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Top -35
r
5 - u nde
3 lists
Fina d
le
profi
Nazeer Essop
Developing
sustainable solutions
for the public sector
B-BBEE
Insightful
5
Corporate
Reporting
things to
Public Sector
Special report
know about
transfer
pricing in
• Corruption incident management South Africa
• audit readiness
• post-implementation of grap 16
• performance management and reporting
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contentS ➲
DEVELOP
4 Up-to-date: Keeping you informed of September 2014
business today
9 Cover Story: Developing sustainable
solutions for the public sector
13 Viewpoint: Everything you need to
know about issues that matter to you
the most
18 Analysis: When is a company
financially distressed?
20 Analysis: First-time adoption
of the accrual basis
22 Analysis: Time to ditch your CC
for a company?
INFLUENCE
24
Influence: The common risks
associated with financial reporting
26
Influence: Transfer pricing in South
Africa: f ive things you need to know
30
Influence: Driving better reporting
by embedding B-BBEE into your
corporate strategy
35
Special Report: The public sector
LEAD
48 35-under-35
58 Motoring
60 Lifestyle Gadgets
62 Recruitment
Main features
TOP -35
R
9 – cover story:
NDE
35-U alists
Fin
led
profi
Nazeer Essop
Developing
sustainable solutions
Developing sustainable solutions for the public sector
for the public sector
B-BBEE
Insightful
30 – B-BBEE:
5
Corporate
Reporting
things to
Driving better reporting by embedding B-BBEE into
Public Sector
SPECIAL REPORT
know about
transfer your corporate strategy
pricing in
• CORRUPTION INCIDENT MANAGEMENT South Africa
• AUDIT READINESS
• POST-IMPLEMENTATION OF GRAP 16
• PERFORMANCE MANAGEMENT AND REPORTING
transfer pricing in South Africa:
Five things you need to know – 26
48 – 35-under-35
Cover Story: monique verduyn
Photography: steve marais from one league
September 2014 | ACCOUNTANCY SA 1
EDitor's DESK
Enough is enough
Sane, James compares affluenza with selfish capitalism – it’s a
viral condition that spreads through affluent countries. In these
countries people define themselves by how much money they
make. They’re also ruled by superficial values – how famous they
are, how much they are able to show off.
Erich Fromm would have said that we have moved from a state
of being to a state of having.
When I recently read an article on this very topic, I couldn’t
help realising that in South Africa we are in a state of advanced
capitalism and that for many having has become much more
important that being. Considering the controversial R246 million
upgrades to his private home, our President is – alas – an excellent
example. He is avoiding accountability, and not only does his
response to reports undermine the Public Protector’s findings, but
he seems to be acting as both judge and jury on the issue.
We focus on the public sector this month, where accountability
is a big issue. It is saddening to see how far some in the ruling
elite have strayed from the examples set by Nelson Mandela. He
understood the vital importance of the constitutional principles
of accountability and the rule of law. An important barometer of
the extent of the problem in the public sector is the increasing
diversion of public funds away from the public good to serve
private interests. Naturally corruption in the private sector is also a
problem, but unless we get a handle on corruption in government,
corruption in the private sector will continue unabated.
L
South African partners of Transparency International in
government, business and civil society are also of the opinion
that corruption is becoming worse. Transparency International’s
ast year social media networks were swamped when Global Corruption Perceptions Index for 2013 shows that South
a US court found a teenager not guilty after he was Africa has dropped 34 places since 2001, with half the decline
driving under the influence and caused the death of occurring since 2009. We are currently ranked number 72 out of
four people. The judge accepted his defence: that he 175 countries and heading downwards.
suffered from “affluenza” (his affluent parents hadn’t Fortunately many great companies and CAs(SA) are fighting
taught him to accept responsibility for his deeds). corruption and are aiming to improve accountability.
“Affluenza” is a term used by child psychologist Oliver James in We should continue to stand up for what is right and strive to
his book Britain on the Couch, in which he asserted that “advanced get our country in a state of being instead of having.
capitalism makes money out of misery and dissatisfaction, as if
it were encouraging us to fill up the psychic void with material
goods”. In a later work, Affluenza: How to Be Successful and Stay Gerinda Jooste
ACCOUNTANCY SA
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2 ACCOUNTANCY SA | September 2014
Change the way your municipality does business. Start with your billing and ERP solution. BREAKING NEWS: Sage Evolution participates in National Treasury’s pilot programme for SCOA. 0861 EVOLUTION www.sageevolution.com
DEVELOP UP-TO-DATE
Up-to-date KEEPING YOU INFORMED OF BUSINESS TODAY
Interest on a manner as to enable the
debtor reasonably to assess
unliquidated the quantum thereof. Interest
shall be calculated at the rate
debts prescribed by the Minister
of Justice by notice in the
Interest often has a material
Government Gazette as at
effect on the amount owed by a
the time when such interest
debtor. This is also true in the
begins to run (that is, the
case of unliquidated debts such
date of service of a demand
as damages of which the amount
or summons or the date of
is only ascertainable after an
commencement of arbitration
investigation.
proceedings, whichever date
In a claim for an
is the earlier). Currently the
unliquidated debt, a debtor was
prescribed rate is 15,5% per
traditionally not held liable for
annum. There are indications
interest in the absence of an
that this rate will shortly be
agreement as to quantum or
amended by the Minister,
until such time as the amount
however.
had finally been assessed by
Interest on that part of
a court or arbitrator. In 1997
a debt which consists of the
the legislature stepped in by
present value of a loss which
means of an amendment to
will occur in the future shall not
the Prescribed Rate of Interest
commence to run until the date
Act 55 of 1975 when it inserted
upon which the quantum of that
section 2A into the Act. Section
part is determined by judgment,
2A provides for interest on
arbitration or agreement.
unliquidated debts.
