Financial statements The frustration continues…

As part of their research and teaching activities, many accounting academics spend a lot of time poring over published financial statements.

Strangely, some of them find this work fascinating. To most people, an enthusiasm for reading accounting reports is about as comprehensible as, say, an infatuation with spoon collecting. But those accounts are more than just endless columns of numbers, and page upon page of unfathomably dense verbiage.

They represent a fine allegory on the general state of accounting, and there is some satisfaction to be had from reflecting on this, while dealing with the frustrations of trying to glean usable information from unhelpful financial reports.

Accounting is supposed to have a purpose beyond a mechanistic application of processing rules, producing artefacts of questionable descriptive ability along the way. Indeed, the whole point of accounting may be put in one simple, central proposition: it is meant to provide information that is usefully representative of an underlying economic reality.

Confirmation that accounting has not achieved unequivocal success in this task is available almost everywhere you might care to look. For example, the various accounting standard setting bodies have yet to shut up shop, and declare that their work is done. Academic researchers have for decades been finding compelling evidence that a variety of accounting constructs are irrelevant to equity returns. And financial analysts are routinely obliged to alter accounting numbers in order to derive values that more relevantly reflect the reality of the reporting entity’s operations.

There exists any number of plausible explanations for these perceived deficiencies in accounting. Possibly the most important one is that the accounting standards in terms of which financial statements are prepared may be fundamentally inadequate to the representational task. This is why a reader of financial statements might reflect, with as calm a demeanour as possible under the circumstances, on why the standards result in an accounting presentation that obliges him to search, in three or four different places in at least two different financial statements, for the numbers that allow him to determine the reporting entity’s total return on financial investments. Or why so much work is involved in transforming the accounting treatment for operating leases, so that the ratios more appropriately measure the reporting entity’s results, rights and obligations.

It is unlikely that accounting will ever solve all of its problems. There are too many different personal conceptual frameworks in existence, and too many opposed interests. However, there is surely much more that can be done to reduce the frustrations of that financial report reader.

Author: Mark Bunting CA(SA), CFA, is an associate Professor of Finance at Rhodes University


All human beings are entrepreneurs

Entrepreneurship is the pursuit of opportunity without regard to resources currently controlled. This definition is about opportunity and resources. It has nothing to do with society’s view of self-employment, dreams and guts. The definition includes everyone.

So, how do entrepreneurs who don’t have their own business but work at a company embody that entrepreneurial spirit? What can businesses do to encourage them?

This is great news for all employers who have an underutilised entrepreneurial well of opportunities within their businesses. What can you do to value and benefit from your employed entrepreneurs?

The most valuable assets in your business are always your employees. Your employees will perform at their best when they are motivated and happy. As an entrepreneur yourself, you know that it is key to feel a sense of ownership in your business in order to rise to challenges and capitalise on opportunities.

How do you create motivated ownership?

Goals.For each project, ensure that your employees understand the goals, and allow them to determine the time frame. The fact is that if you choose your own deadline, you will feel accountable to meet it.

Standard measurements.Be specific about your minimum measurement standards – your ‘non-negotiables’. Grant your employees the authority to make the needed compromises through their decision-making.

Resources.Give your staff access to all resources available and, most importantly, full budget information. Let them evaluate the risk-return strategy, given the constraints.

Coaching.Guide them in the process through support and by being a sounding board. However, let them make the decisions.

Mistakes.Don’t allow negligent mistakes, but let your staff take chances and be quick to forgive. Use mistakes as opportunities for feedback and growth. Remember that experience is what you get when you didn’t get what you wanted.

Reward.Be forthcoming with deliberate praises when they are deserved. Feeling important encourages your employees to do more.

Grow your own entrepreneurs Once you have your corps motivated, based on their ownership in your business, they will make your decisions as if these were their own.

All human beings are born entrepreneurs. Unfortunately, many have never had the opportunity to discover that part of their life, so it remains hidden. Inspire, motivate and grow your entrepreneurs!

Author: Stanford Payne CA(SA) is an ICF Accredited Executive and Business Coach.


Four factors undermining faith in financial institutions

Banks, pension funds and insurance companies are the three most important pillars of our financial system, and all of them depend on large-scale participation to work effectively. The more people are invested in a pension scheme, the more capital it has to work with and the more opportunities it has to make successful investments. The more people have insurance policies, the smaller the portion of the shared risk each of them assumes.

There are, however, several factors currently working to undermine faith in these financial institutions – which may lead more and more people to opt out, thereby increasing the risk for everybody. One of these factors is out of our control, but the other three are well within our power as a society to fix.

What is out of our control, of course, is the unpredictability of markets themselves. Dips and crashes can and do happen. The real challenge here is one of education and experience. The older a person is, the more likely they are to have lived through previous crashes, and to understand that what goes up must come down, and go up and down again, but all in the context of a very long term rising trend.

