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Mafia Buzz 2008

Introduction to Mafia Buzz 2008 2. Can it be explained simply in a minute or so to the non- accountant? This year sees a change in policy regarding the writing of 3. Does it make intuitive sense? Mafia Buzz. Topics relevant to: 4. Does it describe the underlying economic reality in the 1. Knowledge on portfolio management and financial eyes of management? analysis will be published in SowB Buzz If these are his criteria, which are superb, lots of work still 2. Knowledge on valuations will be published in has to be done on his standards. (Page 28) Valuations Buzz. In the 1950’s a group of researchers asked Harvard 3. Knowledge on IFRS will be published in IFRS Buzz. Graduates if they had goals. Almost all of them said: General information on the above topics and other items of “Yes”. They were then asked: “Have you written them general interest will be published in Mafia Buzz. down?” Only 3% of the graduates had written them down. A follow-up survey was done 30 years later and it was The workshop material will contain back copies of the discovered that the 3% who had written their goals down relevant Buzzes. had amassed as much wealth as the other 97% put together! January 2008 (12 Minutes) [This really makes you think! At the age of 18 I was “fortunate” to land in hospital with severe bronchial Accountancy problems. While there I read a book on personal management and adopted the concepts. I still have the Chris Quick says that a recession in 2008 is by no means a summary of the book in a plaque in my office. Had I also certainty but it would be fair to say that the UK’s economic read a book at that age on emotional intelligence, I could prospects are at least uncertain. [Do you notice that really have gone places!] Writing goals down helps you everybody is trying to talk us into a recession? (Page 1) crystallise your thoughts. If you carry them around in your Some junior twit at the UK Revenue & Customs sent two mind, they are little more than dreams. To achieve results CDs with personal and financial details of child benefit one must translate intentions into plans. [I really do enjoy claimants through the post, and they disappeared. It is Dr. Rob Yeung’s insights.] Page 64) estimated that the information on these discs is worth £1,5 The Institute of Chartered Accountants in England and billion. (Page 5) Wales has launched a new assurance service designed to The CEO of KMPG says that once you have established bridge the gap between a voluntary audit and an accounts leadership in an area, you must not stop looking for ways to compilation. With the threshold for audits in the UK to rise improve. As soon as you do stop, you become vulnerable. to revenue of £6,5m, there should be a market for such a (Page 6) service in the UK. It will also provide work for the many small practitioners who are being left high and dry with the Audit firms are not happy about the proposed Professional demise of auditing for SMEs in the UK. The objective of Oversight Board’s plans for scrutiny of their work. E&Y this service is to provide a negative form of conclusion on feels that this will result in the most intrusive regime for unaudited financial statements saying that nothing has come auditing firms in the world. [He should pay SA a visit to to their attention to suggest that the financial statements do see what intrusions take place here!] (Page 8) not give a true and fair view. The work done to enable the Baby Boomers in the UK who have not made succession reviewer to come to this conclusion will involve making plans are having to sell their practices. This is not only a enquiries of management, applying analytical procedures UK problem but a world-wide one. (Page 10) and assessing whether the entity has applied its accounting The shareholders of the Dutch Supermarket group, Ahold, policies in an appropriate manner. [I seem to remember are planning to sue Deloitte for millions of Euro. In 2003 vaguely that we had something like this in RSA many years the company overstated its profits by €1 Billion. (Page 13) ago and it seemed to have died a natural death. I wonder if clients will fall over themselves to make use of such a Letter from a reader: An article on engagement letters in the service? I think it is a poor compromise and I, as a user, December 2007 journal stated: “As an accountant or tax would not place much reliance on it.] (Page 96) adviser your primary aim must always be to make sure that you don’t get sued.” And there was I foolishly believing “ Most experts and observers understand that the US will that our primary aim had something to do with offering a eventually be converting to IFRS – it is only a matter of first class service to our clients! [Love it!] (Page 16) time.” (Page 115) Sir David Tweedie says that 2007 was a watershed year for Following on from the above, the Securities Exchange IFRS in that it saw the 108th country sign up with countries Commission in the US has approved a rule amendment that like Canada, Israel, Chile and Japan waiting in the wings. will allow foreign companies to use IFRS financial He says that by 2011, 150 countries will have signed up. statements without reconciling them to US GAAP. [Let’s hope that they have sorted out most of the major A seller of a business wanted his profits to look good so he issues by then.] (Page 26) boosted sales by fictitious credit card sales. He then Sir David says that the four tests for a good principle-based borrowed money, which was banked crediting debtors for standard is: card sales. The auditor used a tool called Luhn’s Algorithm which can, to a certain extent, validate credit card numbers. 1. Is it written in plain English and can it be easily He ran it on the credit card numbers at the company. It translated into other languages? rejected 87% of the numbers. It you are interested in these 1 Mafia Buzz 2008 things you may be able to get the formula by emailing amount that accrues is the amount per the invoice and [email protected] – Chetan Dalal was the author of appearing on the statement. Only on settlement does any the article. (Page 120) settlement discount accrue to the customer. I totally agree There is a move in the EU for predecessor auditors to with this argument and believe that the SAICA circular was provide their successors with access to their working wrong. Has the taxpayer taken this to a higher court? papers. There is a fear that this will extend the liability of (Volume 46, Part 1, 2007) auditors. What do you think? Good idea or bad? It will Guardian 5 September 2007 certainly make for better quality audits. (Page 122) There has been an outcry following the issue of IFRS 8 SAICA News 3 January 2008 from NGOs and investors. The problem is that the standard At last something might happen with accounting for does not require meaningful information to be disclosed retirement funds. The IFRS standard on this topic is one of about the geographical activities of reporting entities. the oldest standards in IFRS and it is amazing that it has Major companies do not want to publish this kind of been left in its present form while the rest of IFRS has information and the lobbying by interested parties fell on developed – a case of not getting priorities right? Let’s see deaf ears. IFRS 8 gives management discretion on where we go on this initiative. whatever they might choose to publish. Some examples of what geographical information could produce: Business Times 25 January 2008 1. NewsCorp has lots of economic activities in the UK John Mbuya, an executive at the Risk Management but pays little corporations tax. Association of SA, says that the kind of fraud that happened 2. Microsoft has relatively few employees in Ireland but at the French bank Societe Generale is common in banks in over $16bn of assets and $9bn of profits. Why? Tax SA. He says that you do not know what happens behind haven? closed doors. He says that three years ago one of the big four banks in SA lost R16 billion through fraud but it was [Being an analyst, segment information is absolutely vital. never reported. It was just swept under the carpet and the I am angry that the new IFRS 8 is going to permit employee was fired! If this is true, it is a terrible indictment companies to hide industrial information. Another problem on the accounting profession in SA!!! How did this I have is that auditors do not appear, from research I have statement get ignored by IRBA??? (Page 13) conducted, to treat this statement with the respect it deserves. So I cannot be sure that the information disclosed Guardian on 29 August 2007: in it is meaningful.] The IASB is a highly secretive organisation. It is the Accountancy SA offshoot of a private company registered in the US state of Delaware, a place well known for corporate secrecy. It is I do not summarise this journal as you should read it in full. funded by the big four accounting firms and major CFA’s Continuing Education Programme corporations. Many accountancy trade associations have signed up to the IASB to advance the narrow interests of What a pleasure it is to belong to a professional body who their members and keep public accountability at bay. respects its members! They are not going to force their Auditors claim to independently enforce accounting members to company with a CE programme but are to standards but they are in bed with corporate interests and encourage compliance. Their programme signals that they control the production of the standards. To secure its have faith in their members and believe that a voluntary