Notwithstanding the
Such interest shall run from
the date on which payment of
provisions of the Act – but South Africa slow to adopt
subject to any other law or an
the debt is claimed by service
agreement between the parties online shopping, with logistics a
on the debtor of a demand or
summons (or, in the case of
– a court of law, or an arbitrator, problem
or an arbitration tribunal may
arbitration proceedings, the
make such order as appears just In South Africa, buying food and beverages as well as clothes online
date on which the creditor
in respect of the payment of continues to lag behind global norms, an EY survey revealed in July
takes steps to commence the
interest on an unliquidated debt, 2014.
proceedings), whichever date is
the rate at which interest shall Though online activity is rising in South Africa, markedly
the earlier.
accrue, and the date from which through mobile platforms, complex logistics have seen few major
“Demand” means a
interest shall run. retailers set up ecommerce functionality and the effect on the bottom
written demand setting out
the creditor’s claim in such Marius Potgieter, Cliffe Dekker Hofmeyr line is yet to be seen.
EY retailer and consumer products sector leader Derek
Engelbrecht said the cost of a single delivery could be substantial
compared to the value of the order and substitution for unavailable
items, particularly where a consumer had a strong affinity for a
brand, was not handled properly.
In a retail market worth more than R500 billion, online
transactions account for less than 1% in South Africa. Grocery
retailers have shied away from pushing e-commerce hard as
shoppers tend to make fewer impulse purchases online. Also, buying
clothing continues to be an experience where consumers want to
touch and see the products.
Looking at the very high mobile-phone penetration in South
Africa, and being one of the highest globally, people are already
doing a lot online in terms of browsing and price comparability.
Roger Tejwani, an independent analyst, says online shopping over
the next five to six years would “certainly” take off in South Africa.
Source: Financial Mail, 6–11 June 2014
4 ACCOUNTANCY SA | September 2014
Anton van Wyk
to lead the
world’s largest
internal audit
organisation
Anton van Wyk, a partner at Mastering the market
PwC, was elected 2014–2015
global chairman of the Planning to pursue a corporate career overseas? Or just to enjoy some management work
Institute of Internal Auditors experience before settling back in South Africa? Then get a business master’s.
(IIA) at its annual meeting in It doesn’t have to be an MBA. Management, accounting or finance will do. International
London in July 2014. He is research shows that more companies are seeking out master’s graduates to help them flourish in
the first individual from the
an increasingly competitive business environment.
African continent to lead the
world’s largest internal audit If you don’t have a master’s, then learn to speak well. The 2014 Corporate Recruiters Survey
organisation. shows that the non-academic skill most prized by employers is the ability to communicate.
The election of Van Wyk “Employers seek recent graduates who are highly proficient in communication skills, specifically
to the IIA’s top volunteer post oral, followed by writing and listening skills and writing skills,” it says. “On average, employers
comes at a time when growing rank communication skills twice as important as managerial skills.” The survey was compiled by
demands on the profession
the Graduate Management Admission Council, the international organisation that administers
are prompting a deeper
examination of its value to the GMAT entry exam for graduate business and management programmes.
stakeholders. Survey findings are based on corporate responses from 44 countries in Europe, North
The IIA is the largest America and Asia-Pacific. Results show that 80% of companies interviewed this year plan to hire
organisation representing the an MBA graduate, up from 50% five years ago. Master’s in management graduates are sought
interests of the profession
by 50% (18% in 2009), master’s in accounting by 45% (17%) and master’s in finance 44% (no
and provides ethical and
professional guidance, comparative figure).
continuing education, Companies say business school graduates come ready – trained in innovative thinking,
certifications and more to over leadership and strategic acumen. So it requires only a “short learning curve” to adapt that
180 000 members worldwide. education to specific corporate context.
Van Wyk said that as Not every industry is equally enamoured. The survey shows that while finance and accounting
chairman he would focus
companies want more master’s graduates and 90% of healthcare and pharmaceutical employers
on urging internal auditors
worldwide to be mindful of want MBAs, the technology sector is mixed. There’s more demand for accounting, finance and
potential gaps between internal MBAs are flat, and there’s a declining demand for management. Manufacturing wants more
audit services and stakeholder accounting and finance graduates.
expectations. New technologies Communication skills dominate the non-academic wish list of almost every business sector.
and global economic dynamics, The only exception is manufacturing, where employers’ priorities are, in order, integrity, drive,
he said, are creating new
ability to inspire others, innovation and strategic vision.
opportunities as well as
emerging risks that threaten to Source: Financial Mail, 25–30 July 2014
expand these gaps.
September 2014 | ACCOUNTANCY SA 5
DEVELOP UP-TO-DATE
technical updates
a revalued amount at either cost or revalued.
ACCOUNTING Following a submission by Currently bearer plants are
the SAICA APC, the IFRS accounted for in terms of IAS
SAICA APC urges the
Interpretations Committee has 41 Agriculture and therefore
IASB to prioritise the
clarified that when an entity have to be accounted for at fair
disclosure initiative
carries an item of property, value.
