Mafia Buzz 2002

January 2002 (20 Minutes)

AccountancyThe IASB is sending signals that it will not be pushing for full fair value accounting for financial instruments in the short term. The banks are lobbying against full fair value accounting and it seems as if the lobbyists are exerting more pressure on the IASB than the purists are. Sir David Tweedie still insists that in the long term they will move to full fair value accounting (he is a purist) but says that work on this will probably only start in five years. (The next back down will be to retain hedge accounting, which the purists have been fighting to destroy.) (Page 7)

According to a recent discussion paper called Valuing Intangibles published by the ICAEW, financial directors want to measure intangibles but analysts feel that this is a waste of time because they, as part of their valuation process, automatically arrive at the value of intangibles. Both groups are anti standard setters requiring intangibles to be measured and recognised. The study found that, other than focusing on cash flow and the investment fit into the fund, 60% of a company’s value is determined by “soft factors” such as management strategy and processes, efficiency and use of intangibles, size, turnover, quality of management and staff, staff incentives and gut feel. (Page 8)

Quote: “The proposals might be criticised by others, but an inability to solve all problems does not justify inaction.” (Our authorities need to understand this principle!) (Page 8)

The ICAEW is to introduce mandatory practice review. (Playing catch-up with RSA!) (Page 8)

Consolidator Tenon has issued a profit warning and the share price has dropped by 30%. (I have been against this concept for years. I wonder how the clients of the auditing firms that were taken over by the “consolidator” feel about this?) (Page 8)

Another IT company was found to be overstating its turnover, in this case by 93%! The share price has fallen from 198p to 7p. The auditors are in for the high jump! (Our local practice review insists on verifying completeness of revenue and validity of expenses. Had the UK auditors done this, they would not be facing court action. Listen to Gillian, she is trying to help you!) (Page 9)

Joe Berardino of Andersen writes: “Standard setting is too slow. Responsibility for administering discipline is too diffuse and punishment is not sufficiently certain to promote confidence in the profession.” (Page 10)

The statement on investment property only permits freehold property to be recognised at fair value, not leasehold property. A company called Hongkong Land wiped 88% of its equity off its balance sheet because leasehold property has to be amortised over the lease in terms of the statement on leasing and may not be valued in terms of the statement on investment property. A lobby group has been set up to try to persuade the IASB to change this. (Page 11)

Because of dissatisfaction with the results achieved using GAAP, many companies provide pro-forma information in their financial statements. SEC has objected to this and has stated that if pro-forma information is provided, it must be reconciled back to the GAAP information. If not done, anti-fraud legislation could be applied against the company. (Page 11)

Canada has issued a new standard requiring that stock options be recognised at fair value as an expense. In the past, for example, goods and services paid for with stock options went unrecorded. (Note that the US’s standard still has to be passed by Congress, so the fight is still on in that country.) (Page 11)

The AIMR found from a survey that 80% of financial analysts and portfolio managers want to see share options treated as an expense in the income statement. (Time to take heed of what the users want for a change? Or is the preparer lobby going to win again?) (Page 14)

The average accountant’s salary in the UK, after bonuses and other perks, is ₤117 771 p.a. (No wonder there is an exodus from RSA.) (Page 14)

It became known in October 2001 that the Boots pension fund (we are talking big money here) moved from an equity bond ratio of 75/25 to 0/100. There have been arguments for and against this action. What the trustees did was to crystallise a surplus in the pension fund thereby reducing the risk to the employees and the company. One must wonder if this is a wise long-term strategy or merely a strategy to get out of the market when it had peaked. The interesting by-product of this event was the reaction on the share price on publication of the news – it did not move! (Page 48)

Robert Bruce takes a look at the move from the word “audit” to the word “assurance”. He states that the word “audit” has unpleasant connotations (like being sent to bed with no supper) whereas the word “assurance” has a certain “Aura” and “Mystique” (sounds like the names of lap dancers) to it. (Page 49)

If a dividend is proposed and declared before the year-end, it must be raised as a liability. What does the recipient do? Raise it as revenue on the last day to register? There has been much debate on this. I believe that the answer is to accrue it when declared. (Page 98)

If a defined post-retirement benefit fund does not meet the definition of a plan asset, it is recognised as an asset on the company’s balance sheet, with the obligation being recognised as a liability. (Page 98)

A new batch of exposure drafts from the IASB is on its way: first time application of GAAP, business combinations, financial instruments, banking activities and share based payments. The IASB set a target to have these statements completed by the end of 2002. (Page 100)

Ron Patterson looks at the demise of the prudence concept. He argues that this concept is a feature of many statements (inventory, PPE, provisions, etc.) and feels that it should be a fundamental concept. (Hanging onto the past dear Ron?) (Page 105)

In an excellent article by Henrietta Thompson, the problems with the implementation of AC116 are addressed. Points raised are: Ignorance of the standards Recognition of a surplus in the fund The normal v abnormal treatment in the income statement The impact on the results of the company The fact that the actuaries only value the fund every 3 years The impact of changed assumptions when valuing obligations Valuing the scheme assets at the balance sheet date The time it takes actuaries to produce the values(These points are of concern here in RSA and are not, in many instances, being addressed.) (Page 108)

The directors of a company called Gameplay in the UK decided that the costs of preparing consolidated financial statements and a cash flow statement did not outweigh the benefits and felt that a qualified audit report was in the best interests of the shareholders! (A smoke screen to cover up more serious problems in the company?) (Page 112)

Liverpool Football Club has changed its accounting policy of amortising its intangible assets (player’s contracts) from the period of the original contract to the period of the extended contract. In the year the player signs the extension, the unamortised portion of the intangible asset is written off over the new contract period.

- -- 1 - 1

Mafia Buzz 2002

An employment condition of a psychiatrist working in the UK was that he periodically underwent personal psychotherapy (they go mad themselves if they don’t!). The revenue authorities disallowed this expense, as its purpose was to enable him to perform his duties and was not in the performance of his duties! (And you thought our SARS was mean?) (Page 119)

The UK is looking at an alternative to an audit of a small company called the IPR (independent professional review). This service is cheaper than an audit and, in some cases, is more effective as it focuses on the big picture (analytical review). However, it picks up fewer errors. (Page 123)

Often auditors are called upon to give a special report to a third party such as a potential lender. Auditors should weigh up the level of risk taken against the compensation received for taking this risk. They should also point out to lenders that they are unable to give an opinion on future income and solvency of a client as no amount of audit evidence could support such an opinion. (Page 124)

The UK is in the process of reviewing its laws on small companies. The feeling is that “small” should be replaced with “private” – it looks like SAICA is on the same track. (Page 129)

A study was conducted on the reasons for failures of SMEs and found that the lack of regular quality accounting information was top of the list. (Page 130)

Accountancy SALinda de Beer and Alta Prinsloo say that there is a joint initiative between SAICA and the JSE to form a GAAP Monitoring Panel to which GAAP contraventions will be reported. They also acknowledge that private companies are being burdened by having to comply with Statements of GAAP and they are going to form a committee (another one) to look into the matter. (Page 8)

Danie Coetsee writes about classification of financial instruments – mainly quoting the statement. He gives some basic examples to illustrate the statement. (Page 13)

Nigel Payne lists the primary characteristics of corporate governance per the draft King 2, which is based on ethics, integrity and disclosure:1. Discipline: Adherence to correct and proper behaviour.2. Transparency: Facilitate meaningful analysis of AFS.3. Independence: Avoid conflicts of interest.4. Accountability: Enable investors to query director’s actions.5. Responsibility: Correcting and penalising mismanagement.6. Fairness: Balancing the interests of all stakeholders.7. Social responsibility: Response to social issues.My article was on problems between the analyst and GAAP. (Page 29)

AIMR AdvocateFrom a letter to the editor (shortened): “Our credit department approved a loan submitted by my supervisor with the proviso that the client could prove that he had liquid assets exceeding an amount of $250 000. My supervisor wrote on the letterhead of another bank that this was indeed so, forging the signature of the bank manager. When I queried this, my supervisor said: “it is not what you can do to reach our monthly targets, it is what you must do.” On approaching the head of my department, I got the same response. What do I do?” The answer given was to document that whole situation and report it to the firm’s head of compliance. (People and companies victimise whistleblowers so if this was my brother, I would advise him to document the whole story and get the heck out of there as fast as possible.) (Page 6)

Canada has set a goal to harmonise with US GAAP. (Alliances are being formed and the battle lines are being drawn.)

Financial MailVenture capital is alive and well in RSA. Promoters, who earn hefty commissions, target selected investors with prospectuses that show wildly unrealistic projections. These investors are left with unlisted stock that cannot be sold. When, and if, investors receive annual reports, the picture presented is very different to the prospectus picture. (Suckers are born daily.) (11th, page 26)

Exceptional returns from SA property trusts and loan stocks over the past three years have highlighted asset diversification as the cornerstone of sound investment portfolio construction. (Note: The past is not a guarantee for the future.) (11th, page 38)

Donald Rumsfeld says of Bin Laden: “We know for certain that he is in Afghanistan, some other country or dead.” 11th, page 58)

In a letter to the editor supporting the death penalty, the writer says that it is God’s responsibility to forgive criminals and it is our responsibility to facilitate their meeting as soon as possible. (18 th, page 8)

The chances of a managed investment fund beating the Alsi index are 1000:1 and investing in an index fund is a no-brainer. (Letter to editor, 25th page 11).

Why were investors happy to invest in Enron at a PE of 80 when all it did was trade in oil? One big lesson to learn from this event was: “Diversify your investments!” (25th, page 49)

FortuneJohn Dingell, the democratic representative from Michigan, says that self-regulation in the accounting profession is not working. (7th, page 55)

Auditing has become a commodity and firms are using it as a loss leader to open the door to more profitable consulting contracts. (This is the main reason why small auditing practices do not want to see the demise of the audit for small companies. They will lose work to the Certified Financial Accountants.) (7th, page 55)

Harvey Pitt, the new SEC chairman (who used to be Andersen’s lawyer) does not want reform in the profession. He is calling for clearer language in F.S., prompt, disclosure of material information and disclosure by the auditors of the three to five subjective accounting decisions that are the most important to the company’s financial status. (I think that the last idea is great!) (7th, page 56)

Marie worked for Enron for 15 years investing 15% of her salary into her pension plan, which invested the total amount into Enron (what else!). At the age of 61 she had amassed $500 000 and started contemplating retirement. (Weep for her! Lesson? It starts with a “D”.) (7th, page 76)

Economists watch the yield curve for clues as to future economic trends. When the yield curve is downward sloping (short-term interest rates are higher than long-term), indications are that there will be an economic slowdown. When the yield curve slopes upwards (long-term interest rates are higher than short-term) there is almost always an economic recovery in sight. Another indicator to watch is the gap between corporate bond rates and government bond rates (the corporate credit spread). The wider the spread, the bleaker is the corporate performance outlook. So if markets are buoyant but there is a downward sloping interest yield curve and corporate credit spreads are increasing, reduce your exposure to equities, subject to the other indicators such as corporate earnings. (7th, page 78)

Sustained high achievement requires not just a sharp intellect but also physical strength, emotional intelligence and a strong sense of

- -- 2 - 2

Mafia Buzz 2002

purpose. Fear, anger and frustration reduce our capacity to perform. The sense of challenge, possibility, determination and positive fight is what makes it possible for us to apply our talent and skill. We must continuously refine our vision and purpose statements and to map our plans for change and achievement. (7 th, page 84)

A letter to the editor asks why stealing from employees, shareholders, the consuming public and the taxpayer is becoming the standard way of doing business. (I know! People have forgotten that real joy comes from the simple things in life – sunsets (and rises), walking in the bush, swimming in the sea or a mountain stream, watching a good movie, etc. Instead they have become materialistic, which costs money. What is the easy way to get money? Take it!) (21st, page 9)

You can make money on the stock exchange by realising that the market determines the price of equities based on its expectations. These expectations are ever changing and market prices reflect these changes. If you can predict when the market will revise its expectations, you can coin it! How do you do this? By applying fundamental analysis techniques (which the market seems to have abandoned) to the company and its equity instruments, taking your own views as to increases in revenues, margins, ability to generate cash flows, growth, etc. and to assess the market views in relation to your own. (Not a bad idea but a lot easier said than done.) (21 st, page 79)

TechtalkThe IASB is considering changing the requirement to amortise goodwill and intangible assets.

The 9/11 event may not be used as an excuse to allocate expenses to extraordinary items.

ED149 (auditing fair value measurement and disclosure) and ED150 (effect on the audit of financial statements where the Internet or other public network is used) have been issued for comment.

IFAC is looking at ways of assisting small and medium practices.

STRATE has had an impact on script count audits to verify existence. Auditors will now have to rely on the electronic records of CSDPs

The CFA DigestCompanies that make a voluntary decision to provide greater levels of disclosure are valued by investors, which should lead to a reduction in the cost of capital. (Page 3)

How is this for strategic thinking: A biotechnology company was awaiting approval for a drug that it developed. If approval were granted the company would need cash to launch the product so it bought call options on its own shares. Drug approved, price skyrocket, sell call options, make the money to launch the product. The story had a sad ending: the drug was not approved and the share price fell by 35%. But what a fantastic idea! (Page 10)

Research shows that smaller companies tend to hold more cash in relation to total assets whereas larger companies with access to capital markets hold less cash. Excess cash leads to small increases in capital expenditures, acquisition spending and dividends paid to shareholders. (Page 13)

TimeAnyone who destroyed records out of stupidity should be fired. Anyone who destroyed records to try to circumvent our investigation should be prosecuted. (21st, page 18, commenting on the Enron affair)

February 2002 (20 Minutes)

AccountancyJapan, which contributes $3 million p.a. to the IASB, lifted its threat to pull out of the standard setting process over its unhappiness about the possible elimination of the pooling of interest (or, as we know it, the uniting of interests) method of business combinations. (Australia, New Zealand and Hong Kong have already eliminated this method.) (Page 8)

SEC would like to see in place a tough, no nonsense, fully transparent disciplinary system, subject to independent leadership and regular monitoring of accounting firms. (Page 8)

A member of the Nokia board was recently fined ₤70 000 for exceeding the speed limit in Finland by 25kph – fines in that country are based on the offender’s earnings. (Page 11)

There will always be a potential threat to the independence of auditors as long as those to whom they report have the power to appoint and dismiss them. The writer rejects the idea that the public sector should get involved in their appointment and suggests that auditors of auditors could be a possible solution. (Additional costs and delays, but, hey, more income for our profession!) (Page 24)

There is much controversy in the UK about the concept of “consolidators”, i.e. companies taking over the services supplied by smaller audit practices and consolidating them into one large practice. Tenon has, by following this approach, become the 10 th

largest firm in the UK. But not all is well in this industry. (If you are tempted to go this route (there are consolidators operating in RSA) read this article and you may think again. (Page 26)

Financial directors (short-term thinking, cost cutting beancounters) and marketing directors (spendthrift, creative, long-term developers of brands and markets) are gradually understanding each other’s point of view. Accountants are starting to understand, for example, that brands are important where product differentiation is difficult and that there is a need to incur marketing expenditure even where an immediate return on investment cannot be justified. Accountants need to develop new techniques to measure and evaluate advertising and promotional spends so as to optimise investment in this area. (For a business to be successful there should be synergy between the production, marketing, personnel and accounting functions, not conflict.) (Page 34)

Over the years English case law has accepted that “fraud” is to “deprive by deceit” (Isn’t that beautiful?) This article warns that one should not institute an action at law if the intention is a moral crusade (typical in a divorce). Don’t go to court unless you can demonstrate actual loss. (My view is don’t go to court – the only winners are the legal guys and dolls.) (Page 45)

Dr Trisha Greenhalgh’s articles are always excellent – she writes on medical matters. This month she explains what a MET is (one calorie burned per kilogram of body mass per hour). If you are looking to lose weight, work out at 5 METs (equivalent to a brisk walk) over a long period of time (one hour), whereas if your goal is cardiovascular fitness, work out at 10 to 15 METs for short periods (five minutes). She says that weight lifting is good for bones and muscles. (Page 46)

If you are thinking of building a website, read the article on pages 50 to 51.

Does your audit committee add value or does it just go through the motions? Audit committees should: Set themselves measurable objectives Review their performance against their objectives Assess the business risks and the responses to them

- -- 3 - 3

Mafia Buzz 2002

Assess the degree of prudence in the financial statements Avoid temptation to become bureaucratic or process driven(Page 68)

The IASB has issued SICs 27, 28, 29, 30, 31 and 33. (I will be getting hold of them and updating your GAAP material if you did a workshop in 2002.)

Canada has approved its standard on differential reporting. It will apply to enterprises with no public accountability and where all of the owners entitled to vote have given their unanimous consent in writing. (We started our initiative more or less when they did. They are one step away – just need final approval. How many steps do we still have to go? Have we even started?) (Page 78)

Ron Paterson welcome’s the IASB’s intention to do away with black lettering in its standards. (Page 82)

The second, and last, part of the article on post-retirement benefits deals with, among other things, the situation where the employees of a group of companies belongs to the group defined benefit scheme. In the subsidiaries, it may not be possible to identify the fund assets and obligations attributable to that company so in each subsidiary the fund will be dealt with as a defined contribution fund. However, on consolidation, it will be dealt with as a defined benefit fund. (Page 84)

The IASB is here to stay and it means business! But it will not all be plain sailing what with the attack on it by the Japanese and the Enron scandal. Behind the scenes they have been working hard. By May 2002, there will be 14 new exposure drafts out, including EDs on business combinations and share based payments. (Just when we thought that we could have some peace and quite!) (Page 95)

I was in the middle of preparing my valuation manual for participants of my valuation workshops when I came across the article on pages 104 to 106. I was able to pick up some good ideas from it but was disappointed to see that, in a journal of this stature, they talk about using Ebitda as a basis for valuing the operations of a company! (Page 104)

The latest version of the UK’s Financial Reporting Standard for Smaller Entities (FRSSE) is on pages 115 to 151. (The world is passing us by!)

Accountancy SAAnd now for something completely different! I think that SAICA is opening itself up to attack by publishing some of the comments made in this article. If you are an activist from the 60’s or in your early 20’s, you will enjoy this one. (Page 3)Jan Kotze’s article on sustainable competitive advantage makes the following points:1. Your products and services should provide value.2. You must swiftly respond to customer demands.3. Ideas and information drive the new economy.4. To seize the initiative your must be flexible.5. Continuous improvement is essential to being competitive.6. Develop a strategy that gives you a competitive advantage.7. Focus on your core competencies.8. Get all managers involved in strategic thinking.9. Encourage learning through making mistakes, if necessary.(Page 14)Bernard Agulhas writes about what is happening in public sector accounting. I am so impressed to see that they are now coming around to understanding that AC statements cannot be imposed on NGOs without major modifications, e.g. museum assets do not have to be impaired because they are not generating economic benefits!

If you are wondering whether your pay is sufficient, read page 19 where rates of pay for accountants are set out.Carolina Koornhof and Danie du Plessis from Tukkies deal with red flags that lenders or investors should look out for before committing cash to a company. The top ten are:1. Dishonest and unethical management.2. An audit qualification: a break down in controls.3. Suspension or de-listing from the stock exchange.4. Poor reputation of management in the community.5. Autocratic management.6. Frequent changes in directors, legal council or auditors.7. Doubt as to the ability to continue as a going concern.8. Continuous problems with regulators.9. Unpleasant surprises.10. Lots of profits but no cash flows.(Page 21)My article called “Your dog is fat” was about how not to take decisions. The topic was on deferred tax and the short-term insurer. The point I made was that one can’t leave tough decisions to committees to resolve. See next month’s Techtalk were SAICA announced that the committees could not solve the problem with deferred tax and the insurer. (Page 31)Penelope Webb looks at the morality of the structured tax schemes that abound in RSA and compares them to the infamous film and plantation schemes that were touted by reputable auditing firms in the past. (Page 33)

Business DayMichael Raynor of Deloitte Consulting says that it is a waste of time trying to predict the future and has come up with a concept termed strategic flexibility:1. Understand the drivers of change that affect the business.2. Create a strategy that is optimal for each scenario.3. Build resources for each strategy.4. Monitor the environment. When it makes sense to act, act.

Walking away from an option is not always a bad thing.

Financial MailJaumain Georges, in a letter to the editor, does some interesting arithmetic:1. Had you invested R100 000 in 1984 with a typical financial

institution, you would have today R1,3 million. (15% p.a.) 2. The price of a BMW 518 in 1984 was R9 000 and a meal in a

top restaurant R7. The cost today is 20x (18% p.a.).3. Had you invested R100 000 in dollars in 1985 and earned 7%

p.a., you would be worth today R4,5 million (24% p.a.).(1st, page 10)

Bram Meyerson says that companies should allocate more resources to developing systems and solutions to deliver new products and services (and existing ones) and on research activities to find new ways to deliver value to the business. (1st, page 58)

Before starting an investment programme you should define your risk tolerance level, high, medium or low. (I hear stories that young CAs starting out on their careers are choosing low risk (money market) investments for their defined contribution pension funds!) (1st, page 85)

Stephen Cranston draws attention to the poor administration of pension funds in RSA. (I was chatting to someone the other day who specialises in auditing pension funds and he told me that he had to qualify 17 of the past 24 funds he had audited.) Mr. Cranston suggests that members of funds should become proactive and wake the trustees up! (1st, page 87)

- -- 4 - 4

Mafia Buzz 2002

Mr. Alan Greenspan said: “If you thought that you understood my comments, then I did not make myself clear.” (1st, last page)

A Plummer, in a letter to the editor, asks why there has been such little comment on the legislation on pension funds that was promulgated in December, 2001. He states that this legislation will be the final nail in the coffin for defined benefit plans. (Maybe this is why there has been so little comment: companies have already moved away from DBPs to DCPs. But I wonder how many people have looked into the retrospective implications of this legislation?) (8th, page 12)

Sharon Wood looks at some of the actual and proposed legislation affecting pension funds. New rules on how trustees should invest the funds and the possibility of having to invest part of the funds in “Socially Responsible Investments” are being considered. Retrospective legislation has just been passed requiring funds to find and pay past members part of the surplus in a fund. (Guess who will end up paying for all this? The members of the fund will foot the bill. I am so pleased I do not belong to a pension fund! If you do, your pension is being eroded, my friend. You had better start making your own plans.) (8th, page 69)

Shoprite’s MD Mr Whitey Basson stated that the group was paying R78 million p.a. rentals on uneconomic leases, hence the poor margins at the company. (Did the auditors not tell Mr. Basson about the statement on provisions and the requirement to provide for onerous contracts?) (22nd, page 59)

FortuneThe real tragedy of Enron was that thousands of employees invested their entire pension into the company’s shares and lost the lot. (4th, page 19)

The merger of AOL and Time Warner has resulted in $155 billion being wiped off the market capitalisation of the two companies. A goodwill impairment of $40 to $60 billion is to be taken. (So much for the merger of all time!) (4th, page 57)

Geoffrey Colvin asks why there was not more of an outcry when Kmart shut its doors. Its job losses are more than Enron, its purchases were $25 billion p.a., it was in a straightforward business and yet, in relation to Enron, this failure went almost unnoticed. (My answer: Enron involved scandal, which sells newspapers, whereas Kmart was just dull, pathetic management.) (18th, page 15)

Warren Buffett suggests that audit committees should ask the auditors the following three questions:1. If you were solely responsible for preparing the company’s

financial statements, would they have been different?2. If you were an investor would the information you receive

give you the necessary understanding of the financial performance of the company?