Perhaps both private and professional investors need more reminders that wealth building is not a short-term game.

But there are more troubling issues feeding the current scepticism concerning our financial system. Some of it has to do with outright fraud. Every Bernie Madoff and Arthur Brown puts another dent in everyone’s trust. Perhaps even worse, it adds another layer to the red tape that makes an already-complex business even more complex and expensive.

The third factor falls short of actual fraud, but still smacks of unethical practice – unscrupulous or ill-educated brokers and advisers who make claims they can’t justify, or who sell products they know to be of questionable value, just to rack up their commissions. There have been great strides taken in eliminating this kind of dodgy practice, but there are still too many bad products in the market.

Finally, the actions of governments can reverberate around the world. If people in Cyprus can have their savings raided to fund government debt, can it happen anywhere? In the long run, this may be one of the most troubling developments of all. The stakes are high. For all its many faults, the current global financial system underpins just about everything we do. Without it, the world would be unrecognisable to most of us. However, it’s built on a foundation of trust that is ultimately very fragile. Maintaining that trust should be a high priority for everyone involved, not just the regulators.

Author: Kevin Phillips CA(SA) is the Managing Director of Idu Software.


G4 – Sustainability’s new ‘gold standard ’

It’s a rainy ‘spring’ Sunday in Germany – in a smoky, panelled pub filled with elderly citizens shuffling past the buffet – and in the air is a way of life on its way out. Even so, what a poignant setting for writing this column before jetting back to Joburg tomorrow. During May this year, in Amsterdam, over 1 500 business and government leaders, academics and sustainability practitioners from around the world gathered from 22 to 24 May for the launch of the new G4 standard released by the Global Reporting Initiative (GRI).

In his keynote speech, South Africa’s ex-Justice Mervyn King quoted legendary economist Milton Friedman as having written: “There is … only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it … engages in open and free competition without deception or fraud.”

King noted that this definition is redundant in the 21st century, as overwhelming evidence shows that “business as usual” is damaging the planet past its ability to recover.

What then does G4 practically mean to accountancy in general and the many CAs(SA) heading companies as CEOs, CFOs and company directors? Business regulators around the world are steering corporations to reduce their negative impacts on the environment and society, or at least account for how the value they create balances against the harm they may be causing. But how do organisations actually do this?

The GRI is among several sets of guidelines on offer, but appears to be the one becoming most universally accepted. It is also being dovetailed with the integrated reporting framework being developed by the International Integrated Reporting Council (IIRC), chaired by the self-same Mervyn King. The G4 standard is in effect the means through which organisations evaluate their environmental and societal impacts in tandem with their traditional financial reporting.

Far bigger than just the G4 release, the GRI Conference on Global Sustainability was a stunning eye-opener in how quickly this new discipline is expanding. The “Big Four” accountancy firms exhibited their corporate sustainability offerings, while IT providers displayed sophisticated software for data collection and collaboration – from the source indicators right through to the final integrated report.

It was noteworthy how few Americans attended, while Brazilians, Europeans and the Chinese were aplenty. A large South African stood out in his full ZCC (Zionist) regalia. I was struck by how far South Africa is ahead in integrated reporting, which was widely accepted as “the next big thing” by delegates. King III and the JSE’s decision to introduce it in 2011 were clearly prescient.

The Sunday lunch buffet has ended and cigarette smoke wafts out with the last diners into the gathering rain. It’s time to go.

Author: Clive Lotter is an Integrated Reporting Consultant and writer of Annual reports for listed companies.


Reaching your target for services over and above compliance

Last month we looked at the ‘law of fee flexibility’ – the larger amount clients will pay you in fees provided you meet their needs and can deliver a return on their investment. Based on a survey of over 100 attendees at my recent practice management workshops, the following five services were reported as being the most commonly delivered: • Estate planning and wills • Payroll • Management accounts • Business valuations • Business advice.

You manage what you monitor

Do your forecasts for the next year include a financial target for these types of extension services? Do you have systems and processes to enable you to deliver these services in a cost effective manner? Do you give clients a guarantee regarding the value you will deliver? Can you select five services that at least 60% of your clients might benefit from?

Are you committed to expanding your service capability so you become a ‘famous person’ for this type of work in your community?

One approach for business advising is to offer a regular meeting plan – perhaps quarterly. What will you discuss? Well, experience reveals that half the meeting will be driven by you, the accountant, while the client will seize the opportunity during the other half as they discover the value of your advice.

Does your reception area include a menu of your full service offering? Visit a restaurant and the restaurateur will present you with a list of everything they can offer.

Why not publish a card of your services?

The times, they are a-changing It may be almost 50 years since Bob Dylan’s song made the charts, but the sentiment has never been more relevant. Some practitioners look and see threats around them, while others find what I call ‘oppathreats’ – on the flip side of every threat, there is always an opportunity. Start with your own firm and look for the opportunities.