legitimacy, the IASB has covered itself in garbs of programme is the way to go. (CFA Magazine, Nov Dec pluralism and “due process” which invites interested parties 2007, page 8) to comment on its proposals. There is no evidence to show that any note is taken of the views of non-corporate SAICA Publications respondents. The aim of the IASB is nothing less than SAICA issued a document to explain the revision process global domination and to make the rest of the image of the of the Companies Act. It was handled in two phases, west. The accounting standards forced on developing namely, the corporate Law Amendment Act and the countries have already failed. The IASB project is Companies Bill. imperialist in nature and a recipe for domestic strife and international conflict. [Wow! And people say that I am The Corporate Law Amendment Act came into effect on 14 controversial!! I would love to see the rebuttal to the above December 2007. It defines a widely held company and a accusations.] limited interest company, amended Section 38 to allow companies to fund the acquisition of its own shares subject Income Tax Reporter to certain provisos (special resolution, solvent and can pay debts), amended Section 228 to require a special resolution, A company reduced its profits by settlement discounts set requirements for audit committees for widely held totalling R4,4 million in terms of the circular published by companies, required the formation of a body called the SAICA arguing that this amount only accrues when the Financial Reporting Standards Council that will set purchaser of the goods does not take the settlement Financial Reporting Standards and requires auditors to discount. SARS added this amount back for tax purposes. attend annual general meetings. It went to the Income Tax Court (case ITC 1815). The Court ruled in the Commissioner’s favour stating that the 2 Mafia Buzz 2008

Widely held companies are required to comply with awareness, self-regulation, motivation, empathy and social Statements of “Generally Accepted Accounting Practice skills. [They need to work on this at school before kids get (GAAP). [Surely they should have said that listed to the workplace.] (Page 56) companies have to comply with IFRS?] Limited interest There are now almost 5m SMEs in the UK employing companies can either comply with GAAP or Statements of nearly 60% of the private sector workforce and contributing Generally Accepted Accounting Practice for SMEs. If they over half of the UK’s turnover. They pay a lot of tax, go the latter route, they need to refer to Circular 09/2007 which they spend considerable time in administering and issued by SAICA. collecting. A consistent message from them is that there is The Companies Bill is expected to be issued for public too much change and what they need is a more stable tax comment during 2008. system. [They also have their problems.] (Page 111) February 2008 (10 Minutes) IRBA Communications (1 February 2008) And now for something really different: Another initiative Accountancy to get small gaap up and running by the profession. One In January Société Générale was rocked by the discovery of wonders how many times such an initiative has, with lots of a €5,5 billion fraud suffered from a rouge trader taking fanfare, been started only to fizzle out. A new IFAC paper massive fraudulent positions. KPMG has predicted that the looks at the proposed IFRS for SMEs (which SA has UK should brace itself for similar occurrences this year. already adopted) and comments that possibly it is too (Page 6) complex for micro-entities. I have now run three workshops on SME IFRS and have concluded that it is Prince Charles is pushing for more green accounting [more irrelevant to 98% of private companies in SA. red tape!]. (Page 10) Letter from reader: “We need a campaign to make Citizen 25 February 2008 financial statements more concise and informative to It was reported that FNB restated its headline earnings shareholders and investors.” [Now here is a campaign I because of two new rules in the new circular: would be happy to lead.] (Page 16) 1. The circular requires that gains and losses made on the Mike Brooks laments that entrepreneurs ignore, at their sale of associates and joint ventures held by a private peril, the advice offered by accountants. [Maybe it is equity entity are now included in headline earnings. because accountants are not communicating this advice effectively enough.} (Page 22) 2. Gains and losses on investment property held by long- term insurers are now included in headline earnings. The profession in the UK has controversially passed a resolution that the press and the public may be invited to When you think that price earnings ratios are calculated disciplinary hearings. [One advantage of this is that using headline earnings and the sale of these two items are members cannot be abused in private. However, does on not of an annuity nature, i.e. you cannot rely on them to really want to be abused in public?] (Page 34) generate future earnings, it is another reason to adjust published information to get to fair presentation for the A survey in the UK showed that over half of the purpose of assessing value. accountancy firms outside the top 50 firms were making an economic loss. Two conclusions were given: Either the Finweek 28 Feb 2008 clients do not value the services given by the firms or the Ewald Muller, a recently appointed senior executive at firms do not properly manage their businesses properly. [I SAICA, wrote an excellent article setting out the challenges am sure that if this survey were conducted in SA one would in the new Companies Act. Here are some of the points he find that 75% of firms are not making economic profits.] makes: (Page 47) 1. Legal backing for accounting standards could get More accountants, once qualified, value flexible working as preparers and auditors into a lot more trouble than in an advantage to working for a firm. (Page 53) the past. Travelodge suggests that when leaving a hotel room, one 2. The standard setting function will be the responsibility should check that all your belongings have been removed. of the Financial Reporting Standards Council under the Items left behind include a mayoral chain, an urn of ashes, a umbrella of the Department of Trade and Industry blue glass eye, a pet cat, a suitcase full of diamond [where are they going to find standard setters in SA?] jewellery and a lucky Buddha charm. Even a child was left 3. New regulations will put pressure on public interest in the hotel room! (Page 53) companies and their auditors. Sociologists believe that only 20% of a person’s success 4. Potential hazards await those who manipulate financial comes from IQ, the ability to learn, understand and reason. statements and “evade” tax or are a party to such 80% comes from EQ (emotional quotient), the ability to actions. relate to others, to understand oneself and to usefully direct 5. Smaller companies will benefit from differential one’s emotions. The emotionally intelligent person reporting. understands his or her emotions and is able to control them, 6. Skills to cope with the new regulations are likely to be a real advantage in dealing with colleagues and clients. in short supply. Generally speaking, there are five elements of EQ: self- 3 Mafia Buzz 2008

7. Small practices may find their lifeblood ebb away due 1. Classify data according to sensitivity and to the demise of the audit for SMEs. confidentiality and take appropriate security measures. 8. 50% of the profession’s trainees come from small firms 2. Perform a formal risk assessment to identify security – alternative sources of training grounds will have to vulnerabilities and take appropriate risk measures. be found. 3. Make people accountable for data security. March 2008 (10 Minutes) 4. Employ tools such as encryption and biometrics where necessary. Accountancy March 2008 5. Place information security on the agenda of the audit committee. 66 of the 97 FTSE 100 finance chiefs boast at least one big four firm on their CVs. (Page 5) 6. Get the board to allocate the necessary resources to this risk. The profession in the UK is angry that the Government is 7. Educate and remind staff of the risks. (Page 41) now expecting it to fund the regulatory body that governs the profession. (Page 5) More than 50% of CVs contain lies about employment, academic and professional qualifications, directorships, etc. Auditors of banks are coming under pressure regarding the Research has found that the worst offenders are in the 36 to losses being taken on the synthetic collateralised debt 40 age group. (Page 51) financial instruments. [I am surprised that we have not heard more about this to date.] (Page 6) Canadian companies will have to convert to IFRS for years commencing on or after 1 January 2011. [I have already The profession’s watchdog in the UK is proposing that had an invite to go there to run IFRS workshops! No defendants in disciplinary cases will not be able to claim chance.] (Page 70) back their costs if they win the case. [This opens the door to abuse!] (Page 8) The IASB has said that is does not foresee further extensive use of fair value accounting as either necessary or desirable. The UK has introduced a flat rate of 18% for capital gains [They need to get rid of fair value for agriculture – you do tax. [Here is hoping that Mr Manuel does not hear about not make a profit when the sheep grows, you make it when this.] (Page 10) the sheep is sold.] (Page 71) The Economic and Monetary Affairs Committee of the EU The UK has started an initiative to improve