Auston and classification of expenses

Auston International Group's former chief financial officer, Chua Peck Wee, 32, was sentenced yesterday to seven months in jail - for playing a part in the falsification of the company's accounts four years ago. The charge carries a penalty of a fine and/or a maximum seven-year jail term.

Auston is a listed company in the education business.

What was the accounting falsification done?
The former CFO admitted to instructing its accounts staff to record a payment of $268,525 as 'academic cooperation fees' to the Upper Iowa University for FY2003.

This amount was actually a payment made by Auston to the University of Wollongong for university fees for FY2002.

What is the impact?
By falsely recording the amount as academic cooperation fees instead of university fees, Auston could capitalise it as a development cost and subsequently amortise the amount over three to five years from FY2003.

Essentially, Auston had avoided recognising $268,525 as expenses for FY2002. It increased the net profit for Auston's IPO prospectus in 2003.

The ex-CEO said the ex-CFO had came up with the wonderful idea of smoothening out the expense. The ex-CFO said he was too weak to stand up against the ex-CEO's demands.

Whatever the circumstances preceding the crime, you Mr ex-CFO had helped to pass the necessary entries. So you got to pay for it!

Reference - Jan 12, 2007, "Ex-Auston CFO gets seven months' jail", Business Times, Michelle Quah.

Xpress Holdings - 2 responses in the press

Subsequent to Ms Michelle Quah's article on Xpress and its auditors, Mr Christopher Chong, Chairman, Audit Committee, Xpress Holdings Limited and Mr Mak Yuen Teen, director of Corporate Governance and Financial Reporting Centre NUS Business School presented their respective views on the Jan 9/10, 2007 respectively.

Mr Chong covered the following areas in his letter:-

• He said the statement that " 'problems' began in Nov 2006 with the dismissal of Deloitte & Touche ('Deloitte')" is incorrect. He said the issue with Deloitte started in Sep 2006 and the committee reacted with increase allocation of resources to address those concerns raised. So Mr Chong, are you making an issue on the 2 month's difference?
• The statement by Ms Quah that Deloitte 'refused to pass the company's accounts' is wrong as per Mr Chong. From his response, I couldn't see what is wrong with the statement. Yes I can read from Mr Chong's letter that Xpress has taken steps to address the concerns of Deloitte. But I am also sure the brains in Deloitte must have taken all these into consideration before deciding not to complete the audit exercise.
• To be fair to Xpress, I note that it has secured help and endorsement from other experts such as RSM Nelson Wheeler in Hong Kong, KPMG Corporate Finance Pte Ltd and Foo Kon Tan Grant Thornton at an estimated cost of $500,000, in its effort to work with Deloitte.
• Mr Chong said he couldn't understand why ACRA is not agreeable to the extension request. While I may understand that ACRA or any other governmental/business entities may take the position that it is not obliged to give you a reason for rejecting your application, we should however ask whether such position is good for the maturity of Singapore's corporate scene.

Mr Mak, a recognised authority, in the field of corporate governance, came forward with the following views:-

• On the Xpress' issue with its auditors, the shareholders should direct questions at the audit committee, who has the primary responsibility on audit matters. The committee should state its views on the matters raised by the auditors, and share any plans to do to address the concerns.
• On a more a macro level, he suggests that "shareholders carefully study the independence, expertise and activities of the audit committee of companies they invest in and ask more questions about it at AGMs. Companies should consider following higher standards on matters such as the independence, expertise and frequency of meetings of the audit committee..."

Well Jan 15, 2007 is the AGM for Xpress. Perhaps we will have more daylight on the issue after "the day after tomorrow".

Till then, cheers.

Reference
- Jan 9, 2007, "Why Xpress changed auditors", Business Times, Letter to the Editor.
- Jan 10, 2007, "Ask the Xpress audit committee", Business Times, Letter to the Editor.

Xpress Holdings has sacked its auditors?

Deloitte & Touche, Xpress Holdings' auditors, has refused to sign off on its FY2006 accounts. The company subsequently decided to sack the auditors.

The latest development is that ACRA has refused to grant it an extension of time - to get its accounts audited and hold its annual general meeting.

Why the refusal to sign off the accounts? Two main issues.
1. Precise Media Group (PMG)
Deloitte had doubts about certain revenue items recorded in the statements of PMG, and the cost of Xpress's investment in PMG and the goodwill from the purchase, recorded in Xpress's books. (Xpress had raised its stake in PMG in June, from 60 per cent to 100 per cent, in a $27.5 million deal.)

2. PMG's internal control


What is Xpress' position?
Xpress said they have tried to address Deloitte's concerns.

