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Should Michael Jackson have had more of a bond with David Bowie?

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It’s one year since Michael Jackson died.  In the year since his death, his estate has made earnings of £670 million.

Given that he was allegedly in serious financial trouble at the time of his death, this must be the source of a certain amount of posthumous frustration to Mr Jackson.  His ability to spend the money has been significantly impaired in the period since the money started to roll in, on the grounds of his no longer being alive.

This is a quandary well known to many pop stars.  The murder of John Lennon in 1980 sparked a sudden and deep revival of his career.

I can’t help but wonder why none of Michael Jackson’s advisors pointed him in the direction of the Bowie Bond.

David Bowie issued bonds in 1990 that were secured on the future income to be earned from songs that he had written up until that date.  This is a simplification of course, but that’s the big picture.  By doing this, David Bowie was able to get the benefit of some of his post death earnings while he was still alive.  He is a smart business operator as well as enormously popular song writer, it seems.

The Bowie bond has been influential in business since it was issued.  In practice, I personally used it as the backbone of market data to help in the divorce settlement of another well known musician.

Its influence amongst accountants is significant, though less so with the pubic at large. Rock stars probably don’t shout about it because valuation and securitisation of intellectual property isn’t really very rock and roll.

Auditors are good at lots of things but could we spot what’s happening to the bees?

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I often believe that society at large does not get best value for money from auditors.

That’s not to say that we deliver bad value for money.  Quite the contrary in fact; audit work does not attract especially high fees, has high costs of provision and very high insurance costs as a result of fairly high risk of litigation.

All of these factors conspire to mean that audit work is often not undertaken by smaller firms of accountants at all – the risk/ return profile is just not good enough.

Today, I noticed that the UK government had committed to spending up to £10 million for urgent research by eminent scientists into why the population of bees and other pollinating insects is rapidly falling.  Answers are needed soon – bees play an essential role in the food chain that we all depend on.

There are significant amounts of money spent on government research and enquiries. For example, the results of an enquiry into the “Bloody Sunday” killings were announced last week.  This enquiry had reportedly cost £100 million in fees, with a further £91 million in disbursements.  It had also taken fourteen years to reach its conclusions.

Now, I rather doubt that most auditors have the scientific skills necessary to determine the reason for bees’ decline, but I suspect that they do have the skills necessary to identify the key assertions by witnesses to the Bloody Sunday killings, obtain and evaluate sufficient, appropriate evidence and then reach a conclusion.

This process is often known by an alternative name of “auditing”.  Our skills are already used in forensic investigations.  I wonder why people don’t think to use us in other situations where establishing facts is so critical?

With our innate focus on VFM audit and the natural sense of urgency that comes from having to report on financial statements within a matter of months, I can’t help but wonder if auditors would have been able to do the job for less than £191 million and sooner than fourteen years.

Singing, dancing, puppets and Enron. Of course it makes sense…

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I had a great weekend and on Saturday was lucky enough to see the play Enron at the Noel Coward theatre.

Enron is arguably the best known corporate bankruptcy in recent years. The US energy and communications giant collapsed in 2001 owing approximately $60 billion. The collapse of Enron is well documented.  Jeffery Skilling, the CEO of Enron, was keen on mark-to-mark accounting systems which allowed notional value to be given to ideas which might pay off in the future. Billion dollar losses were disguised as profits. Skilling was sentenced to 24 years in jail for fraud and Kenneth Lay, Enron’s founder, died before sentencing.

Enron was also a major factor behind the introduction of the Sarbanes-Oxley Act and also the collapse if its auditor Arthur Anderson resulting in the “Big 5” becoming the “Big 4”.

Whilst on the face of it a play about accounting fraud at a US corporation doesn’t sound the most exciting thing to watch it really was very well put together. Theatre, dancing, singing and puppets all added to the drama!

The play was great and if you do get an opportunity to see it I’d strongly recommend that you do so.

My husband is in the medical profession and he is always joking that accounting and finance is easy. Unfortunately the play was so good at explaining complex financial issues in a relatively straightforward way that he is now even more convinced that finance concepts are easy to understand!

CIMA results and performance with a smile…

First of all congratulations to all CIMA students that received their exam results yesterday and were successful. Your hard work paid off so very well done! We’ve heard from a number of you that were successful and those are always the best type of emails to receive from students!

If your results weren’t as expected though and you didn’t pass then better luck next time.

Various papers have performance management within the syllabus. A rather unusual method of managing performance was recently reported by the press.

Japan’s Keihin Express Railway Co., in an effort to promote a friendlier customer service, has implemented something called “smile scanners” at its stations to assess the smiles of their employees!

Employees have to look into a camera every day and have their smiles scored by a computer that analyses their facial features and gives feedback. The quality of the smile is reportedly rated on a scale ranging from 100 to zero.

Is it effective? Can the scanner distinguish between an artificial and a genuine smile? The jury is still out.

While we at ExP love technology, we’re not sure we would submit to such assessment, at least not before our morning coffee!

Remember the short term and long term

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One item that people should be aware of is that management accounting and financial management are similar to the extent that they are both concerned with resource usage. But there are differences.

I was lucky enough to have recently flown on the new Airbus A380 super jumbo and that got me thinking about some of the financial management issues that Airbus face. Designing and producing the A380 must have been a phenomenal exercise and a real testament to man’s engineering skills. It’s capable of carrying over 800 passengers and has a range of nearly 15,000 km. It’s a fantastic machine.