accounting for says that it is not in a position to make its views known to pension plans. Here are the suggestions: the IASB on an equal footing with other countries and it is 1. The full liability should be presented on the balance of the view that the IASB lacks transparency, legitimacy sheet of the company, i.e. the plan should be and accountability. [Gee, these guys can moan!] (Page 13) consolidated. [The final nail in the coffin of defined The profession in the UK’s application to permit its benefit plans.] members to do probate work (the handling of a deceased 2. The liability should be discounted at a risk free rate. person’s will and estate, previously done exclusively by [At present one can use corporate bond rates.] solicitors, has been accepted. (Page 15) 3. The actual return on assets should replace the expected Emile Woolf laments the new EU directive that requires an return in the income statement. [Volatility, here we outgoing auditor to make his or her files available to the come.] incoming auditor. The apparent reason for this is that it 4. All actuarial gains and losses to be recognised will make the change over cheaper. He foresees auditors immediately, i.e. no more smoothing corridors. having to sanitise every audit file before signing off. [We {Good!] (Page 75) do this in SA because of practice review.] Just imagine Some user groups are requesting that the audit report be how this can expose the outgoing auditor to civil action. more meaningful, e.g. it should give information on (Page 22) estimates, judgements, sufficiency of evidence and The risk of losing customer data is becoming an issue in the uncertainties. The Auditing Practices Board in the UK has UK. The Minister of Defence admitted that details of published a discussion paper on this issue. (Page 76) 600 000 applicants to the armed forces were stolen from a Samantha Collins says that it is important to balance works laptop in the boot of a naval officer’s car. Revenue and and life responsibilities. [Please, Sam, tell me how!] She Customs lost two discs containing details of 25m child has developed a three stage model: benefit recipients. Norwich Union lost £3m of customer money through identity fraud and Nationwide lost a laptop 1. Vision and direction: think about the problem. containing 11m customer details. Travellers in the UK lose 2. Choose: learn to say no. 8 500 laptops and other mobile divides in UK airports every 3. Manage energy: Look at what gives us energy and year. A primary Care Trust recently revealed that it lost the what takes it away. personal medical records of 4 000 patients on a USB stick. She gives the following tips to improve balance: [Recently someone was supposed to copy information from my USB stick to his computer. When I checked the stick 1. Focus on outcomes rather on what has to be done. the next day I found that he had moved the information and 2. Don’t do everything: use the 80:20 rule. I had lost it! Fortunately I am paranoid about back-ups.] 3. Schedule time for preparation and planning. The following advice is given for better data security: 4 Mafia Buzz 2008

4. Take time before accepting assignments. regulators in France and E&Y. Past head of the SEC, Lynn 5. Schedule open time to allow for the unexpected. Turner expressed her objections and stated that the override 6. If you decide to take it on, do it well. in IFRS should be withdrawn. [Question: Was Jerome’s action an extremely rare circumstance as visualised by IAS 7. Create a “not to do list” and tick them off when you do 1.19 in this day and age?] (Page 6) not do them. [Too complex for me.] 8. Deal with emails twice a day (mid morning and mid There is still much to be done to meet the needs of investors afternoon) and other stakeholders in financial reporting despite all the work done in this area. Respondents to a survey raised [Wow: That was easy. But I thought that she was talking concerns about the reduced usefulness of financial reports about getting balance into life like taking time off for due to complexity and the increased focus by companies on whatever normal (non-accountants) people do.] (Page 111) compliance instead of reporting on the essence of the The former CFO of hedge fund Bayou Group was business. (Page 73) sentenced to 20 years for his role in a scheme that cheated The IASB is looking into the problem with classifying investors out of more than $400m. various types of instruments as equity. For example, I have Financial Mail 14 March 2008 always had a problem with classifying as equity cumulative redeemable preference shares where the date of redemption The FSB is probing the manipulation of share prices by has still to be fixed by the issuer. It looks as if this may, at those who placed the share game called Make-a-Million last, change. (Page 83) sponsored by Galileo Capital, PSG and Moneyweb. [How would the public react if a casino sponsored a game to see Finweek who could win the most at gambling to get people hooked The financial director of a SA top 40 company told the so that the casinos could improve their profits from their editor that his profession has gone crazy and that he has newly found addicts?] asked his children to study something other than Finweek: The Top 200 accounting. The editor writes: “Obviously, the IFRS – an attempt to entrench auditing standards worldwide – have This journal published the top 200 companies on the JSE. merits, such as tighter regulation of the profession after In the introduction they state: several corporate scandals.” You wonder who edits the 1. Taxed profit is before extraordinary items. editor’s column! (17th, Page 6) 2. Adjustments have been made for the LIFO reserve Fortune 3. Excluded are items such as “cost of control” The April 14 issue of this journal contained an excellent This is their 2008 survey!!! Someone should wake these article describing the demise of the 85 year-old Bear dinosaurs up. Stearns. The company had $11,1 billion of equity What you always wanted to know about sin supporting $395 billion of assets. Rumours did the rounds but were too afraid to ask that the bank was in a liquidity squeeze. Clients starting withdrawing deposits from the bank. When the bank During the past 15 centuries the seven deadly sins, as requested a $2 billion short term loan to cover its liquidity catalogued by Pope Gregory the Great were: deficit from another bank, the request was turned down and Pride, gluttony, sloth, lust, greed, envy and anger. the bank imploded. J P Morgan stepped in to acquire the bank. So much for all the sophisticated risk management Mohandas Gandhi’s version was: systems that banks are supposed to have installed. (Page Wealth without work, pleasure without conscience, science 40) without humanity, knowledge without character, politics Nassim Taleb, the author of The Black Swan, states that we without principle, commerce without morality and worship have replaced experience and common sense with models without sacrifice. that work worse than astrology because we assume that the The Vatican says that today they are: unlikely event does not exist. He blames business schools Genetic modification, human experiments such as cloning, for promoting models and devaluing common sense. He polluting the environment, causing social injustice, causing argues that the use of these models will get in the way of poverty, becoming obscenely wealth and taking drugs. transmitting experience to the next generation. He says that the Nobel committee who award prizes for these models Clearly, these are not as poetic and effective as the first and should be taken to task for doing so. He says that banking second versions. 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 April 2008 (10 Minutes) reading it – will report back in a later Mafia Buzz. This Accountancy needs to be a lesson to our profession which has got rules for everything and has and has abandoned common sense in Societe General backdated the loss it incurred in January the process.] (April 14, page 44) 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

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Time Rock, the failed mortgage bank. [Good to see someone take responsibility for a change.] (Page 6) In the US girls are outstripping boys in the intellectual game. It is getting so bad that universities are starting to Members of the European Financial Reporting Advisory apply affirmative action, rejecting girls in favour of boys to Group caused an outcry when they said that fair value had a keep the balance between males and females per the role to play in the credit crunch. The suggestion they made population proportion. [My experience in our profession is was that fair value should not be based on market prices at that women are overtaking the men at an exciting pace. Do the year end but should be based on an average price over a we try to artificially rectify this by excluding deserving representative period, e.g. the past six months. [I don’t women from the selection process? My answer, if I had a have a problem with this. It will put a stop to manipulating say, would be a definite “NO”. Let natural selection take markets at year ends.] (Page 6) its course. If women deserve the job, they must get it. The Parmalat trial gets underway with 55 defendants facing Eventually men will realise that the only way they can charges of bankruptcy fraud, false accounting and criminal compete is to become as diligent as women. This will raise association. All deny the charges against them. (Page 15) the whole standard of our profession instead of limiting the standard to the