Financial leverage?

It relates to how your business is funded ie. how much of it is funded by your own money and how much of it is funded by other people's money.

There is always a price for money. Money is a precious resource. Price of money comes in different terms ie. interest, dividend etc.

While you may be willing to forgo your dividends for the monies that you have invested in the business, other investors and lenders of monies to the business would want their "pound of flesh". These groups of people would want to be paid.

Thus the risk.

In any economic downturn and consequent negative impact on your topline ie. sales revenue, it would severely reduce your ability to pay these investors.

As accountants to be and in practice, we have to ensure a capital structure that is vigorous enough to protect the company's existence and also to meet the investors' aspirations.

Refer - http://investingwithedgar.blogspot.com/2008/01/big-picture-impacts-on-singapore.html

I will continue to review the specifics of the article here in AWE.

Was Mr Wee Sing Guan the only one who knew? Part 2

BNPP relied on Singapore Financial Reporting Standard 39 as the basis of its rebuttal to Mr Riehl's expert opinion.

BNPP said concealment or deferment would be impossible "with fair valuation of ALL derivative financial instruments through the profit-and-loss account as required by by FRS39".


BNPP said this is further evidenced by assurances made by Board of Directors in 2006's audited financial statements on Mr Wee's forex transactions.


BNPP said it was not able to fully appraise its client's forex positions as it was dealing with 11 other banks.


On a hindsight, similar to APB's case, a bank with significant dealings with a company, should seek periodic face-to-face report and review with a panel of at least 2 or more its senior management staff.

Was Mr Wee Sing Guan the only person who knew in SembMarine? Part 1

Referring to the court proceeding between BNP Paribas (BNPP) and SembMarine as reported by Conrad Raj in BT, January 3, 2008.

Heinz Riehl, SembMarine's "expert" witness, is trying to offer a defence for SembMarine, with the following:-

• non-financial institutions do not mark to market the value of the forward positions and;
• only recognise cash (ie. realised) profits and losses.

My opinion

This is a very poor excuse offered on behalf of a corporate of the size of SembMarine. He is saying that SembMarine do not have anyone to monitor whether the respective forex positions were making money or otherwise. They would just receive any profit and pay out any losses upon closure of any position.

As I have said before in my last posting on this topic, SembMarine could always ask the bank for a daily mark-to-market report assuming if SembMarine may not have the expertise in house.

Mr Riehl, are you saying that once a pregnancy is conceived, there is no need for any medical review at various stages of pregnancy but are only concerned with the outcome at the day of birth?

Changes to ACCA OBU Degree

The following changes will be effective immediately for ACCA students who registered after 1 January 2007 and who will sit the new ACCA Fundamentals level papers in December 2007.

* RAP - research and analysis project

1. Project mentor is still required.
2. RAP will be graded A, B or C.
3. RAP word limit is increased to 6,500 words.
4. Overall class of degree will be determined by the average marks of F4 - F9 module papers and the RAP grading.
5. You have to submit the RAP and a Skills and Learning Statement. And you must pass both papers.
6. If you failed the first submission of RAP, you can only get "C" at best, for getting a pass on resubmission.
7. You are given 3 chances to secure a pass for RAP. After 3 "strikes", you are out!

Bottomline
The process to be a "graduate" has become more vigorous. You need to plan your time and effort as part of your ACCA education strategy. For more information, you may click www.accaglobal.com/students/study_exams/qualifications/degree/.

Positive impact of fair value gain for Ipco

On Dec 15, 2007, BT reported that fair-value gain boosted Ipco International's 6-month profit by more than 100% (ie. from $2.1mio ti $5,4mio on a revenue of $24.4mio) despite a 31.5% fall in first 6-month sales.

What is Ipco's business?
Ipco is essentially a developer and investor in oil and gas, water and environment infrastructure projects.

ESA Electronic, its subsidiary in the semiconductor equipment distribution business, responsible for 31.5 per cent fall in group's sales of goods to $11.9 million from $17.4 million.

This was offset by a rise in other revenue from $2.4 million to $8.2 million, which included $7.5 million in 'fair-value gain' on financial assets.

So without the fair-value gain, the Group's total revenue would be $16.9mio instead of the currently reported $24.4mio (a 16% drop instead).