3. Would you be happy with the company’s internal control procedures if you were the CEO? (18th, page 23)

IBM’s revenues were up only 5% in 2001 yet its earnings were up by 20%. This was achieved by financial engineering, e.g. buying back its own shares, using the surplus in its pension plan and managing its tax rate down. (The US could learn a thing or two about financial engineering if they came to RSA and studied our techniques!) (18th, page 38)

SAICA NewsMr Sehoole wrote to all members and associates to inform them of the work that SAICA was doing to address the fallout from the Enron affair, e.g. work on disciplinary procedures, the legal backing project and the formation of the review panel.

TechtalkThe IASB is working on a new statement that will give guidance to companies preparing financial statements for the first time under International Accounting Standards.

SAAS 910, engagements to review financial statements, has replaced AU333.

To protect the public from incompetent financial service providers, the Government is seeking to regulate anyone who furnishes any recommendation, guidance or proposal to clients in respect of the purchase of any investment or financial product. (Looks like we will have to be careful with our portfolio management workshop – may end up with a R1 million fine or 10 years or both!)

TimeMemories of Nick Leeson surfaced in Ireland with a new rogue trader called John Rusnak taking Allied Irish for $750 million. This is not quite in the same league as Nicky boy’s $1,3 billion but questions are being asked: “Did the banks not learn from Barings Bank’s experience?” (18 February, page 38)

March 2002 (20 Minutes)

AccountancySir David Tweedie says that the US standards are generally accepted as the most comprehensive and detailed in the world but that does not mean that every individual standard is the best or that the US approach to standards is the best. He says that the rule book mentality lends itself to finding ways of getting around the standards. (Page 16)

The Confederation of British Industry is to lobby the government over the statement on retirement benefits due to the volatility it is producing in financial statements. (The users of financial statements know how to deal with this volatility – they don’t just look at the bottom figure anymore. Wakeup CBI.) (Page 16)

Commentary is coming in on the IASB’s IFRS (the new name for IAS – better get used to it!) new preface. Criticism is levelled at confining the statements to general-purpose profit-orientated entities. (This is what they were designed for, silly. Leave NGOs and SMEs to get on with developing standards that are appropriate to them.) Some are calling for a “true and fair” override. (This is not possible, as it will undermine the standards.) Some are opposed to the idea of scrapping the black lettered paragraphs. (For what it is worth, I liked this idea and will be sad to see it go.) (Page 17)

Guess who is dying to say “I told you so!”? Mr. Arthur Levitt, past chairman of SEC. He tried to push for auditor independence while in office but was blocked by congress. The senator who opposed him has come out with an apology following the Enron affair. Joseph Lieberman conceded that “the gatekeepers were not keeping the gate and the watch dogs were not watching.” (Page 17)

The IASB is starting to come under pressure. The Japanese and the French are not happy that the IASB intends to patch IAS 39 (financial instruments). The secretariat is of the opinion that they need to do “something” to the statement so that people can use it. (Sounds wishy-washy to me!) (Page 20)

The UK’s and Canadian’s ASBs are questioning the point of adopting a statement such as IAS39 when they know that it is going to change in the near future. (Agree!) (Page 20)

- -- 5 - 5

Mafia Buzz 2002

The problem with separating the auditing function from other functions, such as consulting is that the auditing function provides an ideal opportunity to cross-sell other services. Other services make up a large proportion of an audit practice’s revenue and to ban auditors from giving these other services would be a major blow to the viability of auditing practices. (Page 23)

One must question whether the IASB will be able to maintain its independence considering the way it is funded. Contributors (e.g. Japan) could put pressure on the standard setters by threatening to withdraw their contributions if they do not like what is being produced. (Page 29)

A letter to the editor criticises FASB for withdrawing the requirement to amortise goodwill and other intangibles. The auditor maintains that all assets are costs held in suspense, which eventually have to be recovered. He states that this will encourage companies to overpay for acquisitions and employees’ bonuses will now increase as such costs no longer have to be expensed. (Page 29)

The cover feature discusses the traditional budgeting process, looks alternatives and asks the question: does budgeting really add value to a company? (I read somewhere that Virgin Atlantic, for example, does not prepare budgets.) (Page 32)

The annual cost of fraud in the UK is ₤13,8 billion. This article encourages companies to collect evidence that will stand up in court and report fraud to the police. By not reporting fraud, one sends the message to the perpetrator that there is little downside and lots of upside for his or her activities. (I reported a massive fraud that was taking place in a public hospital about ten years ago. I collect the evidence and made a statement only to be told that the police could take it no further. A year later, the Sunday Times blew the story. By then the Government had lost millions of rands. A waste of time in RSA?) (Page 72)

Here is an age-old story. Two equal partners are in business. One is active and the other passive. Active makes an offer to Passive to buy her out. Passive gets advice from a CA who finds that Active has been understating the profits of the business by manipulating GAAP to get the shares at a cheap price! (I was holding a valuation workshop at Strachan Tayler in Durban recently – an awesome knowledgeable and experienced team of partners these. One of the partners told us of a concept called the “Texas Auction”. It works like this: if two people are in a negotiation such as this, and they cannot agree on a price, the partnership agreement must give the seller the right to buy the shares from the buyer at the offer price. Don’t you think that this is absolutely brilliant?) (Page 67)

Roger Hughes of PwC says that any auditor who is willing to compromise his or her independent judgement must be mentally deranged to put the firm and its partners in jeopardy of losing everything. He states that the brand name of any audit firm rests on integrity. He states that the failure rate of audits is very low and when failures do occur it is due to misplaced trust, incompetence or bullying. He believes that the safeguards built into auditing standards and guidelines are adequate. (Well said sir. I am in full agreement, but there is only one problem: we all need to be reminded of these standards periodically. Maybe this is where the answer lies: an annual dedication service to integrity! Joking.) (Page 81)

The ICAEW’s audit and assurance faculty has issued guidance for auditors on auditing defined benefit retirement schemes. It can be downloaded from www.icaew.co.uk/auditassfac. (Come on SAICA, we need this guidance desperately in RSA.) (Page 85)

You can download the draft statement on accounting for insurance contracts from www.iasb.org.uk. (Page 95)

The abuse of reporting standards appears to lie at the heart of the Enron crisis, i.e. non-disclosure of related party transactions and the off balance sheet treatment of structured finance vehicles. The author looks at:

US GAAP (consolidation is based on a legal view, i.e. ownership, with specific rules regarding SPEs)

UK GAAP, which consolidates “quasi-subsidiaries” International GAAP, which provides for the consolidation of

SPEs where the substance of the relationship indicates control, e.g. bear the majority of the risks or rewards

(Page 98)

Ron Paterson talks about the capitalisation of borrowing costs. In the US it is compulsory to capitalise borrowing costs, the UK gives an option, favouring capitalisation and IAS gives an option favouring expensing. The IASB has now come out in favour of scrapping capitalisation! (For once, RP does not give his view! Also confused, RP? I have always been in favour of capitalisation, if additional borrowing costs were incurred.) (Page 100)

Sir David Tweedie says that the IASB will be ready with their long-term plans in May 2002. The board discussed five important projects at its technical session:

1. The statement on employee benefits, where a quirk was discovered which needed immediate rectification.

2. The statement on business combinations, which is going to require major surgery if convergence is going to happen.

3. The improvement project: lots of exciting improvements being considered – can’t wait for them to be published!

4. A new statement on reporting performance, which seems to be taking an absolute age to process.

5. Insurance contracts - an incredibly difficult standard on which to get consensus.

(Page 106)A synopsis of the new SIC standards is contained on page 114:

SIC27: Evaluating the substance of transactions involving the legal form of a lease. If a series of transactions involving the legal form of a lease are linked and the overall effect cannot be understood without reference to the series of transactions as a whole, they should be treated as one transaction. (This often happens where leases are tax structures.)

SIC28: Business combinations – date of exchange and fair value of equity instruments. The date of the acquisition is the date the acquirer gains control of the operations. The fair value is the quoted price at the date of exchange unless the price is considered to be an unreliable.

SIC 29: Disclosure of service concession arrangements. This statement merely sets out the disclosures necessary in this situation.

SIC 30: Reporting currency: translation from the measurement currency to the presentation currency. Use the standards in AC112 when presenting financial statements in a currency other than the measuring currency for convenience of users. Such financial statements should not be part of the official ones.

SIC 31: Revenue – barter transactions involving advertising services. Such revenue should be measured at the fair value of the advertising services provided.

SIC33: Consolidation and equity method: potential voting rights and allocation of ownership interests. When assessing control or significant influence, should consider potential voting rights that

- -- 6 - 6

Mafia Buzz 2002

are currently exercisable or convertible. However, when calculating minority interest or share of profit of associate, these potential voting rights should be ignored.

It is suggested that, to avoid being seen to be dependent, retired audit partners should not join the board or the audit committee of a former firm’s client. (Page 134)

AccountancyDavid Damant writes about headline earnings. He admits that what the users really want is sustainable earnings. However, as it is not possible to get agreement on what this concept, the next best thing is headline earnings. The concept of headline earnings is to take the gains and losses on capital items out of earnings to be left only with trading earnings. (One has to ask the question: are we not flogging a dead horse here? DD stated that in RSA there was a committee of financial analysts looking at the original statement. This is incorrect. There was no such committee.) (Page 3)Professor Saul Klein quotes a book called The Lexus and the Olive Tree by Thomas Friedman, which lists what makes a successful country. He converts the positives into negatives, i.e. what makes an unsuccessful country. This is scary reading as what makes an unsuccessful country is a perfect description of RSA; e.g. “The country would emphasise and support its unique linguistic diversity, and avoid unifying its people through the imposition of a common language.” (Page 7)Mike Henderson looks at the gap between salaries of top management and the lower level workers. With the disclosure of CEO salaries, questions are being asked if 100 times the worker’s salary is a fair salary for a CEO. Reduce this ratio and we lose our top people. COSATU wants the ratio to be brought down to 8! (Page 17)Steven Firer writes on the move to fair value accounting. He concludes that full fair value accounting will convert the balance sheet into a true statement of economic net worth. (Page 19)Howard Cooke suggests that one can earn higher returns for money held in trust for the beneficiaries if the money is pooled and rates negotiated. (Page 21)My article was a summary of the survey we did on differential reporting. 2 284 took part in this survey. (Just as an aside, I never received any acknowledgement of the work put into this survey or for the personal costs incurred by me. The letter to SAICA referred to in the article was never acknowledged. So on behalf of all the small audit practitioners in RSA, who I was trying to support, “thank you Charles”.)Penelope Webb (what a pleasure to read this lady’s articles) advises you not to let SARS grind you down when trying to stand up for your rights. (Page 31)Nigel Payne looks at corporate government issues following the Enron meltdown. He places most of the blame for Enron on the lack of corporate governance (greed, dishonesty, complex transactions, lack of risk management and internal control, conflicts of interest, etc.) and points to poor guidance from the audit committee for the fiasco. He says that internal audit’s focus is primarily on operational as opposed to financial risks and controls and thus the potential for cross reliance may be limited. He says that it takes a brave audit committee to choose one firm to provide internal and external audit services. (Page 34)The editor never passed Hilton Shuttleworth’s letter onto me so I have not replied to it yet – watch this space. (Page 37)There is a cute letter from a student from Queenstown complaining about the smear campaign against auditors. He believes that auditors are not that dull and feels that SAICA should do something to stop the attack! What he does not realise is that we are the butt of jokes because we are so successful! If we really were dull, the advertisers would leave us alone. (Page 37)

AIMR ExchangeIn response to the collapse of Enron, the Association for Investment Management and Research (the crowd that issue the Chartered Financial Analysts qualification) placed a paid advertisement in the Wall Street Journal and Financial Times giving its reasons for the crash (damage control?). These were the points made:

1. Auditors and issuers dominate the setting of standards for financial statements, and not users.

2. The IASB should be free from political pressures.3. GAAP should not permit preparers to structure transactions

to suit them.4. The impression given was that analysts were to blame for the

mistakes made when the analysts were the victims of flawed financial reporting.

(Let’s face facts, all the parties must share part of the blame for this disaster:

1. The directors for being totally deceitful.2. The standard setters in the US for not having solid standards

on SPEs.3. The authorities for impeding the work of the standard setters.4. The analysts for not asking the right questions.5. The investors for not diversifying their investments.6. The auditors for not being strong enough to stand up to the

directors.Every one is trying to blame the other party.) (Page 1)

Business DayBBC’s boss has developed a system for people who put other peoples good ideas down: he issues a yellow card to the negative one that says: “Cut the crap and make it happen.” (4th, page 5)

Sanchia Temkin questions the dual role of lawyers in acting as board members and as legal advisors to companies. (This lady is great!) 12th, page 3)

Minister Manual has delayed the implementation of the Accountancy Professional Bill. Reasons given are the Enron affair (what has this got to do with RSA?) and the demise of Regal (poor management blamed on the auditors?), Saambou (why should the auditors take the blame for this one) and Unifer (must auditors get involved in the business plans of their clients?). (Isn’t it lovely having a scapegoat?) (12th, page 16)

“Profurn bowed to shareholder pressure and restated its headline earnings per share from 12,8 cents to a loss of 31,7 cents. The shareholders wanted capital items to be passed through the balance sheet. The change means that the cost of cancelling its joint ventures is included in the income statement. The initial results were in accordance with GAAP. The restated headline earnings are also in accordance with GAAP.” (And we pay good money to read this garbage!) (25th, page 12)

CitizenBritish workers are being rewarded with new titles instead of increases in salary. Some creative ideas are: “Optical illuminator enhancer” for window cleaner “Stock replenishment executive” for shelf stacker “Technical sanitation assistant” for washroom attendant(9th)

- -- 7 - 7

Mafia Buzz 2002

Financial MailWhere there is any doubt about a company’s accounting or corporate governance, management must be aware that investors will heavily penalise the company’s share price. (1st, page 46)

ApexHi is praised for its communication to the financial community. (1st, page 75)

SARS disallowed a taxpayer’s 1992 assessed loss. After many years of fighting, SARS gave in and allowed it. SARS then disallowed assessed losses for later years on the basis that the company had not objected to them in time. The taxpayer had focused on defending the 1992 one and had forgotten to defend later ones. (When SARS plays games like this it alienates taxpayers.) (8th, page 107)

Marriott conducted an interesting survey on retirees to formulate their strategy for providing products to retired persons. Some of the findings were:1. Income of retirees ranged from R5 000 to R18 000 p.m.2. Cash flow and capital preservation are the main goals of

retirees.3. Concerns of retirees were inflation, the fall in the rand,

medical costs, falling interest rates and the state of the economy.

4. High on the list of investment goals was not eating into their capital base, growing their capital base and income generation.

Marriott point out that retirement planning is a long-term project and that there will be a tug of war between increasing wealth and preserving capital (return and risk). It is essential to build the wealth destroyer, i.e. the inflation factor, into your plans. (8th, page 110)

McKinsey, the international business consultants, found from a survey conducted that global institutional investors would pay up to 22% more for the equity of a company with good corporate governance – per Mervyn King of the King report fame. (29th, page 13)

In some industries more than 60% of the workers are infected with the HIV virus and yet few are reporting on how this would affect their future financial health. It has been calculated that companies with 250 workers could be facing bills of R27 million p.a. King 2 recommends that companies report on this aspect of their operations. (What about a provision?) (29th, page 19)

FortuneMost analysts shrug off giant goodwill write-downs. However, this shrinks the equity asset base and increases the debt-equity ratio thereby increasing the cost of capital. (Do we really include goodwill in the assets when calculating cost of capital?) (4 th, page 15)

Those investing in debt securitisations are in for a shock when they discover that they are the proud owners of Enron’s and/or Kmart’s debt. Banks use financial engineering techniques to reduce risk, e.g. credit derivative, but someone took the risk of such debt and a time bomb is about to explode. (4th, page 16)

Liberty NewsMunich Re, the world’s biggest re-insurer is worried about the possible risks for insurers arising from meteorite crashes! (If it is big enough there won’t be anyone to pay out, so why worry?)

ManeoClaude O’Flarherty is of the opinion that the delay in passing the Accountancy Professions Bill is not helping to reduce the expectations gap and protecting the investor. He also states that some of the reporting of corporate failures is speculative and, at

times, downright misleading. He states that we should get the facts before taking action. (Claude, did you not know that facts just get in the way of decision making and authorities will find any excuse to avoid the effort of having to take action?) (Page 1)

Sunday TimesGraydon Morris states that if you have assets in the $250 000 to $5 million range, you are considered to be one of the many affluent people. To be rich you need $10 million and to be super rich $100 million. (I get depressed reading things like this!) (24 th, page 13)

RMB’s Asset Management philosophy is:1. They are disciplined in applying their investment philosophy

and they stick to it. They educate their clients to have faith in the process and not allow their emotions to get in the way of their decisions. (Our CawB team’s philosophy!)

2. A top down asset allocation team makes decisions about exposure to different asset classes such as shares, bonds and properties.

3. A sector allocation team decides on when there should be changes in the weightings between different sectors such as resources, financials industrials and real estate.

4. A bottom up team focuses on security selection.(A superb approach.) (24th, page 13)The three criteria for good managers are:1. Be honest – go beyond mere compliance with laws2. Be frugal – remember the extravagances of the dot.coms3. Be prepared – strategic planning is essential to success(31st)Larry Valkin and Carol Jones show how hidden costs (commissions (4,5%) and administration fees (3%)) can turn a managed investment fund’s return of 15% p.a. into 6,5% p.a. (Note that R100 000 will grow to R6,6 million at 15% p.a. over 30 years but only to R0,7 million at 6,5% p.a. Manage your own investments I say. (31st)

TechtalkI am delighted about the introduction of the AC500 series statements. There are many IASC quirks that we need to sort out in RSA. I wish the committees well with this new concept.IFAC has released new independence rules (Enron fallout).SAICA is looking for nominations for a committee to work on differential accounting – a committee to solve this problem? Why don’t they listen to the 2 200 members who have already voiced their opinions?A committee was formed to solve the deferred tax problem with the contingency reserve (refer to my article called “Your dog is fat”) in the February journal. Two meetings were held and no consensus could be reached on the matter so the problem was left unsolved, i.e. your dog will stay fat. If decisions in real life were only taken if consensus was reached, the world would come to a standstill!

Berkshire HathawayI downloaded the financial statements of Berkshire Hathaway Inc. for the year ended 31 December 2001. Mr WB had his worst year in history (since 1965). His net asset value fell by 6,2% (never before had a fall in NAV). The fall in the S&P 500 was 11,9% during the same period, so relatively, he did not do so bad. Some gems from his annual report (always a delight to read) are:1. It is common to see shareholders losing billions of dollars

while the CEOs, promoters and other higher-ups who fathered these disasters walk away with extraordinary wealth. They encourage others to buy the shares while they are quietly selling.

- -- 8 - 8

Mafia Buzz 2002

2. In our companies managers buy shares, not options. They face the downside of decisions as well as the upside. They incur a cost of capital. They can’t “re-price” their stakes. What they paid for is what they live with. (Seems W.B. is not in favour of options for staff!)

3. In the insurance industry we all made a fundamental underwriting mistake by focusing on experience, rather than on exposure thereby assuming a huge terrorism risk for which we received no premium.

4. Bad terminology is the enemy of good thinking. When companies or investment professionals use terms such as “EBITDA” and ‘Pro forma”, they want you to unthinkingly accept concepts that are dangerously flawed.

New Auditing Exposure DraftsED 149 deals with auditing fair value measurements and disclosures. Guidance on this issue is badly needed but don’t expect any major breakthroughs in this statement. ED 150 deals with electronic commerce using the internet or other public networks and how this affects the audit of financial statements.

JaWell, No FinePension plans can overlay an equity market-neutral fund with equity index futures to create a synthetic long equity portfolio. To the extent that the hedge-fund component outperforms its funding cost, the alphas may be transferred back to a long-only equity portfolio via derivatives. In theory, one can reverse this process to form a pseudo hedge fund; that is, an equity long-only manger’s alpha over an equity index can be transferred back to an absolute return fund by shorting equity futures. (A bunch of loonies, I tell you! (Financial Analysts Journal, volume 58, no. 2, page 16) Seen on a T-shirt in the mountains: “One tequila, two tequila, three tequila, floor.”

TidbitsDid you know that Francis Bacon – philosopher, historian and essayist – the most distinguished man ever to occupy the office of Lord Chancellor, the UK’s senior judge, was fired because of taking bribes? His defence was that he never allowed a bribe to affect his judgement. (Did I miss the definition of a bribe?)Mr Alan Greenspan commented that a firm is inherently fragile if its value added emanates more from conceptual as distinct from physical assets. The rapidity of Enron’s decline is an effective illustration of the vulnerability of a firm whose market value largely rests on capitalised reputation.Monique Rissen-Harrisberg, chief executive and founder to The Voice Clinic states that the ten personal assets needed to take you to the top are (accountants take note):1. Personality plus.2. A high emotional quotient.3. Good vocal habits (she can help you here)4. Managing information (see Mafia Buzz!)5. Being able to participate with others6. Creating strategic alliances (networking)7. Being open to change (an accountant???)8. Keep learning (Mafia Buzz?)9. Stay healthy!