The SAICA Accounting
plant and equipment at a
Practices Committee
revalued amount, disclosure The produce growing on bearer
(APC) has encouraged
about the items carrying plants, for example, grapes, tea
the IASB to prioritise the
amount based on the cost model leaves, oil palm fruit and latex,
disclosure initiative and has
should also be provided. Read and living plants will continue
recommended that entities
more at the May 2014 IFRIC to be accounted for in IAS 41.
be required to disclose how
update.
they determine materiality
Entities are required to apply
in the context of the financial
Accounting for the amendments for annual
statements.
bearer plants periods beginning on or
changes after 1 January 2016. Earlier
The SAICA APC comment letter
New amendments that require application is permitted.
on ED 341 Disclosure initiative:
bearer plants such as grape
Proposed Amendments to IAS
vines, rubber trees and oil Agriculture: Bearer plants –
1 Presentation of financial
palms to be accounted for in Amendments to IAS 16 and
statements can be downloaded
terms of IAS 16 Property, plant IAS 41 can be downloaded
from the SAICA website.
and equipment have been from eIFRS and the IASB press
published. release. The project summary
Disclosure
and feedback statement can
requirements for
This will mean that bearer be downloaded from the IASB
property, plant and
plants can be accounted for website.
equipment carried at
TAX
New dispute resolution rules
After much anticipation, SARS has finally
issued new dispute resolution rules in terms
of section 103 of the Tax Administration
Act 28 of 2011 (which was promulgated
in October 2012). The new rules, effective
from 11 July 2014, govern the procedures
for lodging an objection or appeal against
an assessment or decision made by SARS
and also sets out the conduct and hearing of
an appeal before a tax board or tax court. It
is important to note that the new rules will
apply even if initial steps were already taken
in terms of the old rules. Particular attention
must be paid to the changes in the time
periods relevant for submission of required
forms and documentation in order to ensure
that important deadlines are not missed. It is
encouraging to note that with respect to the
appeals process, SARS may now respond to a
taxpayer’s grounds of appeal. This will provide
more insight into SARS’s views on the matter
and may assist the taxpayer or representative
tax practitioner in the appeals process.
6 ACCOUNTANCY SA | September 2014
DEVELOP UP-TO-DATE
Robin Hood Michael Megacities of the
rankings Jackson’s estate future
grew by
People in cultures that are According to a UN report, 13
relatively accepting of inequality R7,4 billion urban areas are on track to join
in power or wealth are less likely after his death the list of megacities by 2030,
to give to the needy, according meaning they will contain more
to research by Karen Page It’s a half a decade since Michael than 10 million people. And
Winterich, of Pennsylvania State Jackson’s death and the pop Johannesburg happens to be on
University, and Yinlong Zang, icon’s financial fortunes are the list!
of the University of Texas at San positively blooming. A sampling (plus projected
Antonio. Countries with high The self-proclaimed King populations):
levels of giving, such as Australia, of Pop was struggling to avoid BOOK OF THE
Canada, Ireland, New Zealand bankruptcy when he died on 25 14,8 million MONTH
and the US, were found to be less June 2009. Bangalore
accepting of inequality. Those At the time, he was in The Contract with
with low levels of giving, such as rehearsals for a series of Yourself
Bulgaria, China, India, Russia, comeback shows he hoped 12,2 million By Dineshrie Pillay
and Serbia, were more accepting would resurrect his wealth. Lima
of inequality. An acceptance of But in the five years since, the “As long as you are in
inequality may reduce people’s Michael Jackson Estate – which
runs his affairs on behalf of
a legal contract with
sense of responsibility for others, 12 million
the researchers say. Jackson’s mother and three Bogotá someone else, you are
children – has earned R7,4 fulfilling their dreams,
Source: Harvard Business Review, July– billion, according to a new book. not your own.”
August 2014
“Michael Jackson is making 11,6 million
more money now, five years Johannesburg What if there was a
after his death, than he had been contract that expressly
since the prime of his career,”
stipulated how you
Zack Greenburg, author of 10,8 million
Michael Jackson, Inc, told AFP. Dar es Salaam
should run your life
– a contract that was
Source: The Star, 25 June 2014 Source: Time Magazine, 28 July 2014 designed by you, signed
by you, and monitored
by you? A contract that
honours the wishes of the
most important person in
your life – YOU!
Stat watch
The Contract with
Employees who spent Yourself explores what
the last 15 minutes that ideal contract with
of each day of their yourself should look like
training period writing
with a view to achieving
and reflecting on what
they had learned did
personal success and
23% better in the final living an extraordinary
training test than other life. You will assess and
employees, according to a plan all areas of your
study by Giada Di Stefano life – from your spiritual
of HEC Paris; Francesca life to your education;
Gino and Gary Pisano of career; health and
Harvard Business School;
fitness; wealth building;
and Bradley Staats of
the University of North societal involvement;
Carolina. “Learning by and personal and family
doing” is more effective relationships. Success
when coupled with comes from doing
deliberate reflection, or the simple activities,
“learning by thinking,” consistently. This book
the study shows. is a reminder of those
Harvard Business Review, activities.
July–August 2014
8 ACCOUNTANCY SA | September 2014Developing sustainable solutions
for the public sector
Nazeer Essop, the public sector leader for Deloitte Southern
Africa and an audit partner, believes in the power of education
to transform lives, families and communities. Monique Verduyn
spoke to him
September 2014 | ACCOUNTANCY SA 9W
DEVELOP Cover Story
achieve this goal. He managed it in seven, becoming
a partner in 2004, proving that it is possible to
achieve anything if you set your mind to it. Today he
sits on the Deloitte board, is the public sector leader
for Deloitte South Africa, and is also the key liaison
partner for the Auditor-General.