stupidest male!] (14 April 2008) Emile Woolf writes that if the distress and devastation of recent months has one serious message it is that incentives JSE Proposal based on single-year performance of earnings per share The JSE is proposing that audits of JSE listed companies be must be abandoned and remuneration should be contingent restricted to auditing firms with at least three partners and on results over several years, and in that way be released with an IFRS in-house expert or IFRS expert contracted to more gradually. (Page 20) the firm. I must admit that as an investor, I limit my This issue dealt with Islamic finance. The concept of this investments to companies audited by the big four. But I form of finance is that all forms of interest are forbidden. It have serious concerns about this kind of control. If works on a principle of risk-sharing, i.e. the customer and management want a small firm, why not let them have one? the bank share the risk of any investment on agreed terms They have a choice of paying more audit fees or increasing and any profits are divided between them. (Page 23) the cost of their capital. I am against legislating choice. But this seems to be what those in ivory towers are doing A survey conducted among 1 073 finance chiefs around the these days. It is called “ Power”. world revealed that 75% saw a US recession starting in 2008 and almost half felt that it will last for at least 15 Fortune 28 April 2008 months. 35% said that their companies had been hurt by The CEOs of Countrywide, Citigroup and Merrill Lynch, the reduced availability of credit and 60% were putting off under whose tenure the sub-prime scandal broke, were expansion plans due to the credit market conditions in retrenched with packages of over $100 million each. [Nice general. A former CFO of IMB and Chrysler said that he work if you can get it.] was expecting the coming recession in the US to be the worst he has seen in his 46 year career. (Page 34) The internal controls at Societe Generale allowed Jerome Kerviel to create open positions of $75 billion. The CEO Michael Goddard, former finance director of Concorde became aware of this position on 20 January 2008, a Express Transport says that executives given share options Sunday afternoon, while preparing for a board meeting. He get rewarded when there is a bull market, which has took a courageous step, which probably saved the bank. He nothing to do with their performance. By giving options to hid the position from the board to avoid a stampede on the management, one is encouraging them to take high risks bank. Over a three day period he and his team unwound the because they gain on the upside but do not lose on the position and persuaded two US banks to guarantee $8,8 downside. He says that managers with limited areas of billion of new capital. Only when the situation was responsibility should not be granted share options but stabilised, did he call a meeting of the board and reveal all. should be given incentives that pay off in relation to results He took major flack from the board but ended up saving the under their control. (Page 45) bank. The IASB is looking to revise accounting for pensions. Taxation Criticisms of the existing standard are that the statement of financial position does not recognise the full asset or If companies want to use their STC credits they will have to liability and the various options do not result in do so by declaring dividends before withholding tax is comparability between entities. The elimination of income implemented in 2009. smoothing would be a step in the right direction and the It appears as if companies that declare dividends will have blurring of the contribution-based and defined benefit to check the tax status of their shareholders before promises is to be addressed. (Pages 77 and 78) withholding tax on dividends. [More red tape!] Now that IFRS 2 has been in operation for some time, people are starting to realise that it makes no sense. May 2008 (10 Minutes) Matthew Curtis of E&Y is of the opinion that serous consideration should be given to moving away from the Accountancy grant date approach to accounting for the intrinsic value. The UK’s Financial Services Authority has admitted that it He feels that the benefit the employee receives should be fell short in its administration duties in regard to Northern the cost to the company at vesting date. [There are other 6 Mafia Buzz 2008 serious problems with this standard that need to be Fun Corner addressed.] (Page 80) The Darwin awards were created by Wendy Northcutt in Richard Bennison of KPMG says that audit reports have 1993. Every year an award is given to someone who does become too lengthy and obscurely complex and perhaps something really stupid. Up for the award this year is a even turgid. He says that a change needs to be made by man who had a number of body piercings and decided to writing them in a fashion that conveys clearly and connect a power source to his two nipple rings. Rescue unambiguously the auditor’s opinion. (Page 82) personnel were unable to revive him. Another contestant tried to hit his dog by swinging a loaded shotgun by the The IASB has recognised that the standards on financial muzzle. The gun struck the ground and went off, hitting instruments are far too complex and has published a paper him in the abdomen. A past contestant mailed a letter to simplify them. Suggestions are to do away with financial bomb which was retuned to him for having insufficient assets held to maturity and available for sale financial assets stamps. He opened the letter. One of Charles Darwin’s and to reduce or eliminate the hedge requirements. (Page theories is the tree of life is self-pruning. (Citizen, 22 April 84) 2008) Robert Bruce interviewed the SEC commissioner, Kathleen I was picked up by a driver in Windhoek recently and he Casey, who made the following observations: complained about the traffic. It took us about five minutes 1. She stressed that people who prepare and audit to get across town. Traffic in Thailand’s capital is so bad financial statements should be vigilant and transparent. that hundreds of women over the past few years have been 2. She accepts that there are problems with fair value forced to give birth in cars. The Police have trained 145 accounting but feels that this is the best option. officers in basic midwifery. In Bangkok police don’t 3. She is sympathetic towards the notion of a principles- consider traffic bad until a car is stationery for at least an based accounting system but believes that such a hour. An average car spends 45 days a year stuck in traffic. movement would require changes to be made to the US 2 000 vehicles are added to Bangkok’s roads each day. [In legal and regulatory culture. SA about 1 500 are added per day in the whole country.] 4. She states that using a principle-based system will Old Silicon Valley joke: If HP had invented sushi, it would increase the risk of poor judgements, which could have called it “cold, dead fish”. foster more litigation when judgements are challenged. 5. She would like to see more than the big four auditing June 2008 (10 Minutes) firms competing for audits and is concerned about the demise of one to be left with the big three. Accountancy 6. She accepts that IFRS will become the global standard, KPMG are to axe 190 jobs in the UK due to market and not US GAAP. conditions and internal reorganisation. (Page 5) 7. She is bullish about the concept of Extensible Business Mid-tier firms in the UK could shrink by more that 20% in Reporting Language (XBRL). (Page 110) the next few years due to the lack of profitability mainly The most recent estimate by the International Monetary though mergers. (Page 8) Fund is that the losses or write-downs worldwide iro Firms in the UK are against discounting pension fund collateralised debt obligations is likely to reach $500bn. liabilities at a risk free rate. (Page 10) Fingers are now being pointed at the credit rating agencies whose ratings were relied upon by investors. (Page 114) “Surely the cost to the company of issuing an option is the same as the benefit to the person receiving it at the vesting Fortune date?” (Letter to editor, page 16) [I agree.] Every year the CEO of Seagate Technology spends $2 Emile Woolf suggests that accounting could have caused million taking 200 of its employees on a week of hiking, the sub-prime crises. He says that mortgage loans were kayaking, and adventure racing in the mountains of New sliced, diced and parcelled beyond recognition and the Zealand. The idea is to build team spirit and modify parcels were marked to market on the supposition that they behaviour. Employees have to apply for a position in this could be sold on to another institution on the ever rising experience and have to train for months before the event. value curve. He questioned why the auditors didn’t check At the beginning of the trip, Bill Watkins tells his the credit risk when verifying the values. (Page 20) employees that they are all going to die at some point and The risk in gambling is capable of being quantified. But that they should face important choices about where they one cannot apply gambling risk calculation techniques to want to work, what they want to believe in – choices about business because there is a much wider range of things that change and ultimately happiness. He asks: “Are you doing can go wrong. If you are playing a game, ensure that you what you want to do in your life? Or are you just blowing have an edge. Gambling where the odds are stacked against through?” He says: “I am challenging