April 2002 (25 Minutes)

AccountancyGeorge Bush has outlined ten proposals to safeguard shareholders from another Enron type disaster. They are based on providing better information to investors, making corporate officers more

accountable and developing a stronger more independent audit system. (Page 9)

FASB has voted to tighten the rules on consolidations as a result of the Enron disaster. An SPE is be consolidated by its primary beneficiary when it lacks sufficient independent economic substance. Independent economic substance is when the SPE is able to fund or finance its operations without assistance or reliance on the primary beneficiary. (Page 9)

FASB is thinking of becoming more flexible by reducing the number of members from seven to five and shortening the comment period. (Page 9)

A new survey has found that 71% of practising accountants want to ban auditors from doing non-audit work where there is a public interest (note, not for small non-listed companies!). (Page 10)

The IASB has rejected claims that its framework will not permit share options to be expensed. (I am looking forward to reading their arguments.) (Page 12)

The IASB is considering looking at SMEs. (They should focus on setting standards for general-purpose financial statements and leave SMEs alone!) (Page 13)

There is a major push in the UK to abandon FRS 17 and move to IAS 19 (employee benefits). (Page 17)

Liberty International was hauled over the coals for treating the excess purchase price of a property portfolio as part of the cost of the properties and not goodwill. (Surely there can be no goodwill when one buys a few properties?) They were required to restate their balance sheets and create goodwill. (Page 18)

The following are possible consequences of the Enron fiasco:1. Audit firms will be banned from providing non-audit services

to audit clients (presumably only where the interest of the general public is at stake).

2. US accounting rules will change.3. Changes will be made to campaign funding in the US.4. Banks and their analysts will be doing some soul searching.(Page 22)A professor expounded a theory that marriage increases wealth. In a letter to the editor, a correspondent suggests that the reason for this is that spouses work longer hours to avoid having to spend time together! (Page 29)

A CFO should outsource their administration to keep the clutter at bay. S/he is there to ensure that the numbers are correct and that the business is properly controlled. S/he needs to understand the financial consequences of strategic decisions. Strategic thinking and risk management are strategically linked. S/he needs to enable others to achieve their aims and goals. Leadership, emotional intelligence, strategic thinking, communication, interpersonal skills, coaching, people management and risk management are foremost among the new competencies required by a CFO. (Page 33)

John Shuttleworth challenges the myth that the longer equities are held, the lower is the risk. He agrees that the longer equities are held the higher is the likelihood that they will outperform bonds. However, he says that the size of the shortfall when equities under-perform should be factored into the equation. Paul Samuelson says that it is a blunder, if not a crime, for a fiduciary trustee to believe that equities’ risk decreases over time. (The S&P 500 in the US has fallen by over 30% in the past few months.)

Liz Fisher says that many firms rely too heavily on their existing clients for business when they should be looking at ways to win new clients. If firms ensure that existing clients get exactly what they need and potential clients are constantly reminded of their

- -- 9 - 9

Mafia Buzz 2002

name, the firm will eventually reap dividends. Some ideas for better servicing existing clients are: Offering unlimited free telephone support Being clear regarding the fee structure Offering quality care Building up a relationship of trust and confidence Maintaining a database of client information(Page 79)Chris Swinson wonders whether quarterly reporting is a good thing. He suggests that it encourages the belief that recent performance is a guide to future performance. (Page 85)

When FASB proposed expensing employee stock options in the early 1990’s they caused a furore. Congress objected so FASB backed down by only requiring pro-forma information to be given as to the effect on profits. A recent survey by the AIMR (1 944 members responded) found that 89% were of the opinion that employee stock options are employee compensation and 83% said that they should be expensed. (Page 96)

Allister Wilson suggests that the goal of true and fair financial reporting has been overshadowed by the quest for mechanical adherence to accounting standards. He states that accounting standards and fair presentation should go hand in hand. (Maybe they should look to our Companies Act, which states that financial statements must fairly present in accordance with . . .) (Page 97)

Keith Cornish states that it is probably not sensible or relevant to adopt IAS in full in emerging markets. (No comment.) (Page 99)

Ron Paterson, as usual, hits the nail on the head. He says that no amount of standard setting will make devious people honest. He believes that the International Standards need a statement similar to FRS 5 in the UK (Reporting the substance of transactions) and that fair presentation should be preserved as the underlying principle of reporting. (Similar thoughts to Allister’s.) (Page 100)

Accountancy SABernard Agulhas poses the question: “Can the profession survive another onslaught?” He believes that a holistic solution is required. IFAC has embarked on the formation of various task forces to address the problem. (One wonders whether forming task forces, committees and boards will really solve the problem.) Bernard states that a true professional should not require standards and rules to govern moral and ethical behaviour – it should be something that truly comes from within. (Are there really enough “true professionals” around to do what needs to be done? Maybe we should go the way of the US – legislate jail time for immoral and unethical behaviour where public interests are at stake.) (Page 2)

Illse French and Dudley Wright give an excellent summary of the Pension Funds Second Amendment Act, which became operative on 7 December 2001. Extracts from their article are: (page 5)1. All actuarial surpluses in the fund belong to the fund.2. The employer is not entitled to any part of the surplus until an

apportionment has been made.3. The board of the fund (75% approval) must submit a scheme

for the proposed apportionment of any surplus to the Registrar.

4. The apportionment may include: Improvements of benefits to existing members Increases to benefits of former members Allocation to member surplus accounts Allocation to employer surplus accounts5. A representative of former members must be appointed for

former members who left the fund going back to 1 January 1980.

6. Member surpluses may be used to improve benefits or reduce contributions.

7. Employer surpluses can be used for a variety of purposes, e.g. contribution holiday, medical aid subsidies, improving health benefits, etc. Cash can only be taken on the liquidation of the fund.

Abel Dlamini’s article deals with financial management capacity building in terms of the Public Finance Management Act. (Page 9)

Zahn Hulme looks at the brain drain and possible brain gain when those leaving the country return. She lists the following ten main reasons for leaving RSA: Better prospects Higher earnings Improved safety and security Better future for children No confidence in the future of RSA Affirmative action policies of the government Deterioration in social services Decline in quality of life Lower tax rates A decline in standards.Over 80% of those who leave are in the 26 to 35 year bracket. Over 50 years, the percentage is 0%! (Page 14)

My article is about the reaction of the analyst to deceit discovered in the published financial statements of companies. (Page 19)

Nigel Payne writes about his passion, namely, risk management. He states that auditors should assess the board’s understanding of risk in determining whether or not to accept the audit and in the design of the audit procedures. He believes that value at risk models should augment value-based management and that management should identify and monitor key performance measures daily to keep their finger on the pulse of the business operations. (Page 21)

Raymond Swenson asked why Enron should affect small practitioners. Claude O’Flaherty responded that every auditor must observe the highest professional standards regardless of the style of the practice. (I met a delegation from Canada, the US, Australia and New Zealand the other evening and told them that small companies in RSA were forced to comply with International Accounting Standards and the response was: “This is a waste of valuable resources.” My response was: “No, it is a redistribution of income.” Hang in there Ray, my man, you can make lots of money out of your clients if you toe the profession’s line!)

Business DayThe companies rated as excellent in the financial reporting category in RSA are Absa, African Bank, Afrox, Allan Gray Property, Anglogold, Anglo Platinum, Aveng, Avmin, Barloworld, BOE, Edcon, Firstrand, Goldfields, Illovo, Implates, Investec, Iscor, Kersaf, Liberty, Nampak, Nedcor, PPC, SAB, Sanlam, Sappi, Sasol, Stanbic. (It is interesting to note that 11 of these companies get me to address their staff in-house on GAAP.) (4th)

The overhaul of RSA’s corporate laws is being planned. Optimists say that it will take at least four years for the process to be complete. (So small private companies will have to incur unnecessary costs in the meantime preparing financial statements complying with international standards. Why they can’t delete paragraph 5 of schedule 4 as an interim measure I will never know.) (29th)

- -- 10 - 10

Mafia Buzz 2002

Financial MailLeisureNet paid DM10 million for half a German company that had no assets or liabilities. (What is the auditor’s responsibility in a case like this? To insist that the investment be impaired at the balance sheet date. I don’t believe that the auditor can be held responsible for the decisions of management. This is something that the Government and the public do not quite understand.) (12th, page 6)

Mr Mboweni wrote to the Financial Mail objecting to being called by his first name! (Isn’t that fascinating? I would feel honoured to be called by my first name in a journal. I would object to being called "Hattingh”! Just shows you how the cultures differ in our beautiful diverse country.) (12th, page 12)

A shareholder, who lost R16 million on a share investment, sued the directors of a company for negligence and won. The directors argued that they had a fiduciary duty to the company, not to the shareholders. The court held that the shareholder could sue on behalf of the company. Jacqui Pile, the author of the article, states that this could result in more directors taking out professional liability insurance. (This would relieve the auditors of some of the pressure brought on by company failures.) (12th, page 23)

SEC has accused Xerox of using accounting tricks to overstate its pre-tax operating performance by $1,5 billion in the four years to 2000. (19th, page 61)

FortuneGeoffrey Colvin says that companies should stop trying to guide analysts by talking their earnings up or down. They should rather focus on giving investors more data to allow them to assess the situation. (1st, page 23)

The first rule of asset allocation is to protect what you’ve got. The second rule is to grow your investments. To do this you should have a plan, e.g. 40% into super safe cash and bonds 40% into equities and 20% into speculative investments. You must then stick to your plan. (We are debating this aspect at length in our Chartered Accountants Wealth Builder workshops.) (1st, page 72)

The fight is on in the US: Do you or do you not account for employee options as an expense? A powerful lobby from commerce and industry is lining up to defeat the proposal to treat options as an expense in the income statement. Warren Buffett says: “If employee stock options aren’t compensation, what are they? If compensation isn’t an expense, what is it? If expenses don’t go to the income statement, where do they go?” Logic is not the issue here. What’s at stake is massive reductions in reported earnings of companies with falls in market prices and a resultant impact on the economy. (I wonder if they are not over-reacting? Surely analysts already take options into account in their valuation models? Passing a journal entry should not have an impact on the value of a company.) (15th, Page 28)

With the exception of 1992 when changes to accounting rules drove profits of US companies down, this year saw the highest fall in the Fortune top 500 companies’ profits in 48 years. 97 of the 500 companies reported losses totalling $148,5 billion with one company, JDS Uniphase making a loss of $56 billion. (15 th, page 94)

What do you do if you work in a nuclear power plant and you find that control procedures are being by-passed? Blow the whistle? The gent who did this was ostracised by his company and then fired. He cannot find employment and his wife walked out on him because he cannot provide for her anymore! Studies have found that 90% of whistleblowers can expect some kind of reprisal. (Many years ago a newly qualified CA joined a listed company. He found that it was grossly overstating its assets, with the blessing of its auditors. He approached me for advice. After

considering all the options I advised self-preservation: walk away and shut up! I am not prepared to do this and that is why I am unemployable!) (15th, page 183)

TechtalkSAICA has released ED 151 on headline earnings for comment. A new series of statements called statements of investment practice has been created to accommodate this statement. It will be interesting to see what other statements are issued under the SIP banner.

An amendment to AC116 has been published for comment. I am awaiting the final draft before sending it to you.

AC500 and AC501 exposure drafts have been issued. AC500 will be the preface to this series and AC501 deals with STC accounting issues.

IFAC has issued two new statements on the audit of banks: audits of the financial statements of banks and the relationship between banking supervisors and the bank’s external auditors.

SAAS 4012 to 4015 have been revised and are now SAAPS 1001 to 1003 and 1009. The statements are computer assisted audit techniques, environments – on-line computer systems, IT environments – stand-alone personal computers and IT environments – database systems.

The effective date for disclosure of individual directors’ remuneration is for years commencing 1 March 2001.

IFAC has issued various guides on IT in final and draft form. If you are into IT, go to www.ifac.org/store for information.

Various task forces have been formed around the world to do damage control after the Enron affair. One initiative is the creation of a forum of firms (FoF). (No amount of committees, forums, task forces and boards will solve the problem. We need legislation that provides jail time.)

TimeA 56 year-old Briton has been sentenced to eight years in jail, 800 lashes and $500 000 for selling alcohol in Saudi Arabia. (Now here we have the punishment fitting the crime!) (22nd, page 18)

A 60 year-old US Congressman faces up to 63 years in prison for taking bribes and kickbacks and filing false tax returns. (60 + 63 = 123!) (22nd, page 18)

At least one in 10 children in the Western world was not sired by the man believed to be the father. (22nd, page 42)

May 2002 (30 Minutes)

AccountancyFinancial analysts recommended Enron stock although privately they knew that it was garbage. Enron’s bankers knew that the quality of the earnings was suspect but kept quite. Under time pressures, audit work is routinely falsified. And regulators often engage in cover-ups. (What chance do investors have?) (Austin Mitchell, Labour MP for Great Grimsby) (Page 1)

PwC dropped two clients due to suspect business transactions! (Great stuff!) (Page 8)

The introduction of FRS 17 (employee benefits) in the UK is causing waves. Electrical retail store Dixons has closed its final salary scheme to new members blaming the new statement. The Conservative Party is calling for the statement to be delayed to avoid a catastrophic reduction in pensions savings. The Confederation of British Industry is calling for changes to the rules in the statement. (Page 13)

- -- 11 - 11

Mafia Buzz 2002

Japanese banks are defying IASs by valuing investments at the average price for the month preceding the year-end. (Page 13)

Global Crossing’s network capacity swaps made with its competitors are under scrutiny. (Page 14)

13% of women surveyed recently said that their fantasy date would be with a financial director. Only firemen and policemen came ahead of financial directors. (Something positive to come out of the Enron affair!) (Page 14)

Xerox knowingly increased revenue and earnings by accelerating recognition of revenues, used “cookie jar” reserves, disguised loans as asset sales and otherwise manipulated its accounting in violation of GAAP. KPMG declined to sign off Xerox’s 2000 accounts and was, as a result, fired as auditors by the firm. SEC is talking about bringing charges against KPMG! (Auditors just cannot win, can they!) (Page 15)

Enron boosted its revenue by the sale of “wholesale energy contracts” and derivatives, some deals taking place with its own SPEs. Despite this increase in revenue, working capital fell. They revalued contracts and included such revaluations in cash flows. By the use of SPEs they were able to hide massive losses and debt. The banks, who earned hundreds of millions of dollars in fee income from Enron employed analysts who encouraged other to invest in the company,. (Page 20)

Brian Singleton-Green argues for FRS 17 saying that the arguments against the statement are either idiotic (like requiring asset values to be valued at an average value at the year-end) or late (like arguing that the statement should be delayed). (Page 30)

Customer relationship management (CRM) includes making contact with the business easy, enjoyable, hassle-free, faster, cheaper and safer. Companies need to know who their customers are, how much they spend, what they spend the money on and the correct contact details. One area companies should concentrate on is answering the telephone. (My secretary telephoned an audit firm last week and asked for someone by name. She did not pronounce the name correctly and was ridiculed by the person who took the call!) (Page 34)

Professor Higgs, dean of Henley Management College, says that the key to being oneself is emotional intelligence, which he breaks down into seven elements: Self-awareness: awareness of your own feelings and the

ability to recognise and manage them Emotional resilience: The ability to perform well and

consistently under pressure Motivation: The drive and energy to achieve results in the

face of challenge and rejection Interpersonal sensitivity: To be aware of the needs and

feelings of others and to use this awareness to effectively interact with them

Influence: The ability to persuade others to change their viewpoint

Intuitiveness: The ability to use insight when faced with ambiguous or incomplete information

Conscientiousness and integrity: To keep committed and act in line with ethical standards

(Page 41)Buyers should be sceptical when evaluating a cash business as it is easy to exaggerate or hide profits in such operations. (Page 44)

John Shuttleworth states that equity investment by a pension fund makes no difference to the value of the company. He states that a pension fund obligation is merely long-dated liabilities of the business and that changing the mix of the assets that are used as collateral to meet these liabilities has no effect on the size of the liability. He says that one may as well reduce the pension fund

risk by funding the liability with bonds. He says that funding the liability with equities means that there is a mismatch between the obligation and the assets, which the company has to underwrite. (Do you see the obvious flaw in JS’s thesis?) (Page 52)

Emma Keelan encourages auditing firms to supply investment and other financial services to clients. Clients in the UK trust their accountants and are driving the initiative. (The practitioner can do the investment planning with the client and then hand the client’s investment portfolio over to a reputable asset manager. The practitioner can then help the client monitor and measure performance of the assets and take action when necessary.) The article ends with these words: “We are second to vicars. As auditors, integrity is bred into us – ask clients which profession they most trust and they will say their accountant.” (Where has Emma been in the last year?) (Page 72)

Non-executive directors (NEDs) are appointed to a board to contribute to the development of the company’s strategy and to provide expertise. However, they have a control and monitoring function too and it is necessary for them to address these functions if confidence in the capital markets is to be restored. It is essential that they have the independence to challenge the executive management and draw attention to dubious practices. (Page 79)

James Mendelssohn is of the opinion that small auditing firms are being made to pay for the greed of the big five. The cost of the media blitz by the profession is being funded out of contributions made by all practitioners but is only benefiting one section of the profession. He feels that the clients may start voting with their feet. (Page 80)

Andrew Oswald has worked out that more doctors in a society does not increase the average life of the community. (Page 81)

Chris Cantwell is warning all players to get their act together for the introduction of the statement on employee benefits. (Page 83)

Ron Paterson addresses an issue that has been one of my contentions for ages and that is accounting standards are now dictating how businesses are being run. This should not be the case. Business decisions should be in the best interests of the long-term value to all stakeholders. He gives an example of companies paying higher finance costs to get assets and debt off the balance sheet. (We have all seen this in RSA). Another example is of take-overs being thwarted because of the subsequent accounting for the take-over. Other examples given are the proposed accounting for employee options, post-retirement benefits, etc. (As an example, Transnet used to give their retired staff the facility to travel at 10% of the normal cost on their trains, busses or aircraft using spare capacity. This arrangement benefited Transnet and their staff. It was withdrawn when talk started on providing for post-retirement benefits.) (Page 96)

SIC 32 only permits internally generated website costs to be capitalised if the site meets the six recognition criteria in the statement on intangible assets. Capitalisation does not apply if the site is used purely for advertising of products or promotion purposes. (I would have said that advertising and promotion does result in future economic benefits. Maybe accountants do not believe in this. Would one argue then that a large billboard constructed by a company cannot be capitalised?) (Page 104)

Canada has published its first series of questions and answers on its statement on share-based compensation. (I wonder if they will pursue this statement now that the US congress has rejected it for US companies?) (Page 105)

The IASB is making progress on business combinations, the first time application of IFRSs, insurance contracts, reporting performance and share based payments. As soon as the EDs are out, Mafia Buzz will give you the details. (Page 105)

- -- 12 - 12

Mafia Buzz 2002

Accounting SADaniel Malan discusses a survey carried out on ethics in RSA organisations. It found that a basic ethics infrastructure was in place in most of the organisations surveyed but that the ethical practices have not been integrated into management practices, e.g. 58% did not provide training on the application of the code. The article contains a checklist of questions management should ask when implementing a code of ethics. (Page 5)

Pieter von Wiellig and Craig West ask whether companies are ready for the implementation of AC116. Management must understand the challenge, the actuaries must get the figures ready and the auditors must be prepared to apply their minds to the recognition, measurement, presentation and disclosure problems. (Page 12)

Nigel Payne gives an excellent synopsis of the 2002 King Report. Get the report and study it. Then read Nigel’s article. (Page 16)

My article dealt with GAAP challenges analysts face. (Page 29)

AIMR AdvocateThe National Association of Securities Dealers and the New York Stock Exchange have filed new rules with SEC to address research analyst conflicts of interests. The new rules would:1. Refortify the fire-wall between investment banking and

research.2. Restrict analysts’ compensation from being related to

investment banking deals.3. Improve disclosures of investment banking relationships with

issuers in research reports.4. Reduce the potential for analysts to personally benefit from

investing ahead of or to the disadvantage of investors.5. Improve accountability for the performance of analyst

ratings.FASB is considering reducing the number of members on its board to five to accelerate the standard setting process.

Business DayMerrill Lynch was fined $100 million for misleading investors with their stock ratings so that they could earn lucrative investment banking fees. (22nd)

Executalk1. Work is progressing to address the Enron fallout.

2. The GAAP monitoring panel has been approved.

3. Work is “starting” on SME gaap.

Financial MailUnit Trusts promise above average long-term returns but seldom deliver. The article goes on to show how fees eat into the returns and discusses how direct investments would have fared against unit trust investments over time. Recommendation: Go direct. (Only if you know what you are doing!) (3rd page 85)

FortuneMark Sandi, chief economist at economy.com has built a model to show that the S&P 500 price earnings ratio is pointing to the fact that the market is fairly valued and not over valued. (This was when the S&P was 1 100. It is now 864. My model tells me that it is now fairly valued! Let’s see what happens now.) (23rd page 23)

An excellent article appears on pages 36 to 44 of 27th May’s Fortune called “Why companies fail”. Most companies fail because of managerial error. The recent events have been

described as “an incremental decent into poor judgement” caused by a success-oriented culture, mind-numbing complexity and unrealistic performance goals exposed when the violation of standards became the standard. Corporate sins such as denial, hubris, ego, wishful thinking, poor communication, lax oversight, greed and deceit all added up to a failure to execute. It is a fact that people are less likely to make optimal decisions after prolonged periods of success. Managers were quick to blame currency fluctuations, problems in Latin America and every excuse they could find but the real cause: A bad business model. Management must start to see the stock price as a by-product of their efforts and not the driver. They should become good stewards of the shareholders’ money. They should avoid quick fixes. They should avoid a culture of risk taking without accountability, profit taking without disclosure and conflicts of interest without safeguards. Alan Greenspan feels that a firm is inherently fragile if its value-added emanates more from conceptual as distinct from physical assets. Three suggestions are made:1. Reengineer the board.2. Turn employees into corporate governors (watchdogs).3. Banish Ebitda and other fads.

