenging your life right now. What would you do if you know you couldn’t fail? Would you take a trip around the world? Run a company? If you are not doing what you want, that’s where I want you to go. This week is about you doing what you want to do for every week of the rest of your life.” (Page 76)

Fun CornerThe Darwin awards were created by Wendy Northcutt in 1993. Every year an award is given to someone who does something really stupid. Up for the award this year is a man who had a number of body piercings and decided to connect a power source to his two nipple rings. Rescue personnel were unable to revive him. Another contestant tried to hit his dog by swinging a loaded shotgun by the muzzle. The gun struck the ground and went off, hitting him in the abdomen. A past contestant mailed a letter bomb which was retuned to him for having insufficient stamps. He opened the letter. One of Charles Darwin’s theories is the tree of life is self-pruning. (Citizen, 22 April 2008)

I was picked up by a driver in Windhoek recently and he complained about the traffic. It took us about five minutes to get across town. Traffic in Thailand’s capital is so bad that hundreds of women over the past few years have been forced to give birth in cars. The Police have trained 145 officers in basic midwifery. In Bangkok police don’t consider traffic bad until a car is stationery for at least an hour. An average car spends 45 days a year stuck in traffic. 2 000 vehicles are added to Bangkok’s roads each day. [In SA about 1 500 are added per day in the whole country.]

Old Silicon Valley joke: If HP had invented sushi, it would have called it “cold, dead fish”.

June 2008 (10 Minutes)

AccountancyKPMG are to axe 190 jobs in the UK due to market conditions and internal reorganisation. (Page 5)

Mid-tier firms in the UK could shrink by more that 20% in the next few years due to the lack of profitability mainly though mergers. (Page 8)

Firms in the UK are against discounting pension fund liabilities at a risk free rate. (Page 10)

“Surely the cost to the company of issuing an option is the same as the benefit to the person receiving it at the vesting date?” (Letter to editor, page 16) [I agree.]

Emile Woolf suggests that accounting could have caused the sub-prime crises. He says that mortgage loans were sliced, diced and parcelled beyond recognition and the parcels were marked to market on the supposition that they could be sold on to another institution on the ever rising value curve. He questioned why the auditors didn’t check the credit risk when verifying the values. (Page 20)

The risk in gambling is capable of being quantified. But one cannot apply gambling risk calculation techniques to business because there is a much wider range of things that

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can go wrong. If you are playing a game, ensure that you have an edge. Gambling where the odds are stacked against you is a bad idea. Pick the right business to be in. In the short term a bad player can win and a good player can lose. The trick is to be in the game for the long term. (Page 28)

Too much time is being spent in crunching numbers and not enough time on analysing them. Regulatory requirements such as Sox are making the reporting procedures more complex and by the time the numbers are presented they have lost their relevance. Finance departments need fast access to more meaningful data. (Page 49)

Ernst & Young announced a bold move to integrate its firms across Europe and Africa. It believes that doing so will improve its ability to manage risk. It has obtained legal advice that this would not significantly increase its risk. One wonders if their legal advisors took Arthur Anderson into account. Grant Thornton International was not affected by the Parmalat fiasco because they are a loose association. However, a court in the US has given a client who is suing BDO Siedman the go ahead to hold BDO International jointly liable for damages. (Page 64)

The EU is of the opinion that SME IFRS is far too complex for small to medium-sized companies. Ian Mackintosh, the chairman of the UK Accounting Standards Board, is pushing for it to be accepted. [I wonder if he really knows what it is all about!!! There are hardly any concessions.] (Page 83)

New regulations are in place in the EU and UK to require outgoing auditors to give incoming auditors access to relevant information to maintain the effectiveness and efficiency of the audit process. Guidance is being prepared to help auditors in this regard. If auditors are willing to give information outside the mandatory framework, the permission of the client will be necessary. This new requirement will not be in contravention of confidentiality requirements. [Can you just imaging the sanitising of audit working papers that will take place if there is a change in auditor. It remains to be seen if regulation increases the outgoing auditor’s liability.] (Page 84)

The UK government is introducing legislation to permit auditors to limit their liability to a level that is fair and reasonable. Andrew Mitchell MP said: “Apart from auditors, I can think of no other group in commercial life in Britain that can neither limit their liabilities through insurance nor by contract with their customers. Auditors, as far as I know, are the only group stuck in that position. It is bizarre that men and women in the auditing profession are asked to take on personal risks that the insurance market, with all its resources, experience and analysis now says is unacceptable. (Page 87)