Xpress then hired Foo Kon Tan Grant Thornton for a 2nd opinion on its financial results. Foo Kon concluded that 'Deloitte's observations are mostly correct' but added that alternative evidence could be obtained to address those concerns. It was obtained.

Foo Kon 'indicated its willingness to act as Xpress's auditors'. Xpress proceeded to ask Deloitte to resign and moved to hire Foo Kon.

The AGM is slated for Jan 15, 2007.

As shareholders of Xpress, would you not be interested in asking Deloitte what have caused the "divorce"? Shareholders should also ask the new "bride to be", why she would be willing to marry Xpress?

P/S - Edgar has got no shares in Xpress.

True and Fair - Accounting or Legal Concept?

Can you find a specific definition of "True and Fair view"? As of my last attempt, there is no authoritative ie. "black and white" version available for all parties to adopt.

The ambiguity then gives rise to confusion.

The public accountants are required by the Companies Act to express an opinion on whether the financial statements are true and fair. The auditors conduct control test and substantive test based on varying degree of sampling to reach a conclusion.

Clients may enter into a lengthy discussion to change their auditors' opinion to qualify their accounts.

ACRA said the criterion of a "true and fair view" is NOT an accounting criterion. It is open to legal test in Court. ACRA is saying that public accountants thus do not have the final say.

Mr Joseph Alfred, Technical Director of ACCA Singapore, in his article in Focus Qtr 4- 2006, presented his arguments against accounting profession being "absorbed and subsumed under the legal profession".

Given the current direction from ACRA, he said you should not be surprised if you were to be directed by your auditors to the lawyers to obtain opinions on contentious accounting interpretations.

My view
Why should the accounting profession be exempted from a legal review when other professions like medical are included?

Grig says...

Dear Edgar,

Thanks for your kind support during last year. I feel my MBA at least 30% yours because according to my classmates accounting was the most difficult module.

Grig
25 Dec 2006

Merry Christmas!

If someone will grant me a wish for or maybe if there is enough of us to pray for peace, happiness and a stop to the degradation of the environment, the world would be a better place for all.

My friends, take care.

Serene, I thank you too :)

Hi Edgar,

I was your student in your main & revision classes this year (ie. 2006) from Jan to May, I took my CBE exam for paper 1.1 last week and am pleased to tell you I've passed!!!

To me, this exam was a difficult one, though I only managed to score 76 marks but I believe I had done my best and am glad I've cleared the paper!

I would like to take this opportunity to thank you for being an inspiring lecturer, though I was confused sometimes but over all I thoroughly enjoyed and am enriched from your lectures. Keep up the good work and may you enjoy more success in the coming Jul term!

Best wishes and God Bless You!!

Regards,

Serene
28 June 2006

Auditors to pay $775,000 damages

Who sue who and for what?

Gaelic Inns (of Muddy Murphy's Irish Pub and Penny Black of Boat Quay) sued Patrick Lee Public Accounting Corporation for $1 million losses suffered by Gaelic Inns.

How was the monies stolen?

The then Group Finance Manager, Ms Denise Ang did not banked in the daily bar takings between March 2003 and May 2004.

What is the Hon Judge Belinda Ang's decision and basis?

The Judge ruled in favour of Gaelic Inns and awarded $775,000 plus interest.

Judge said "while an auditor is not expected to be a detective, the duty to audit carries with it an incidental duty to warn... managementt or the directors of fraud or irregularities uncovered".

Was it uncovered by the auditor?

The audit was in progress in March 2004 while the crime was still in progress.

Mr Lawrence Phong, the audit manager in charge then, was reviewing the bank reconciliation statements. There was a discrepancy of about $680,000 noted between cash balance as per accounts and actual cash in bank!

Mr Phong was faulted for not doing an indepth investigation immediately upon its discovery, tardy in follow-ups and lastly for not highlighting the matter to the management.

Conclusion

Does this decision further increase audit risk to the auditors? Lawyer Philip Fong, representing Gaelic Inns, seems to think so. The decision highlighted the need to review process and audit procedures of cash, particularly in F&B or retail businesses.

However, such annual audits are still not expected to discover frauds unless specially commissioned to do so. In this case, the auditor had laid his hands on the most glaring documents highlighting the crime ie. bank recon statements. And thus the decision.

Good night.

P/S - Pic of December's rain clouds

Can you give some pointers to the new students?

Dear students, past and present,

Need your help to contribute some advice to the new students coming in in next academic term.

Advice on the following:-
How to manage time between work, studies, family and bfs/gfs?
How many subjects should I take?
How should I study? Read textbook or not?
How to deal with lecturers to get them to help?

Given that you guys and gals have now got the experience of going through at least one exam, let me have your views.