StarStandard and Poor have decided to count stock options as an expense when assessing a company results. (16th)

TechtalkIf you are involved in holding funds on behalf of the public or giving investment advice or acting as an investment brokering service, you had better look into the financial intelligence centre act, which deals with money laundering.

If you are into IT, download a paper entitled e-business and the accountant: risk management for accounting systems in an e-business environment from www.ifac.org/store.

TimeSome of the research teams in investment houses promise to praise a company’s stock in return for underwriting and other deals. This resulted in analysts recommending stock to their clients they did not believe in. One analyst earned over $10 million in underwriting fees in return for favourable recommendations on the company’s share price. He rated WorldCom as a strong buy until the price was down by 88%. (20th page 74)

The UK government’s strategy is to put the responsibility for funding retirement onto the individual. A typical 30 year-old educated Brit has not even started to think of saving for retirement. The Association of British Insurers estimates that there is a $39 billion gap between what people are actually saving and what they should be saving. Because of the declining birth rates, there are not enough young people coming through the system to support the retirees. In Italy there were 270 pensioners per 1 000 workers in 2000. The ratio is expected to be 667 pensioners per 1 000 workers by 2050. (Increase retirement age?) (20th page 79)

June 2002 (30 Minutes)

AccountancyThe EU has issued a voluntary independence code for auditors. Some ideas are (page 11): Auditors should document each time there is a potential risk

or threat to their independence and should record the safeguards implemented. (The best safeguard would be to avoid such relationships.)

- -- 13 - 13

Mafia Buzz 2002

There should be a two-year cooling off period before a partner can join a client.

There should be a mandatory rotation of partners at least every seven years.

The auditor should provide a written declaration of independence to the client’s governing body.

SEC has launched proceedings against E&Y because they entered into a business relationship with a client to market the client’s software! (Page 11)

The fight over whether FRS17 or IAS19 (retirement benefit plans) produces the better answer is raging in the UK, i.e. FRS17 does not permit actuarial gains and losses to be smoothed over time whereas IAS19 does permit it. (Who is right? For what it is worth, I believe that FRS17 has got it right.) (Page 11)

We need progress to be made on the definition of control for consolidation purposes. The UK says that two concepts are required in the definition: the ability to direct and the ability to benefit. The use by Enron of SPEs to take debt and losses off the group’s financials has resulted in standard setters getting a wake-up call to do something about the antiquated statement on consolidations. (Page 14)

At any given moment of the day there are more people from PwC on board aeroplanes than any other organisation on earth! (Page 16)

The appeal tribunal looking into the Bearings collapse said that it would have been easy to uncover the Leeson fraud if the auditors had applied their minds properly. (Page 16)

In the May issue a commentator on Enron said: “Sadly a fraudulent set of accounts does not carry a big red warning label stuck on the cover.” Martin Levey of the Czech Republic wants to know why the auditor’s report should not be that “big red warning label”! (Page 27)

“Honesty, decency and integrity are greater accomplishments than success and wealth, and more difficult to achieve.” (Page 26)

Stuart Barnes says that in all other aspects of people’s lives they may be decent and upright, but dangle large sums of money before them and their ethical sense can soon evaporate. No matter how much trust you may have in a colleague, do not put temptation in her or his way. Take all the precautions you can think of. (Page 40)

Karen Lindsay writes that identity theft (thieves using your identity to gain access to your accounts) is on the increase and you should be ultra-careful, e.g. check your bank statements carefully, retain copies of paid cheques, receipts, your passport, identity documents, etc., use different PINs for different account, etc. Be alert for this kind of attack on you. (Page 42)

John Shuttleworth believes that moving from defined benefit to defined contribution funds makes sense as it reduces the risk to the shareholders. He says that when times are bad and shares fall in value, the company must contribute to a DBF. When times are good, shareholder value is diluted by gratuitous benefit improvements to the fund. DCFs reduce the risks to companies. (I don’t think anyone disputes this. The problem is a socialistic one: will employees be able to absorb this risk by increasing their savings?) (Page 45)

Clare Gascoigne wonders whether the excess return achieved by equities in the UK over bonds in the past 80 years of 4,2% is sustainable in the future. Inflation is down to 2% and the number of people aged between 40 and 75 is set to double in the next 20 years. So what do we do? Put everything into bonds as some in the UK are doing? One thing is certain and that is no one can tell the future so the best bet is to hedge by spreading your investments. (Page 68)

Moira Hindson relates a story where a vendor’s accountant gave advice to the buyer of a business without warning the buyer of the risks being assumed. The accountant charged the buyer a fee for the assistance given and was successfully sued by the buyer when things went wrong. The main lesson to be learned from this case is: “Do not be so keen to assist your client (in this case the vendor) that you lose sight of your professional duty of care to others with whom you do not have a formal professional relationship.” (Would this not also apply to a CGT or estate duty valuation?) (Page 74)

Bob Tricker says that our profession has become a business. In his day and age it would be better to lose a client than your integrity. The audit process demands absolute objectivity of thought and independence from the client. Today auditing is big business where fee generation and growth are all that counts. He suggests that until auditing gets back to its roots, it may be better for government to regulate auditing to protect the creditors and shareholders. (Sad if it comes to this!) (Page 79)

Chris Swinson says that the lesson to be learned from Arthur Andersen’s demise is that if your reputation becomes tainted, your credibility as a validator will be questioned and your clients will abandon you. He says that professional names have disappeared before, either by merger or by death, but none quite as Andersen has subsided. He ends his article with: “There but for the grace of God . . .” (How true.) (Page 80)

In the UK an auditor can claim as a defence that they relied on fraudulent misrepresentations by a director. (Page 89)

The wrong of deceit at common law consists in making a statement knowing it to be false or recklessly not caring whether it is true or false. (Page 89)

The IASB has proposed revisions to 12 standards. (I have listed the 95 proposals separately on my website.) (Page 96)

Anne McGeachin explains why it was necessary to patch AC116 to rectify a silly situation where the wording of AC116 resulted in reporting a gain on the occurrence of an actuarial loss. She suggests that the whole deferral story may be looked at again. (Page 100)

Ron Paterson discusses the on going saga of goodwill accounting. The latest is that goodwill will probably be capitalised and tested for impairment each year. He says that this will work until some other accounting scandal comes along. And the wheel will continue to turn, and turn, and … (Page 101).

How do you account for the sale of future revenue? Some in RSA state that the full revenue is taken up-front. For years I have argued that you borrow money on the strength of the future revenue. I am pleased to see that PwC agrees with this interpretation. (Page 103)

The issue of global accounting was discussed at the European Accounting Association’s 25th annual congress. Graham Ward favours principles over rules. Karel van Hulle says that political agenda will be more difficult to overcome than the technical one. Cultural differences would also be a hurdle to overcome. (Page 106)

David Chitty deals with accounting for the “reserves” in a charity. The Charity Commission has become aware that some charities often hold funds for years without spending them and others have pie in the sky plans but no reserves. (I really think that if funds have been designated for a specific purpose they should be held in a fund (between equity and liabilities) and not as a reserve. Then charities will not be loath to spend the funds as they will not be treated as expenses when incurred – the debit will go directly to the fund account.) (Page 110)

The new preface to IFRSs states that IFRSs are only intended to apply to general purpose financial statements of profit-orientated

- -- 14 - 14

Mafia Buzz 2002

enterprises whatever their form and whether in the private or public sector. Good news is that they have decided to retain bold/italic text for standards and plain text for related guidance. Some other changes made are (page 116): IASC standards and SICs are deemed IASB standards Removal of the reference that these standards only apply to

material items The old statement will be in force while changes to it are

being consideredMajor changes are being proposed to the statement on business combinations. (Page 116)

Sanjay Bhandari discusses the preliminary report on the John Rusnak (JR) fraud that cost the Allied Irish Bank ₤500. JR was involved in foreign exchange trading and hid losses he made. He incurred these losses and got away with it because:1. His supervisors did not understand what he was doing so he

was allowed to act on his own.2. The architecture of the trading was flawed.3. There were no double checks on his work.4. Internal audit was deficient.5. He was allowed to exceed trading limits.6. The risk reporting systems were inadequate.7. Management failed to act on signs that were there.Risk managers and auditors have got to learn to be less complacent. What is needed is a healthy degree of scepticism. (Page 128)

David Clinker gives some homely advice to anyone thinking about opening his or her own practice. If you are contemplating starting a practice, you need to read this article. (Page 132)

Canada proposes to ban disclosure of cash flow per share, other than dividend per share. (Good!) (Page 115)

Discussions on share-based payments are in progress. Any new statement will have to take into account that there are usually vesting periods before options are exercisable, service performance is sometimes attached to vesting and options are usually not transferable. (Page 115)

Accounting SAZanne Koppeschaar concludes her article on differential reporting by saying that the debate has just begun. Zanne, this debate has been going on for years. The big auditing firms, who are in control of decisions in our profession, clearly do not want differential accounting in RSA so it will not happen, at least in my lifetime. I will be delighted to be wrong on this issue. (Page 2)

The Ilbury-Sunter HIV/Aids matrix (ISM) looks like this: Draw a vertical line with “Control” at the head and “No control” at the foot. Then draw a horizontal line cutting the vertical line in half with “Uncertainty” on the left and “Certainty” on the right.1. In the “Certainty/No control” section one defines the rules of

the game, i.e. HIV causes AIDS Without treatment you die It is spread by heterosexual sex Only actions count2. In the “Uncertainty/No control” section one looks at the key

uncertainties (U) and possible scenarios (S): U: We don’t know what the level of infection really is U: We are not sure if it is class bound S: Deny it exists S: Total onslaught3. In the “Control/Uncertainty” section one looks at the options:

Muddle through Prevent and treat4. In the “Control/Certainty” section one takes decisions: Go for it Neglect itClem Sunter suggests that the worst decision we can take is to neglect the problem. (Page 5)

Franso van Zyl sets out the role of the regulator (the Financial Services Board (FSB)) in creating a framework in which investments in RSA can take place. He says that the investor has the right to be informed, the right to choose and the right to redress a wrong. It is essential to the economic well-being of a country to maintain the trust and confidence of investors in the financial services industry and this is what the FSB is about. (You and your colleagues at the FSB are doing a great job, Franso.)

Pieter von Wielligh and Craig West state that the obligation to pay out the defined benefits should be discounted at yields of high quality corporate bonds (in RSA we use government bonds as we do not have a deep market for corporate bonds). One should not use investment returns to discount obligations as, if the investment returns are insufficient, the employer has to fund the shortfall. I have a major problem with this argument. The employer undertakes to place money into a fund to meet future obligations. If the money in the fund can only earn 6% p.a. the law says that we should assess the obligation by discounting the cash flows at 6% p.a. to ensure that there is enough money in the fund to meet the liabilities. The fund is separate from the company. By discounting the obligation at the government bond rate (say 11% p.a.) the financial statements are going to reflect that there is a surplus in the fund, which is not true! Can you just imagine the problems with a company publishing a massive pension fund surplus in its financials when, in fact, it could have a shortfall in the fund? (Page 11)

Peter Godhawk discusses the minefield of closed periods during which directors and employees of a listed company are precluded from trading in its securities. He looks at the reason for having closed periods, who is considered to be an insider and the proposed length of a closed period. A pity that he does not cover the penalties for non-compliance – another article Peter? (Page 19)

Emma Kingdon suggests that the boards of companies should be looking into the proposed requirements of the Electronic Communications and Transactions Bill. This bill contains certain protections in favour of consumers. For example, sites offering products and services will have to provide full details about these items and allow consumers to cancel the contract within a cooling off period. (We must watch these developments carefully.) (Page 21)

My article contains examples of poor accounting policies in the financials of a certain listed company (do not ask me which company this is!) (Page 27)

Nigel Payne states in his article on risk management and internal control that he is passionate about the subject. May I add that he is also extremely knowledgeable about it! He states that there are four ways to address risk:1. Avoid it, i.e. do not take it on.2. Transfer it to someone else contractually or by insurance.3. Accept it as being unavoidable or too costly to outsource.4. Manage it, e.g. by employing sound internal controls.He states that the board must identify the key risk areas and review the effectiveness of its internal controls. He says that at least the following risks should be addressed: Physical and operational, human resource, technology, business continuity and disaster recovery, credit and market and compliance. (Page 31)

- -- 15 - 15

Mafia Buzz 2002

SAICA has launched a new career service whereby potential job seekers and employers can meet. (Page 37)

Business DayA former employee of Global Crossing accused the company of shredding documents after US regulators began investigating the company. (24th)

Financial MailUS cable operator Adelphia, whose accounting is under Federal investigation, revised its sales and subscriber numbers and fired its auditor, D&T (nice to blame the auditors when management were draining the money for their own purposes!). (14th page 8)

The UK Post Office spent ₤500 000 to change its name to Consignia last year and is now paying twice that amount this year to change it back to Royal Mail Group. (21st page 8)

Fortune“Never before has a board of directors lent so much cash to the board’s own chairman, drawing funds from the coffers of the company they are legally obliged to protect.” (Commenting on the loan given by WorldCom to its chairman Bernard Ebbers. (24 th

page 33)

As founders and the main shareholders of Adelphia Communications, they borrowed $2,3 billion from banks, with Adelphia guaranteeing the loans. They invested most of that money in Adelphia shares, which have plunged 99% in the past three years. (24th page 33)

If you owe a bank $1 million and can’t pay, you are in trouble. If you owe a bank $1 billion and can’t pay, the bank’s in trouble. When Donald Trupp received an $800 000 insurance bill for his boat that was mortgaged by the bank, he sent the bill to the bank with a note that if the boat sank, the bank would have no collateral. The bank paid the bill. (24th page 33)

Ideas for improving accounting to recreate trust in financial statements:1. Stop the funny numbers like pro forma earnings, adjusted

earnings, cash flow earnings and EBITDA.2. Start accounting for stock options.3. Stop the abuse of reconstruction costs.4. Stop boosting income from over funded pension fund

surpluses.5. Comply with the spirit of GAAP, not the letter. (24th page 24)There are two measures to take when measuring blood pressure:1. The lower number is the base line pressure present at all

times.2. The top number is the surge of pressure after each pump of

the heart.The optimal is 120/80. Anything above 130/85 needs attention as hypertension is a major risks of heart failure, stroke, dementia (too late for me) and kidney failure. (24th page 96)

ManeoThe PAAB supports the initiative of the Minister of Finance to work towards practical and lasting solutions for the governance of the profession.

The auditing standards committee has been hard at work:1. It has submitted for approval: A revised preface to the standards A SAAS on the reporting accountant’s report on the report of

historical financial information to be include in a prospectus2. Issued the following pronouncements:

ED SAAS 502 enquiries regarding litigation and claims Circular 1/22002 guidance for auditors on productive asset

allowance of the motor industry development programme Work is presently taking place by IAPC on:1. Quality control.2. Auditing fair value measures and disclosures.3. Assurance engagements.4. Understanding the entity and its environment and assessing

risks of material misstatement.Karen Lauf emphasises that the black and grey letters in the statements have equal authority.

A practitioner was fined R5 000 for taking a client’s tax refund in payment for a disputed fee.

Another practitioner was fined R20 000 for, among other dirty deeds, not performing a valuation of a CC in accordance with the valuation guide. He did not set out in his valuation report the approach adopted, the model used, the critical valuation determinants identified and the assumptions made in arriving at the determinants. (SAICA has withdrawn the valuation guide so does this mean that in future practitioners will not be fined if they do not comply?)

Sunday TimesXerox Corporation, under pressure from SEC, restated its revenue by $6 billion. They had previously classified sales of equipment as service revenue. (Service revenue is more stable revenue in the eyes of the analyst!) (30th)

TechtalkIFAC is pressing on with various initiatives to restore public confidence in the accounting profession.

If you perform audits of attorneys’ trust accounts, check the highlights of a meeting of the Joint Attorneys and Accountants Committee in this issue of Techtalk.

The APB has approved AC427 to AC431 and AC433 for issue.

IFAC has issued new guidance on e-commerce risks entitled Electronic commerce – effect on the audit of financial statements, which can be downloaded from www.ifac.org/store.

Usury rates are now: 23% < R10 000 and 20% =/> R10 000.

TimeIn convicting Arthur Andersen of obstruction, the court placed the blame for the deed on a single person, Andersen’s Chicago-based lawyer Nancy Temple, who played the corrupt persuader and led AA astray. (24th, page 55)

July 2002 (40 Minutes)

AccountancySEC chairman Harvey Pitt has told the US accounting profession that the era of self-regulation is over. A new Public Accountability Board will perform quality control reviews at least once a year on larger firms and every three years for other firms. Disciplinary powers will be given to the PAB. (Page 8)

The ICAEW has voted to adopt new independence rules. There will be restrictions on non-audit services provided to audit clients, a two year cooling off period before a partner can join a client, tighter rules on financial interests in audit clients and rotation of audit partners every seven years. (Page 8)

The European Council of Ministers has agreed to the 2005 adoption of IASs for all EU companies. (Page 10)

- -- 16 - 16

Mafia Buzz 2002

Karel van Hulle is confident that SEC will drop its requirement for reconciling IAS and US GAAP results using Enron as his motivation. (Fat chance!) (Page 10)

PwC’s global head has come out in support of global principles based GAAP. His vision is a three-tier system: standards for measuring and reporting industry-specific information, guidelines for company specific information and corporate governance and performance measures. (Page 11)

Insurance companies are putting up a front against fair valuing insurance obligations as these obligations are not sold between insurance companies. (Page 11)

Deputy chairman of the IASB says that the Enron scandal has given the IASB a golden opportunity to toughen its standards and converge with US GAAP. (Page 11)

An auditing firm in the UK has decided to restate its revenue from ₤77,3 million to ₤44,4 million. (Now is the opportunity to come clean, even for auditing firms!) (Page 14)

A former managing director has been given a nine-month suspended prison sentence for lying to the company auditors. (Page 18)

The number of companies offering final salary pension schemes to new members is falling at a startling rate in the UK. (Page 18)

In a poll conducted on Radio 4 Today (6 722 polled) on the most respected professions, doctors, nurses, teachers and fire-fighters came in the top four. Accountants came in at number 82, just after insurance brokers and before company directors. (Page 21)

PwC spent $110 million for the name of its consulting firm: “Monday”. (Page 21)

The jury at the Arthur Andersen trial agreed that the firm was guilty in substance but could not settle on the precise details of why it was guilty. Eventually the jury reached agreement on a single e-mail that neither prosecution nor defence had regarded as significant. The jury, therefore, relied on substance over form whereas Arthur Andersen accepted Enron’s accounts based on formal requirements of US GAAP over substance. (Page 31)

At the Infosecurity Europe 2002 show, a staggering two out of three people told interviewers what their computer password was! And the most popular password used was “password”. (Page 35)

Andrew Bonfield, FD of British Gas says that you should remember that you are there for the benefit of shareholders and your aim is to drive long-term shareholder growth. (Funny, but I thought that management was there for the benefit of management!) (Page 39)

The bursting of the dot.com bubble ensured that everyone now knows that it takes slightly more than youth and energy to make a company profitable. (Page 41)

John Shuttleworth writes that the fundamentals of equity investment are immutable, i.e. an equity share is worth its future dividend stream including any share buy-backs. For an economy as a whole, this growth should be in line with real growth and inflation (2,5% plus 2,5% = 5% in the UK). After comparing bond investments with equity investments he comments that history cannot tell us how to make money but it can tell us how not to lose money. He says that at the micro level, markets seem to be efficient but it is not very efficient at the macro level. (Interesting thought!) (Page 44)

Jane Simms states that 70% of a typical equity share comprises intangible assets and the way that companies treat their people plays a large and growing part of their success. KPMG has calculated that 83% of mergers and acquisitions either reduce or do not increase shareholder value because they fail to exploit the combined human potential of the merged enterprise. (Page 46)

Stuart Burns says that fraudulent activity is growth at an alarming rate and that companies need to protect themselves. He says that anti-fraud policy should be considered part of corporate governance. The plan should include the identification of the assets at risk and how they may be threatened. One person should be responsible for this policy. Employees must know that the company will always prosecute – this is the most effective anti-fraud scheme of all. (Page 57)

Andrew Oswald says that 80% of all expenditure in life (on cars, swimming pools, etc.) is an attempt to buy status. Most people do not think deeply why they really make purchases. (This is especially so if the person making the purchase did not earn the money!) (Page 79)

Ian Hay Davison, past managing partner in the UK of Arthur Andersen writes some personal historical notes on what was once the largest professional firm in the world. He concludes by quoting the founder’s maxim: “Think straight, talk straight” and suggests that this may have been forgotten in the modern firm. (I am sure that there will be many more histories written about this once great firm. If you were associated with AA, get this article and read it.) (Page 92)

Kristin Hazzis summaries the IASB’s new Preface to International Financial Reporting Standards. SAICA will, I am sure, follow this with our own preface. In the meantime, some new terms to learn are: IFRS = International financial reporting standards (was IAS) IFRIC = International Financial Reporting Interpretations

Committee (was SIC)(What is worrying me is that they can’t seem to get simple names to describe themselves. We are in for some complex statements, I am sure!) (Page 95)

The IASB has published a ED of proposed amendments to financial instruments. Some of these proposals are:1. On initial recognition an entity can designate any financial

asset or financial liability as one that is measured at fair value through the income statement.