So while Labroy and SembMarine have been negatively affected by financial assets valuation, we have a company here that has been glossed with positivities instead.

P/S - Fair-value gain of $7.5mio is accounted as "Other revenue". Hmmm...

Audit exemption criteria for Groups?

a Japanese chef who has left this

The current law on audit exemption applies to individual company but not to a group of companies. So say Mr Joseph Alfred, Technical Advisor for ACCA Singapore.



Which law?

• Companies Act's Section 205(2) says companies are required to appoint auditors.
  
• Companies Act's Section 205A says private exempt companies with less than $5mio turnover and dormant companies are exempted from audit.

Where is the problem?

Let me illustrate with a simple example. Holding company has a turnover of less than $5mio and may be exempted from audit.

Subsidiary company has a turnover of more than $5mio and thus its financial statements would be audited. So far so good.

But when it comes to Group's consolidated financial statements, the regulator has confirmed that there is no legal compulsion for them to be audited.

Joseph opined that a Group with a turnover of of more than $5mio should NOT be exempted.

As for me, I am still not convinced with the need to audit the consolidated statements. As some practitioners have said, the need to audit should rest primarily on who are the ultimate key users of the statements. We should not just rely on mere criteria.

Four banks vs Asia Pacific Breweries for $109mio

"The best defence is offence."

Well that is the basic position of the four banks against APB in trying to claim back $109mio of their lost funds. Disregarding the bank's internal control failure to detect the fraud, the banks have chosen to place the faults on APB.

• One of the banks argued that Chia Teck Leng's acts were carried out in his capacity as APB's finance manager - and the company must shoulder the blame.


• Senior counsel Steven Chong, who represents two of the foreign banks, told the court that the fundamental issue was how Chia was able to perpetrate the fraud for almost five years and remain undetected. The obvious answer, he said, is that APB has vested wide powers and authority on Chia without any proper checks and balances in place.


• Chia was also able to ensure that correspondence from the banks was never opened by anyone other than him. His secretary was specifically never to open letters from banks addressed to him.

Background

From 1999 to 2003, Chia, now 47, had submitted to the banks fictitious documents with forged signatures of top APB executives, which convinced the banks to give him credit facilities in APB's name.

What did Chia do with the monies? He blew $62 million in casinos around the world, before being convicted and sentenced to 42 years' jail in 2004. Some millions still cannot find.

While Mr Chia sits in prison for the remaining 39 years, many bank officers' career have been scarred.

Accounting for Charities and Coops

The new Accounting Standards Council (ASC) will issue a separate set of accounting rules for Charities and Coops.

Donors to charities are more concerned with how the donated funds were used rather than financial performance information generally required by shareholders of companies.

The new accounting rules are still pending ie. waiting the new Council to get around to this issue.

Appeals Court raps Accounting profession

The Courts of Appeal ruled recently on 2 fraud cases where the auditors took some blame for losses experienced by their respective clients.

What are the 2 cases?

• Case 1 - Gaelic Inns vs PlanAssure Public Accounting - I discussed it back in Feb 2007. Take a look. http://accountingwithedgar.blogspot.com/2007/02/denise-ang-and-her-gaelic-victim.html


• Case 2 - JSI Shipping vs TeoFoongWongLCLoong (Tfwl) - Mr John Riggs, the MD of JSI Shipping, made $1.8 million disappeared via its monthly salary! FYI - his salary represented 25% of total staff costs. The Court said "Tfwl should have shown more professional scepticism." (In another word, the errors are so BIGG that normal human eyes should be able to see and check on them.)

So what is the penalty for not doing your job?

In Case 1, PlanAssure is to pay Gaelic Inn $317,108 (half of earlier ruling of $775,266) for contributing to the negligence.

In Case 2, Tfwl is to pay JSI $273,386 for being bo-chap to Mr Riggs' activities.

As in any profession, auditors too have their fair share of problems and risks.

Origin of "Debit" & "Credit"

I was curious about where and how the terms debit and credit come about.

I finally come across a brief explanation of the terms.

The words have Latin origins ie. "debitum" and "creditum". Pacioli is the name of the Italian monk who wrote about accounting in the 15th century and used these terms.