“One of the most important factors that
contributed to the growth of my career was the
way I approached my articles,” he says. “Auditing
is not only about doing actual audits – it’s about
hen Nazeer Essop told his parents and his taking the opportunity to really understand your
extended family that he wanted to become a chartered accountant, their immediate client’s business intimately. I used my articles
response was, “Why would you want to work for a boss?” as an avenue to get to know my clients' business
Essop, born and raised in Laudium, south-west of Pretoria, comes from a family intimately, understand how they operate and learn
of entrepreneurs, but the idea of choosing a profession as a career appealed to him what enables them to be successful. That meant I
from an early age. was able to make the most of my articles, which can
“I’d always done well in maths, accounting and economics,” he says. “It was a be a tedious period if you let it. Instead, I was excited
natural choice for me to study BCom Accounting at Wits University once I completed about learning and I took everything I could out of
high school. I wanted the flexibility to be able to work in a variety of different the process. It’s an approach I recommend to young
industries, but it was also a path that I believed would be exciting and challenging.” people – always make the most of what an employer
He began his articles at a small firm in Pretoria where he did box audits, has to give you; don’t focus simply on what you have
preparation of general ledgers and trial balances. to offer. It’s a relationship that should work both
Six month into his articles he wanted to explore something different and more ways. Take your three years of articles and maximise
challenging. Not one to wait for opportunity to come knocking, he applied to them to develop relationships with people, learn
Deloitte South Africa in late 1996 and – thanks to an impressive academic record about your clients and build strong and extensive
– managed to secure an interview with the then Head of Audit and current COO of networks.”
Deloitte South Africa. It was this approach that led to Essop to achieve
partner status in record time. Deloitte employs more
COMBINING WORK AND STUDIES than 3 000 people. By the time he had completed his
Recognising the significance of the opportunity, Essop joined Deloitte in 2007. articles, he knew most of those people, as well as the
There he had to face the dual challenge of combining employment with his studies as products and services that the firm had to offer.
he was studying towards his Certificate in the Theory of Accounting (CTA). He also “To make partner, you have to build your
had to start his articles afresh as Deloitte’s standards were more exacting. network,” he advises. “You may be a clerk, but don’t
“Serving articles and studying CTA at the same time posed a significant challenge let that stop you from knocking on the CEO’s door
in my life but I would like to emphasise that it is attainable. By dedicating an hour and saying hello. That level of confidence can only
every night after work, as well as allocating an additional three hours of studying stand you in good stead in a competitive job market.”
time from 6.00 am to 9.00 am every weekend, helped me to pass CTA. This was an
approach that worked extremely well for me as I never fell behind and I also had DEVELOPING THE CHARACTERISTICS OF A
time to socialise with friends and family. This process has taught me all about work– PARTNER
life balance. I still manage to maintain this philosophy in my career as well as in my When Essop decided that he wanted to be a partner,
personal life. Especially now, being a father to three young children, it has proven to he set out to determine exactly what the duties and
be invaluable.” responsibilities of a partner were. Essentially, they
Essop describes himself as a person who likes to simplify, making things easy manage risk, look after clients, manage people and
and manageable. His fundamental approach being that nothing is too complicated win business.
and everything is possible. “When I started working with the partner in
“It’s a belief that I initiated in my first year of high school, “he says. “I was charge of the Auditor-General’s account, I set out to
in Standard 6 when I launched my own business, buying items like bags on do these four things, primarily through developing
consignment and selling them to family, friends and people in the community. I relationships, and I succeeded in growing that
saved up enough money to buy my first car at the age of 14. I then started buying account by between R3 million and R4 million
cars, fixing them up and selling them with the help of my father. At the same time, per year as an audit manager. Winning that extra
I bought a minibus taxi, again with the help of my father who had his own taxi business was a direct result of growing my networks
business. That is how I paid my university fees. By the time I started working at and becoming a trusted advisor. I never said ‘no’. ”
Deloitte as a trainee accountant I had my own car, fully paid off, just from learning As an example, the Auditor-General’s office
to buy and sell.” called him one Friday morning and told him they
It’s no surprise that full-time eight-to-five employment in a large corporate was a needed 20 trainees to start work in Bloemfontein on
huge adjustment for a young man who had grown up as an entrepreneur, but he was Monday. He found the people, trained them to do the
determined to see himself as a flexible and agile individual who could adapt to any job on Saturday, and sent them off to the Free State
situation. on Sunday, ready to start work on the Monday.
“It’s important to have goals in mind and to focus on future growth if you want to
make progress and achieve your dreams. When things were difficult, I remembered OPTING FOR THE PUBLIC SECTOR
what my aspirations and ambitions were and honed in on those.” Ask Essop why he chose to go into public sector,
and he’ll tell you that he is determined to make
RECOGNISING THE POWER OF NETWORKS a difference in the lives of fellow citizens and
After three months at the firm, Essop approached one of the senior partners and asked improving the country. “Working in the public sector
him how he could become a partner. He was told it would take at least ten years to gives you the opportunity to impact the lives of 50
10 ACCOUNTANCY SA | September 2014million people through departments like education and health, as well reporting standard.”
as local municipalities, which makes the potential of this industry Essop cautions that public sector work is not for everyone,
enormous.” emphasising that it’s critical to be passionate about social
Today, under his leadership, the public sector accounts for development if you choose this path. Sincerity and honesty have
approximately 20% of Deloitte Southern Africa’s turnover. In his role served him well. He refers to the three “Ps” in the public sector:
as public sector leader at Deloitte, Essop is responsible for driving Passionate, Positive and Patient.
the strategy for specific value propositions, which includes education, “This is not an easy area to work in, but if your approach is
health, local government turnaround, technology and innovation, ethical and you are genuinely committed, it can be extremely
donor funding, infrastructure and capital projects, skills development rewarding and fulfilling. I’m driven by the dream that, one day,
and capacity-building, job creation, clean audits, and performance/ patients in public hospitals will receive the same standard of care
value for money audits. that those in private hospitals expect and that children in public
He and his public sector leadership team have linked these value schools will experience the same or a better quality of education than
propositions to the goals of Vision 2030 as set out by government that in private schools.” ❐
in the National Development Plan (NDP). The aim, among others,
is to eliminate poverty and create 11 million jobs by the year 2030.