2. Improved guidance is given on the impairment of loans and receivables.

3. Some changes are made to the principles on hedge accounting that will bring them more into line with US GAAP.

4. Tighter derecognition rules will apply. (Those entering into securitisation schemes should check them out.)

5. Modifications are made to measuring the split between the equity and liability portions of a compound instrument.

You had better download this draft from www.iasb.org.uk and study it. (Page 96)

At the IASB technical session on 22-24 May further discussions took place on business combinations, first time application of IFRSs, insurance contracts, reporting performance and share-based payments, all controversial complex topics. (Page 109)

The incoming president to the ICAEW comments that one of the consequences of the Enron affair is that accountants have lost their Monty Python dull, boring image and are now considered, according to the Wall Street Journal, hip. He points out that in the UK there is no systemic failure in financial reporting, auditing or corporate governance. (Page 124)

The poor UK profession is being inundated with new statements to get them up to speed with IASB standards. Published in this journal are exposure drafts on financial instruments: hedge accounting, the effects of foreign exchange rates, financial reporting in hyperinflationary economies, related party

- -- 17 - 17

Mafia Buzz 2002

disclosures, earnings per share and events after the balance sheet date. In addition, two UITF abstracts are published:1. The recognition and measurement of pre-contract costs:

recognition is only permitted when it is virtually certain that the contract will be obtained, costs incurred prior to this date may not be capitalised and only directly attributable costs are capitalised.

2. Recognition of death in service and incapacity benefits should be recognised as an expense measured at the expected cost of providing the benefits for the period.

Accountancy SAJohn Clulow summarises the media attack on auditors and makes some of his own observations, e.g. he is for audit rotation. (Page 3)

Elza Oodendaal says that you can reduce the risk of losing your practice by choosing your clients well. (Page 6)

Wilna Steyn and Willie Hamman present a simplistic view of the value added statement (first year accounting stuff). (Page 16)

Nigel Payne continues with his brilliant discussion of risk and internal control. This month he deals with the role of the internal auditor. He says that the directors should ensure that their internal auditors provide them with the assurance they need. It is up to the board of directors to approve the internal audit charter defining the purpose, authority and responsibility of the internal audit function. This function should embrace all business risks and not just focus on financial controls. (Page 21)

My article deals with negative goodwill. (Page 27)

Two letters to the editor come down hard on the control that the big five (now four) have on the profession. The complaints are:1. They are using resources of the small audit firms to try to put

out the fires that they lit themselves.2. They have moved from being a profession to a business

based on greed and generation fee growth.3. Because they dominate the various societies, smaller firms

are disenfranchised.4. At the end of the day, the clients will vote with their feet.5. Practice review should be focusing on the risks when

planning their work (the big firms and not the small firms).(Page 34)

Business DayUS drug company Merck booked $12,4 billion of revenue it never collected. These amounts were collected by pharmacies from patients. The deceit did not affect profits as a like sum was reflected as cost of sales. (9th)

Economist Elie Cohen believes that because of the recent accounting problems, self-regulation of the profession will end. (I sincerely hope this conclusion is wrong.) (10th)

Sir David Tweedie is of the opinion that deceit and greed is the only way to explain the recent accounting scandals. He believes that the next three years will prove to be critical for the IASB to produce globally accepted accounting standards. A working committee has been set up to get convergence between IASB standards and US standards. It all depends on whether SEC will accept IFRSs.

SA Airways has provided for R130 million for its 21 billion frequent flyer miles accumulated under its Voyager programme. (Using my calculator, this works out at 0,62 cents per mile!) (12th)

Graham Terry’s article headed “corporate health means reform across the board” is a masterpiece of logic in this day and age of

flying accusations. The points he makes are that it is not only the auditors that should take the rap for Enron:1. Banks must have known of the off-balance sheet tricks being

used by Enron. (It is the banks themselves that usually sell these schemes to companies!)

2. Management’s state of mind can undo all the wonderful procedures the company puts in place, e.g. audit committees.

3. Enron was allowed to operate outside the regulations normally laid down for such companies.

4. Had the users of the financial statements looked at the facts and not listened to the spin, they would have seen through the smoke and mirrors.

Graham’s parting shot is that the accounting profession has accepted the challenge to get its house in order. He asks whether the regulators, banks, analysts, lawyers, mangers and directors are going to make the world a safer place for investors. (12th)

Irene Charnley, MTM director, says that the auditing profession should return to old-fashioned basic concepts such as ethics, integrity, honesty, truth, trust and trustworthiness. She say that managers who lie to their directors and auditors should go to jail and so should the auditors who connive with management to mislead investors. (Well said madam.) (18th)

Worldcom lent its CEO $400 million for personal investments to avoid him having to sell shares in the company, which would have reduced the market value of the shares. (Why did they not rather use the money to buy back his shares?) (19th)

Research conducted by KPMG has shown that not one of the 22 bank failures in RSA can be attributed to the auditors. The failures were due to bad corporate governance, management incompetence and regulatory failures. Tom Grieve, KPMG’s chairman says that rotating auditors is not the answer to corporate failures. He is also of the opinion that the selling of non-audit services in no way contributed to company failures. (22nd)

George Bush signed new legislation creating a board that will set standards for accountants and review their audits. It bars auditing firms from providing nine types of consulting services. It makes securities fraud a crime carrying a maximum sentence of 25 years and increases penalties for other financial crimes. It paves the way for investors to recover their money in the case of securities fraud. And it strengthens SEC’s powers by providing more money for investigations. (31st)

CitizenR22,2 billion is owed to municipalities around the country. Death threats, arson, drive-by shootings and other attacks on councillors are making the collection of fees for municipal services difficult. The Minister said: “Debts can only be written off when there is provision for bad debts.” (Help!) (2nd)

Every thoughtful investor now has reason to doubt figures published by companies. There is general agreement that the US is no longer the place to invest. (28th)

Financial MailGeorge Bush warned that cheating corporate executives will go to jail and those who get rich through bad accounting practices will be forced to pay back their profits. (5th, page 8)

Investing in shares is an act of trust. They have to believe that management is honest and the financial statements fairly present. However, managers seem to treat companies as cash cows, milking their expense accounts and building empires to justify higher salaries. Giving management options is a one way bet: management will peruse high risk policies as they have everything to gain and nothing to lose. (5th, page 24)

- -- 18 - 18

Mafia Buzz 2002

Only 17% of active fund managers in the US beat the S&P 500 index in the past five years. And tracking funds do not make sense either, e.g. at its peak Vodafone accounted for 10% of the UK index and trackers, knowing that the share price was hopelessly overvalued, were forced to keep 10% of their funds in this share. (5th, page 60)

A survey carried out by Stanford University found that when shoppers were confronted with six flavours of jam, 30% of them bought some. When offered 24 choices, only 3% bought. Too much choice leads to confusion. Therefore, keep your investment options limited to a few counters. (5th, page 61)

CRM, or customer relationship management, is topical at present (another fad?). Paul Fick says that there are four types of CRM:1. Interactions between the company and its customers.2. The IT infrastructure necessary to store and process the

information.3. The processing of this information.4. The analysis of the information on which to base decisions.(12th, Page 43)The FM interviewed Suresh Kana of PwC, who had the following to say:1. There must be strong disciplinary action for unethical

conduct and non-compliance with standards.2. The bureaucracy is hindering efforts to strengthen corporate

reporting in RSA (hear, hear).3. Preparers will always question why they must comply to

some practice if it is not legally enforceable.4. Rotation of auditors will come with a high risk. There is

higher audit risk in the first year of an audit. There is a learning curve that must be experienced.

(12th, page 115)The editorial states that accountants should take a stand on accounting for options now. (26th, page 14)

The UN estimates that between 2000 and 2005 the life expectancy of South Africans will fall by 19 years (Kenya by 17, Zimbabwe by 26 and Botswana by 34). (26th, page 19)

Stafford Thomas writes that local investors are not happy with the new indices being used by the JSE (me too!). Some interesting classifications are Metcash, listed as cyclical services and Shoprite listed as non-cyclical. Richmont, the luxury goods group finds itself under household goods and textiles! (26th, page 32)

Andrew McNulty states that SA accounting standards are silent on disclosure of employee share options. The guy should read AC116! (26th, page 46)

FortuneRob Norton is of the opinion that Eliot Spitzer went after Merrill Lynch, not to protect the small investor, but to boost his own political career. (8th, page 18)

Geoffrey Colvin says that deceptive transactions can accomplish only three things:1. Move earnings – usually from the future to the present.2. Avoid tax (in RSA we would call it evade).3. Hide debt.He says that there is a theory that the only deterrent is orange jump-suits. (8th, page 20)

Sunday TimesMark Welman says that 10% of staff would never commit a crime, 10% always would and 80% are subject to temptation. (28th)

Merrill Lynch is not alone in issuing misleading reports. Elliot Spitzer, the New York attorney-general, said that there were other examples of e-mails ridiculing stocks that were hyped in public reports. (28th)

Howard Rodd of Alexander Forbes says that a common benchmark for retirement fund equities is necessary as resources, which have too high a risk for retirement funds, are too heavily weighted in the Alsi. (28th)

TechtalkThe APC has issued proposed improvements to IFRSs (I have posted these improvements (summarised) on my website. If you are keen, you can download the 300 odd pages from SAICA’s website.)

Work on business combinations is continuing. The latest idea is to measure and recognise contingent liabilities and contingent assets on a takeover. (I hope SAICA points out that the same argument should apply to STC on a takeover.)

The proposals on reporting performance seem to be going around and around in circles!

TimeUnlike Enron, WorldCom fooled investors with an accounting trick that a first year accounting student could have devised: treating operating expenses and assets – they are both debits. (8 th, page 24)

Suggestions on how to avoid the next stock bomb:1. Don’t buy serial acquirers.2. Read the fine print in the company’s report.3. Don’t feed money to pigs (overpaid managers).4. Watch the cash flows.5. Don’t bet on the debtors in a company’s balance sheet (we

just have to look at Unifer and Saambou for this rule).6. Spread your bets.(8th page 25)The real reason for Enron and WorldCom is that incentives for fudging are much greater when half of all households in the US are ready to bid up company shares and lavish their CEOs with silly money if they can show 15% p.a. plus growth in earnings. It really has nothing to do with the accounting standards used in the US. (8th page 29)

With George Bush’s support, both houses of congress beat back an amendment to US GAAP that would have required companies to deduct the cost of share options given to executives and other employees from income. Alan Greenspan and Warren Buffett were for accounting for options as an expense. It is clear that the lobbyists won again. (We need standard setters who can be independent of Government interference!) (29th, page 26)

Other Tidbits1. Coca-Cola decided to expense its staff options and the share

price took a dive (from $56 to $45)!2. The UK effectively abolished audits on 15 000 companies by

raising the limit from ₤2,8 million to ₤4,8 million.3. Because of a loophole in Japanese GAAP, Japanese banks

have been boosting their revenue by entering into interest rate swaps.

4. The Reserve Bank has proposed in the Banks Amendment Bill 2002 that auditors be rotated every five years.

5. UCT is of the opinion that STC on ordinary dividends should go to the changes in equity statement

- -- 19 - 19

Mafia Buzz 2002

Formulas Doing the RoundsEBITDA = Earnings by insiders to deceive analystsEBIT= Earnings before irregularities and tamperingCEO = Chief embezzlement officerCFO = Corporate fraud officerEPS = Eventual prison sentenceROI = Restatement of incomeIBM = I bought Monday (PwC’s consulting arm)

Core EarningsStandard and Poor has published a document on measuring corporate earnings. They consider three types of earnings presently being used:1. Reported earnings, which is calculated in terms of GAAP.2. Operating earnings, which usually reverses out some

corporate or one-time expenses.3. Pro-forma earnings, which has become known in the field as

earnings before the bad stuff.S&P have proposed using a measure called “Core Earnings”. The calculation starts with GAAP earnings before extraordinary items, cumulative effect of accounting changes and discontinued operations. The following are included in core earnings:1. Employee stock options granted as expenses.2. Restructuring charges from ongoing operations.3. Write-downs of depreciable or amortizable operating assets.4. Pension costs.5. Purchased research and development expenses.Excluded from core earnings are:1. Goodwill impairment charges.2. Gains and losses on the sale of assets.3. Pension gains.4. Unrealised gains/losses from hedging activities.5. Merger/acquistion related expenses.6. Litigation or insurance settlements and proceeds.It is interesting to compare these rules with those in headline earnings, e.g. impairments of assets are excluded from headline earnings. I agree with the core earnings concept.

Nightmare Financial AdviceI was clearing my office and found the following comment in Finance Week, 26 November 1999, page 44: “PSG Online dealer Willie Greenen says that now is the time investors should be going for blue chips such as Dimension Data, Datatec, Comparex and Old Mutual.” Had “investors” taken this advice they would have lost 90% of their money on the three IT companies recommended.

August 2002 (35 Minutes)

AccountancyA white paper published in the UK proposes that British company directors that deliberately mislead auditors could end up in jail for two years. (Page 8)

The fallout of the current accounting scandals for smaller auditing firms could be an increase in premiums for professional indemnity insurance. (Page 14)

The fallout in the US of the current accounting scandals is that corporate fraud could result in a ten-year prison sentence, the profession is to be regulated by an oversight board consisting of non-accountants and all forms of consulting to audit clients could be banned. In addition, proposals are on the table to take the

setting of auditing standards out of the hands of auditors! (Page 16)

“We need senators and congressmen to realise that the problem is not with the country’s auditing standards, but with individual auditors who ignore their professional responsibilities.” “Most of the blame for scandals in corporate America are the result of an incentive-driven culture, greed-based, seeking continuing growth at any price.” (Page 16)

Beth Holmes asks how accounting principles, as opposed to accounting rules, could have stopped WorldCom from classifying so much revenue expenses to capital items. This is not a rules v principles problem but a corporate governance one. She states that the auditors have taken the rap for what has happened but wants to know why the internal auditors, management themselves, the audit committee and even the analysts did not detect what was going on. She also makes the point that the UK should not be criticising what is happening in the US. She lists five major accounting scandals that took place recently in the UK. (And let us not forget our own Masterbond, Leisurenet, Regal, Supreme, Macmed, etc.) (Page 18)

The EU and the ICAEW are proposing that audit partners not be allowed to join their clients before a two year cooling-off period. (Amazing the knee jerk reactions that are going on!) (Page 21)

The Association of British Insurers is contacting FTSE 350 companies to suggest that they make the audit committee’s duty to shareholders official and that audit committees certify in the financials that they are happy with the audit. (More knee jerking!) (Page 22)

The top 10 global auditing firms are PwC, Deloittes, KPMG, E&Y, BDO, Grant Thornton, RSM, Horwath, Moores Rowland and Baker Tilly. PKF (Fisher Hoffman in RSA) comes in at number 19. (Page 25)

The UK financial services industry is under attack by the government for poor service to the investing public. Poor advice is being offered, with the accent on tax savings rather than on investment returns. The average unit trust in the UK under-performs the market by 2,5% p.a. despite high asset management fees. (Page 26)

The IASB is pushing ahead with its exposure draft on accounting for stock options despite much opposition. (Page 26)

PwC says that managers, analysts and investors are all using different performance measures to evaluate a company’s value. Investors are calling for more information on profit margins, quality of management, asset growth, market share, asset retention, competitive landscape, customer acquisition costs and brand visibility. (Page 26)

A letter to the editor comments that the key performance measure in our profession now seems to be fee income per partner. This can be measured so it can be managed. However, how do you measure partner independence, objectivity and integrity? When partners are prepared to walk away from an assignment rather than compromise professional ethics, we will have regained our professionalism. (Page 31)

Chris Quick debates a topic that has been thrashed to death, i.e. why are our most important assets, those that we can’t touch such as relationships, knowledge, leadership, culture and values, reputation and trust, skills and competencies and processes and systems, not measured and recognised? The simple answer is that it will make the financial statements less reliable. (In my opinion, analysts should be told how much is spent each year on these intangibles so that they can separate such expenditures from operating profits and measure the effectiveness of them in the future.) (Page 47)

- -- 20 - 20

Mafia Buzz 2002

Melanie Johnson, MP in the UK says that the government should approach the Enron fall-out in an informed and co-ordinated way rather than as an ill-considered knee-jerk reaction. (How refreshing!) Possibilities being discussed are rotation of audit firms and a ban on non-audit services to the audit client. (Page 65)

Chris Swinson says that the world’s regulators are on the wrong track by trying to change rules when the problem is the ethics of the persons reporting the company’s results. (A person who lacks ethical standards is not constrained by rules or principles, no matter how good they are.) His parting shot is: “What does it profit a man if he gains the world but loses his soul.” (The real problem is that mankind has forgotten its soul!) (Page 86)

Allister Wilson questions the wisdom of issuing a whole wad of new statements in the UK when the UK is to comply with IASB standards in 2005. (I thought that the UK was just playing catch-up.) (When you think about it, SA is way ahead of the game.) (Page 77)

Ron Paterson comments on the new UK standard, which effectively adopts IAS 32 and IAS 39. He is so depressed about the complexity of these standards that he is preparing to throw in the towel! (Again, SA is ahead of the game, thanks to the APC and APB, which decided many years ago to “adopt” IAS.) (Page 82)

Proposed changes to financial instruments are being considered by the IASB. They are:1. Guidance on how to classify derivatives based on an entity’s

own shares.2. The exclusion from the scope of loan commitments that will

result in an originated loan.3. The inclusion in the scope of derivative type contracts on

non-financial items held for trading and financial guarantees.4. Major changes to the rules on derecognition.5. Changes on how to impair groups of loans, receivables and

held to maturity investments.6. Changing how cash flow hedge gains and losses are to be

recognised – leave in equity until underlying goes to income.Before writing new accounting systems, go to the ED to check it out (www.iasb.org.uk). (Page 85)

The IASB has taken some tentative decisions on how to account for share based payments. It is still early days to get involved. (Page 97)

The UK has agreed to convert to IAS standards as from 2005 for all listed companies. (Page 89)

Accountancy SAMoney laundering is the process whereby criminals attempt to conceal and disguise the true origin and ownership of their illicit gains from unlawful activities and make them appear legal by means of a single or series of transactions thereby avoiding prosecution, conviction and confiscation of the illicit gains. The Prevention of Organised Crime Act places an obligation on all employees to report transactions that could have resulted from unlawful activities. To comply with this act, companies should obtain for each client: Positive identification Source of wealth/income Identity of all beneficial owners of the business Expected volume and type of transactions(Page 5)

It is suggested that the IASB develop a standard on the accounting treatment of carbon emission credits. (Page 9)

Magnus Orrell summarises the proposed changes to IAS32 and IAS39. The proposals deal with:1. Accounting for derivatives issued on the entity’s own equity.2. Compound instruments.3. Permitting entities to elect whether or not to fair value

financial assets or liabilities (there goes comparability!).4. Cash flow hedges.5. Impairment of loans.The closing date for comments was 14 October 2002. (Page 17)

My article was on foreign exchange. (Page 29)

Nigel Payne says that every company should report at least annually on the nature and extent of its social, transformation, ethical, safety, heath and environmental management polices and practices. He gives guidance on each of these areas. He advises that sustainability should not be regarded simply as an additional cost area but should enhance non-financial value drivers such as brand equity, reputation, customer loyalty, innovation and human capital. (Page 31)

AIMR AdvocateThe AIMR is of the opinion that the US should have one comprehensive statement on revenue. The statement should be conceptually based to enable companies to better measure performance. They also want the second criterion in the definition of a derivative to be improved (the existing one is too vague to be of practical use) and they are calling for a single set of accounting standards (Global GAAP).

Business DayIf proposed legislation is passed, all companies and close corporations will be required to submit returns annually to the “Registrar”. (More red tape!) (14th)

All listed companies will have to report on HIV/AIDS from next year. Disclosure is required of the prevalence in the work place (number, race, marital status), the effect on costs and productivity, the effect on customers and revenue, programmes to address the problem, etc. If no testing takes place, it must be assumed that the company has the same prevalence as RSA in total. (Does anybody know what this is? Every report I read has got a different estimate.) (16th)

PwC has launched its global code of conduct. A heavy emphasis is placed on the organisation’s values and reputation. Such a code is essential in any firm as an action by one member of staff can bring the whole firm to its knees, as happened with Enron and Arthur Andersen. The code deals with issues such as:1. Professional behaviour by employees.2. Respect for colleagues and clients.3. Obligations as a responsible corporate citizen.4. Upholding the name of the firm.5. Compliance with the code.The cornerstones of the code are:1. Teamwork.2. Excellence through innovation, learning and agility.3. Leadership which demands courage, vision and integrity.A list of questions to test whether employees are being ethical is given: Is it legal? Does it feel right? How would it look in the newspapers? Will it reflect negatively on you or the company? Would you be embarrassed if people knew you did this? Is there a better alternative? Is it against the firm’s or professional standards? What would a reasonable person think? Can you sleep at night?