So they were NOT "debere" or "credere" as I thought they were initially. And the mystery continues ie. who was the inventor of these terms.

Well I learned something new today.

Are SFRSs very different from IFRS?

How does Singapore Financial Reporting Standards (SFRS) fare in terms of our assessment as being IFRS-equivalent?

One opinion said that SFRS are almost in complete sync with IFRS and are applicable to all entities. How come? Singapore generally adopts new or amended IFRS within a three-month period but there are some exceptions.

• FRS 40 Investment Property

IAS 40 was issued in year 2000 and effective for financial periods commencing Jan 1, 2001 while FRS 40 was issued in 2005 and effective for financial periods commencing Jan 1, 2007. By now, there are no timing differences between IFRS and SFRS.

Any difference between FRSs? Yes, the difference is in these areas:-

• Differing finance lease requirements
• One-off revaluation exemption from periodic revaluation for property, plant and equipment.

Anyway Accounting Standards Board (who will replace the Council on Corporate Disclosure and Governance with effect from Sept 1, 2007) is to present to Committee of European Securities Regulators (CESR) that the SFRS is equivalent to IFRS. Probably to get some sort of compliant certification from the Euro body.

Source - "Bridging the gap between accounting standards", Aug 23, 2007, BT, Choo Eng Beng and Chew Tong Gunn

Mid-career folks as Public Accountant?

my coffee at 11.37pm

In Joe's humble opinion - it is difficult for a middle-aged person (at least under current framework to qualify) to switch career and work his way to be registered as a Public Accountant.

Why is Joe so pessimistic?

Joe said the biggest stumbling bloke is the Practical Experience requirement.

Joe is a living example of someone who has acquired 4 of the 5 requirements but could not take the final step to be a public accountant.

How to get the Practical Experience?

For him to fulfill this requirement, he got to work in an audit firm as an audit professional for 3 years.

While the opportunities to seek such positions may be plenty at this point in time, the economics of transition has to be considered. Can Joe maintain his current income level to sustain the current costs of living with family bla bla bla while pursuing the trophy of public accountancy?

Define mid-career folks?

ACRA has defined “mid-career entrants” to include:

(a) people who have worked in other professional settings (such as bankers and financial analysts), but decided to make a career switch to the audit industry; and

(b) people equipped with the basic accountancy qualifications, but had chosen not to engage in any accountancy work in the early stages of their career.

Why is ACRA eager to look for ways to bring the mid-career folks into the audit profession?

One view is that professionals from alternative specialised industries often are experts in their own fields. These “experts” could make significant contributions to the audit profession by bringing in valuable knowledge and strengthen the audit team by adding to the team’s range of expertise.

Where the mid-career entrant aspires to become a public accountant, he could acquire the necessary audit experience under a public accountant before seeking to be registered. BUT HOW given Joe's position?

Any idea?

What are the qualifications needed to be a good Public Accountant?

flowers for me. thanks irene.

Can help me to answer the above question by classifying the existing 5 requirements (described below) either as

• "Essential",


• "Good to have" or


• "Thoroughly irrelevant".

The current 5 requirements for registration as a Public Accountant:-

1. Academic qualifications;


2. Practical experience;


3. Continuing professional education;


4. Completing the course on ethics and professional practice subjects as determined by the Public Accountants Oversight Committee; and


5. Membership with the Institute of Certified Public Accountants of Singapore.

Your view, please?

Public Accountant - How to be one?

Currently, the registration framework for public accountants comprises five elements:-

1. Academic qualifications;


2. Practical experience;


3. Completing the course on ethics and professional practice subjects as determined by the Public Accountants Oversight Committee; and


4. membership with the Institute of Certified Public Accountants of Singapore.


5. Continuing professional education.

The above first 4 are the various doors that a person aspiring to be a public accountant would have to go through before you gain your official registration and recognition as a Public Accountant. The 5th door is a maintenance factor.

What is a Public Accountant?

Public accountants are persons who are registered with ACRA in accordance with the Accountants Act (the “Act”) to provide public accountancy services of audit and reporting on financial statements or any other professional services that are required by any written law to be done by a public accountant.

What is the problem?

We have a shortage of them now and in future to promote high quality audit and corporate financial reporting to build confidence in Singapore’s corporate financial reports.

Any idea?