Peter Holgate of PwC says that the IASB is considering moving closer to US GAAP on deferred tax. In the US if one acquires an asset that is not tax deductible, one grosses the cost to arrive at a pre-tax value and provides for deferred tax out of this amount. He is of the opinion that this will not help solve the problem. [Agree!] (Page 91)

Australia abolished federal inheritance tax as from 1 July 1979. In that year it was found that deaths peaked after the

deadline. [Who says that you cannot plan your death?] (Page 160)

FinweekThe JSE is considering amending its listing requirements to introduce a roster of accredited audit firms for listed companies. This will bring more red tape and costs for auditors. (12th, page 57)

“At more than R470/share, McGregor BFA analysts think Sasol is still a buy.” [A month and a half later the share is standing at R387.] (12th, page 40)

In the share dealings section, Mr M S Mark sold 550 000 shares in Truworths. I wonder who bought these shares from him. (12th, page 36)

FortuneDavid Neeleman, who built JetBlue airlines, which collapsed after an ice storm grounded the planes, says that if you make a mistake you must admit to it. You must explain what happened and explain how it is never going to happen again and what you are doing to make sure it doesn’t. Had he done this at the time, his airline would probably have survived.

July 2008 (5 Minutes)

AccountancyThe CFO of BP, Mr Michael Starkie, wrote a letter to the Financial Times accusing the IASB board members of lacking the knowledge and experience needed to produce lasting accounting standards which will benefit the capital markets and the wider economy. He called for a total reconstruction of the board. The IASB hit back by pointing out that over 100 countries had adopted the standards and that the standards go through a due process before being finalised. [Surely Mr Starkie should be specific as to what the problem is (embedded derivatives) and address this issue directly rather than having a high level attack on the IASB?] (Page 6)

Deloitte reports that many football league clubs are facing insolvency over the next few years as the directors of these clubs do not seem overly concerned about generating profits. (Page 8)

The Judges in the Court of Appeal case against Moore Stephens held in favour of the auditing firm as the company was the perpetrator of the crime and not the victim and the loss was the legal consequence of the company’s action, which prevents the company from recovering the loss from someone else. [What a pleasure to see such logic. I wonder if a US court would have come to the same conclusion. Well done the Brits!] (Page 10)

Arthur Levitt has called for the creation of audit-only firms to help ensure the security of struggling companies. [Can you see the logic here?] (Page 12)

Letter to editor: “Please replace IFRS 2 with a standard based on reality before other ageing accounts like me think that they have lost it.” [Agree!] (Page 14}

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Steve Pipe suggests that the way an auditing firm can improve services to its clients is to produce a list of high impact ideas to improve the business of clients, to brainstorm this with the firm’s partners and to present these ideas to the clients with the suggestion that the firm can help implement these ideas. (Page 34)

One of the first things unthinking accountants suggest in times of turmoil is “cut costs”. Tony Grundy says that this can be counterproductive and damaging to the business of the company as it can lead to a loss of customers and market share, loss of high value-added staff, and create inefficiencies that could lead to higher costs in the future. He says that:1. Costs should never be reduced if this undermines

business strategy.2. The cost base should achieve strategic objectives with

least unit cost.3. Costs must always be managed for economic value.(Page 47)

Only one adult in six in the UK now smokes, down from more than one in two in the 1950’s. Deaths from lung cancer, which lag some 15 years behind smoking rates, have been falling for two decades. However, this is not the case in developing and middle income countries. Nearly 70% of men smoke in the former USSR and over 60% in China and the rates for women are rising. [Of what use is this information to you? Stop smoking and buy shares in BAT.] (Page 64)

One in four UK school-leavers believes that an ISA (individual savings account) is an MP3 player accessory or an energy drink. (Page 109)

August 2008 (10 Minutes)

AccountancyKPMG and one of its partners must pay out a combined £1,6m for their role in the collapse of Independent Insurance. KPMG said that it regretted the shortcomings in certain aspects of its audit and accepted that it could have done better. [It is great to see someone accept responsibility like this for a change.] (Page 6)

The Financial Reporting Council has launched a project to review the complexity and relevance of current company reporting requirements. (Page 15)