What can you do to keep ahead in these rapidly changing times? New services? New clients? Maybe, before the end of 2013, you could ask your top 50 clients this question: “Do you know anyone who needs a great accountant?” Yes, I know I have asked a lot of questions, but usually they are the key to unlocking the door to discovering how you can be of further value to nclients, as you seek to access the power of fee flexibility.

Author: Mark Lloydbottom is an author and consultant at Mark Lloydbottom Consulting.


Unleashing your unfair

Many years ago, most budding professionals were advised by career guidance counsellors, parents and others from that era to find a good job at a solid company to have stability in life.

Thankfully, that thinking has changed. First and foremost, it is important to understand, appreciate and celebrate what you truly love doing, as this will typically be where you excel.

Even the most clever and diligent people can, at best, be only good – never great – at something about which they are not passionate. Good is not good enough. Our respective individual talents should be applied for maximum effect and achievement. Life is meant to be lived and enjoyed to the maximum.

So, how do you know what you really love, what you are exceptionally good at and, consequently, what you should enjoy doing most of the time? Contrary to popular thinking, the answer for most people is not that straightforward. Here are a few tips to consider:

• What do you look forward to doing? Carefully consider what generates energy in you – what you are doing when time seems to fly and where you feel most fulfilled, with the greatest sense of achievement.

• What are your unfair advantages? Be realistic about your talents – to direct or to do, to lead or to follow, to work alone or in a group, to work with people or numbers or both, to strategies or to execute. The things that come naturally to you are your ‘unfair advantages’ in life. Make sure you position yourself to take full advantage of these.

• What will be in the credits of your life’s movie? Imagine fast-forwarding the movie to consider what you would like to be remembered for one day – what would you consider to be your greatest achievements and contributions to society?

For the auditor in us, there are various tools available on the internet that shed light on these questions and provide independent feedback from a number of perspectives. An interesting example is StrengthsFinder 2.0. This book provides access to an on-line test with instant feedback regarding your most prevalent strengths, based on your natural talents.

Contrary to old-school thinking that suggests working to correct your weaknesses, you should instead be working on your key strengths or ‘unfair advantages’ at which you are naturally gifted.

Focus on improving these areas further, as these are where you can add the most value and obtain the best return on your effort.

Life is too short, and the long hours you spend at work ought not to be toiling, but rather involve loving what you do! As Kermit the frog says: “Time is fun when you’re having flies.”

Author: Anneke Andrews is the director that leads RecruitTalent at Deloitte.


Delayed gratification and wealth creation

While technical financial advice has become regulated and is getting more proficient, is this being matched by investor behaviour? Independent American investment research group, DALBAR Inc., published research in 2006 showing that over some 20 years, the average US investor in share funds lost 77% of the available return.

The S&P 500 delivered an annual average return of 11,9%, while the average investor earned 3,9%. Research elsewhere around the world, including in South Africa, reflects very similar results.

Not only do we invest badly, but many of us also live beyond our means. In the words of Thomas J. Stanley: “Income is not wealth. Wealth is what you accumulate, not what you earn.” Earning large salaries and bonuses is not necessarily a guarantee of wealth.

When it comes to instant – or, conversely, delayed – gratification (and aren’t we just tempted with so much today?), there’s the famous marshmallow test from the 1960s. However, new research suggests that it’s not just willpower that will shape our lives, but also trust.

In essence, Walter Mischel, a professor at Stanford, took nursery-school children, put them in a room one by one, and gave them a marshmallow. They could choose to eat it right away, or wait 15 minutes. If they waited, they would get a second marshmallow. Observing children over several decades, the research found that those who chose delayed gratification were generally more successful in their education, profession and personal relationships.

A new study led by Celeste Kidd, a doctoral candidate at the University of Rochester, added another dimension. She had worked extensively as a volunteer with homeless families, and wondered what impact this would have on Mischel’s work.

“If you are used to getting things taken away from you, not waiting is the rational choice. Then it occurred to me that the marshmallow task might be correlated with something else that the child already knows – like having a stable environment.” What was missing, Kidd argued, was trust. She conducted an initial experiment with kids and crayons, and the promise of further painting supplies if they waited. One test group got the painting kit, the other group was told that supplies had run out.

Immediately following the paint supplies experiment, the kids all did the marshmallow test. The results were dramatic. Where the promise was honoured, 9 out of 14 kids held out 15 minutes for a second marshmallow. Only 1 in 14 did so in the other group. So, our ability to delay gratification might be impacted as much by our environment as by innate self-control.

Our inability as individuals to create wealth, despite the markets consistently doing so, has led to many fascinating insights into human behaviour. Despite our arsenal of technical skills, do we sometimes need protection from ourselves?

Author: Mike Lledo