your life right now. you is a bad idea. Pick the right business to be in. In the What would you do if you know you couldn’t fail? Would short term a bad player can win and a good player can lose. you take a trip around the world? Run a company? If you The trick is to be in the game for the long term. (Page 28) 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 Too much time is being spent in crunching numbers and not every week of the rest of your life.” (Page 76) enough time on analysing them. Regulatory requirements such as Sox are making the reporting procedures more 7 Mafia Buzz 2008 complex and by the time the numbers are presented they “At more than R470/share, McGregor BFA analysts think have lost their relevance. Finance departments need fast Sasol is still a buy.” [A month and a half later the share is access to more meaningful data. (Page 49) standing at R387.] (12th, page 40) Ernst & Young announced a bold move to integrate its In the share dealings section, Mr M S Mark sold 550 000 firms across Europe and Africa. It believes that doing so shares in Truworths. I wonder who bought these shares will improve its ability to manage risk. It has obtained from him. (12th, page 36) legal advice that this would not significantly increase its risk. One wonders if their legal advisors took Arthur Fortune Anderson into account. Grant Thornton International was David Neeleman, who built JetBlue airlines, which not affected by the Parmalat fiasco because they are a loose collapsed after an ice storm grounded the planes, says that association. However, a court in the US has given a client if you make a mistake you must admit to it. You must who is suing BDO Siedman the go ahead to hold BDO explain what happened and explain how it is never going to International jointly liable for damages. (Page 64) happen again and what you are doing to make sure it The EU is of the opinion that SME IFRS is far too complex doesn’t. Had he done this at the time, his airline would for small to medium-sized companies. Ian Mackintosh, the probably have survived. chairman of the UK Accounting Standards Board, is July 2008 (5 Minutes) pushing for it to be accepted. [I wonder if he really knows what it is all about!!! There are hardly any concessions.] Accountancy (Page 83) The CFO of BP, Mr Michael Starkie, wrote a letter to the New regulations are in place in the EU and UK to require Financial Times accusing the IASB board members of outgoing auditors to give incoming auditors access to lacking the knowledge and experience needed to produce relevant information to maintain the effectiveness and lasting accounting standards which will benefit the capital efficiency of the audit process. Guidance is being prepared markets and the wider economy. He called for a total to help auditors in this regard. If auditors are willing to reconstruction of the board. The IASB hit back by pointing give information outside the mandatory framework, the out that over 100 countries had adopted the standards and permission of the client will be necessary. This new that the standards go through a due process before being requirement will not be in contravention of confidentiality finalised. [Surely Mr Starkie should be specific as to what requirements. [Can you just imaging the sanitising of audit the problem is (embedded derivatives) and address this working papers that will take place if there is a change in issue directly rather than having a high level attack on the auditor. It remains to be seen if regulation increases the IASB?] (Page 6) outgoing auditor’s liability.] (Page 84) Deloitte reports that many football league clubs are facing The UK government is introducing legislation to permit insolvency over the next few years as the directors of these auditors to limit their liability to a level that is fair and clubs do not seem overly concerned about generating reasonable. Andrew Mitchell MP said: “Apart from profits. (Page 8) auditors, I can think of no other group in commercial life in Britain that can neither limit their liabilities through The Judges in the Court of Appeal case against Moore insurance nor by contract with their customers. Auditors, Stephens held in favour of the auditing firm as the company as far as I know, are the only group stuck in that position. was the perpetrator of the crime and not the victim and the It is bizarre that men and women in the auditing profession loss was the legal consequence of the company’s action, are asked to take on personal risks that the insurance which prevents the company from recovering the loss from market, with all its resources, experience and analysis now someone else. [What a pleasure to see such logic. I says is unacceptable. (Page 87) wonder if a US court would have come to the same Peter Holgate of PwC says that the IASB is considering conclusion. Well done the Brits!] (Page 10) moving closer to US GAAP on deferred tax. In the US if Arthur Levitt has called for the creation of audit-only firms one acquires an asset that is not tax deductible, one grosses to help ensure the security of struggling companies. [Can the cost to arrive at a pre-tax value and provides for you see the logic here?] (Page 12) deferred tax out of this amount. He is of the opinion that this will not help solve the problem. [Agree!] (Page 91) Letter to editor: “Please replace IFRS 2 with a standard based on reality before other ageing accounts like me think Australia abolished federal inheritance tax as from 1 July that they have lost it.” [Agree!] (Page 14} 1979. In that year it was found that deaths peaked after the deadline. [Who says that you cannot plan your death?] Steve Pipe suggests that the way an auditing firm can (Page 160) improve services to its clients is to produce a list of high impact ideas to improve the business of clients, to Finweek brainstorm this with the firm’s partners and to present these The JSE is considering amending its listing requirements to ideas to the clients with the suggestion that the firm can introduce a roster of accredited audit firms for listed help implement these ideas. (Page 34) companies. This will bring more red tape and costs for One of the first things unthinking accountants suggest in auditors. (12th, page 57) times of turmoil is “cut costs”. Tony Grundy says that this can be counterproductive and damaging to the business of

8 Mafia Buzz 2008 the company as it can lead to a loss of customers and represents. [A while back I was motoring in my usual market share, loss of high value-added staff, and create relaxed manner when a driver who had moved over to the inefficiencies that could lead to higher costs in the future. right hand side of the road with his right indicator flashing He says that: suddenly changed his mind and swerved left in front of me. 1. Costs should never be reduced if this undermines I had to take evasive action to avoid a serious accident. business strategy. Naturally, I shouted at the driver. At the next robot he 2. The cost base should achieve strategic objectives with jumped out of the car and ran over to mine with full least unit cost. intentions of attacking me. I had visions of a similar old 3. Costs must always be managed for economic value. man who was attacked by a low life “JOB” who subsequently died of his injuries (whatever happened to this (Page 47) animal?) so took off through the red robot and made for the Only one adult in six in the UK now smokes, down from police station. He eventually gave up the chase (his car was more than one in two in the 1950’s. Deaths from lung no match for my bakkie). He worked for an estate agency cancer, which lag some 15 years behind smoking rates, in Palm Court. I have warned my friends not to deal with have been falling for two decades. However, this is not the this firm – he may attack them if the sale falls through!] case in developing and middle income countries. Nearly (Page 39) 70% of men smoke in the former USSR and over 60% in I find it amazing that whenever there is an economic China and the rates for women are rising. [Of what use is downturn articles appear on how to protect oneself from this information to you? Stop smoking and buy shares in this situation. Some examples given in the article in BAT.] (Page 64) question are: One in four UK school-leavers believes that an ISA 1. Improve your internal controls. (individual savings account) is an MP3 player accessory or 2. Simplify your organisational structure. an energy drink. (Page 109) 3. Improve your financial structure. 4. Have a forward looking view of your business. August 2008 (10 Minutes) 5. Focus on cash flow. 6. Ensure efficient execution of large projects. Accountancy Surely these techniques are important during good times KPMG and one of its partners must pay out a combined and bad. Why are they pulled out of the drawer only when £1,6m for their role in the collapse of Independent there is a downturn? (Page 46) Insurance. KPMG said that it regretted the shortcomings in certain aspects of its audit and accepted that it could have Kerry Richards says that if you answer “yes” to any of the done better. [It is great to see someone accept following questions your brand could be in serious trouble: responsibility like this for a change.] (Page 6) 1. Is your firm name more than two words long? 2. Do you have an unflattering logo? The Financial Reporting Council has launched a project to 3. Is your colour maroon or blue? review the complexity and relevance of current company 4. Is your brand out of date, dictated by a legacy of reporting requirements. (Page 15) tradition? IFRS 2 is a classic case of oh-so-clever, oh-so-meaningless She goes on to suggest that you can boost your brand by: accounting. The abuse of unreported gains on share-based 1. Getting opinions from your staff, customers and payments to executives should have been addressed instead suppliers. of merely adopting the unintelligible American solution. 