IFRS 2 is a classic case of oh-so-clever, oh-so-meaningless accounting. The abuse of unreported gains on share-based payments to executives should have been addressed instead of merely adopting the unintelligible American solution. [How long will it take before the IASB realises that most option schemes given to staff are really disguised share appreciation rights and millions of rands of cash are disappearing from balance sheets of companies into the pockets of management without hitting the income statement?] (Emile Woolf, page 20)

Leadership is about being able to admit your mistakes. It is better to stand up and admit you got it wrong than to pull the wool over people’s eyes because that’s only going to lose you respect. Explain that you are trying to turn the

situation around and people are more likely to accept and respect your decision. (Pete Gould) It is critical that one anticipates what can go wrong and have a disaster plan in place. When things go wrong the last thing you want to be is creative. You will want to follow a pre-prepared procedure where the consequences were thought out in a stress free environment. (Jim Norton) (Page 32)

More than half of company car drivers in the UK admit to shouting, swearing and making rude gestures at other motorists. This can reflect badly on the business that driver represents. [A while back I was motoring in my usual relaxed manner when a driver who had moved over to the right hand side of the road with his right indicator flashing suddenly changed his mind and swerved left in front of me. I had to take evasive action to avoid a serious accident. Naturally, I shouted at the driver. At the next robot he jumped out of the car and ran over to mine with full intentions of attacking me. I had visions of a similar old man who was attacked by a low life “JOB” who subsequently died of his injuries (whatever happened to this animal?) so took off through the red robot and made for the police station. He eventually gave up the chase (his car was no match for my bakkie). He worked for an estate agency in Palm Court. I have warned my friends not to deal with this firm – he may attack them if the sale falls through!] (Page 39)

I find it amazing that whenever there is an economic downturn articles appear on how to protect oneself from this situation. Some examples given in the article in question are:1. Improve your internal controls.2. Simplify your organisational structure.3. Improve your financial structure.4. Have a forward looking view of your business.5. Focus on cash flow.6. Ensure efficient execution of large projects.Surely these techniques are important during good times and bad. Why are they pulled out of the drawer only when there is a downturn? (Page 46)

Kerry Richards says that if you answer “yes” to any of the following questions your brand could be in serious trouble:1. Is your firm name more than two words long?2. Do you have an unflattering logo?3. Is your colour maroon or blue?4. Is your brand out of date, dictated by a legacy of

tradition?She goes on to suggest that you can boost your brand by:1. Getting opinions from your staff, customers and

suppliers.2. Not allowing a committee to take the decision.3. Checking if your firm’s name is memorable or unique.4. Checking whether the colour in your brand says

something about you.5. Checking the font used and whether it is consistently

used.6. Checking whether your brand needs a full makeover

or a gentle tweak. (Page 59)

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You have probably read hundreds of descriptions of the sub-prime disaster but I thought the following explanation is quite good:

The seeds of the credit crisis were sown in the US when lenders packaged bad loans up in tranches of debt and sold them as derivatives. A game of pass the parcel ensued with each new buyer looking to make a quick profit on a loan that would never be repaid. This was fine until the music stopped when the market for bad debt derivates ceased to exist. Over the past few months the challenge for those banks and companies left holding the subprime derivates has been how to account for these financial instruments when they can no longer be traded. (Page 84)

Business DayWK Clifford, a distinguished mathematician: “It is wrong always, everywhere, and for anyone to believe anything on insufficient evidence.”

Thomas Henry Huxley, eminent biologist: “It is wrong for a man to say that he is certain of the objective truth of any proposition unless he can produce evidence which logically justifies that certainty.”

Carel Petrus Hattingh, notorious accountant: “Show me!”

(First two quotes: Michel Pireu, Street Dogs, August, 29 2008 – repeated in SowB Buzz)

FinweekAnn Bernstein, executive director of the Centre for Development and Enterprise says that in at least 75% of our secondary schools, little if any learning actually takes place. We are failing to produce maths and science matriculants necessary for tertiary education. (28 August)

Richard Warren-Tangney says that the straitjacketing of auditing is chasing people away from our profession. He says that auditing is no longer an attractive profession for use as a stepping stone into industry. [He is so right: auditing does not encourage one to develop the skills necessary for taking on a CFO’s job anymore. The only skill taught in this profession today is how to tick pre-programmed procedures. [Hopefully, the latest banking crises may force the authorities to change the way we do audits where we can go back to the good old fashioned method of analytical review, keeping your ears to the ground, asking questions and building up corroborating evidence, etc.] (28 August)