Government has already embarked on a process to align its long-term
strategy to these plans, identifying where policy change is necessary
for this alignment.
Essop’s role is to partner with government in terms of the value
propositions mentioned above as well as assist government in
achieving its objectives in terms of the NDP.
Highlighting some of the key issues facing the South African
public sector at present, Essop points to the lack of adequate financial
management, lack of effective procurement processes and a lack of
accountability which resulted in R11,6 billion in irregular expenditure
in 2012–2013 and just 9% of municipalities achieving clean audits.
“The audit outcomes point to lack of skills, talent and effective
service delivery at municipal level, which is where we believe we can
assist,” he says.
In a recent joint venture with the South African Institute of
Chartered Accountants (SAICA), Deloitte trained 1 200 municipal
workers, 300 of whom were previously unemployed graduates, in
financial management across a total of 172 municipalities.
“The aim was to upskill them in service delivery and the core
functions of their jobs. We are determined to do more of these types
of projects. The only way to transform the municipalities sustainably
is to provide training and development and employ skilled resources
to help professionalise the public sector.”
It’s to be expected that Essop has an unshakeable belief in the
power of education to transform people’s lives. “When you educate
someone, the result has a broad impact on that individual’s family
and community, leading to a better quality of life for many people and
enabling that individual to contribute to society in a way that would
not be possible otherwise. Education helps to move families out of
poverty and not just individuals. This is why education is my team’s
number one priority.”
In 2008, Essop arranged for 43 CAs from India to come to South
Africa, trained them to South African standards, and deployed them
to the office of the Auditor-General. “Our aim was not to fill vacancies
but to use the skills of these highly qualified CAs to help provide on-
the-job training, mentorship and academic support to the Auditor-
General’s trainees,” he says.
“The initial two-year programme resulted in a reduction of the
span of control between managers and trainees and additional staff
being retained due to improved work life balance and skills transfer.
These are the types of initiatives that can have a hugely positive
impact on the development of a more effective and efficient public
sector.”
Another area of concern for Essop is the financial reporting
frameworks/standards for different public entities, departments and
local municipalities. “There are some instances where the reporting
frameworks are more complex than they should be, placing an
unnecessary burden on the entities in question. There is no need to
have a Rolls-Royce when a Toyota will do. This is just one of the areas
where we are able to assist in creating the most appropriate financial
July 2014 | ACCOUNTANCY SA
September 11viewpoint
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advisors have the answers
Kevin Phillips Brett Tromp Mike Lledo Gizelle Willows Stanford Payne Dineshrie Pillay Clive Lotter
CA(SA) CA(SA) CA(SA) CA(SA) CA(SA) CA(SA) is an Integrated
is is is CEO at is a Senior Lecturer is an ICF is a business Reporting
Managing CFO of Consolidated in Financial Reporting Accredited owner and Consultant and
Director of Discovery Financial at the University of Executive and Public Speaker writer of annual
idu Software Health Planning Cape Town Business Coach Trainer reports for listed
companies
“With great power “All humans are “As many as six “When making “It is only “A vast majority “Circular
comes great motivated to to seven million decisions, only when you are of professionals economy
responsibility. seek pleasure formal-sector incremental costs able to use the do not use eye business models
Part of being a and avoid pain, employees and benefits knowledge to contact correctly can dramatically
good leader is the to seek hope and have no access should influence get the life and when speaking in reduce the
ability to work avoid fear, and to any formal your future business you public.” cost of source
with others.” finally to seek retirement choices …” want that you materials.”
social acceptance planning or have finally
and avoid protection for started on your
rejection.” their families path to success.”
on death or
B J Fogg disability and
rely on the
state.”DEVELOP VIEWPOINT
BUSINESS ADVISOR LEADERSHIP ADVISOR
Superhero Change behaviour
or supervillain? for the better
Kevin Phillips CA(SA) is Managing Director Brett Tromp CA(SA) is CFO of
of idu Software Discovery Health
P ower has an important role to play in the
business world, especially in the context of leadership. Leaders
need power to get results but they also need to be accountable
for the results of that power and understand the value in
empowering others.
In broad strokes, power can be used in two ways, for good
I recently read an insightful book by B J Fogg,
a Stanford-based scientist best known for his research into
creating systems to change human behaviour.