But what has this all got to do with the difference between management accounting and financial management? One difference is that management accounting tends to deal in short-term timescales whereas financial management is generally more concerned with the longer term. Whilst the longer term is generally considered to be more than one year be aware that certain industries and companies have a distinctly longer “long-term”.

From inception to delivery the A380 took nearly 10 years and the long term view taken by Airbus is certainly longer than some businesses in for example the IT or fashion industries. Some of the businesses in these industries have distinctly shorter “long-terms”.

Anyway, despite the millions spent on design and development of the A380 there was one disappointing thing about my flight and that was I fell asleep during the film and missed the ending…

IFRS 9 released. This is a biggie.

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On 12 November 2009, the IASB issued IFRS 9 “Financial Instruments”.  This is the first stage of a three stage project that will probably make or break the international reputation of the IASB and its deeply impressive chairman, Sir David Tweedie.

The IASB inherited IAS 32 and IAS 39 from its predecessor, the IASC.  IAS 32 and IAS 39 have been rather markedly unloved ever since their introduction.  IAS 39 in particular has been criticised for taking fairly complicated financial transactions and making them more complicated still with piecemeal rules for different types of transaction.  Although it definitely had its supporters, many people said that the perceived complexity of IAS 39 made it insufficiently understandable by most people to be much real use.

Here at ExP, we believe that IAS 39 has had a slightly unfair press over the years.  It does have its faults for sure, but it also has a decent logic at its core.  The new IFRS (which will come in three parts over the next year; the next two stages to deal with impairments and the third phase to address hedging rules) has a tough job.  Make the rules simpler and it will create loopholes that will be exploited by creative accounting.  Close every possible gap and it will result in an accounting standard that puts on weight each year with minor amendments and ends up not understandable.

The attempts at simplification are honourable.  We’ll wait to see with interest how well they work.  But well done to the IASB for keeping calm in the global financial crisis that many commentators blamed the accountancy profession for making much worse.  They were under huge pressure to make change and they appear to have done a good job in the time they had available.

Shutting the stable door

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A UK director of one of the Big 4 firms pleads guilty to false accounting and fraud, having fraudulently claimed more than £500,000 in expenses in order to finance his wife’s extravagant lifestyle!

The director told police that he had stolen the money because “he did not want her lifestyle to suffer”, being afraid that she would divorce him. Apparently his fraudulent claims were kept below £5,000, meaning that they did not require further authorisation!

A spokesman for the firm said:

“Mr Wetherall’s frauds were detected via our own internal checks and he was dismissed in 2008. A thorough internal investigation was carried out and the case was then handed over to the police.”

The firm also stated that they had changed their internal procedures to prevent such fraud being committed again.

That could be useful I guess when advising client’s on their internal control systems in relation to expense claims!

Was the audit evidence sufficient and appropriate?

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It could be very interesting to see how this one develops!

A UK accountancy group signed off the 2007 accounts of one of their audit client companies, having accepted the valuation of £11 million for one of its assets, a ruby known as “The Gem of Tanzania”.

In the previous year’s accounts, a different firm of accountants had accepted the valuation of the same stone at £300,000.

On the basis of the £11 million valuation the owner of the company, came to the rescue of another company Wrekin Construction. Wrekin Construction was subsequently put into administration earlier this year and the administrators, Ernst & Young, looked to have the ‘ruby’ valued.

It turned out instead of being the world’s most valuable ruby, it was in fact a lump of anyolite worth in the region of £100!

Bet those previous auditors are not sleeping very well right now.

Still it would make a really nice paperweight!

Thinking of Christmas already?

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Pricing is an important area of ACCA and CIMA. There are a variety of pricing methods discussed in the syllabus including customer based pricing and competition based pricing. Broadly speaking, the former is based on the amount that customers would be willing to pay for benefits whilst the latter involves setting prices based on the prices of competing products.

In the UK, the Toy Retailers Association has just released their list of the top 12 toys that they expect to be most in demand in the UK this coming Christmas.

The interesting thing about the list is that the average price of the toys is just over £26. This compares to an average price of £32 in the Christmas 2007 list. This represents a fall of nearly 20%.

Has this fall been driven by cost savings by the manufacturer on labour or material? Or maybe reductions in transport and storage costs?

My guess is that the toy manufacturers are aware of the recession and the impact on parents buying power (customer based pricing issue). They are also aware that the toy industry is an extremely competitive industry and at the moment their competitors will be offering cheaper products (competition based pricing).

Either way, I’m sure that there won’t be a lot of children debating this issue on Christmas day when they open their presents!

Do you know your cost of capital?

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The other day I was talking to a few local business owners and I asked them if they knew what their cost of capital was. I got a few blank stares.

When we discussed the issue further, people started to warm up to the idea that the cost of capital can be viewed in terms of opportunity costs:

1. One owner said his cost of capital was the interest rate on his bank loans. I suppose he was 100% debt financed and probably not planning to refinance any time soon! Good luck to him!

2. A second owner said he took out all his savings from the bank and put it into his business. Since the bank deposit rate was so low, he figured his opportunity cost was pretty low as well. He has a point, though he must realize that he has moved into a higher risk category by withdrawing his money from the bank and investing it in a start-up business.

3. Another business owner said he started his company by borrowing from his relatives. Since they haven’t asked for it back he assumes its cost is zero. But he does pay a price, I suppose: at family gatherings he gets dirty looks from his relatives and his wife gives him constant grief. He suspects that the relatives complain about him to his wife.

Since all three owners want to expand their businesses, they asked me if I could recommend new sources of finance. I thought of sending them to our P4 candidates (after the exam!).