ACRA has proposed the following alternative pathways:-

• entry of international auditors (with specialist expertise);


• entry of mid-career professionals with specialist expertise which are relevant to audit; and


• re-entry of former public accountants who had left the profession.
  

Any other way?

Bong says...

Hi Edgar,

Just want to drop a mail to thank you for helping me to pass my 1.1 paper.

I got 90%.

I know you have been putting in a lot of effort on student. So far you are the one that spend most of the time with student. Giving enough time for student to think and try in the class.

That really help in building up confident of student rather than just quickly come out with the answer. especially for account dummy like me (have my study in mechanical engineering before).

Once again, THANK YOU and keep it up with your hardwork!

Your student,
Bong (Class of Jan 2007)

P/S - Bong, you have put in a lot of effort too. Well done.

Majority in CPA survey favour simplified treatment of SME accounting

A difficult bak kut teh lunch

The following are the results of a survey done by CPA Australia and the Corporate Governance & Financial Reporting Centre (CGFRC) at the National University of Singapore (NUS). It is reported in BT today.

1. 42% agreed with the definition of an SME in the proposed IFRS as 'entities that do not have public accountability and publish general purpose financial statements for external users'.


2. More than 60% felt that we should also include large unlisted companies which do not have public accountability into the new standard.


3. 72% said the new standard would better meet the needs of users of SMEs' financial statements.


4. 69% said they feel it would reduce the financial reporting burden for SMEs that want to use global reporting standards.


5. 59% said they believe it would reduce the audit burden of SMEs in general.


6. Banks who lend monies to SMEs are expected to be the main users of the financial statements.

What are some of the suggestions to simplify certain accounting treatments for SMEs?

SMEs are generally not in favour of complex accounting standards - for example:-

• share-based payments,


• accounting for impairment,


• fair value accounting.
  

What are the respondents' concerns?

1. Adopting SME-specific accounting standards today would lead to difficulties in aligning financial statements to full IFRS in future, when needed.


2. SMEs today may dread the work of converting from current full FRS to the new SME standards.


3. Many believe the guidance to implement the proposed IFRS for SMEs is inadequate.

P/S - On Wed, I will attend the Mr Kon's presentation at ASME.

Responses to ACRA Review

Mr Simon Ng Yap Peng and Mr Mickey Chiang, both representing their self and Ms Janet Tan, the executive director of ICPAS sent in their respective suggestions to BT / ST on Aug 2, 2007.

Firstly, Mr Simon Ng suggested:-

1. Let minority shareholders elect their independent representatives to sit in the audit committee of listed companies.


2. External auditors should set up a feedback box in their client's premises for their employees to "whistle blow" any irregularities.


3. External auditors should do surprise check on their clients.


4. Our accounting students should do case studies on recent scandals such as NKF, China Aviation Oil, Citiraya etc etc. [Edgar is doing it now thru' his blogs as he tries to inject realism into classroom learning.]


5. Encourage availability of post graduate courses for grads of other disciplines to learn about accounting matters.

Mickey Chiang questioned the following:-

• He understands that the ACRA review programmes were devised accountants from the Big 4. So are these programmes relevant to smaller/small audit firms?
• How many of those auditors who "failed" the review were from the Big 4?
  

Ms Janet Tan of ICPAS suggested the following:-

• To make available more training opportunities to upgrade knowledge and skills. [Yes, if the ACRA Review has highlighted that its members are caught in a time warp and self-contentment that they are good enough to keep making the monies without the need to keep up with time. But I don't think this is the main issue. Our members are failing at basic stuff ie. things like not doing stock checks and insufficient/no documentation.]


• Provision of a panel of "hot reviewers" for members whose work are now required to be reviewed by another suitably qualified person ie. "hot reviewer". [Yes, this will help an important concern raised by ACRA in the interim.]

Edgar says,

• I agree with Ms Tan that the review should be taken as a wake-up call to practitioners who think they can get away with shoddy work.


• But I am sure ICPAS will look for root causes that have contributed to the poor state. With the information procured during ICPAS's own check on its members over the years plus ACRA report, it should be able to present a more comprehensive remedial measures.

FRS40 and FRS12 equals more problem for companies

FRS40 on Investment Property

From 2007, annual changes in the fair value of investment properties are carried to P&L account.