NoseweekI usually read this magazine to keep my sanity taking most of the stories with a pinch of salt. However, there was a horrific story in this magazine about how Aspen’s Staff Pension Fund was used to help fund a BEE deal and, due to mistakes made by various parties and not picked up by the auditors (including some big four names) the Pension Fund may be at risk of losing a large amount of money. If this story is true, this is another example of what happens when you lose control of your investments. Next time I analyse Aspen’s financial statements, I will check to see if there is any comment on this situation. (Issue 106)

September 2008 (10 Minutes)

AccountancyThe UK standard setting body is proposing that liabilities for defined benefit plans be measured using government bond interest rates and not corporate bonds rates, as is presently done. [Why? Do they want to finally kill defined benefit plans? Will the government be left with providing for old people down the line? I cannot understand what their logic is.] (Page 6)

In a letter to the editor, one Christopher Lord says that two years ago there were massive deficits on pension funds, then last year there were surpluses, now, with the market tanking, we are back into deficits. He suggests that pension fund assets be valued like inventory, i.e. one only takes the profits when realised and writes down when values are below cost. [What lovely logic Chris but the IASB is hell bent on sticking with fair value accounting. It will take something more than the current crises for them to change their mind.] (Page 14)

Emile Woolf [I love this guy] says that there is not a single convincing argument to suggest that astrologers would not do better than economists at predicting future trends. (Page 18)

Now here is a solution to the subprime crises: Merrill Lynch and Citigroup mark to market their liabilities through profit and loss. So any drop in the market prices of financial instruments results in profits for these companies. (Page 18)

I have always wondered how people work in open office plans. Here is a lovely description of someone’s experience: “Workers are hurled headlong into a vast battery-hen pit of hell. They are forced to peck away at laptops for 10 hours a day in what has obviously been calculated by an expert as the smallest possible space in which a human can function. Desks, lined in call-centre rows, stretch into infinity. Colleagues sit so close to each other that computer mice nuzzle. Custody battles ensue over calculators and staplers. A mirror signal, manoeuvre system is required when rising from chairs to avert crashes to the rear. There is no privacy. Everyone sees and hears everything. Stress that is related to other people’s noise is worsened by the feeling that you have no control over it. Stress in open-plan layouts must not be under estimated: claustrophobia, noise pollution, lack of privacy, lack of escape routs. These factors counter basic human instincts. (Page 20)

The debate over fair value accounting rages on. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Measurement assumes the highest and best use of the asset by market participants. It is based on use by market participants even if the intended use of the asset by the reporting entity is different. Techniques for fair value are:1. The market approach, which uses market transactions

to establish fair value.2. The income approach, which uses valuation

techniques such as discounting future cash flows.

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3. The cost approach, which uses the cost to replace the service capacity.

These three techniques are similar to our realisable value, value in use and current replacement cost.

In the absence of independent market data, the entity should attempt to base its assumptions on what the market would expect and not on what the entity would expect. (Page 89)

The number of ICAEW-registered audit firms has declined from 7 500 in 1998 to just under 4 500 today and it is estimated that by 2018, there will only be 2 100 firms. Trying to provide audit services for small firms has become an expensive occupation with the red tape that they have to put up with. This is likely to become the SA story (obviously on a much smaller scale). With the potential demise of audits of small companies, firms will have to find other ways to add value to their clients. In the UK “assurance” assignments is expected to replace audits, where no audits are required. For example, “assurance” by an independent qualified person may be needed by outside users of financial statements. (Page 105)

Warren Bennis says that it is dangerous to assume that leaders are born. He says that with the proper training, leaders are made. It requires a change in mindset from the management mindset of doing things right to a leadership mindset of doing the right things. (Page 110)

Business DayThe Joint Municipal Pension Fund is taking on 25 defendants including Deloitte and the JSE for the R1bn loss suffered by the pension fund due to WJ Morgan speculating in maize futures. It is going to be interesting to see where this case goes. The basis for the case is that any one of the parties could have prevented this loss had they done their job properly. [Two comments:

1. I asked the question in session a few months back: “What was a pension fund doing speculating in maize futures?” and one of the participants, a representative from one of the bodies being sued, said: “There is nothing wrong with pension funds speculating”!!!

