A quote magnet is a person who tends to attract the attributions of various wise sayings.  The term was coined by Fred Shapiro of Yale Law School.  Famous quote magnets include Einstein, Churchill, Mark Twain and Oscar Wilde.  We take funny things that people have said, make them better, then attribute them to one of the magnets.

In accountancy, the main magnet is, of course, Sir David Tweedie.  However, most of the things he's supposed to have said, he did in fact say.  And, on the subject of leasing, he really did say this:

One of my great ambitions before I die is to fly in an aircraft that is on an airline’s balance sheet.

That's right - every airline rents its aircraft from a third party and, thanks to the arcane rules on accounting for leases, they don't show the planes on the balance sheet, they merely show the leasing payments as an expense as they go.

This bit below is simplified to make it a bit easier to understand.

They can do this because at the time the lease is taken out, the airline doesn't contract to rent the aircraft for most of its useful life.  So the account lets them pretend they're just "borrowing" it from its real owner, who will rent it to someone else some day.  To be fair, often they do end up leasing it to someone else.  But that doesn't make Sir David happy.  In other leasing agreements, where the lease term lasts most of the useful life of the asset, the asset and obligation to make future payments both come on to the balance sheet.

So the "pretend" form of leasing has led to a vast cottage industry of banks and various other companies lending assets to other companies using carefully-drafted accountant-assisted contracts that just happen to let the lessee keep the asset off its balance sheet, while providing fat fees for the lessor.  And Sir David is threatening to make this stop.  Because the IASB has issued a long-anticipated consultation paper which promises to ban the "pretend" form of leasing altogether.

Banks are up in arms.  The industry body for lessors, the Finance & Leasing Association, without a trace of irony, is warning that "UK business recovery could be hit by new accounting rules" because of the additional administrative burdens of complying with the standard.  Having prepared finance lease calculations in the past, I have to say the burdens are pretty tiny.  We should at least be thankful they realise that it's just a balance sheet issue; the cash flows shouldn't change at all.

Everyone else though will just shrug and get on with it, meaning that the proposed standard will probably get issued before long.  And perhaps that means that Sir David will get to take that flight... perhaps sooner than he anticipated.

Filed under: Accounting, Regulation with tags banks, finance & leasing association, fred shapiro, leases, sir david tweedie
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Bob Herz, the embattled Chairman of the US Financial Accounting Standards Board, is set to retire early.  He's shuffling off with effect from 1 October, and Leslie Seidman will serve as acting chair(wo)man until a more long term replacement can be found.  He's found it pretty hard going recently, as he attempts to introduce a number of difficult changes to US GAAP, many of them relating to fair value.  I blogged yesterday about some of the hostility he's facing, and there's some more here over at the Going Concern blog.

What many UK accountants may not realise is that Bob Herz is actually one of ours as well as being a US CPA.  It's also hard not to like him.  I met him at a breakfast meeting once, and he asked me where I'd come from.  I started telling him about my audit experience and he stopped me.  "No, I mean, where in London have you come from this morning..."

Filed under: Accounting, Regulation with tags bob herz, fasb, leslie seidman, us gaap
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This is one of the responses to the Financial Accounting Standards Board's consultation "Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Financial Instruments and Derivatives and Hedging":

Thanks to a friend of mine at the Big 4 for drawing my attention to this.

Filed under: Accounting, Entertainment with tags banks, derivatives, fair value, fasb
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This country faces the most almighty pensions crisis. Maybe not today. Maybe not tomorrow. But someday and for the rest of our lives, we will suffer. Why? Because just about everything that can go wrong is going wrong.

People aren't saving enough.  People aren't saving for long enough.  People aren't saving in the right sorts of assets.  The right sorts of assets aren't even really available.  And the pensions companies simply don't care.  It's a grim picture.

We covered amount and length before, in our tale of Mr Grey, so we won't dwell on that now.  Instead, we'll grumble about the dearth of quality investment opportunities for ordinary people.  I am, in my own humble opinion, a fairly sophisticated investor.  I can read and understand accounts, and my audit experience helps a lot with grasping what companies do and how they make their money.  But investing takes time, so most people will turn to funds to help them diversify their portfolio quickly.

And funds are expensive.  Even though we've left most of the bad old days behind, where funds would charge upfront fees, or mask their charges by using incomprehensible bid/ask spreads, funds are still too expensive.  True, most funds can't get away with charging 5% per annum, as some - unbelievably - did.  But a 1% per annum charge is still extortionate in an era of low growth, low dividends and rising prices.  My defined benefit portfolio, which is in the mid 5 digits, has made about 10% in the last five years.  But the pension company has taken 1% in costs over that period - a full tenth of my gains.  And it gets its money whether or not the fund makes a positive return.