His book, called Hooked, taught me much about human
psychology that I am certain can be used to lead people more
effectively.
or for evil, and we are all familiar with the great examples of Knowing how humans tend to behave gives one an
power and leadership found in the annals of superheroes. advantage in leadership. To illustrate this point I would like to
There are lessons to be learned from all the great share a simple example from the book. In an experiment, two
superheroes. Whether your power lies in resources, money groups of people were given loyalty cards for a car wash. The
and people or an exceptional strength unique to you; whether first group was given a loyalty card in which they needed to first
you operate in openness and honesty with transparency that get stamps for eight paid car washes for their next car wash to
earns the trust and loyalty of others like Iron Man or you are qualify as free.
more like Batman, working behind the scenes, overcoming The second group was given a loyalty card with ten car
obstacles while remaining unknown, a symbol of a shared washes in total, in which the first two car washes were given
belief or goal. as free. The study was run with various different groups and
Superheroes can have intrinsic superpowers like without fail the groups that had been given two free washes
Superman, or have gained them through some seeming upfront had an 82% higher completion rate.
misfortune like Spiderman or simply use the strengths at their What can we learn from this? It’s clear that the ease or
disposal to achieve a goal like Batman or Iron Man; they can difficulty in completing wanted or necessary actions greatly
work together in teams like the Avengers or with side-kicks impacts the likelihood that these actions will occur. But note
like Batman and Robin. But they are all “good”, using their that the same level of effort was required to obtain the free gift:
power to benefit others never themselves, predominantly both sample groups needed eight washes to qualify for another
through self-imposed moral standards. The takeaway – free wash.
anyone can be a leader if they use the power they have to lead The difference lay in the positioning of the given task.
by example. As leaders, how we position tasks is incredibly important
Problems arise when someone wants all the power for in driving optimal results and completion. We ought to use
themselves. It becomes not the way in which they achieve a positioning to our advantage to incentivise our people in more
goal but the goal itself, and thus a supervillain is born. The effective ways.
supervillain uses people with no regard for who they are and As Fogg notes: “People creating products need to
their potential strengths are seen only as a means to a personal understand how human behaviour works. All humans are
end; they use their power or resources to manipulate others motivated to seek pleasure and avoid pain, to seek hope and
into meeting their own agendas, blaming others for every avoid fear, and finally to seek social acceptance and avoid
failure and hoarding all the praise for every success. Most of us rejection.” It is our responsibility as leaders to learn the
have worked with or for “leaders” like this in our careers. psychology of human behaviour, and then to apply these
Perhaps in business, the answer lies more in teams of general principles and patterns to guide and motivate our
leaders, like the X-men, all with their own unique powers and teams.
one person whose purpose is to bring them together and teach Plato once said that all learning has an emotional base. By
them how to share that power and how to bring their own increasing our emotional intelligence – that is, by improving
special strength to the fore when the need arises. our capacity to interpret and respond appropriately to the
Power itself is neither good nor evil; it is how it is wielded emotional needs of others – we can unlock the full potential
by those who have it that sets the tone. Part of being a good of our teams. I believe that the ability to harness emotions
leader, and a good superhero, is the ability to work with and apply them to tasks like thinking and problem-solving is
others, sharing power and responsibility and inspiring vital to strong leadership. When an understanding of human
others to believe in something bigger than themselves. When psychology is used to change behaviour for the better, we are
wielding your power, are you a superhero or a supervillain? ❐ guaranteed better team performance. ❐
14 ACCOUNTANCY SA | September 2014WEALTH ADVISOR PERSONAL FINANCE ADVISOR
Why Sunk
plan? costs
Mike Lledo CA(SA) is the CEO at Consolidated Gizelle Willows CA(SA) MCom Finance is a Senior Lecturer
Financial Planning in Financial Reporting at the University of Cape Town
R etirement reform is going to impact our
businesses and employees, and with most employers still in the dark
about the payroll consequences of retirement fund and tax reforms
coming in March next year we recommend that companies prepare well
in advance of the implementation date.
In the wake of the 2014 Budget Speech, National Treasury has
M ost of the readers of this
magazine would have, at the very least, done some kind of
elementary management accounting course at university where
they would’ve learnt about sunk costs.
So we know that these sunk costs are completely irrelevant
to decision-making, but do we actually ignore them when we
released its “2014 Budget Update on Retirement Reforms” paper, a make decisions?
continuation of the process that has already been going on some years. I recently bought a new book by a South African author
What does it all mean? which has been well received internationally. The idea for the
First, employers may need to implement a mandatory system of story is great and I really wanted to like the book, but four
retirement savings. Currently it remains voluntary for employers to offer chapters into it and I just couldn’t anymore.
staff a retirement plan with savings and risk benefits and many opt not Almost every sentence contained a simile such as “her
to do so given the high costs and complexity associated with providing piercing eyes were as blue as the deepest ocean”, which becomes
an employer-sponsored scheme. Consequently, as many as six to seven painful and laborious to read (in my and Stephen King’s
million formal-sector employees have no access to any formal retirement opinion). Just get on with the story! I kept on feeling like I
planning or protection for their families on death or disability and rely on had to finish the book. I’d paid for it and I’d already read four
the state. chapters (I had the same conversation with myself after the
For many small and even medium-sized businesses, as well as their second and third chapters). But then I realised: it was a sunk
employees’ take-home pay, this may be too much of an immediate cost cost! Regardless of whether I finish reading the book or not, I’ve
shock. Therefore, you might consider starting small – but immediately – already paid for it.
and building up with improved benefits and savings over a period of time. When making decisions, only incremental costs and benefits
Second, employees may need to contribute to their own retirement should influence your future choices, yet research shows that
and preserve their fund if they switch jobs. Currently, employees when we are invested in something (whether it be emotionally
resigning or withdrawing from a retirement fund may, and usually do, or financially), we find it more difficult to give up on that
opt to take their accumulated retirement savings as a lump sum for investment.
lifestyle reasons instead of preserving it. Furthermore, the larger our past resource investment in a
Retirement planning expert Nigel Willmott CFP says that “many decision, the larger our predisposition in later decisions. That
employees view their retirement fund as a fall back emergency fund, is, it would be more difficult to put down the book after reading
occasionally even resigning just to access it or try borrowing against it for four chapters than it would’ve been after reading only two
short-term financial relief”. chapters.