2. Not allowing a committee to take the decision. [How long will it take before the IASB realises that most 3. Checking if your firm’s name is memorable or unique. option schemes given to staff are really disguised share 4. Checking whether the colour in your brand says appreciation rights and millions of rands of cash are something about you. disappearing from balance sheets of companies into the 5. Checking the font used and whether it is consistently pockets of management without hitting the income used. statement?] (Emile Woolf, page 20) 6. Checking whether your brand needs a full makeover Leadership is about being able to admit your mistakes. It is or a gentle tweak. (Page 59) better to stand up and admit you got it wrong than to pull You have probably read hundreds of descriptions of the the wool over people’s eyes because that’s only going to sub-prime disaster but I thought the following explanation lose you respect. Explain that you are trying to turn the is quite good: situation around and people are more likely to accept and respect your decision. (Pete Gould) It is critical that one The seeds of the credit crisis were sown in the US when anticipates what can go wrong and have a disaster plan in lenders packaged bad loans up in tranches of debt and sold place. When things go wrong the last thing you want to be them as derivatives. A game of pass the parcel ensued with is creative. You will want to follow a pre-prepared each new buyer looking to make a quick profit on a loan procedure where the consequences were thought out in a that would never be repaid. This was fine until the music stress free environment. (Jim Norton) (Page 32) stopped when the market for bad debt derivates ceased to exist. Over the past few months the challenge for those More than half of company car drivers in the UK admit to banks and companies left holding the subprime derivates shouting, swearing and making rude gestures at other motorists. This can reflect badly on the business that driver 9 Mafia Buzz 2008 has been how to account for these financial instruments In a letter to the editor, one Christopher Lord says that two when they can no longer be traded. (Page 84) years ago there were massive deficits on pension funds, then last year there were surpluses, now, with the market Business Day tanking, we are back into deficits. He suggests that pension WK Clifford, a distinguished mathematician: “It is wrong fund assets be valued like inventory, i.e. one only takes the always, everywhere, and for anyone to believe anything on profits when realised and writes down when values are insufficient evidence.” below cost. [What lovely logic Chris but the IASB is hell bent on sticking with fair value accounting. It will take Thomas Henry Huxley, eminent biologist: “It is wrong for a something more than the current crises for them to change man to say that he is certain of the objective truth of any their mind.] (Page 14) proposition unless he can produce evidence which logically justifies that certainty.” Emile Woolf [I love this guy] says that there is not a single convincing argument to suggest that astrologers would not Carel Petrus Hattingh, notorious accountant: “Show me!” do better than economists at predicting future trends. (Page (First two quotes: Michel Pireu, Street Dogs, August, 29 18) 2008 – repeated in SowB Buzz) Now here is a solution to the subprime crises: Merrill Finweek Lynch and Citigroup mark to market their liabilities through profit and loss. So any drop in the market prices of Ann Bernstein, executive director of the Centre for financial instruments results in profits for these companies. Development and Enterprise says that in at least 75% of our (Page 18) secondary schools, little if any learning actually takes place. I have always wondered how people work in open office We are failing to produce maths and science matriculants plans. Here is a lovely description of someone’s necessary for tertiary education. (28 August) experience: “Workers are hurled headlong into a vast Richard Warren-Tangney says that the straitjacketing of battery-hen pit of hell. They are forced to peck away at auditing is chasing people away from our profession. He laptops for 10 hours a day in what has obviously been says that auditing is no longer an attractive profession for calculated by an expert as the smallest possible space in use as a stepping stone into industry. [He is so right: which a human can function. Desks, lined in call-centre auditing does not encourage one to develop the skills rows, stretch into infinity. Colleagues sit so close to each necessary for taking on a CFO’s job anymore. The only other that computer mice nuzzle. Custody battles ensue skill taught in this profession today is how to tick pre- over calculators and staplers. A mirror signal, manoeuvre programmed procedures. [Hopefully, the latest banking system is required when rising from chairs to avert crashes crises may force the authorities to change the way we do to the rear. There is no privacy. Everyone sees and hears audits where we can go back to the good old fashioned everything. Stress that is related to other people’s noise is method of analytical review, keeping your ears to the worsened by the feeling that you have no control over it. ground, asking questions and building up corroborating Stress in open-plan layouts must not be under estimated: evidence, etc.] (28 August) claustrophobia, noise pollution, lack of privacy, lack of Noseweek escape routs. These factors counter basic human instincts. (Page 20) I usually read this magazine to keep my sanity taking most The debate over fair value accounting rages on. SFAS 157 of the stories with a pinch of salt. However, there was a defines fair value as the price that would be received to sell horrific story in this magazine about how Aspen’s Staff an asset or paid to transfer a liability in an orderly Pension Fund was used to help fund a BEE deal and, due to transaction between market participants at the measurement mistakes made by various parties and not picked up by the date. Measurement assumes the highest and best use of the auditors (including some big four names) the Pension Fund asset by market participants. It is based on use by market may be at risk of losing a large amount of money. If this participants even if the intended use of the asset by the story is true, this is another example of what happens when reporting entity is different. Techniques for fair value are: you lose control of your investments. Next time I analyse Aspen’s financial statements, I will check to see if there is 1. The market approach, which uses market transactions any comment on this situation. (Issue 106) to establish fair value. 2. The income approach, which uses valuation September 2008 (10 Minutes) techniques such as discounting future cash flows. 3. The cost approach, which uses the cost to replace the Accountancy service capacity. The UK standard setting body is proposing that liabilities These three techniques are similar to our realisable value, for defined benefit plans be measured using government value in use and current replacement cost. bond interest rates and not corporate bonds rates, as is In the absence of independent market data, the entity should presently done. [Why? Do they want to finally kill defined attempt to base its assumptions on what the market would benefit plans? Will the government be left with providing expect and not on what the entity would expect. (Page 89) for old people down the line? I cannot understand what their logic is.] (Page 6) 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. 10 Mafia Buzz 2008

Trying to provide audit services for small firms has become you get completely organised – clear the junk, clear the an expensive occupation with the red tape that they have to emails, get a system for everything, file everything where it put up with. This is likely to become the SA story belongs. Only once this is done do you set about (obviously on a much smaller scale). With the potential meditating on your goals, projects and tasks. demise of audits of small companies, firms will have to find Jim Loehr other ways to add value to their clients. In the UK “assurance” assignments is expected to replace audits, He believes that the key to productivity is to manage your where no audits are required. For example, “assurance” by energy and not your time. To achieve anything worthwhile an independent qualified person may be needed by outside one must be able to invest energy. He advocates getting users of financial statements. (Page 105) enough sleep, exercising regularly, eating properly and keeping a proper balance between work and family. Warren Bennis says that it is dangerous to assume that leaders are born. He says that with the proper training, My Conclusion leaders are made. It requires a change in mindset from the The answer, to my mind, is to use a holistic approach, i.e. management mindset of doing things right to a leadership all three are right and their ideas should be incorporated mindset of doing the right things. (Page 110) into a holistic plan. (1st) Business Day October 2008 (15 Minutes) The Joint Municipal Pension Fund is taking on 25 defendants including Deloitte and the JSE for the R1bn loss Accountancy