2. I am laying bets that the poor pensioners are throwing good money after bad. Let’s see if I am right.] (8th)

The squeeze is on small auditing firms (SAFs). The Companies Bill states that SMEs will not have to be audited, which means that a large chunk of fee income of SAFs will fall away. And the JSE has now proposed new rules requiring that audits may effectively only be done by medium to large auditing firms and that these firms have to meet certain expensive regulatory requirements. [How did we get into this mess? Auditing used to be a function that added value to a business. We need to resurrect this function under another name. However, it won’t take long for the power hungry control freaks to start destroying this new function with all their rules and regulations.] (29th)

FortunePaul Keegan spent six months test driving the systems of productivity gurus Stephen Covey, David Allen and Jim Loehr. Here is a summary of what he found:

Steven Covey

He believes that the key to productivity is clarifying your life’s purpose (to live, to love, to learn and to leave a legacy). He says that one should set goals, plan weekly and daily. Once your goals are set you break each goal into projects and each project into tasks. Create a master do-list and start planning to achieve the tasks.

David Allen

He believes that the key to productivity is to start working from the bottom up. He starts the process by ensuring that you get completely organised – clear the junk, clear the emails, get a system for everything, file everything where it belongs. Only once this is done do you set about meditating on your goals, projects and tasks.

Jim Loehr

He believes that the key to productivity is to manage your energy and not your time. To achieve anything worthwhile one must be able to invest energy. He advocates getting enough sleep, exercising regularly, eating properly and keeping a proper balance between work and family.

My Conclusion

The answer, to my mind, is to use a holistic approach, i.e. all three are right and their ideas should be incorporated into a holistic plan. (1st)

October 2008 (15 Minutes)

AccountancyThe IASB set up a panel to defend the concept of fair market values, despite the credit crunch. Their report stated that fundamental values are not consistent with the objective of fair value measurement because they do not take into account factors that market participants would consider when price the instrument, such as illiquidity and credit risk. Opponents argue that marking assets to market prices has led to billions of pounds of write-downs. They want to measure such assets over a six or twelve month period. (Page 6)

A US jury found in favour of a taxpayer who was allegedly given bad tax advice by KPMG over 20 years ago. (Page 10)

A partner at BDO in the UK has been appointed by Treasury to be the independent valuer for Northern Rock at a one-off fee of £4,5m. [Nice work if you can get it!] (Page 11)

Letter to editor: “It is nice to know that the improvements in corporate governance in the US and UK following the Enron debacle have put an end to short-termism and excessive risk-taking at board level, particularly in the banking sector.”

A Citigroup study which examined GAAP filings of 73 European companies listed in the US concluded that the reconciling differences between IFRS and the US standards were so great that they could well cause investors to come to differing conclusions about the performance of the companies. (Page 16)

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A survey conducted by KPMG indicated that less than half of audit committee members are very satisfied that their company has an effective process to identify significant business risks. Only one third of banks were confident that their management had a detailed understanding of the risk management methodology. (Page 39)

The Association of Investment Companies (AIC) says that the governance system under which IFRSs are developed should be improved. They want the investor’s viewpoint to be at the heart of the standard setting process. [Agree! However, when I was on the committees we could never get anyone from the investment community to sit on the committees – they were all too busy making money.] The AIC believes that the one size fits all policy has to change as there is a lot of useless information being produced by companies with not enough relevant information to be able to assess the financial performance and position of the company. [I believe that we need a bottom up improvement approach – changing the people on the governing body has no impact on the standards. We need people like me who use financial statements to say to the IASB stop stupidities such as straight lining leases, recognising embedded derivatives that are part of the business operations of the company, etc. and then get action from the IASB. With a bit of luck, the crisis we are in at present may be a wake-up call to the IASB to do something about the stupidities in IFRS.] (Page 63)

The US Securities Exchange Commission is expected to publish a proposed road map for adoption of IFRS by US users between 2014 and 2016. [Will the target date be 2050, when IFRS has effectively become FASB? Sorry but I am still very cynical about this whole thing.] (Page 65)

James Wong of PwC says that the US can learn from the conversion to IFRS from the EU experience. Here are some of the points he makes:1. Users do not like uncertainty so they must be kept in

the picture.2. There could be tax issues, e.g. LIFO is still allowed for

tax purposes in the US but is not permitted by IFRS (change IFRS?)

3. Management decisions may be affected by the new accounting (accounting determines how management operates and not vice versa!)