No right or wrong view. It is your view. - So just type :)

Stock Grant vs Stock Option

What is stock grant?
Company buys shares from open market and gives them to its staff according to an incentive programme.

What is stock option?
A company issues papers to its employees giving them the right to subscribe to shares of the company at a pre-determined price (usually below current market price) after a certain vesting period.

Similarities
Both forms of incentive plan enable the company to motivate employees to achieve superior performance as well as to align the interests of employees and shareholders'.
Both costs of incentive plan have to be expensed off against profit.

Differences
Expenses incurred to do stock grant is tax deductible as per cash compensation to employees. Stock option expenses are NOT tax deductible.
Determination of cost for stock grant is more definitive. There has been constant debate over the valuation of stock options.

Conclusion
SIA, SembCorp Industries, SMRT and StarHub, are recent adopters that have awarded employees with stock grants for the first time this year.

More expected to follow forth.

AirAsia may have to restate earnings?

Issue
In early Nov 2006, AirAsia, the Malaysian budget airline, have indicated that it may have to restate its earnings for its fiscal year ended June 2006. This is a result of difference in interpretation of a certain accounting policy. The dispute would translate to RM40mio swing in profit.

What is the accounting policy under dispute?

The focus is on FRS 112 under the Malaysian standard.

AirAsia has maintained their position that the International Financial Reporting Standard (IFRS) allows it to recognise unused investment tax allowances as deductible temporary differences.

It argued that its accounts for year ended 30 Jun 2006 will not present a true and fair view of the company's financial performance if it were to comply strictly with FRS 112 under the Malaysian standard.

Malaysia's Securities Commission (SC) had asked AirAsia to restate its accounts.

The Malaysian Accounting Standards Board (MASB) confirmed recently that FRS 112 was not a new standard, and that it is also consistent with the international standard.

Bottomline
AirAsia's accounts could be qualified. The profit definition difference would have no impact on its financial position as the accounting treatment is non-cash in nature.

Anybody got any update on this case?

ACRA goes XBRL

Wef 1 April 2007, ACRA will require companies and local branches of foreign companies to file their financial statements in XBRL format via Bizfile.

To know more, sign up for "Public Awareness Seminar" and learn how to prepare and file financial statements in XBRL format.

Seminar will be held at Supreme Court Auditorium on Thursday, 30 November 2006 at 8.30 am to 12.30 noon. The eflyer says $12 (I think).

I would love to go and learn but alas I will not be in town. So to whoever intends to attend, pls share with us. Go to www.acra.gov.sg for more info.

Do a bit of national service for ACRA la..

N Khan says...

"Dear Mr. Wong,

My name is Nus and I am one of your I.IJ (revision class) student. I am a student of Singapore Accountancy Academy as well but this is the first time I am joining your class. I have already attended the first lesson and I think you have a brilliant approach to make everybody learn the concept and actually "apply" it in examination question.

You said in class, you send reading materials and assignments through the e-mails, and I would be very glad if you send me some materials as well.

I am very determine to pass this coming 1.1 exam and I believe your help will lead me to reach my destination.

Thank You So Much for taking your time to read this."

Your Student,

Ms Khan, May 2006 Revision Class

P/S On 15 Sep 2006, she did passed.

J Liew says...

"I have just completed paper 1.1 in the recent June 2005 exams.

The months of hard work have paid off and I would like to express my appreciation to Mr Edgar Wong for his unwavering commitment, patience and guidance. He has definitely helped his students cope with the subject at a more comfortable pace."

J Liew, Sep 2005

Serene says...

"By the way, I must say that you teach really well, whereby you'll put yourself in students' shoes and explain. As I had taken accounts back in Secondary and Poly days (lecturer seems to be teaching himself or maybe he could not explain clearly).

I didn't actually learn through so much understanding. I've only memorised to pass this far. As a matter of fact, I hated accounts in secondary days. I know I can't play a fool with ACCA now. Have to work triplely hard."

Serene, Sep 2005

Helena says...

"You are excellent lecturer. Your lecturing is very interesting.

I never felt boring or tired when attending your lecture after work. Besides you are very responsible lecturer who really cares about the improvement of the students."

Helena, Sep 2005

“Brave New World” in Financial Reporting

The world's biggest accountancy firms united in their call to make financial statements more meaningful for investors on 9 Nov 2006.

What are some of the proposed changes?

• They are pushing to include more non-financial information.
• They want quarterly financial statements to be replaced by real-time Internet-based reporting.
• They want to create and present a menu of fraud audit proposals at different pricing.
• Individual auditors (instead of the firm) be subject to penalty for faulty audits.

Who are the parties to this 24-page proposal?