- -- 21 - 21

Mafia Buzz 2002

A proven R22 million has been stolen from pension funds. Two cases involving R1,6 billion and R2,7 billion are on the go. The FSB has increased the levy to R4 per member p.a. to help them hire more staff to keep an eye on any administration problems. (20th)

PwC is offering to assist companies with drafting their own codes. This initiative must be welcomed. We must get ethics introduced as a separate subject at university. Maybe PwC should take this up. (Have you written out your own personal code of conduct?) (26th)

The pendulum is swinging back to “dividends count”. In an era of questionable income statements, balance sheets and cash flow statements, the only thing one can 100% rely on is the dividend you get from the company – it goes into your bank! (That is subject to the rule of disposition without value.) It has been calculated that dividends have provided 50% of the total returns on equities in the US between 1971 and 2000. It is predicted that dividends will make up 60% to 70% of the total returns in the US in the future. (Welcome back to the humble dividend!) (27th)

The FSB has prepared a draft bill to legalise statements of GAAP. Rob Barrow says that compliance will be restricted to companies listed on the JSE but expanded to other entities such as pension funds in future. (And private companies, close corporations, testamentary trusts?) As an interim measure, the JSE and SAICA are to introduce a monitoring process. (28th)

Two former directors of defunct brokerage firm Coronet Equities and the compliance officer were convicted on charges of theft and fraud involving R35 million. The two directors got 15 and 12 years and the compliance officer 5. The interesting aspect of this case is that it was the first one handled under the new plea bargaining process. (28th)

The director of technical activities of the IASB says that it is easier to skirt around rules than principles. (This guy and all who quote him are living in cloud cookoo land.) The IASB has been criticised for having too many alternative treatments and is trying to eliminate them at present. “The IASB does not apply such rigid thresholds (as FASB) but focuses on substance over form and allows for the exercise of judgement.” First of all this statement is incorrect – see AC101 – and secondly, if it was correct, would a rule or a principle be easier to manipulate? (I definitely need to write an article on this clearing up the misconceptions.) (1st )

Business ReportEver wondered what the difference between “buy-side” and “sell-side” analysis is but were too afraid to ask? Buy-side refers to those buying large volumes of stock such as fund managers. Sell-side refers to brokers who attempt to attract brokerage by offering their research to institutional investors. (23rd)

Finance WeekThe JSE has announced that listed company directors may not trade in shares between the financial year-end and the publication date of its annual financial statements. (2nd, page 6)

In July foreigners dumped R5,5 billion of SA equities, the Rand lost value, SA mining shares fell and Newmont, the largest mining company in the world, said that investment in SA was no longer feasible. What caused this? The leaked government document on the mining industry and empowerment? (9th, page 8)

Shaun Harris addresses the possible consequences of the retrospective legislation on pension funds. There are all sorts of hidden surprises here, e.g. a company (A) takes over another company (B). B had a surplus in its pension fund at acquisition. This surplus was to act as a cushion for future volatility in equity markets. This surplus may well be a liability the next time the

actuaries do their thing. (There is a lot more to this problem than meets the eye!) (9th, page 16)

Peter Harrison of Deloitte and Touche addresses the CGT issue of whether the apportionment basis can be applied to securities listed on the JSE held prior to 1 October 2001. His answer is “yes” provided:1. You did not choose the weighted-average method in your

first tax return.2. You know the cost of the shares and the date of purchase.He says that once you have chosen one of the three methods (prices at 1 October, apportionment or 20% of proceeds) you have to stick to the one you chose for all listed shares. (Looks like the easiest method will be to go for 1 October – less grief from SARS and less work in trying to establish what the original costs and dates of acquisition were. To try to track special dividends, unbundling, splits, consolidations, scrip dividends, etc. etc. prior to 1 October 2001 will be a nightmare.) (9th, page 30)

A member of a post-retirement defined benefit fund tells the editor that the fund converted to an insurance annuity without notifying members resulting in annual increases in pensions falling from 13,5% p.a. to 4,9% p.a. What can a retired member do about this? (16th, page 5)

Merrill Lynch’s chief economist believes that $1 will cost R9 by the end of the year. (16th, page 6)

Financial Analysts JournalNot everyone can distinguish hindsight from foresight. Most people fall into the pitfall of hindsight by exaggerating the quality of their foresight. Hindsight bias is the belief that whatever happened was bound to happen, as if uncertainty and chance were banished from the world. So if an introverted man marries a shy woman, it must be because (as we have known all along) “birds of a feather flock together”. If he marries an outgoing woman, it must be because (as we have known all along) “opposites attract”. If stock prices decline after a prolonged rise it must be (as we have known all along) that “trees don’t grow to the sky”. If stock prices continue to rise it must be because (as we have equally known all along) “the trend is your friend”. (July/August, page 11)

Financial MailEdcon securitised R2,1bn of its receivables. There are three tiers, namely, class A notes (75% of the total) rated Aaa.za and paying 13,1% (90 basis points above Jibar, class B notes (9% of the total) rated Baa2.za paying 14,5% p.a. (230 basis points above Jibar) and subordinated loans (16% of the total). (Question: Will these loans be included in Edcon’s consolidated balance sheet in terms of AC412?) (2nd)

N Newton-King of the JSE defends the new indices. (What a pain – you just get used to the new ones then they change them again! What could be easier than resources, financials, industrials and real estate? Now we have to live with resources, basic industries, financials, non-cyclical consumer goods, cyclical consumer goods, cyclical services, general industrials, information technology and non-cyclical services.) (9th, page 11)

Stockbrokers are having a tough time. David Shapiro says that the industry is overpaid and you cannot take those salaries forward. (A big shake up is on the cards.) (9th, page 16)

Trade unions have not yet appointed trustees to the R200 billion government employees pension fund despite being required by law to do so six years ago. “Pension funds in SA account for R600 billion of institutional investor assets owning 60% of JSE listed shares.” (60%?? I wonder where he got these statistics from?) (9th, page 17)

- -- 22 - 22

Mafia Buzz 2002

Up to 35% of insurance claims in SA contain an element of fraud. (This is one of the many reasons I refuse to insure.) (9th, page 70)

In 1981 an investor was advised by the Gold and Hard Asset Exchange that a 1953 SA Long proof set would be an exciting investment. He paid R665 for it and has, 21 years later, been offered R1 000 for it (a 2% p.a. return). (And now for the bad news: SARS!) (16th, page 11)

The editorial is pushing for share options to be expensed. One thing that is not fully understood is that in the US they don’t expense share options but they do get them as a tax deduction. So there is more incentive for expensing them in the US as they can increase profits by handing out share options. This is not the case in RSA. The expense in RSA will be pre-tax. (16th, page 14)

The editorial warns that if equity markets do not perform we are looking at a time bomb in a few years when pensioners find that the defined contribution fund cupboard is bare. (16th, page 14)

Andrew McNulty states that excessive executive pay in the form of stock options has undermined public faith in capitalism. His proposed solution is to measure and recognise stock options. Edcon has 8,1 million options in issue (16% of its share capital). So does Alexander Forbes. (16th, page 26)

Anglo has announced that it would be providing free antiretroviral drugs to miners. It is estimated that 23% of its 121 600 uninsured SA employees are HIV positive. Of these about 10% are expected to take up the offer of treatment. (How do we calculate the provision for recognition on their balance sheet?) (16th, page 30)

Old Mutual has published some scary statistics on what death benefits could do to pension pay-outs for the healthy members. Solutions are to cap death benefits, stem the tide of HIV, work until you drop or supplement your retirement fund. (16th, page 72)

The demise of Cenprop, which has yielded a compound growth rate of 8% p.a. over 22 years, has angered investors in the property sector of the JSE. This sector is known to be short on transparency and long on gossip. It is easy to show good returns when investment property is revalued each year through the income statement. (Are we going to see an investigation to get to the root cause of this collapse?) (23rd, pages 14 and 73)

Mr Mboweni wants to see banking supervision remain with the Reserve Bank. (23rd, page 17)

The National Education, Health and Allied Workers’ Union (Nehawu) has suspended its accountant after finding her guilty of theft and fraud involving R500 000. The auditors of the National Union of Mineworkers (NUM) have found large amounts “missing” (one for R360 000). And the auditors of SATAWU have found that the assets of its investment company have plunged from R500 million to R93 million in three years. (23rd, page 31)

Stafford Thomas quotes Professor David Hawkins of Harvard Business School, accounting consultant to Merrill Lynch. The Prof. says that four key ratios should assist the analyst in measuring performance:

1. The cash realisation ratio (CRR), which reflects net operating cash flow after tax as a percentage of net income. This ratio helps assess the quality of income.

2. Return on assets (ROA), which reflects the net profit before interest paid as a percentage of total assets less operating creditors. This ratio tells the analyst whether the company is adding economic value, if compared to WACC.

3. Asset reinvestment rate (ARR), i.e. capital expenditure incurred on replacements as a percentage of depreciation. This ratio should be over one in an inflationary environment.

4. Tax rate, i.e. tax as a percentage of profit before tax. If the company is not providing the nominal rate of tax, part of the profit could be fictitious.

(Note: My preference is to have a holistic analysis system rather than ad hoc ratios.) (23rd, page 56)

Sasha Planting writes that companies that manage their intellectual capital (intellectual property such as patents, intellectual assets such as databases and processes and human capital) will be the winners of the future. A survey in Europe revealed that listed companies, on average, were valued at eight times their book value. (We don’t come close in RSA!) The argument is that to manage it effectively, one must be able to measure it. Accountants cannot agree on how to do this. (23rd, page 56)

Since President George W Bush signed the Sarbanes-Oxley Act on July 30, CEOs of US companies have been certifying the quality of their financial information. (23rd, page 63)

Tony Koenderman asks the question: “Just how valuable are brands?” He makes the point that Trust Bank, Volkskas, United and Allied re-branded themselves into ABSA without the loss of too many customers. He also gives, as an example, Andersen Consulting’s fortuitous conversion to Accenture. (23rd, page 81)

Financial products are often sold based on their tax advantages without looking at the needs of the investor. It is suggested that “financial advisors” that sell these products should rather be called “product distributors”! (23rd, page 83)

Fortune“The true blame for the Enron, Global Crossing, Adelphia and other messes really belongs squarely on the shoulders of the individual investors who have not exercised due diligence.” (Got to be kidding!) (19th, page 16)

The business community needs to stop pursuing growth at all costs. Unabashed growth distorts the allocation of scarce resources. Business people should consider an obscure concept in economics: there is an optimal level of output for an enterprise. Beyond this level marginal costs exceed marginal revenues. (19 th, page 16)

A good reality check on profits of public companies is to get tax statistics. The problem in the US is that options are expensed for tax purposes but not for accounting purposes so this distorts the comparison. S&P are developing a measure called “core earnings” which includes share option expenses. (19th, page 18)

Geoffrey Covin looks at the rules v principles argument and compares the problem in accounting with American Football. He does not come to a conclusion on the debate other that to say that the US will find it difficult after all these years to change. (19 th, page 28)

The top 10 world’s biggest companies by revenue are Walmart, Exxon Mobil, General Motors, BP, Ford, Enron (what?), Daimlerchrysler, Royal Dutch Shell General Electric and Toyota.

Jack Welch always sought the best advice he could find and then went against most of it. This attitude served him well throughout his career at General Electric. (If Arthur Andersen had done this, they would probably have still been a force in the accounting profession!) (30th, page 26)

Sir David Tweedie wants one set of accounting standards for all companies in the world. He gives as an example DaimlerChrysler, which had net income of $733 million last year according to German accounting but a loss of $589 million under US GAAP. He is on a crusade to get options expensed. General Electric has threatened to withdraw funding to the IASB if he goes ahead with this standard! He also wants pension fund accounting to be reformed whereby real gains and losses are recorded each year

- -- 23 - 23

Mafia Buzz 2002

(not spread like they do at present in US and IASC GAAP). He is not winning any popularity contests in the US at the moment! (30th, page 53)

Japanese banks cannot afford to account truthfully for their loan portfolios. To do so would bankrupt them and their customers. The result is that dead wood cannot be taken out of the system and a fresh start cannot be made. The American system is brutal but it works. (30th, page 67)

A new idea is seeping through companies: manage the enterprise not as a collection of products and services, not as a group of territories, but as a portfolio of customers. To increase shareholder value, one must manage the customer portfolio. (30th, page 77)

TechtalkDetails are given of the proposed changes to IAS32 and IAS39. We await the final version.

IFAC has released a study on levels of assurance (prepared by academics), which can be downloaded from www.ifac.org/store.

IFAC has also released a detailed study (also by an academic) entitled competency profiles for management accounting practice and practitioners, which can be downloaded from the same website address as above.

IFAC (busy bees) has also released a document called guiding principles for international education statements – see the above website address.

The electronic communications and transactions draft bill has been issued for comment. For a full summary go to www.kpmg.co.za.

TimeWarren Buffett has been instrumental in persuading some influential companies in the US to expense stock options. (26 th, page 12)

SundriesGavin Sher of the recruitment and human resources firm Focus Group lists some of the attributes of an effective manager:1. Develops appropriate, realistic and effective short and long

term plans that integrate efforts across work teams.2. Recruits good people, building strong teams with

complementary strengths while providing for continuity.3. Identifies and implements effective processes for getting

work done while assigning responsibilities, delegating and empowering others.

4. Co-ordinates action to be taken, provides resources and monitors progress.

5. Uses own time efficiently, balances multiple demands, processes paperwork, manages meetings and assigns priorities.

6. Speaks confidently, conveys written and spoken information well, encourages others to contribute ideas, responds to questions and listens well.

7. Delivers effective presentations and shows confidence.8. Builds relationships with numerous stakeholders, takes an

interest in others and is open to other perspectives.9. Cultivates internal and external networks and relationships.10. Appreciates diversity, builds consensus and brings conflicts

into the open to resolve them.11. Has the courage to address difficult issues, standing firm

when necessary.12. Is able to influence others and mobilise support while

fostering teamwork.

13. Encourages others by creating enthusiasm.14. Challenges wisdom and champions change.15. Conveys urgency and pursues results despite obstacles.16. Sets high standards.17. Develops realistic budgets drawing on relevant information.18. Possesses up-to-the-minute professional and industry

knowledge expertise.19. Understands issues affecting the organisation and industry.20. Takes decisions that enhance profitability while fostering

quality.21. Incessantly explores ways to increase customer satisfaction.22. Develops a worldview sensitive to regional and cultural

differences.23. Acts with integrity and shows sound business ethics, thereby

building trust.24. Able to react to multiple demands while showing resilience

and flexibility in the face of constraints.25. Pursues self-development.26. Can think strategically, solve problems, utilise market

knowledge and focus on strategy.27. Constantly gathers relevant information, shows a grasp of

complexity and is able to apply knowledge and logic to problems.

28. Makes timely, sound decisions and is not afraid to make decisions while uncertainty still prevails.

29. Generates new ideas, brings new approaches to bear and looks for creative solutions.

(Sunday Times October 8 2000)Members of the AIMR (the Chartered Financial Analysts) rejected a proposal to make annual participation in a continuing education programme a condition of using the CFA designation. 29 201 members voted of which 56,3% rejected the proposal.

September 2002 (35 Minutes)

AccountancyRepeat something often enough and it becomes established fact: “There are no systematic corporate government, financial reporting and auditing problems in the UK.” However, with the passing of the Sarbanes-Oxley Act in the US, UK companies with subsidiaries in the US are going to have to comply even though they believe their mantra. (Page 7)

Pressure is being put on the UK standard setters to drop the new hedge accounting statement. The argument is: “Why implement a new statement now if we know it is going to change in 2005.” (Page 11)

The Department of Trade and Industry in the UK is looking into the dominance of the big four auditing firms in the UK, much to the disdain and derision of the four big firms. (Page 18)

Among the provisions under the Sarbanes-Oxley Act are prison terms of up to 20 years for senior directors falsifying or destroying documents as well as heavy restrictions on non-auditing work that accountants can supply to clients. Porsche recently announced that it has put on ice its plans to list in New York because of the new regulations. (Page 20)

British companies and large institutional shareholders are getting ready to fight the EU over their proposal to require quarterly reporting. Their fear is that this will lead to short term thinking in the market. (Page 21)

The DTI in the UK set up a committee to look into how regulations could be improved following the accounting scandals in the US. The proposals are:

- -- 24 - 24

Mafia Buzz 2002

1. The role of the audit committee should be strengthened.2. The rotation of audit firms should be examined further.3. The major auditing firms should be more open about their

own affairs.4. A robust set of accounting standards should be put in place.5. The review panel should be proactive in its enforcement of

accounting standards.6. The competitive implications of the high concentration of

audit firms should be addressed.7. An operating and financial review covering non-financial

areas such as strategy and risk should be required.8. A legal duty should be placed on the directors to volunteer

relevant information to the auditors.9. To give the auditors the right to ask for information from

employees and certain contractors. (Page 28)A letter from a small practitioner asks why they should be targeted when the Enron and other problems were caused by the large auditing firms. (Page 31)

At the heart of any fraud is a dishonest person. Most major cases involve senior management, whose purpose is often to disguise losses or to manipulate share prices. Auditors continue to argue that they are not there to uncover fraud, but they cannot certify that financial statements fairly present without completing a fraud check. If they cannot do it, some other expert should be required to do it. (Page 33)

Ever wondered what KPMG, BDO and PKF stands for?KPMG = Klyneveld, Peat, Marwick and GoerdelerBDO = Binder, Dijker and OttePKF = Pannell, Kerr and Forster. (Page 56)Ken Lever explains why share prices are over or under valued. He writes:1. Students are not educated in the art of assessing economic

value – there is too much emphasis on accounting standards.2. Managers are too focused on accounting metrics.3. The analysts are too focused on the short term.4. There is too much focus on one measure, i.e. EPS. He feels that education should start with an understanding of the value creation process and the economic drivers of value rather than double entry bookkeeping and technical accounting standards. (Page 65)

In his article on how to account for revenue received in advance, Ron Paterson is on his hobbyhorse again. Because GAAP only allows assets, liabilities and equity to be itemised on the balance sheet, what do you do when you received revenue in advance where the amount includes a profit element. The profit element cannot be a liability because the entity only has an obligation to deliver the goods at a cost. To avoid breaking the fundamental rule the Accounting Standards Board is proposing that a liability be valued at its “entry price” rather than at its “exit price”. RP says that the simple answer is to scrap the statement of principles and to adopt accrual accounting. (Page 76)

The IASB has published its ED on first time application of financial reporting standards. It proposes full retrospective application of all IFRSs effective at the reporting date of the entity’s first IFRS financial statements with the following limited exceptions:1. Using some alternative measurement basis as deemed cost

when the determination of cost would involve undue cost or effort, e.g. where the company did not keep fixed asset registers.

2. Using as deemed cost certain values where under the previous basis of accounting such values were deemed to be more relevant than cost.

3. Full retrospective designation of hedges would not be permitted. (Page 78)

The UK has postponed the implementation of its standard on post-retirement benefits by two years. With the fall in the value of equity markets, substantial falls in interest rates, the tax treatment of fund assets and the revisions to life expectancy tables, as many as 75% of the schemes will be in deficit, which would have had an adverse effect on company balance sheets. (You cannot possible publish the truth, can you?) There are indications that the IASB will require immediate recognition of actuarial gains and losses so its and the UK standard will probably be identical. (Page 79)

The International Auditing and Assurance Standards Board (IAASB) has issued an auditing standard called auditing fair value measurements and disclosures. It covers:1. Understanding the entity’s process for determining fair value

and the internal controls governing the determination.2. Assessing the appropriateness of fair value measurements

and disclosures.3. Using the work of an expert.4. Testing the entity’s fair value measurements and disclosures.5. Representations by management.6. Communication with those charged with governance. (Page

88)The IASB really is battling with the statement on business combinations. Some matters being discussed are:1. Deferred tax assets and liabilities would not be fairly valued

on acquisition but would be measured in terms of the statement on income taxes.

2. Guidance will be given on how to value liabilities.3. Post-employment benefit obligations would be measured

based on the acquirer’s actuarial assumptions at the date of acquisition.

4. Changes to plans would not be accounted for as a liability at the acquisition date.

5. Liabilities assumed by the acquirer, such as rectifying the environment, would not be dealt with as a liability at the date of the acquisition. (Page 88)

The IASB is discussing the concepts of control, consolidations and special purpose entities. Some principles being considered are:1. Consolidation policy should be driven by the principle of

reporting on economic entities.2. The borders of economic reporting entities should be

determined by the same control notion that underpins the definitions of the assets.

3. Control should be defined in terms of the capacity to control in order to benefit. Exercise of that capacity is not required. (This differs from our Companies Act.)

4. Control could exist where a shareholding of less than 50% is held and the remaining shares are widely dispersed among passive holders. (I have a big problem with this!)

5. Options to buy shares should be taken into account when considering control.

6. Only one entity can control another.7. A comprehensive statement is required on SPEs. (Page 89)The IASB agreed that share based payments should be measured and recognised in the financial statements of entities in respect of all share-based payment transactions, including all types of employee share-based payments. (Page 90)

Derek A Ross looks at hedging foreign exchange risks. He points out that exposure to such risks arises long before the goods are

- -- 25 - 25

Mafia Buzz 2002

received or delivered. He admits that by not using hedge accounting, the accounts will not reflect commercial behaviour. But then he tries to justify why one should not use hedge accounting. (I wonder if his arguments would be the same if he operated in the SA economic environment?) (Page 105)

Accountancy SAIf the Enron and WorldCom sagas are revealing anything, it is that corporate governance is sometimes not worth the paper it is written on. Should the people involved in implementing corporate governance not have their hearts in the right place and just be going through the motions, the process becomes a charade. (Page 3)

Sustainability is about surviving and thriving, by finding a proper balance between economic, social and environmental development. One cannot relentlessly pursue any one of these three elements of the so-called ‘triple bottom line’ at the expense of the others without the system collapsing. (Page 3)

Xerox artificially increased its pre-tax earnings by $1,5bn from 1997 to 2000. When the audit partner in charge challenged the practices, Xerox demanded his removal. Court records show that the audit firm complied. Xerox’s internal accountants boasted that there wasn’t an accounting standard they couldn’t beat. (Page 7)

Many managers view GAAP, not as a standard to be met, but as an obstacle to overcome. (Page 7)

Customer Relationship Management (CRM) is about making the customers aware of the fact that the company is aware of them as individuals and their individual needs. (Page 11)

My article this month was on tunnel vision fads. (Page 27)

Congratulations to Linda de Beer – she is now the new Technical Director at SAICA – Alta has been lost to the wicked USA!

AIMR AdvocateThe AIMR code requires members to act with competence, integrity, dignity and in an ethical manner. (A good mantra for us all to use: CIDEM.)

AIMR ExchangeThe AIMR plans to prohibit companies and investment management firms from retaliating against research analysts who issue undesirable investment recommendations or ratings. Hopefully, this will give analysts more independence.

BDO’s ADDitudeThe Prevention of Organised Crime Act and the Financial Intelligence Centre Act have been introduced in RSA. In essence, any person who carries on a business, manages or is in charge of a business or is employed by a business that suspects that something untoward is taking place must report such knowledge or suspicion to the Financial Intelligence Centre. Failure to do so could result in a 15-year jail term or a fine of R10 million.

Valuations for Capital Gains Tax purposes must be done before 30 September 2003. In respect of tangible property exceeding R10 million and intangible property exceeding R1 million, they must be lodged with SARS together with the first tax return submitted after 30 September 2003.