4. Lots of consultants are going to jump onto the bandwagon resulting in major cost overruns.

5. Staff will have to be trained on the new rules.6. Systems may have to be redesigned.7. Mistakes are going to be made, which will only be

discovered in future years.8. Conflicts with Sox may arise.9. Loan covenants may have to be looked into.10. Audit fees are going to skyrocket.[Does this all sound familiar to us in SA?] (Page 66)

The increasing size and complexity of financial statements has become a growing concern among investors, accountants, auditors and others. However, attempts to simplify and streamline them are met with stiff resistance from one or more stakeholders [e.g. the printing industry?] Ian Wright, goes on to give examples of complexities in IFRS that need to be simplified, e.g. terms such as “highly

unlikely”, “extremely rare”, “extremely unlikely”, “more likely then not”, etc. etc. (Page 68)

In the UK, auditors are allowed to enter into limited liability agreements with their clients. Jan Babiak of Ernst & Young sets out in an article why firms may want to enter into such LLAs, how their clients may benefit, what types of LLAs can be negotiated and what the key components are of such agreements. (Page 70)

Business DayBryan Hirsch (listen to this guy – he knows what he is talking about) says that what amazes him is that people bail out of equities when the market is down when now is the time to be considering topping up one’s portfolios. He says that if your investment horizon is only one or two years, you should not be in the market. If you are a long term investor, you should not be panicking at this time. (6 October)

FortuneCredit Default Swaps (CDSs) have ballooned from nothing to $55 trillion in the past decade. The idea behind a CDS is that it insures against default. CDCs are unregulated and undisclosed and were partly responsible for the sub-prime fiasco (“we don’t have to worry about these instruments as they are insured”). The problem is that no one knows what risks the writers of these contracts have exposed themselves to. One does not have to own the financial instrument to take out a CDC – one can take insurance on any financial asset. One hedge fund made $15 billion on betting that other investors’ subprime mortgage bonds would default. CDS have become a major way of gambling without any restrictions. The problem is that one cannot be sure that the “house” will continue to pay out on these bets due to the severity of the problem. Some writers of these contracts turned out to be small off-shore operations that had no chance of settling (collect the premiums and walk away from their responsibilities). There are over $1 trillion worth of contracts that are unsettled among counter parties at present. CDSs have become the dark matter of the finance world. (13th October, page 63)

Men’s Health – Best LifeWhat am I doing reading this at my age? Well I got a complementary copy and I read everything that comes my way. I found an article which I related to which I want to share with you. It’s called the Secret of Slow.1. Eat slowly: It helps you lose weight and helps with the

digestion of your food.2. Steam slowly: Take time to lose your temper. Count

slowly before becoming angry.3. Read slowly: Take time to consider and internalise. 4. Speak slowly: Connect with your audience.5. Weight train slowly: Focus on the muscle groups you

want to develop.6. Drive slowly: Stick to the speed limit. Weaving in and

out of traffic does nothing for your petrol consumption and your reputation.

I find that my staff scream out of the office every day and invariable forget something behind and have to waste time coming back to the office to collect it. There is no point in

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trying to rush ahead of life. The most amazing thing is the more you rush the more time speeds up and before you know it your life has come to an end. The moments I treasure the most are sitting in a park, listening to the rustling of the trees, the rippling of the water and the songs of the birds. Slow down to the speed of life and relish it.

November 2008 (15 Minutes)

AccountancyThe blame game is about to start following the fiascos at the financial institutions and right in front, expect the auditors to come in for a hammering. (Page 5)

Pressure is growing from politicians and a number of banks to change the mark to market rules in IFRS. The IASB did allow one concession (permitting entities to reclassify financial instruments designated as at fair value through profit or loss) but held firm on any further concessions without going through the due process procedure. (Page 5)

Letter to editor: “How was it that banks published unqualified sets of accounts with all those toxic assets on their balance sheets? The only conclusion we can come to is that the audited accounts of the banks were not worth the paper they were written on. This is a cataclysmic failure on the part of the auditing and accountancy profession, yet no one in that profession has admitted to the problem or that they need to set their house in order. One lesson must come from this: the audit process must become more robust.” (Page 12)

Emile Woolf (Poet Extraordinaire) writes: “The present crisis abounds with so many lessons that future generations of economic students will face a very different array of textbooks. Critical precepts may remain unchanged, but the scale on which they have been so selfishly disregarded for the sake of short term enrichment, under the gaze of governments and regulatory agencies is without precedent. A veritable Ponzi fraud on a global scale, played with financial instruments so obscure that they took everyone in. (Page 16)