suffered by the pension fund due to WJ Morgan speculating The IASB set up a panel to defend the concept of fair in maize futures. It is going to be interesting to see where market values, despite the credit crunch. Their report stated this case goes. The basis for the case is that any one of the that fundamental values are not consistent with the parties could have prevented this loss had they done their objective of fair value measurement because they do not job properly. [Two comments: take into account factors that market participants would 1. I asked the question in session a few months back: consider when price the instrument, such as illiquidity and “What was a pension fund doing speculating in maize credit risk. Opponents argue that marking assets to market futures?” and one of the participants, a representative prices has led to billions of pounds of write-downs. They from one of the bodies being sued, said: “There is want to measure such assets over a six or twelve month nothing wrong with pension funds speculating”!!! period. (Page 6) 2. I am laying bets that the poor pensioners are throwing A US jury found in favour of a taxpayer who was allegedly good money after bad. Let’s see if I am right.] (8th) given bad tax advice by KPMG over 20 years ago. (Page 10) The squeeze is on small auditing firms (SAFs). The Companies Bill states that SMEs will not have to be A partner at BDO in the UK has been appointed by audited, which means that a large chunk of fee income of Treasury to be the independent valuer for Northern Rock at SAFs will fall away. And the JSE has now proposed new a one-off fee of £4,5m. [Nice work if you can get it!] (Page rules requiring that audits may effectively only be done by 11) medium to large auditing firms and that these firms have to Letter to editor: “It is nice to know that the improvements meet certain expensive regulatory requirements. [How did in corporate governance in the US and UK following the we get into this mess? Auditing used to be a function that Enron debacle have put an end to short-termism and added value to a business. We need to resurrect this excessive risk-taking at board level, particularly in the function under another name. However, it won’t take long banking sector.” for the power hungry control freaks to start destroying this new function with all their rules and regulations.] (29th) A Citigroup study which examined GAAP filings of 73 European companies listed in the US concluded that the Fortune reconciling differences between IFRS and the US standards Paul Keegan spent six months test driving the systems of were so great that they could well cause investors to come productivity gurus Stephen Covey, David Allen and Jim to differing conclusions about the performance of the Loehr. Here is a summary of what he found: companies. (Page 16) Steven Covey A survey conducted by KPMG indicated that less than half of audit committee members are very satisfied that their He believes that the key to productivity is clarifying your company has an effective process to identify significant life’s purpose (to live, to love, to learn and to leave a business risks. Only one third of banks were confident that legacy). He says that one should set goals, plan weekly and their management had a detailed understanding of the risk daily. Once your goals are set you break each goal into management methodology. (Page 39) projects and each project into tasks. Create a master do-list and start planning to achieve the tasks. The Association of Investment Companies (AIC) says that the governance system under which IFRSs are developed David Allen should be improved. They want the investor’s viewpoint to He believes that the key to productivity is to start working be at the heart of the standard setting process. [Agree! from the bottom up. He starts the process by ensuring that However, when I was on the committees we could never

11 Mafia Buzz 2008 get anyone from the investment community to sit on the Business Day committees – they were all too busy making money.] The Bryan Hirsch (listen to this guy – he knows what he is AIC believes that the one size fits all policy has to change talking about) says that what amazes him is that people bail as there is a lot of useless information being produced by out of equities when the market is down when now is the companies with not enough relevant information to be able time to be considering topping up one’s portfolios. He says to assess the financial performance and position of the that if your investment horizon is only one or two years, company. [I believe that we need a bottom up improvement you should not be in the market. If you are a long term approach – changing the people on the governing body has investor, you should not be panicking at this time. (6 no impact on the standards. We need people like me who October) use financial statements to say to the IASB stop stupidities such as straight lining leases, recognising embedded Fortune derivatives that are part of the business operations of the company, etc. and then get action from the IASB. With a Credit Default Swaps (CDSs) have ballooned from nothing bit of luck, the crisis we are in at present may be a wake-up to $55 trillion in the past decade. The idea behind a CDS is call to the IASB to do something about the stupidities in that it insures against default. CDCs are unregulated and IFRS.] (Page 63) undisclosed and were partly responsible for the sub-prime fiasco (“we don’t have to worry about these instruments as The US Securities Exchange Commission is expected to they are insured”). The problem is that no one knows what publish a proposed road map for adoption of IFRS by US risks the writers of these contracts have exposed themselves users between 2014 and 2016. [Will the target date be to. One does not have to own the financial instrument to 2050, when IFRS has effectively become FASB? Sorry but take out a CDC – one can take insurance on any financial I am still very cynical about this whole thing.] (Page 65) asset. One hedge fund made $15 billion on betting that James Wong of PwC says that the US can learn from the other investors’ subprime mortgage bonds would default. conversion to IFRS from the EU experience. Here are CDS have become a major way of gambling without any some of the points he makes: restrictions. The problem is that one cannot be sure that the “house” will continue to pay out on these bets due to the 1. Users do not like uncertainty so they must be kept in severity of the problem. Some writers of these contracts the picture. turned out to be small off-shore operations that had no 2. There could be tax issues, e.g. LIFO is still allowed for chance of settling (collect the premiums and walk away tax purposes in the US but is not permitted by IFRS from their responsibilities). There are over $1 trillion worth (change IFRS?) of contracts that are unsettled among counter parties at 3. Management decisions may be affected by the new present. CDSs have become the dark matter of the finance accounting (accounting determines how management world. (13th October, page 63) operates and not vice versa!) 4. Lots of consultants are going to jump onto the Men’s Health – Best Life bandwagon resulting in major cost overruns. What am I doing reading this at my age? Well I got a 5. Staff will have to be trained on the new rules. complementary copy and I read everything that comes my 6. Systems may have to be redesigned. way. I found an article which I related to which I want to 7. Mistakes are going to be made, which will only be share with you. It’s called the Secret of Slow. discovered in future years. 8. Conflicts with Sox may arise. 1. Eat slowly: It helps you lose weight and helps with the 9. Loan covenants may have to be looked into. digestion of your food. 10. Audit fees are going to skyrocket. 2. Steam slowly: Take time to lose your temper. Count [Does this all sound familiar to us in SA?] (Page 66) slowly before becoming angry. 3. Read slowly: Take time to consider and internalise. The increasing size and complexity of financial statements 4. Speak slowly: Connect with your audience. has become a growing concern among investors, 5. Weight train slowly: Focus on the muscle groups you accountants, auditors and others. However, attempts to want to develop. simplify and streamline them are met with stiff resistance 6. Drive slowly: Stick to the speed limit. Weaving in and from one or more stakeholders [e.g. the printing industry?] out of traffic does nothing for your petrol consumption Ian Wright, goes on to give examples of complexities in and your reputation. IFRS that need to be simplified, e.g. terms such as “highly I find that my staff scream out of the office every day and unlikely”, “extremely rare”, “extremely unlikely”, “more invariable forget something behind and have to waste time likely then not”, etc. etc. (Page 68) coming back to the office to collect it. There is no point in In the UK, auditors are allowed to enter into limited trying to rush ahead of life. The most amazing thing is the liability agreements with their clients. Jan Babiak of Ernst more you rush the more time speeds up and before you & Young sets out in an article why firms may want to enter know it your life has come to an end. The moments I into such LLAs, how their clients may benefit, what types treasure the most are sitting in a park, listening to the of LLAs can be negotiated and what the key components rustling of the trees, the rippling of the water and the songs are of such agreements. (Page 70) of the birds. Slow down to the speed of life and relish it.