“While looting one’s pension as a lump sum payment may provide Think about how difficult it sometimes is to terminate a
some short-term relief, in the long run it results in inadequate personal project that isn’t profitable just because you’ve already invested
retirement savings and that individual becoming a potential burden on so much into it.
the state. These reforms may seem harsh to such individuals, but they Or feeling obligated to attend every rugby game just
will improve South Africa’s low national savings rate, and will indirectly because you’ve bought season tickets, even if you don’t feel well
help employees lift themselves out of the debt trap by denying them and would prefer to stay at home and watch it on the couch?
further access to credit or their accumulated retirement credits,” says And here’s my favourite: you make a phone call and hear the
Willmott. recorded voice say, “Please stay on the line, our operators are
For employees, the reforms will permanently remove the possibility currently very busy.”
of cashing in their future retirement savings – and incidentally risk cover Instead of putting the phone down and phoning back when
– in favour of that new car, and thereafter hoping that a government they’re perhaps less busy, we rather stay on the line as we’ve
pension will suffice in retirement. With this change, financial planning already made the call. Sunk cost!
and education earlier in life will become essential. If you’re making a decision because you’ve already done or
Whether or not employers have a retirement benefit structure in paid x, y and z, you’re making a decision based on a sunk cost.
place, you need to revisit this question now before reform forces your Rather make a decision because it will benefit or save x, y and z.
hand. ❐ Think of the future and don’t be weighed down by the past. ❐
September 2014 | ACCOUNTANCY SA 15DEVELOP VIEWPOINT
Executive and Business Coach PUBLIC SPEAKING TRAINER
Learning = A conversation
education with many
Stanford Payne CA(SA) is an ICF Accredited Dineshrie Pillay CA(SA) is a business owner and
M I
Executive and Business Coach Public Speaker Trainer
adiba said: “Education is the most n this article we are going to bust those eye
powerful weapon which you can use to change the world.” contact myths.
But what is education really? A Wiki definition: Education: a You will never do on stage what you will not do in person. A
form of learning in which the knowledge, skills and habits of a group presentation to a group of people is essentially a conversation with
of people are transferred from one generation to the next through many people.
teaching, training, or research. Any experience that has a formative I often see people act in one way on the stage and in person
effect on the way one thinks, feels or acts may be considered they are a totally different character.
educational. Allow me to focus on the last sentence – the fact that It is almost as if they have put on a “theatrical stage
any experience that has a formative effect on the way one thinks, performance” and for the duration of their talk they were someone
feels or acts is considered educational. else.
It is partly this mentality that creates stress to speak as we try
Education to be something that we are not. So the first rule is to be yourself –
Everyone knows how important it is to stay in school, get a good both on and off stage.
education and graduate with a diploma or degree. In business etiquette we learn that when we have a
Education is key for success today but as the definition above conversation with individuals we should maintain eye contact.
states, where it comes from really doesn’t matter – experience, Steady eye contact displays confidence and trust; whilst speaking
books, interests or formal institutional education or otherwise – it to someone and looking at the floor or avoiding eye contact entirely
should have a formative effect on your thinking. Why is society creates very awkward conversations.
to obsessed with emphasis on formal institutionalised education Some people are taught that if they are scared to speak in
though? Has it got something to do with forms of status and success? public, that they should “speak and look over people’s heads as you
Truth is, it is only when you are able to use the knowledge to get speak”.
the life and business you want that you have finally started on your This is ludicrous! In person, if I were to speak to you, I would
path to success. Determination and drive gets you to really tap into not “speak and look at your head”, so why should I do that when I
your own reserves and abilities to do your best and actually succeed. am on the stage and speaking to you?
The second rule then is to maintain steady eye contact – both
Informal versus formal learning on and off stage.
There are many different ways of learning/thinking/formatting; Have you ever been to a zoo and watched (sadly) how a caged
all very important. About 70% of learning today is thought to be animal paces from one side of the cage to the other whilst at all
informal. Informal learning can be ad hoc, strategically planned, in times keeping its gaze on you?
time or even by chance. It is usually relevant and directly related to It’s a bit freaky! In one-to-one conversations, important points
the place and time in your world. are delivered whilst standing in one spot and we would only move
The victims today: around to demonstrate an action to make a point.
• The qualified professional feeling to succeed you need to add The third rule then is to avoid pacing on the stage and
more formal education to get where you want to be – adding a speaking. More impactful is to have eye contact with individuals
MBA to an existing CA(SA) designation, for example. and deliver impactful lines whilst standing still.
• The student on the other hand (and the guardian pushing for a In individual conversations, we would generally only break eye
formal education as a condition for future help even) who wants contact if we need to pause and think – this, however, breaks the
to discover first life (informal learning) and then hopefully get state of what is being said.
formal education later if needed. The same holds true with maintaining eye contact on the stage.
The moment you break off eye contact and look to the floor or at
Are you really planning and listening to your real needs? And the ceiling, you break the state.
where you want to get? Why not be open to whatever is needed to So the rule is to maintain eye contact with one person until the
get there, instead of the formal vs informal discussion? You will end of a pause or the end of your sentence, then shift your gaze to
be learning regardless! someone else.