With Goldman Sachs predicting that the global credit loss will reach $1,2 trillion, awkward questions about the role of the auditor are starting to emerge. Did the auditors properly apply their minds to the risks involved, the covenant arrangements, the going concern issue and proper accounting for off balance sheet items. [Surely if you sell a financial asset with a put option, one cannot derecognise it? It appears as if the banks did derecognise these assets.] (Page 34)

The public sector in the UK has adopted IAS 16. A typical entity would have an asset register of 15 000 items. With component accounting this could go to 100 000 items. [One has to wonder what benefit such a council will derive from all the additional people it will have to employ to keep track of all these items. All that will happen is that the ratepayers will end up providing work for accountants.] (Page 61)

The US Securities and Exchange Commission has begun an urgent 90 day study of mark-to-market accounting. It will focus on the effects of such accounting on financial

institutions’ balance sheets, the impact on bank failures in 2008 and on the quality of financial information available to investors, as well as the advisability and feasibility of modifications to current accounting standards. (Page 65)

The International Auditing and Assurance Standards Board has issued an audit practice alert relevant in the audit of fair value accounting estimates in times of market uncertainty. [A bit late, isn’t it?] (Page 66)

Gillian Wild of Earnst & Young discusses progress being made with the changes to deferred tax. It appears as if the IASB may be moving away from the gross-up of non-deductible assets on initial recognition to providing for a “tax disadvantage on initial recognition because the entity does not obtain tax deductions on the asset”. Going forward the only deferred tax provided will be that arising on the sale of the asset, in the case of SA capital gains tax. (Page 68)

There is a potential wide open field for accountants to exploit called, not auditing, but giving assurance. For example, entities often require a third party to confirm that their social responsibility programme is acceptable within certain norms, their carbon footprint is acceptable, the entity is meeting good corporate governance standards, etc. [In SA we have the BEE scorecard issue.] The big four are already meeting these needs but mid-tier firms should start developing the necessary programmes and expertise to address this need. (Page 75)

Commentary by senior figures in the financial services industry:

In the past, failures of trust in the financial services have usually been associated with the fraudulent activities of a minority. But the current crisis has raised a far broader question, i.e. is there anyone out there that you can trust? [The answer is clear: “No”. Solution? DIY]

More consumer protection is needed. The UK is a financially illiterate country. The average purchaser of financial products did not benefit from higher education. [If the UK is financially illiterate, what is SA?]

There is a move in Australia to limit documents supporting financial products to four pages. [Why not one page? This will really force the sellers to crystallise their thoughts. And how about a one page set of financial statements for companies, while we are about it?] (Page 99)

Fortune 3 NovemberThis magazine is full of fascinating information. Try to get hold of it if you can and read it in full.

To help bail out General Electric (that stalwart of the US economy) Warren Buffett invested $3 billion in high yielding preference shares with an option to acquire a like amount in ordinary shares over the next five years. GE’s shares are trading at half their price of 12 months ago. Over the years the company has moved away from its core activities of jet engines, locomotives, appliances and light bulbs to where it is today: 40% of its profits is now generated from financial services. It has now come to light that GE has, in the past, “managed” (a kind word for manipulated) its earnings using GE Capital as the tool.

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With the credit crunch this year, it found itself unable to manipulate its portfolios, hence it could not delivery earnings numbers it was able to “achieve” in the past. [They all do it don’t they!]

GE has been buying back its own shares at prices in the $30’s. It is now trying to sell the same shares back at $22 per share. [Surely the income statement should reflect a loss? However, IFRS does not permit them to take this loss to profit or loss!]

The hedges they had in place were stress tested using a 1% move in prices either way. They never foresaw the massive moves in the markets that actually occurred so their hedges turned out to be losses. [Page 46]

Geoff Colvin looks into what makes someone as successful as Tiger Woods, Yo-Yo Ma, Bill Gates and others. Here are the “secrets” he unfolds:

1. The whole process starts off with a deeply felt want or need to achieve. Without this, the process will not get going. [I call this the “Spark”].

2. You have to believe that the effort you put in will result in success. Without this belief you will not stick the course.