12 Mafia Buzz 2008

November 2008 (15 Minutes) value accounting estimates in times of market uncertainty. [A bit late, isn’t it?] (Page 66) Accountancy Gillian Wild of Earnst & Young discusses progress being The blame game is about to start following the fiascos at made with the changes to deferred tax. It appears as if the the financial institutions and right in front, expect the IASB may be moving away from the gross-up of non- auditors to come in for a hammering. (Page 5) deductible assets on initial recognition to providing for a “tax disadvantage on initial recognition because the entity Pressure is growing from politicians and a number of banks does not obtain tax deductions on the asset”. Going to change the mark to market rules in IFRS. The IASB did forward the only deferred tax provided will be that arising allow one concession (permitting entities to reclassify on the sale of the asset, in the case of SA capital gains tax. financial instruments designated as at fair value through (Page 68) profit or loss) but held firm on any further concessions without going through the due process procedure. (Page 5) There is a potential wide open field for accountants to exploit called, not auditing, but giving assurance. For Letter to editor: “How was it that banks published example, entities often require a third party to confirm that unqualified sets of accounts with all those toxic assets on their social responsibility programme is acceptable within their balance sheets? The only conclusion we can come to certain norms, their carbon footprint is acceptable, the is that the audited accounts of the banks were not worth the entity is meeting good corporate governance standards, etc. paper they were written on. This is a cataclysmic failure on [In SA we have the BEE scorecard issue.] The big four are the part of the auditing and accountancy profession, yet no already meeting these needs but mid-tier firms should start one in that profession has admitted to the problem or that developing the necessary programmes and expertise to they need to set their house in order. One lesson must come address this need. (Page 75) from this: the audit process must become more robust.” (Page 12) Commentary by senior figures in the financial services industry: Emile Woolf (Poet Extraordinaire) writes: “The present crisis abounds with so many lessons that future generations In the past, failures of trust in the financial services have of economic students will face a very different array of usually been associated with the fraudulent activities of a textbooks. Critical precepts may remain unchanged, but the minority. But the current crisis has raised a far broader scale on which they have been so selfishly disregarded for question, i.e. is there anyone out there that you can trust? the sake of short term enrichment, under the gaze of [The answer is clear: “No”. Solution? DIY] governments and regulatory agencies is without precedent. More consumer protection is needed. The UK is a A veritable Ponzi fraud on a global scale, played with financially illiterate country. The average purchaser of financial instruments so obscure that they took everyone in. financial products did not benefit from higher education. (Page 16) [If the UK is financially illiterate, what is SA?] With Goldman Sachs predicting that the global credit loss There is a move in Australia to limit documents supporting will reach $1,2 trillion, awkward questions about the role of financial products to four pages. [Why not one page? This the auditor are starting to emerge. Did the auditors properly will really force the sellers to crystallise their thoughts. apply their minds to the risks involved, the covenant And how about a one page set of financial statements for arrangements, the going concern issue and proper companies, while we are about it?] (Page 99) accounting for off balance sheet items. [Surely if you sell a financial asset with a put option, one cannot derecognise it? Fortune 3 November It appears as if the banks did derecognise these assets.] This magazine is full of fascinating information. Try to get (Page 34) hold of it if you can and read it in full. The public sector in the UK has adopted IAS 16. A typical To help bail out General Electric (that stalwart of the US entity would have an asset register of 15 000 items. With economy) Warren Buffett invested $3 billion in high component accounting this could go to 100 000 items. yielding preference shares with an option to acquire a like [One has to wonder what benefit such a council will derive amount in ordinary shares over the next five years. GE’s from all the additional people it will have to employ to keep shares are trading at half their price of 12 months ago. track of all these items. All that will happen is that the Over the years the company has moved away from its core ratepayers will end up providing work for accountants.] activities of jet engines, locomotives, appliances and light (Page 61) bulbs to where it is today: 40% of its profits is now The US Securities and Exchange Commission has begun an generated from financial services. It has now come to light urgent 90 day study of mark-to-market accounting. It will that GE has, in the past, “managed” (a kind word for focus on the effects of such accounting on financial manipulated) its earnings using GE Capital as the tool. institutions’ balance sheets, the impact on bank failures in With the credit crunch this year, it found itself unable to 2008 and on the quality of financial information available manipulate its portfolios, hence it could not delivery to investors, as well as the advisability and feasibility of earnings numbers it was able to “achieve” in the past. modifications to current accounting standards. (Page 65) [They all do it don’t they!] The International Auditing and Assurance Standards Board GE has been buying back its own shares at prices in the has issued an audit practice alert relevant in the audit of fair $30’s. It is now trying to sell the same shares back at $22

13 Mafia Buzz 2008 per share. [Surely the income statement should reflect a What you would rather not know but I am loss? However, IFRS does not permit them to take this loss going to tell you anyway to profit or loss!] The hedges they had in place were stress tested using a 1% Another Financial Scandal! move in prices either way. They never foresaw the massive Bernard Madoff is a US investment broker manager and moves in the markets that actually occurred so their hedges former Nasdaq chairman. He masterminded a $50bn Ponzi turned out to be losses. [Page 46] (pyramid) scheme. Funds of funds investment managers Geoff Colvin looks into what makes someone as successful channelled investors’ funds into this scheme. No indication as Tiger Woods, Yo-Yo Ma, Bill Gates and others. Here has been given of the total loss to investors yet. Watch this are the “secrets” he unfolds: space. The author of the article says: If you cannot trust managers of investment funds, who do you trust. Answer: 1. The whole process starts off with a deeply felt want or Yourself. Do it yourself. The layers of fees that you pay need to achieve. Without this, the process will not get by giving your money to others to invest just do not going. [I call this the “Spark”]. compensate you for the additional return (what additional 2. You have to believe that the effort you put in will return?) you could earn by getting someone else to invest result in success. Without this belief you will not stick on your behalf. (Citizen, 16 December 2008) the course. Scams 3. You have to understand that the effort you put in is not People all over SA fall for scams set up to fool you into going to be fun. It is going to require hard work. handing over your hard earned cash. Last week my family 4. Success will require not just practice but deliberate was conned out of R1 000. Friends of the family were practice. This involves: conned out of R3 000. In our case the solution was simple: · Designing activities to push the boundaries Do not ever pay money into some else’s bank account · Identifying the areas that need improvement before receiving the goods! David Alexander, an ex con · Repeating the process over and over until it becomes artist, gives the following rules on how to avoid being second nature conned: · Focussing full energy on the task 1. Understand the opportunity being offered. [My rule is 5. You need to strive for continuous improvement: do not hand your cash to anyone. Do it yourself.] 2. Avoid the tyrant, the guy who forces you to sign. [My Continually monitor performance to provide · rule is not to invite him in.] feedback 3. Use common sense. If it is too good to be true, it Analyse performance looking for improvements · usually isn’t. · Focus on rectifying mistakes and poor performance 4. Manage your greed. There is no free lunch. · Identify what can go wrong and prepare for such 5. Consider the consequences. [Easy: If you pay money eventualities [Page 68] to an unknown person, will you never see it again.] December 2008 (15 Minutes) 6. Take nothing at face value. [See the goods first. My wife recently ordered a piece of glass and paid a Time deposit. The next day the company had disappeared.] 7. Be security minded. [Be vigilant at all times. Do not Guy Kawasaki, author of eight business books, says that trust anyone.] when you are young you should work 80 hours a week to 8. Assess the level of trust you can place in the person. create a product or service that changes the world. [The [Don’t trust anyone!] youth of today working 80 hours a week? Give me a Last week I paid for my dry cleaning in cash. I noticed th break.] (15 , page 48) the person standing next to me glancing at my wallet. When I walked out of the shop this person was halfway What you always wanted to know but down the block tying his shoelaces. I stopped and were too afraid to ask watched him. He looked up to see where I was and carried on tying his shoelaces. There were two What it a “mashup”? Well it started in the music industry possibilities. Either his mother had not taught him how where two different bands merged their music into one to to tie shoelaces efficiently or he was waiting to mug create new hits. This idea was carried over to crime me. I turned around and went into the chemist. Be prevention where Chicago Police mashed their crime vigilant. Be alert. It is your best weapon. statistics with Google Maps to better understand the problems. Google’s application programming interfaces Internal Control at SAICA (APIs) make combining data from various sources into one On my rounds presenting workshops to companies I am possible. (Page 62, November 2008 Accountancy) 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 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 14 Mafia Buzz 2008 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 Corner I 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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