PricewaterhouseCoopers, KPMG, Ernst & Young, Deloitte, Grant Thornton and BDO

Basis to include non-financial information

KPMG Singapore's head of audit, Tham Sai Choy explained the close link between non-financial information and valuation of a company. Example of non-financial information – the changes to a company's oil reserves, a telco's subscriber numbers, an airline’s load factor etc. Is there a need for these numbers to be audited too as they become more and more meaningful in giving guidance to investors on its performance?

Basis for Internet-based reporting

The report has also suggested that information be easily accessed by users through new Internet-based reporting technologies. The main reason for the lag is the need to assure quality and reliability of business information to users. Till then, paper-based financial statements will prevail as the only legitimate form of communicating performance.

Basis for fraud audit proposals at different pricing

• to close the expectation gap with clients to expect auditors to discover frauds and errors under current audit programmes
• to provide clients with a choice on the level of intensity of investigative work needed

My Conclusion

It is an amazing effort for so many key players of the auditing industry to be able to come together present a united front. But what is the true underlying driving this cohesion? Is the auditing profession looking at how they can enhance their relevance to the business community and thus ensure their continued economic existence? One of the proposals highlighted the need for individual auditors (instead of the firm) be subject to penalty for faulty audits.

In any industry, the industry players are encouraged to do some self-regulation to ensure service quality and fair existence before the strong arms of the LAW come in and take full control of its destiny.

Hour Glass, Gems TV and FRS39

Hour Glass paid $15.5 million for a 5% stake in Gems TV Holdings towards the end June 2006.

Who is Hour Glass and who is Gems TV?
Hour Glass is in business of retailing luxury watches and accessories and listed in the SGX.

Gems TV buys cut gemstones, makes them into handcrafted jewellery in Thailand and sells the goods through a 'reverse auction' over television shopping networks to home buyers in the UK.

Gems TV is currently offering nearly 285.8mio shares at $1.08 apiece in its IPO now.

At the offer price of $1.08, that stake will be worth $44.5mio ie. a potential unrealised investment gain of $29 million after just 4 months!!! This is definitely a situation of “got money can make more money”.

What is Hour Glass’s investment horizon?
Hour Glass has indicated that it will hold the investment for the long term. It has also agreed that it will not, without the PRIOR CONSENT (as compared to “moratorium”) of the IPO's global coordinator, dispose of any of the shares for 12 months after the listing. Thus technically speaking, Hour Glass may be able to sell its stake within 12 months.

How will Hour Glass account for this investment in their books?
Hour Glass has stated that the investment will be classified as being available-for-sale (AFS) under FRS39 – Financial Instruments: Recognition and Measurement and will thus be restated at fair market value as at the end of the financial year.

What are the impacts of this decision?
For investments under AFS, any unrealised holding gains and losses are deferred in reserves until they are realised or when impairment occurs.

Thus the unrealised gain of $29mio expected on 10 Nov 2006 will go to the reserves and not go to P&L.

Shareholders will thus see the impact on net tangible assets per share and no effect on the earnings per share.

Place your bets! Place your bets!

Hi,

Anyone dare to guess what questions will come out for Section B in the coming ACCA Paper 1.1 (ie. Dec 2006)?

Q1 -
Q2 -
Q3 -
Q4 -
Q5 -

Come on! Give it a calculated guess!!!

Good nite...

A New Ratio from Manchester Business School

Hi friends,

Attended a taster seminar by Mr Bob Ryan of Manchester Business School.

Interestingly he is rumoured to be the examiner for ACCA's new financial management paper. After listening to him for 2 hours, I wish "All the Best" to those taking that paper :)...

Back to the topic proper.

What is the issue?
When companies are required to show aggressive numbers, creative accounting (hei! actually some are not so creative after all) becomes the order of the day. Companies like Enron, ACCS and Informatics are at various stages of proving their respective revenue recognition being true.

Is there a magic panacea to detect this problem before it explodes and takes the savings of thousands of good hardworking people and places thousands of people out of work?

The ultimate test of a true revenue is whether that revenue is convertible to "CASH".

The question an investor, a good CEO, a good CFO should asked is whether the Operating Cash Flow (OCF) commensurates with the rapidly growing Operating Profit (OP). If OP had grown by 300% while OCF grew by a meagre 2%, one should ask where had the OP gone to?

The Panacea
The panacea as proposed by Mr Bob Ryan required us to calculate the COP, Cash to Operating Profit ratio.

COP = EBITDA / OCF

The steady state would be COP = 1 where a $1 of EBITDA would translate to $1 of OCF.

Mr Bob Ryan said the ratio would have detected a severe dislocation in ENRON given its COP of 19!!!!!!

Tired and sleepy.. pardon me for any typo and factual disjointment..
Good night and take care.