I had had enough, so I rang them to request a transfer into my SIPP, which has no annual charges.  They said they'd send out the forms and hung up.  Even this amazed me.  I was basically telling them that I would no longer be paying them a few hundred pounds a year, and they just let me go.  No sensible business  should do that.  They should have at least asked me why I wanted to transfer my money out.  Their complacency is alarming, but far from extraordinary in the tragedy that is the modern British pension.

Filed under: Capital markets, Economics with tags idiots, pensions, sipp
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On Monday morning, the Today programme carried a jovial interview with Michael O'Higgins, Chairman of the Audit Commission, the body that seeks to ensure that local authorities and some bits of the NHS are getting value for money and which is about to be axed by the Conservatives.  Why?  Well, because Eric Pickles, the man who ate all the pies (probably at our expense) and who was booed by an angry Question Time crowd for claiming that he had to have a second home a mere 37 miles from London, doesn't like them.  He wasn't available to explain himself, so he sent Bob Neill, Parliamentary Under Secretary of State at the Department of Communities and Local Government, to do his dirty work.

Neill made a total hash of it.  Even Ritchie thought he was talking complete nonsense.  His argument was that the Audit Commission spends lots on bagels and pot plants and that it's outrageous that those costs have to be absorbed by the public sector when paying for audit contracts.  So he supports outsourcing audits to the private sector, who - incidentally - also tend to pay for food when having clients to visit at lunch times and have pot plants in their offices.  So, in exactly the same way, they will absorb the costs of those expenses into the fees they charge. His inability to grasp this fundamental point while floundering around trying to criticise the Commission made him sound as stupid and out of touch as many Labour ministers did in Labour's last term.  Quite an achievement.

His coup-de-grace, though, was to suggest that the Audit Commission might be floated off as a mutual organisation.  Er, Bob.  We already have a great deal of mutual organisations operating in the audit market.  Each of the Big Four firms is owned by its partners.  Did he even get a briefing prior to the interview?

Filed under: Auditing, Politics with tags audit commission, bbc, bob neill, eric pickles, idiots, michael o'higgins, nhs, question time, richard murphy, today
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Ritchie has convinced the disorientated folk at The Guardian to publish his awful dross about the tax gap.  It's all in there, including his claim that the tax gap is £120bn.

I was on holiday, so I'll merely point out that I've dealt with all this before.  Pleasingly, it's far from plain sailing in what should be a pretty captive audience for him.

Filed under: Economics, Taxation with tags idiots, richard murphy, tax avoidance, tax evasion
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On of the first things I've picked up since getting back from my holidays is the discussion paper Auditor scepticism: Raising the bar.  Issued by the UK's Auditing Practices Board on 5 August, it ponders whether a contributory factor of recent crises was a lack of scepticism in auditors.  In part this draws upon reviews undertaken by the Audit Inspection Unit, who recently issued a somewhat patchy report about this year's round of inspections.

I find myself pretty underwhelmed by the APB's report.  Auditors always have to face charges from their clients that they are not being "commercial", which is code for "you're being too sceptical, but I want you to go away".  And auditors have had to use their judgement as to whether to stand their ground or stand down.  Face down your client over a trivial technicalities that other accountants might let go, and you'll risk losing the engagement.  But overlook too many requirements and you'll face the wrath of the regulators.  It's a tightrope, and auditors spend years getting the judgement just about right.

Scepticism is what auditors do.  They tend to mistrust things the client has prepared that can't be externally verified, and they prefer written evidence to aural evidence (okay, so this isn't rocket science, it's actually within auditing standards).  The APB is trying to make out that you can be more sceptical, as if that's a good thing.  But scepticism is, in my mind, a binary concept.  You either are sceptical - which means having the right amount of mistrust about the world without turning totally paranoid - or you don't.  It's nonsense to say that auditors could be more sceptical.  What they actually mean is that they wish, with hindsight, that auditors had put their foot down while the rest of the world was insisting that growth could go on indefinitely.  That is to impose our current view of the world on the past.  It would be a fallacy to use that to assume that auditors were not sceptical.

Even if one accepts that you can be more or less sceptical, the APB has failed to make the case that more scepticism would be a good thing.  Could they be seeking to encourage auditors to fight more battles while leading them to lose the war?

Filed under: Auditing, Regulation with tags aiu, apb, commercial, judgement, scepticism
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OK, holiday's over. Thank you for letting me have the best part of a month off. Now to catch up on what those crazy regulators have been doing while all good sensible people have been off enjoying themselves.

I've also done some software upgrades on the site, so there's every possibility that things won't work properly.  Something else to look forward to!

Filed under: Site admin with tags meta
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