Business DayIf you are fed up with the budgeting process, go to www.bbrt.org and join an enlightened bunch of managers who have moved beyond this antiquated approach to management. (30th)

Finance WeekGovernment is considering forcing pension funds to invest in job-creating companies! (18th, page 8)

A curator is appointed to try to determine what happened to R1,7 billion of contributions to trade union Saccawu’s provident fund. (18th, page 8)

Willem Landman sets out seven rules for developing a code of ethics:1. Write it in a format and style that is readily understood.2. Tailor it to the organisation.3. Communicate it to all internal and external stakeholders.4. Promote it.5. Revise it due to changing circumstances.6. Live it – follow it daily.7. Enforce it and reinforce it. (18th, page 72)

Financial MailFollowing the Enron affair, SAICA is looking at four issues:1. The relationship between clients and their auditors.2. The provision of non-audit services to audit clients.3. The forced rotation of auditors of particular businesses.4. Auditors who leave an audit firm to join one of their clients.SAICA is also considering making audit committees mandatory. (Why? They are required by the JSE and are irrelevant in the case of small private companies. Looks like another overkill coming!) (6th, page 36)

Government is planning to legislate that auditors be rotated. The profession is of the opinion that this will result in an increase in costs (and audit risk) and will not have the desired effect. KPMG, for example, audits half of SA’s banks. Of the 10 banks that failed in SA in the past 12 years, not one was audited by KPMG. It does not make sense that KPMG be taken off audits of banks because of a rule on rotation. (20th, page 88)

In 1997 a structured investment promising a guaranteed capital back and an upside based on the growth in a package of overseas indexes became popular. Based on back testing, these investments should have produced a return of 26% p.a. These investments are maturing this year and investors will receive only their capital back. Had they invested in fixed deposits at an after tax return of 7% p.a. they would have received R140 000. (Lesson? Past performance is irrelevant to future returns.) (20th, page 100)

Stephen Cranston says that most so-called financial planners are still simply insurance salesmen. A financial advisor can claim the title only if paid by the client, i.e. not by the product provider. (20th, page 101)

SARS is to challenge the financing mechanism that allows companies to deduct repayments of loans as interest. It appears as if section 24J is the basis of their challenge. (Going to be interesting. My guess is SARS will ultimately lose and the Act will be changed to stop this scheme.) (27th, page 69)

FortuneThis magazine lists 20 directors who cashed in their shares at the height of the stock market bubble leaving their shareholders holding, in many cases, worthless stock. The amounts of the sales vary from $1,57 billion (Phil Anschutz of Qwest Communications) to $102 million (Ken Lay of Enron). (2nd, page 42)

Investors are wrestling with how much growth is real and how much is due to serial acquisitions or dodgy accounting. Many others are not waiting to find out. The have been pulling their

- -- 26 - 26

Mafia Buzz 2002

investments out of growth funds and been jumping into value funds. (2nd, page 70)

When other investors capitulate (when irrational pessimism takes hold, the instant of mass misery, when hope and reason are cast aside and irrepressible selling takes over), this is the time to be looking for value and buying. Clues as to the point of capitulation are:1. When wealthy individual investors start shouting at their

brokers to “just sell”.2. High volumes experienced while prices are going down.3. When the cartoons start! (2nd, page 84)

ManeoClaude O’Flaherty says that the dangers of a rule based approach as opposed to a conceptual framework approach is that an ever-increasing number of rules are formulated that inevitably fail to cover every eventuality. (The danger of a conceptual framework approach is that it is left up to the interpretation of those who must comply – how does one enforce concepts?)

In terms of the listing requirements of the JSE, if preliminary results have not been audited, they have to be reviewed by the auditors. Karen Lauf gives an example of the wording of the review report on page 3.

If you are up for review soon, go to page 5 and read what Jillian has to say.

Dirk Vercuil sets out the rules and regulations governing the long term investments of moneys on behalf of clients in terms of the Attorneys Act of 1979 on pages 10 to 12.

SAICA NewsThe GAAP Monitoring Panel was launched on 4 September 2002. This is a joint initiative between SAICA and the JSE. The GMP will investigate instances of poor compliance and should have the effect of deterring creative accounting. The committee comprises the cream of our profession. My only hope is that it will not allow itself to be used as a weapon by shareholders to punish the company. (3rd)

All companies (CCs?) have got until 28 February 2003 to comply with the Access to Information Act. (4th)

StarIn their book called “Getting to yes”, Roger Fish and William Dry state that before commencing a negotiation you should consider the “best alternative to a negotiated agreement” (BATNA). This will give you more muscle in a negotiating situation. (2nd)

TechTalkThe IASB has approved the exposure draft on the first time application of IFRSs.

The IFAC has commenced an initiative to rebuild public confidence. A revision of quality control standards is on the cards. A forum of firms has been established. The requirements for establishing and maintaining quality assurance programmes is to be revised. It will become more active in encouraging the adoption of its Code. And ISAs will be made more accessible through IFAC’s website free of charge.

October 2002 (30 Minutes)

AccountancyNon-executive directors, known as NEDs, are being pressurised by the National Association of Pension Funds into becoming whistleblowers and to resign in cases where there are corporate

governance failures. They also want NEDs who hold more than five such positions to explain in the annual report how they can devote sufficient time to the job. (Page 7)

Banks who colluded with Enron to set up SPEs could face litigation from the creditors of Enron. (Could some of those creditors be the same banks who colluded?) (Page 8)

US telecom giant Qwest has admitted to a further $1,5bn accounting “error”. (Page 13)

Peregrine Systems is planning to sue its former auditor Andersen for $1bn due to it overstating revenues by $1,5bn. Andersen’s comment was: “This looks, smells and tastes like a hysterical board of directors looking for a scapegoat to cover up their failures and the failures of their handpicked executives. It really is outrageous, even in this season of blaming the auditors.” (Page 14)

A survey conducted by Oswald and Young found that distributing excess cash and creating a more efficient capital structure were frequently cited motives for share buybacks, with 28% of companies including the former in their list of reasons and 26% the latter. However, by far the most frequently cited motive (47%) cited the desire to increase EPS. The prevalence of EPS-based performance measures in executive compensation plans hints at an even more sinister possibility. (Page 26)

How to fire your staff: Invite them to a champagne breakfast. Direct those who are to be fired through a door to the car park where they are informed of the news while those not to be fired are directed to the breakfast room where they enjoy a bubbly breakfast. (Page 30)

Peter Wyman, ICAEW president, points out that many non-statutory audit fees are in fact for audit related work such as reports to regulators, tax compliance, etc. (Page 30)

Many mid-tier audit firms are looking at limited liability partnerships as a means of protecting their downside, post-Andersen. (Page 34)

Alun Bowen, senior partner at KPMG, suggests that the best thing that government can do is to provide a framework in which companies can work rather than to create tighter regulations. Putting companies in a straight jacket is counter productive and prevents them from achieving their goals. (Our RSA government should take note.) (Page 37)

Research by PwC has shown that under the current reporting regime, few companies provide enough information to meet the needs of investors. Investors need to know what kind of risks companies are facing and how they are dealing with them. Investors want to know what the indicators of value creation are beyond the economic parameters. The feeling is that the IASB is not addressing these issues. (Page 38)

Questions are being asked whether analysts have the necessary objectivity, integrity and ability to do their jobs. Post Enron and WorldCom investigations revealed that they promoted investments they privately disparaged in internal e-mails. Terry Smith of Collins Stewart says that the vast majority of analysts cannot analyse. They have to ask the company what to write in their reports. He says that analysts ignore the facts when they write reports as they need to obtain corporate deals. They cannot afford to offend their clients. (Page 48)

Given motives for share buybacks are usually:1. To boost a flagging share price.2. To pay back excess cash rather than invest in value

destroying projects. (An idea for Pick ‘n Pay?)3. To optimise the benefits to be obtained by the use of gearing.However, the real reason in most cases is to increase EPS. (Page 52)

- -- 27 - 27

Mafia Buzz 2002

Some ideas on negotiating:1. Set a clear objective before entering into any negotiation.2. Identify what you want from the deal – set parameters.3. Identify the benefits to the other party.4. Think carefully about your personal style – avoid posturing.5. Encourage the other party do the talking – open their hand.6. Get the big picture and deal with the major concerns first.7. Avoid confrontation – respect their opinion.8. Make concessions gracefully – be prepared to lose a battle to

win the war. (Page 55)It is devastating to be made redundant. If it happens to you, you need to develop a plan to get back onto your feet again. Here are some tips when looking for a new job:1. Be prepared for questions about your redundancy.2. If as a result of a specific event, have evidence to back-up

your story.3. Get good references from your previous employers.4. Have a contact from your former employer who is prepared

to speak on your behalf.5. Beware of a lengthy unemployment period without a reason.6. Consider contract work, but choose carefully.7. Don’t hold out for your dream job.It is best to look for a new job when you want one, not when you need it as the latter weakens your negotiating position. (Page 56)

Index-trackers outperform roughly 60% of active managers, mainly because of their lower costs. After adjusting for risk, only a handful of active mangers beat the index. And, they do not seem to be able to repeat this feat in the next period. For active managers to win:1. Markets need to be inefficient.2. They (the managers) need superior skills.3. Their fees need to be low.4. There should be little competition for the same investments.Clearly, active management is a no win situation. So what is the solution? Index tracking! Vanguard, the US index-tracking giant, has worked out that its total costs are 3.1% p.a. (R100 000 invested at 12% p.a. for 30 years = R3,0 million. At 8,9% p.a. it comes to R1,3 million. Who wins with tracking? You get 1,3 million and the tracker company gets R1,7 million. So what is the solution? Intelligent DIY!) (Page 61)

Sir Andrew Likierman says that accountants should seriously consider looking to government as a career. He says that it is fascinating work with huge challenges where one’s efforts really do make a difference. (I recently spent four days addressing the Auditor General in Durban and in Pretoria. I found the quality of the people working there to be of the highest standard and that the problems being addressed by the AG to be extremely challenging. This experience changed my perception of Government as a place to make a career.) (Page 77)

Ron Paterson explains that the original objective of accounting for pension costs was to smoothly spread the cost of providing for pensions over the period of service. The mistake the standard setters made was to try to modify this concept in a framework that requires the balance sheet to be the prime document. The result is that daft results are produced. (Again, RP has hit the nail on the head. The IASB is reconsidering its standard in the light of similar criticisms – see below.) (Page 86)

The IASB’s work on employee benefits includes:1. Dumping the corridor approach.2. Dealing with the asset ceiling and its impact on profits.3. Reviewing the definitions of defined benefit and contribution.

4. Allocating costs to accounting periods.5. Merging FAS standards. (Page 90)

The IASB’s work on business combinations includes:1. Eliminating the pooling of interests method.2. Prohibiting the amortisation of goodwill.3. Re-looking at the measurement and recognition of acquired

assets and liabilities. (Page 90)The IASB’s work on consolidations includes looking at what constitutes control. There is a conflict with IAS standards and the US. The latter sees control arising when majority ownership is present (the same as our local Companies Act?). The fight is on! (Page 90)

The IASBs work on revenue and liabilities includes:1. The distinction between liabilities and equity.2. When to recognise a liability.3. When to recognise revenue. (Page 90)(Going round and round and round and round!)

It is important to recognise that the problems at Enron and WorldCom appear to have stemmed primarily from a failure to follow existing rule-based accounting standards rather than from a need to introduce new standards. (Sanity is starting to prevail!) (Page 94)

The IASB has produced over 800 pages of exposure drafts comprising its improvements-project and an exposure draft on first time application of IFRSs. What do companies do in the meantime? Do they start becoming familiar with the proposals so that they can hit the road running or do they wait for the final statements to be published before taking action? The latter approach is the easy way out. However, it could result in a crisis developing. It is recommended that management plan ahead by studying the proposals to avoid unpleasant surprises. (My job for 2003?)

President Bush signed the Sarbanes-Oxley Act into law on 30 July 2002. Auditors of companies to which the Act applies must register with the oversight board created by the Act. This board can call for testimony or the production of documents from the auditors. Its other functions are to:1. Establish rules governing auditing and the production of

financial statements (is this duplicating the work of the standard setters?).

2. Inspect auditing firms (similar to our Practice Review?).3. Conduct investigations and disciplinary proceedings (similar

to our PAAB?)4. Set standards for the audit committees of companies.A firm may not act as auditor if the CEO, controller, CFO or chief accounting officer of the company participated in any capacity in the audit with the firm in the previous year. Audit partners have to be rotated at least every five years. Certain non-auditing services by the auditing firm are prohibited and certain non-audit services may only be performed if approved in advance by the audit committee. And the CFO and CEO must certify that the 20F and financial statements are accurate and complete. Other requirements are:1. If the financial statements are restated, the CEO and CFO are

required to return their incentive-based bonuses. (Lovely!)2. No officer or director may attempt to influence the auditor.3. All material correcting adjustments identified by the

independent auditor must be reflected in the financial report filed with the SEC.

4. The annual report and the 20F should disclose all off balance sheet transactions and balances.

- -- 28 - 28

Mafia Buzz 2002

5. The annual report and the 20F should contain an internal control report attested to by the auditors.

6. Increased enforcement and penalties are contained in the act for, among other things, destroying audit working papers, falsifying records, etc. (Page 110)

Accountancy SASustainability refers to the achievement of balanced and integrated economic, social and environmental performance. These three elements of sustainability have been called the “triple bottom line”. (Page 13)My article “tries” to address the problem with provisions – this was a tough subject for me! (Page 47)

Business DaySanlam surveyed 500 companies regarding their HIV/AIDS policies. More than 75% have no idea of the prevalence of HIV/AIDS in their organisations. 46% have no AIDS policy and 85% do not offer voluntary AIDS testing. Companies need to take their heads out of the sand and address this problem. (And SAICA needs to publish a statement on how to account for the problem!) (4th)

Michael Katz says that directors have a fiduciary duty to the company and not to themselves. He said that what went wrong at Enron was a complete breakdown of ethics and morals. (11th)

A half page advertisement appeared in Business Day on 15 October attacking the PAAB for calling for only black applicants for the job of CEO. C D Rowe called for support from members of our profession. I can only guess that he was alone in his call to make South Africa a truly race free country. CAs will privately agree with CDR but will not want to stick their necks out as it is politically incorrect to comment on these kinds of actions. I really feel for CDR as I used to try to get the support of the profession for just causes in the past, to no avail. (15th)

The securitisation scheme of Siltek is being probed with the objective of setting it aside. Siltek took R200 million of its assets off its balance sheet and housed them in a SPE. The liquidator of Siltek is arguing that these assets should be used to satisfy all Siltek’s creditors, and not just those benefiting from the securitisation scheme. (Will the GAAP panel of the JSE please take note and do something about all of the companies out there that are blatantly contravening AC412?) (18th)

About 10% of US public companies have restated their accounts in the past six years, an accelerating trend that seems to have shaken investor confidence. (The difference between the US and the rest of the world is that at least there is transparency in the US. In the rest of the world we do not know how rotten it could be below the veneer.) (24th)

From a survey conducted by Tony Bell of PeregrineQuant of 10 pension fund mangers over the past six years it was found that during any three year period 97% of the total fund returns could be explained by the benchmark. Only 3% of actual returns achieved were, therefore, attributable to decisions of the asset manager. (31st)

CitizenAccording to Mr Bryan Hirsh of Sasfin, there is ample evidence to prove that a well chosen portfolio of shares over a long period of time will create greater wealth than many traditional insurance or investment products. He notes that endeavours over the past ten years to find new products that not only give tax efficient income but also provide capital growth have failed dismally. (2nd)

Finance WeekOnly 46% of work hours in SA companies are used productively. This is due to inadequate planning and control by management. This compares to 63% in Germany. (16th, page 6)

The former chief accountant of Worldcom has admitted to covering up $7bn of expenses with false entries in the books. (16 th, page 6)

William H Gross, MD of Pacific Investments, California, is of the opinion that the Dow will only show value when it reaches 5 000 and the S&P 500 when it reaches 650. He says that investors were mislead by phoney figures. Investors were led to believe that money for dividends would be better left in the hands of the company for managers to covert to tax efficient capital gains. Then companies diluted investors’ interests by issuing share options to managers. He says dividends are now an important element of share investing (wow, really? – amazing how easy it is to forget such fundamentals). (16th, page 9)

World equity markets, defined by the MSCI World Index, fell 18,7% in the last quarter and by 26,5% for the first nine months of 2002. (30th, page 36)

Financial MailThe Minerals Bill holds present and past directors of mining companies responsible for unacceptable negative impacts on the environment caused by the company or CC they represent. (Who would want to be a director of a mining company?) (4th, page 48)

Comments by Mr Mervyn King of the King report fame:1. One cannot legislated against dishonesty.2. A good definition of corporate governance is: “The way we

do things around here when no-one is watching us”.3. Boards need to be aware that dissent is not the same as

disloyalty. They need to constructively criticise.4. The board should be privy to all information in good time.5. The board members should be individually accountable.6. Board members should be evaluated once a year.7. Board decisions should be rational and in the best long term

interests of the company.8. The sustainability of the business of the company is the

ultimate social responsibility of the board. (11th, page 84)A survey by Sanlam shows that 10% of pension funds do not provide annual benefit statements to their members and 49% only report once a year. And, 36% do not have an investment policy in place. (11th, page 81)

FortuneValue investors are the penny pinchers of the stock market. They refuse to follow fads. They pour over financial statements to find true worth. Such investors are looking into what were previously regarded as growth stocks due to the levels to which such stocks have fallen. (14th, page 109)

At the Fed’s insistence, bankers in the US are considering getting rid of their analysts due to conflicts of interests. Investors are usually not prepared to pay for research so other means will have to be found to access and pay for the research. Already boutique firms are getting into the act. (28th, page 19)

Companies can raise or lower their profits merely by changing the estimated return on investments of their pension funds. The estimated return is credited to the income statement and any differences between the estimate and the actual are amortised over time as unrealised actuarial gains or losses. (28th, page 26)

- -- 29 - 29

Mafia Buzz 2002

Until breakthroughs are made, the best strategy to keep Alzheimer’s at bay is to exercise your mind as well as your body – stay stimulated and keep on learning. (28th, page 92)

StarAnn Crotty says that the problem with paying employees by share options is that the company ends up paying the employees an annuity in the form of dividends forever. (This is not a bad argument until one reasons that employees could be paid in cash, use the cash to pay for the shares and receive an annuity “forever”.) (2nd)

Sunday TimesA survey conducted among asset managers by Jeremy Thomas (a journalist really worth reading on a regular basis) concluded that dividends should be used as the basis for finding value in shares. The value of a share is the discounted cash flow expected to be generated from this share. (Gee, when did they forget this concept?) (13th)

TechTalkThe APC has issued “first-time application of IFRS” for comment.

The ASB has issued SAAPS 1013, Electronic commerce – effect on the audit of financial statements.

The IAASB issued ISA 545, Auditing fair value measurements and disclosures.

IFAC’s standards (the ISAs) are available on their website at no cost (www.ifac.org). (Why does the IASB not do the same?)

The JSE has notified listed companies about the requirements for submitting financial statements to the Listing Division for approval – the details are on page 30.

An example of a review report by the auditors is given on page 30 – required for listed company results.

Be warned that you must have complied with the Access to Information Act by 28 February 2003.

TimeOne of the fall-outs of the stock market decline is that insurance companies, which are heavily invested in equities, may have to offload equities onto the market. This will have a cascading effect on the prices on equities, which could further impact on their liquidity ratios. In Europe, insurance company share prices have dropped by 58% this year compared to an overall market decline of 35%. A catastrophe could be on the cards. (21st, page 50)

The publicly traded Germany technology company, ComROAD, disclosed that 96% of its sales were fictitious. They were billed through a non-existent Hong Kong company. (28th, page 49)

OtherFrom Wharton, courtesy of Steve Gawthrop Strategies CC: EBITDA may have been indirectly responsible for some of the corporate carcasses now littering the landscape. This concept is the lazy analyst’s cash flow and is a dangerous concept. It is not a measure of performance as it excludes expenses that are necessary for performance. It was originally thought to be a good measure of debt capacity. This backfired as it does not take into account the cash cost of replacing plant and machinery and the cash cost to the company of inflation – increases in working capital required just to keep the company afloat. (Scrap it!)

Depression is prolonged sadness that results in a blunting of emotions and a sense of futility. Suggestions for overcoming depression are:1. Face up to what is happening.

2. Reason though it – reconfigure your view of the world and develop a more realistic perspective.

3. Exercise – a good workout or a brisk walk.4. Clean up your act – diet, environment, finances, etc.

Fun CornerAn old man was sitting on a bench in a mall. A young man walked up and sat down. He had spiked hair in different colours: green, red, orange, blue and yellow. Every time the young man looked, the old man was staring. The young man finally asked: “What’s the matter, old timer – never done anything wild in your life?” Without batting an eyelid, the old man replied: “Got drunk once and had sex with a parrot. I was just wondering if you were my son.” (Finance Week, 18 September, page 90)

Two hunters were out in the woods when one of them collapses. He does not seem to be breathing and his eyes are glazed. The other man pulls out his phone and calls emergency services. He gasps to the operator: “My friend is dead! What can I do?” The operator in a calm soothing voice replies: “Take it easy, I can help. First, let’s make sure he is dead.” There is a silence, then a shot is heard. Back on the phone the hunter says, “OK, now what?” (This was supposed to be the funniest joke ever! I think the previous one is funnier!) (Business Day, 4 October)

A man was getting into the shower just as his wife finished her shower when the doorbell rings. After a few seconds of arguing who should answer it, the wife gives up, wraps herself in a towel and runs downstairs. When she opens the door Bob the next door neighbour is standing there. Before she is able to say anything, Bob says: “I’ll give you R3 000 to drop your towel.” She thinks for a moment and then complies. After a few seconds, he hands her R3 000 and leaves. Confused but excited about her good fortune, she wraps herself in the towel and goes back upstairs. When she gets to the bathroom her husband asks: “Who was that?” “It was Bob, our next door neighbour” she replies. “Great,” the husband says, “did he say anything about the R3000 he owns me?” (Finance Week, 9 October, page 66)

To End“Someplace right now, in the layers of a Fortune 500 company, an employee – probably high up and probably helped by people who work for him – is perpetrating an accounting fraud. Down the road that crime will come to light and cost the company’s shareholders hundreds of millions of dollars.” Fortune, August 1999. (No a bad prediction. However, they underestimated the amounts involved, did not predict that one of the big-five auditing firms would be wiped out and missed the resultant market meltdown around the world.)