So increased valuation of such properties would increase profit and consequent tax burden, vice versa. Recently, Overseas Union Enterprises (OUE) recorded fair value gains of $105.9 million in Q207 (nil in Q206) on its investment properties, due to the escalation in property values in line with the present exciting real estate market.

Such property firms would have already a cashflow issue in complying with FRS40 ie. cash to pay income tax on unrealised revaluation gains.

In addition to the above, property firms has another angle to consider ie. the impact of FRS12 on Income Tax on FRS40.

Companies have to account for the FUTURE tax consequence of a CURRENT event. This element of deferred income tax for any upward revaluation would have to be accounted for as an expense in the P&L.

What is "future tax consequence of a current event"?

An upward revaluation of an investment property

==> an increase in future stream of rental income OR increase in proceeds from disposal

==> make provision for the future tax liability today ie. deferred tax

While there is no actual cashflow for the provision, it is accounted for as an expense to create that provision.

Consequently, higher tax expense and higher effective tax rate.

Reference - "Property companies could be hit by deferred tax provision issues", Aug 2, 2007 Busines Times, Michelle Quah

A student of mine has joined AGO

Recently I received an email from a student with this type of address ie. @ago.gov.sg.


Curious, I ask him as to which branch of government is she working for now.


"Auditor-General Office," she said. [I thought it was the Attorney General Office. :)]


She is helping AGO to fufill its role to audit all ministries, statutory boards, embassies, and Temasek owned complanies for President. [Wow!]


That conversation brought my attention to the recent article in BT dated Jul 20, 2007 entitled, "Govt audit reveals financial lapses".


Examples of financial lapses revealed by Auditor-General are:-

• The Infocomm Development Authority of Singapore (IDA) could have better managed over $200 million in cash reserves for higher returns. [..from zero return?]


• National Volunteer & Philanthropy Centre (NVPC) had accumulated unused grants of $4.9 million in March 2006. [So again money is sitting idly around.]


• Ministry of Health (MOH) was found to have continued its payments for some 106 deceased persons through a scheme was administered by an agent. It has recovered some $55,850 of the $178,150 that was paid. [Phew! Amount not big.]

My Words

• Thank goodness we have a Government who is willing to be transparent about their own boo-boos.


• Thank goodness we have a good problem of dealing with money sitting around to the tune of millions of dollars. It shows that we have some hidden reserves ie. like housewives putting away money.


• Thank goodness we did NOT find massive frauds.


• It is good that we have taken stock of the problems. We will remedy them and move on.

5 Public Accountants' licence were suspended or cancelled

What happened?
ACRA, the independent regulator of auditors in Singapore, conducted a "test" on 110 of the total 780 public accountants from April 2005 to March 2007.

On Jul 25, 2007, ACRA has for the first time released the "report card" on the state of auditing profession in Singapore. The results are as follow:-

• One third of the 110 received a 'good' rating.
• Another third were rated 'satisfactory'
• The remaining third, or 36 accountants, were asked to undergo remedial action.
• The special 5 got their licence suspended or cancelled.
  

What are the areas of weakness?

ACRA deputy chief Mr Ow Fook Chuen listed the common boo-boos as follow:-

• Inadequate documentation of audit opinions.
• Lack of follow-up on subsequent events up to the date of the audit report. [Why the need to follow up? These events may materially affect the financial statements and the validity of the audit opinion.]
• Audit procedures were conveniently updated as 'noted' or 'done' without actual audit work or assessments being carried out. [While corners were being cut, clients still got charged. Or the other way round where clients want to lower audit fees and thus the corners cut.]
• Insufficient inventory count procedures eg. no physical count procedures.
• Some also blindly and recklessly relied on the audited financial statements by the auditors of overseas subsidiaries without considering their competence.

Edgar's words of wisdom (ha!)

A second round with wider coverage is expected to be completed in 2011. Hmm... isn't it a wee bit too long for the next report card in the current dynamic world?

To hasten the process of quality renaissance, should we do with public accountants what we did to hawkers in Singapore ie. force them to display their "A" or "B" or "C" licence? As hawkers' hygiene in food preparation has public implication, likewise the quality of work of auditors too has significant public implications.

So ACRA what say you?