3. You have to understand that the effort you put in is not going to be fun. It is going to require hard work.

4. Success will require not just practice but deliberate practice. This involves:· Designing activities to push the boundaries· Identifying the areas that need improvement· Repeating the process over and over until it becomes

second nature· Focussing full energy on the task

5. You need to strive for continuous improvement:· Continually monitor performance to provide

feedback· Analyse performance looking for improvements· Focus on rectifying mistakes and poor performance· Identify what can go wrong and prepare for such

eventualities [Page 68]

December 2008 (15 Minutes)

TimeGuy Kawasaki, author of eight business books, says that when you are young you should work 80 hours a week to create a product or service that changes the world. [The youth of today working 80 hours a week? Give me a break.] (15th, page 48)

What you always wanted to know but were too afraid to askWhat it a “mashup”? Well it started in the music industry where two different bands merged their music into one to create new hits. This idea was carried over to crime prevention where Chicago Police mashed their crime statistics with Google Maps to better understand the problems. Google’s application programming interfaces

(APIs) make combining data from various sources into one possible. (Page 62, November 2008 Accountancy)

What you would rather not know but I am going to tell you anyway

Another Financial Scandal!Bernard Madoff is a US investment broker manager and former Nasdaq chairman. He masterminded a $50bn Ponzi (pyramid) scheme. Funds of funds investment managers channelled investors’ funds into this scheme. No indication has been given of the total loss to investors yet. Watch this space. The author of the article says: If you cannot trust managers of investment funds, who do you trust. Answer: Yourself. Do it yourself. The layers of fees that you pay by giving your money to others to invest just do not compensate you for the additional return (what additional return?) you could earn by getting someone else to invest on your behalf. (Citizen, 16 December 2008)

ScamsPeople all over SA fall for scams set up to fool you into handing over your hard earned cash. Last week my family was conned out of R1 000. Friends of the family were conned out of R3 000. In our case the solution was simple: Do not ever pay money into some else’s bank account before receiving the goods! David Alexander, an ex con artist, gives the following rules on how to avoid being conned:1. Understand the opportunity being offered. [My rule is

do not hand your cash to anyone. Do it yourself.]2. Avoid the tyrant, the guy who forces you to sign. [My

rule is not to invite him in.]3. Use common sense. If it is too good to be true, it

usually isn’t.4. Manage your greed. There is no free lunch.5. Consider the consequences. [Easy: If you pay money

to an unknown person, will you never see it again.]6. Take nothing at face value. [See the goods first. My

wife recently ordered a piece of glass and paid a deposit. The next day the company had disappeared.]

7. Be security minded. [Be vigilant at all times. Do not trust anyone.]

8. Assess the level of trust you can place in the person. [Don’t trust anyone!]Last week I paid for my dry cleaning in cash. I noticed the person standing next to me glancing at my wallet. When I walked out of the shop this person was halfway down the block tying his shoelaces. I stopped and watched him. He looked up to see where I was and carried on tying his shoelaces. There were two possibilities. Either his mother had not taught him how to tie shoelaces efficiently or he was waiting to mug me. I turned around and went into the chemist. Be vigilant. Be alert. It is your best weapon.

Internal Control at SAICAOn my rounds presenting workshops to companies I am often approached by candidates who wrote the qualifying examination with horror stories of how they were notified about passing or failing only to receive a letter a week later

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Mafia Buzz 2008

saying that their result was the opposite to that on the published lists. You do not want to know what stress this causes. A few years ago I was invited to a party celebrating the passing of the Q.E. by the son of a businessman in the Northern Suburbs. The father presented his newly qualified son to his business associates with much pride. The next week the son received a letter in the post informing him that his number had been mixed up with some else’s number and in fact he had not passed but had failed.

Recently I received tangible evidence of what is going on. A candidate received one set of symbols that painted a pretty grim picture of his results. Three months later he gets a letter in the post painting a completely different picture. This does not give one much confidence in the procedure at SAICA. I hope that SAICA has insurance to cover the consequences of this poor internal control.

Fun CornerI don’t know about you but I find the jokes at the end of each Finweek to be pretty weak. However, this one, in my opinion, bucked the trend:

On the way to the office this morning I rear-ended a car. Somehow I knew it was gong to be a bad day. The driver got out of the other car and he happened to be a dwarf. He looked at his dented car and then looked up at me and said: “I’m not happy”. So I said: “Well, which one are you then?” That’s how the fight started.

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