November 2002 (25 Minutes)

AccountancyIt is expected that accord will have been reached on the main issues of Global GAAP, i.e. the best of IFRS and US GAAP, by 2005. (Page 26)

Although most people will try to do the right thing, few will have the moral courage to stand up to one’s peers. Those who do often find that their colleagues gang up on them and drain their energies or they find that their colleagues privately agree with their stance and see its necessity but in the boardroom simply sit quietly and let the bullies bully. (This brings back memories of my days on the APC!) (Page 30)

The IASB and the FASB will be comparing their two sets of standards over the next few months and will vote on which provisions are best in each case. This will not be easy as the two frameworks are very differently based (the one on rules and the

- -- 30 - 30

Mafia Buzz 2002

other on principles). This process could eventually lead to Global GAAP – still some time off. (Page 32)

Ideas for mid-tier firms: Develop a focused marketing strategy. Establish how and where you make profit. Ensure that your strategy focuses on these markets and others where you can grow profits in future. Clients value the industry insight demonstrated by firms that organise themselves with a degree of sector focus, rather than purely by specialist function. (Page 35)

SPEs, which were used extensively in the Enron, Global Crossing and Tyco scandals, are coming under scrutiny of the standard setters. Enron, for example, set up more than 880 SPEs to hide its problems. Many SPEs are set up for valid reasons, e.g. to raise finance. However, we should soon find new rules applying to SPEs. (Page 40)

Enron won six environmental awards in 2000 and was voted the best company employer for three years in a row! (Page 50)

There is a major conflict between the way actuaries and accountants measure pension fund obligations. Actuaries discount liabilities at the return the investments are expected to make whereas finance theory says that one should use the discount rate with the closest characteristics to the pension fund obligation. (I have never come across this “theory” before.) Equities should give a higher return than bonds as they are riskier than bonds. If one uses an equity return, one will get a lower obligation, “bearing in mind that trusts are tax-exempt”. This is the crux! In RSA one pays tax on interest in pension funds! If we use a pre-tax rate to evaluate our pension funds, we will grossly understate the obligations of our pension funds. This will result in massive published surpluses when none exist. The APC tried to get this point across when we were in the process of adopting the standard, but to no avail. Actuaries cannot understand why accountants are hopelessly overstating pension fund surpluses. I believe that accountants are just following AC116 without knowing what the effects are. Just wait until some shareholder sues SAICA for misinformation! (Page 70)

The key to continuing reforms in corporate governance is to make sure that auditors focus adequately on professional scepticism. This is the core of the auditor’s work. (Page 77)

To avoid the risk of strokes, stop smoking. Smoking doubles your risk of a stroke. Stopping reduces the risk after 72 hours. (It takes a little longer for the risk of cancer to reduce after stopping – 15 years.) High cholesterol levels and a lack of exercise also increase the risk of strokes. So three simple things you can do to increase your most valuable asset, being the time you have been allocated to visit this wonderful planet, are: stop smoking, get your cholesterol levels down and exercise. (Page 80)

Unless the profession re-establishes its reputation for high standards of behaviour, the perception that it lacks moral fibre may strengthen and society will do something to protect itself, thereby curtailing the freedoms enjoyed by the professionals. We should ensure that students of accounting are encouraged to learn about this aspect of the profession. (In the 35 years I prepared candidates for the QE we had less than 10 marks p.a. on professional ethics in the examination. My protests were ignored.) (Page 83)

Harvey Pitt, chairman of SEC, said in a speech given at the ICAEW conference in Brussels that the FASB and the IASB are committed to working together to produce a set of high quality standards and to eliminate key differences between the two sets of standards. (Page 86)

In the UK the tax authorities are considering aligning tax law with accounting standards. One of the main problems with this will be taxing companies on profits not realised in cash. (In RSA this is done at present anyway!) (Page 94)

Paul Pacter has prepared a checklist of some (80) differences between IFRS and US GAAP on page 97.

The IASB and the FASB have expressed their support for eliminating differences between the two sets of standards and for co-operating when setting new standards to ensure that new differences are not created. (Page 106)

The IASB and the FASB have encouraged their staff to arrive at definitions for “financing”, “operating”, “income flows” and “valuation judgements” to progress the statement on financial performance. (Page 106)

The IASB and the FASB have agreed to carry on working on business combinations and revenue recognition as joint projects. Work is continuing on post-employment benefits, employee benefits, insurance contracts and share-based payments. (I can’t wait to see what they come up with!) (Page 106)

Accountancy SAInvestors cannot place a reasonable value on a company without knowing the impact of HIV/AIDS. Where a company is particularly exposed, staff absenteeism will increase due to the illness, compassionate leave, attendance at funerals, etc. Productivity will reduce, costs of recruiting and training will increase, demands will be made by unions on companies, capital will move out of the country, thereby increasing cost of capital, etc. etc. We know all this and still do not have a statement giving guidance on how to measure and recognise the provision for all of these future costs! At this stage, listed companies have been told to give full disclosure by SAICA and the JSE. Disclosure results in a constructive obligation, which results in a provision having to be made. Where is the measurement standard? (Page 7)

SAICA is drafting guidelines on how to disclose the impact of HIV/AIDS, but not a GAAP statement on how to measure and recognise the provision. Statistical modelling suggests that the prevalence for age 18 to age 64 is 23% at present. With the right care, medication and lifestyle guidance, employees are capable of leading productive lives for many years after becoming infected with HIV. However, for a couple of years when HIV turns in to AIDS, some companies have undertaken to continue medicating their employees while at home. It is surely these costs (at least) that should be measured and recognised as a provision. (Page 10)

Bienkie Shuttleworth sets out the following concerns in respect of the statement on agriculture:1. Compliance with the statement may give SARS ideas.2. With the prevalence of droughts, floods and diseases in this

industry, recognising unrealised gains is questionable. 3. Where observable markets do not exist, accounting for values

becomes subjective.4. The costs of compliance with this statement will surely

outweigh any possible benefits of applying this statement. (Page 13)

The basic elements of leadership are vision, communication and trust. The tasks that leaders perform are to:1. Set goals in conjunction with the followers.2. Clarify roles and responsibilities for task accomplishment.3. Plan and organise resources.4. Establish time limits and priorities.5. Design control procedures for evaluating performance.The behaviour characteristics displayed by leaders are:1. Supporting staff during the accomplishment of their tasks.2. Inviting ideas and suggestions from staff.3. Facilitating problem solving and decision making.4. Listening to and encouraging staff.

- -- 31 - 31

Mafia Buzz 2002

5. Thanking staff for the work they have done. (Page 20)My article was designed to debunk the argument that substance and economic reality override GAAP. (Page 23)

AIMR AdvocateIn October the SEC issued proposed rules to implement provisions of the Sarbanes-Oxley Act designed to preserve the integrity of audits. Specifically, the proposal would prohibit an issuer’s officers and directors from taking actions to fraudulently influence, coerce, manipulate or mislead the issuer’s auditor for the purpose of rendering the financial statements materially misleading. (Page 2)

The Boards of the IASB and FASB have agreed to launch a joint project on revenue recognition as this is the single largest source of financial restatements in the US. (Page 11)

AIMR Conference ProceedingsAggressive corporate accounting practices (a game of nods and winks) between corporate managers, auditors and analysts have caused the quality of reported earnings to deteriorate. David Tice gives some ideas of what to look out for:1. Financial confusion, e.g. reconstructions, changing year-ends,

complex explanations for items in the financials, discontinued operations, acquisitions, exceptional items, etc.

2. Aggressive revenue recognition practices.3. EPS growing at say 20% with sales growing at 2%.4. Cash flows not in line with earnings.5. Poor returns on capital employed.6. Focusing on the good and avoiding the bad.7. Non-compliance with GAAP.8. Pushing fads such as EBITDA.(Page 57)

Business DayDave Mohr, chief investment officer of Citadel, says that a broad asset mix to gain the maximum benefit from diversification is pivotal to sound wealth preservation strategy. He measures performance relative to inflation after costs and taxes. (1st)

Shauket Fakie has welcomed the increasing scrutiny of the independence of external auditors by public entities. (21st)

A committee is a cul-de-sac down which ideas are lured and then quietly strangled – Barnett Cocks. (21st)

CitizenA senior employee of Galahad has been indicted on charges involving R151 million. (16th)

EconomistThree choices exist for measuring and recognising the cost of options given to employees: at the date granted, at the vesting date or at the exercise date. The IASB has chosen the grant date, which will usually result in a lower cost to the company. (1st)

Finance WeekMonica Singer says that if you ask your broker for all notices and annual reports in the companies in which you have shares, you will receive them. This was in response to complaints that STRATE deprives shareholders of this information. (6th, page 7)

A German man was beaten to death in a beer garden for refusing to switch off his cellular-phone. You can now buy a jamming device that has a 20-meter radius. But before rushing out to buy it, you need to know that there is a R500 000 fine with a two-year prison sentence thrown in for using such a device. So rather use

the former solution in a restaurant – it’s a cheaper option in RSA. (6th, page 48)

Inflation in Zimbabwe is expected to be over 500% next year. (13th, page 5)

Foschini has provided R5 million for HIV. (A start. Where is GAAP to give us guidance on this?) (13th, page 29)

In future transfer duty will be levied even if the property is in a company or a CC. (13th, page 30)

The unemployment rate in RSA is “down to 40,9%”! (13th, page 32)

Investment ideas:1. Remain in tune with your objectives, age and risk profile.2. Don’t get caught up in short-term cyclical chases – think long

term.3. Maintain realistic expectations.4. Go for value.5. Remember the importance of asset allocation.6. Select high quality shares and diversify.7. Focus on achieving capital appreciation within the context of

preserving capital as far as possible. 8. Forget sentiment, go for value.9. Don’t churn your investments; transaction costs destroy

value. (13th, page 35)The Germans are objecting to the provision in the Sarbanes-Oxley Act that requires managers to swear to the accuracy of the financial statements. They say that the board as a whole takes responsibility for the financials and not individual members of the board. (13th, page 62)

According to KPMG, 25% of job applicants submit false CVs and 29% of SA companies do not bother to check the applicants’ backgrounds. (20th, page 7)

The government is considering making tax experts accountable for tax advice they give. (20th, page 7)

AngloGold has calculated that the cost of not doing anything about HIV/AIDS works out at $9 per ounce of gold mined. Its programme of providing support for its employees is $6 an ounce mined. It estimates that 25% of its 38 000 workforce has fallen victim to the pandemic. The healthcare cost to the company is R1bn p.a., nearly half of its taxed profits. However, the cost of the anti-retroviral treatment has reduced from R1 200 per employee to R840 over the past two months. (27th, page 30)

Financial Analysts JournalCorporate managers need to abandon the habit of blindly increasing company size and investment managers need to carefully consider the drawbacks of diseconomies of scale. Company managers need to make a fundamental shift in their strategic orientation from "growth now, profit later" to “profitable growth now”. Growth should not be the input to strategic planning but the outcome of a sound investment strategy that is geared to accepting value-creating projects. Investors and portfolio managers should be aware of the dangers of conforming to market pressures from growth for growth’s sake. (Ramezani, Soenen and Jung)

Financial MailRemember John Rusnak? He was the currency trader that lost $700 million of Allied Irish Bank’s money. He has been jailed for 7,5 years. (1st, page 8)

According to the UN, 20% of South Africans are infected with HIV (4,7 million people) and there are 660 000 orphans in the country. This compares to 34% in Zimbabwe, 33% in Swaziland,

- -- 32 - 32

Mafia Buzz 2002

31% in Lesotho, 39% in Botswana and 22% in Namibia. (22nd, page 32)

SAICA has published ED160 on share options. Comments close on 21 February 2003. (22nd, page 97)

African Bank has raised provisions of 33% of its lending book of R6,2 billion in loans. Peoples Bank has a provision of 40% of its R1,2 billion book. (How do we stop this culture of non-payment in South Africa?) (29th, page 45)

FortuneThe actions for which CEOs and CFOs are getting indicted and sued are the result of situations where someone faces a choice between right and wrong and chooses to do wrong. (11th, page 18)

“I’m gonna run a big company, I’m gonna cook the books, and inflate my stock price, and move offshore, and not pay taxes, I’m gonna be a CEO!” The article by Jerry Useem traces the fall of CEOs from heroes to goats. In his article he describes how stock options were abused by CEOs. The original idea of stock options was to align managers’ interests to those of the shareholders. However, CEOs started taking options, not worth thousands or millions but tens or even hundreds of millions of dollars. It then became a game. Instead of building successful companies, where the by-product was the increase in the value of the stock, the game was to pursue stock value as an end in itself regardless of the means or the long term cost to the company. (18th, page 26)

Sunday TimesGaenor Lipson reports that Ernst and Young’s global executive partner Paul Ostling is of the opinion that to rotate auditors will not achieve its intended objective and could have a counter productive effect. (I get the impression that all four of the big firms are of the same opinion.) (3rd)

TechTalkDetails of the new GAAP Monitoring Panel are given – a joint initiative between the JSE and SAICA.

IFAC has released a paper on financial reporting on the Internet. This is an important initiative that will save companies costs in the future and will result in easier dissemination of results to shareholders.

Details are given about the meeting between the IASB and the FASB where they agreed in principle to work on a project that may result in convergence of accounting standards one day. (Don’t get too excited!)

SAAPS 1004 and 1006 and SAAS 545 and 502 have been issued by the ASC for approval by the ASB.

TimeAndrew Fastow, ex-chief financial officer of Enron has been indicted on 78 counts of fraud, conspiracy and charges. He allegedly engineered an intricate web of partnerships that hid the energy giant’s financial ills. (11th)

December 2002 (20 Minutes)

AccountancyUS analysts are saying that the audit report is not worth the paper it is printed on. The question is whether the integrity of the audit is so damaged that it serves little useful purpose in its present form. Audit has suffered because the public does not understand what the audit is about (back to the old expectation gap!). An audit is a subjective process conducted by experienced professionals whose knowledge of companies lends a capacity for judgement. It

is an opinion and not a certificate. However, the question remains: “What are the shareholders paying for?” (Page 7)

The UK accounting profession, who have been arguing that the British system of corporate governance is superior to that of the US have been stunned by the accounting problems of a company called MyTravel. The restatements are not of the same size of Enron but still a shock that it can happen in the UK. (Page 9)

There are plans afoot to require European companies to report quarterly. However, many in the UK believe that this will result in short term thinking in the marketplace. (Page 10)

Accounting irregularities in the US are up by 145% since 1997. Qwest Communications restated $531 million of revenue in 2000 and 2001 and is planning to write assets down by $35bn. WorldCom is on its third restatement of its results. (Page 16)

The SFI group in the UK, which owns pubs and a lap-dancing chain, has admitted to overstating its assets and understating its liabilities over several years. (Is this not a male prerogative?) (Page 16)

There seems to be a move in the UK where the big four auditing firms are focusing on large companies in the metropolitan areas whereas the mid-tier firms are taking over in the regions – family type businesses. (Page 22)

The UK Institute is facing major opposition to its practice assurance scheme. Smaller firms want to know how this will benefit them. (Gillian Bailey from our own PAAB can probably teach them a thing or two!) (Page 26)

Chris Quick believes that now is the time for the profession to do something about the expectation gap between what the users of an audit report think they are getting and what the auditors think they are delivering. He criticises managers for telling their superiors only what they want to hear. This spins out of control and there is a huge shock when reality hits. He says that being commercial is about telling it like it is and finding realistic ways of moving forward. (Page 31)

Investors who want to assess the future of a company are more interested in whether the directors understand the risks they are taking rather than whether the cash has been correctly counted. It is the intangible, rather than the tangible, issues that are bringing companies to their knees. (Page 81)

There is a danger that many young people are sleepwalking into a retirement of relative poverty due to a combination of increased longevity, lower expected investment returns and declining employer pension fund contributions. Solutions include saving more, planning carefully, investing wisely and working longer. Some of the ideas given in the article for government involvement are not applicable to this part of the world. (Page 88)

Nigel Sleigh-Johnson comments on the IASB proposed improvements. He does not like the idea that you can avoid compliance with a statement on the basis of “undue cost or effort” (I agree 100%). He believes that the IASB can gain from dialog with the UK standard setters. (Page 95)

Richard Sage looks at the paradox that results from accounting for liabilities at fair value. If a company’s credit rating is downgraded, the fair interest rate for the liabilities will increase. The liability will fall in value resulting in an immediate profit. Common sense tells us that you should not make a profit when your credit rating is downgraded. The article goes on to explain why the company did profit by the downgrade. (I would argue that as the person who gave the loan is worse off because of the downgrade, the company must be better off.) (Page 96)

Kimberly Crook gives a run-down on the ED on share based payments:1. All share-based payments to be recognised.

- -- 33 - 33

Mafia Buzz 2002

2. Value to be based on the value of the goods or services or the value of the shares, whichever is more readily determinable, at the date of receipt of the goods or services.

3. For transactions with employees, the value to be based on the value of the shares or options granted at the grant date. No subsequent changes in value to be accounted for.

4. Where options are not traded options, valuation to take this into account.

5. An additional expense to be recognised when options are re-priced.

6. For options or shares, equity to be credited.7. Share appreciation rights to be accounted for as a provision.(Page 97)David Chitty reviews the lessons learned from applying the revised Charities Statement of Recommended Practice, which was designed to improve the flow of information to stakeholders. (If you are in this game, get the article.) (Page 100)

The UK is trying to come to grips with the impact of IASB standards on the results of companies. The major problem is that they used the partial basis of deferred tax in the past. They are also assessing the impact of unwinding the discount rate for provisions, capitalising leases, pension fund accounting and financial instrument accounting. (RSA is way ahead of the UK in this department!) (Page 103)

Ron Paterson looks at the impairment statement and makes the following observations:1. Impairing assets has the effect of improving future profits.2. Impairing assets has the effect of improving returns on

equity.3. Impairment may be triggered because of shifts in capital

markets (increase in interest rates or a fall in the company’s share price).

He concludes with the thought: Why try to import so much ostensible science into an area of accounting that ultimately depends on subjective judgement. (I 100% agree!) (Page 105)

Where a company purports to comply with IAS and the local GAAP, the auditor should consider and report on each framework separately (per IFAC). (Page 107)

The IAASB has issued three exposure drafts with the objective of improving risk assessment by auditors (www.ifac.org).

The IASB met on 23 to 25 October and discussed the following issues:1. Phase 2 of business combinations2. Consolidations and SPEs3. Which standards will be applicable in 20054. Post-employment benefits5. Phase 1 of insurance contracts6. Performance reporting7. Revenue recognitionSome interesting decisions taken were:1. The holder of the interest in an SPE with the most variability

of expected outcomes should be the entity that consolidates.2. Control should not be assessed by whom has the power to

direct financial and operating policies. It should be assessed by “other means”. (Going to be interesting to see what they are.)

3. The actual return on plan assets in a post-employment benefit fund should go to income, not the expected return. There would then be no smoothing of returns into the future.

4. There would be no such thing as actuarial gains or losses!5. Past service costs would be expensed immediately (good!).

(Page 108)

Business DaySARS has proposed a self-governing body with legislative powers to regulate tax practitioners. As from January 2004 anyone offering tax advice will have to be registered with the Association of Tax Practitioners – could end up in prison for two years if you don’t! (And so the screws tighten and tighten.) (2nd)

The Government has appointed a 17-member committee to review the Accounting Profession Bill. It is interesting to see that there are no users or preparers of financial statements on this committee! (We will have to watch this one carefully.) (10th)

The JSE is to publish a pension fund index that can be used as a benchmark for investors and managers of pension funds. For example, Anglo American will be down weighted in the index as pension funds may not hold more than 10% of their assets in any one counter. (31st)

Finance WeekAccording to Finance Week, Corpcapital bought a 48% stake in a company for R2,7 million and revalued it, within months, to R150 million. The revaluation profit was credited to income in accordance with AC133. In the next year it was again revalued through income, by R71 million. The following year it was written down to R110 million. Besides the question posed by FW regarding whether or not these revaluations affected directors’ remuneration, one must ask the question: “Do revaluations through the income statement that are based on subjective criteria really add value to the financial statements?” (9th, page 10)

FortuneGeoffrey Covin questions whether the Sarbanes-Oxley rule that the majority of the board of directors be independent will benefit the shareholders. He says that the sort of persons who would qualify could not possibly contribute to the wellbeing of the company. He also questions the qualifications of those who are permitted to sit on the audit committee and asks whether anyone in their right mind would want to take on this responsibility. (I was offered a position and turned it down!) (30th, page 32)

Newly obtained e-mails have revealed how a certain Wall Street brokerage company compromised its independence by influencing its stock research to win investment-banking business. Some of the big players are now simplifying their rating systems. For example Morgan Stanley now publishes three recommendations instead of five (underweight, market weight and overweight). Merrill Lynch publishes buy, sell and neutral. (30th, page 70)

TimeMartin Luther King Jr. said: “Our lives begin to end the day we become silent about things that matter.” The persons of the year award by Time for 2002 was made to three very courageous women who were prepared to stand up and be counted. They were:1. Cynthia Cooper of Worldcom who blew the lid off the

capitalisation of billions of dollars of expenses by the company.

2. Coleen Rowley of the FBI who exposed the FBI for what it was: protecting itself against attack for being ineffective instead of protecting the public against events such as 9/11.

3. Sherron Watkins of Enron who exposed the accounting shenanigans that eventually brought the company (and Arthur Anderson) to its knees.

One has to admire these women for doing the right thing at enormous personal cost. Cynthia and Coleen had husbands who were full-time stay at home dads so they were the breadwinners of

- -- 34 - 34

Mafia Buzz 2002

their families. Tremendous pressure was brought to bear on all three women to back off by management. And being women they were bullied by their male colleagues. (I wonder how many of us would have the courage to put our future on the line for the good of society in general? Time must be congratulated for its choice.) (30th, 36 to 62)

Some of the comments that came out of the interviews with the three ladies above were:1. It is very important to do the right thing. The leaders should

set the tone.2. Never allow yourself to be intimidated: always think about

the consequences of your actions.3. Men are more reluctant to put their friends in jeopardy.4. Warren Buffett is boring. He did not invest in tech stocks

because he did not understand how they made their money. He was right. But we value splashy leaders.

- -- 35 - 35