Cultivate a life of learning, seek opportunities for knowledge Maintain eye contact whilst thinking – your audience will
and go change your world! ❐ assume it’s a deliberate pause! ❐
16 ACCOUNTANCY SA | September 2014INTEGRATED REPORTING ADVISOR
Virtuous
circles
Clive Lotter is an Integrated Reporting Consultant and
T
writer of annual reports for listed companies
p l e t e t a x
Com
he industrial revolution created linear
economies in which raw materials were sourced, turned into
products as cheaply as possible and then sold to consumers.
re t u r n s i n
half
For centuries little thought went into where and how end-of-
life products would be disposed of – but waste is now one of
humanity’s biggest headaches. We also are running out of easily
extracted resources, which drives up their prices. Making, selling
e
and throwing away goods is not only destroying the planet, it’s
t i m
increasingly cutting into profit margins. Hence the arrival of the so-
th e
called “circular economy” in which products are designed from the
outset for repurposing time and again. For companies that convert
to the circular economy business model, sustainability is no longer a
peripheral issue – it becomes the heart of the business.
All the hot air being generated by governments and NGOs about
climate change has hardly changed how manufacturers go about
their production, but saving money will certainly get their attention.
Circular economy business models can dramatically reduce the
cost of source materials – a prospect that multinationals are now Part of our TaxWare suite of products, the Individual Tax
examining with keen interest.
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Ellen MacArthur Foundation report estimated that the circular
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circular economies would take manufacturing back to nature – but
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the ecosystem. By focusing on entire systems instead of individual
components, closed-loop industrial processes will recycle materials
The ultimate solution to get you
indefinitely. Recognising that “green economy” alternatives are
financially out of the reach of most people, circular economies
through this taxing season
offer the promise of being accessible to all, while also economically
viable for companies able to undertake the production shifts. Early
adopters may grasp this concept as the opportunity to dominate
their markets – and most significantly, regulators and interest
groups won’t be driving change, they need only to allow it happen. ❐
011 507 0000 | www.taxware.co.zaDEVELOP ANALYSIS
When is a company
financially distressed?
It is important to understand the meaning of “financial distress”, as the
requirements of Chapter 6 of the Companies Act 2008 are triggered as
soon as a company is in financial distress, writes Johan Erasmus
C
creditors that it decided not to adopt business rescue, the company
is in breach of the Act and the auditors may have to report this as a
reportable irregularity.
FINANCIAL DISTRESS
The Companies Act defines “financially distressed” in section 128(f)
to mean that it appears to be:
hapter 6 of the Companies Act 71 of (i) Reasonably unlikely that the company will be able to pay all of
2008 deals with business rescue. Business rescue is largely self- its debts as they fall due and payable within the immediately
administered by the company, under independent supervision ensuing six months, or
within the constraints set out by the Act, and could be subject (ii) Reasonably likely that the company will become insolvent within
to court intervention, at any time, on application by any of the the immediately ensuing six months.
stakeholders.
For purposes of business rescue, it is important to understand The first part of the test seems clear. A company will be in distress
the meaning of “financial distress”, as the requirements of if there is a reasonable likelihood that the company may reach a
Chapter 6 of the Act are triggered as soon as a company is in position within the next six months where it will no longer be able to
financial distress. Where a company is in financial distress, and pay its debt as it becomes due and payable. “Reasonable likelihood”
the company failed to either adopt a resolution to go into business implies that there must be a rational basis for the conclusion that
rescue, or provide written notice to shareholders, employees and the company may not be able to pay its debt within the next six
18 ACCOUNTANCY SA | September 2014CPD Verifiable - 30 Minutes
months. This conclusion amounts to an educated prediction, based commercial context, and that courts must look beyond the assets
on the current financial position of the company, and considering and liabilities used to prepare a company’s statutory accounts when
all relevant factors that may impact the company’s liquidity in the deciding whether or not a company is “balance sheet” insolvent.
foreseeable future. By employing the narrower definition of “financial distress”
The second part of the financial distress query deals with (that is, the factual insolvency test which excludes subordination
insolvency, and here the question often arises as to whether this agreements and other management actions) one arrives at an answer
refers to factual (technical) insolvency or commercial insolvency. that may not serve the best interests of affected parties (shareholders,
There are conflicting views. Some argue that because part (i) clearly creditors and employees). There is little point in writing to affected
deals with commercial insolvency, part (ii) must deal with factual parties, informing them that the company is financially distressed
insolvency (that is, a balance sheet test). In terms of this approach when it is in fact perfectly able to continue to do business.
a company is regarded as technically insolvent (and thus financially Furthermore, start-up companies are generally factually insolvent
distressed) if the liabilities of the company exceed its assets. This in the first few years of trading and applying the narrower definition
approach does not take into account subordination agreements, or would impair their continued existence. This approach does not
any other management action. Others believe, however, that one support the purpose of the Act, which also purports to promote the
must consider the definition in conjunction with the definition of economic development of South Africa, entrepreneurship, investment
business rescue and the objectives of the Act pertaining to business and innovation, and may have a detrimental effect on both the
rescue. company and its stakeholders.
Section 5(1) of the Act requires that the Act must be interpreted
and applied in a manner that gives effect to the purposes set out in DOES THE SUPREME COURT OF APPEAL PROVIDE A
section 7. As such, when interpreting these particular provisions one POSSIBLE ANSWER?
needs to consider the purpose of the Act in this regard, that is, to In Boschpoort Ondernemings (Pty) Ltd v Absa Bank Ltd (936/12)
provide for the efficient rescue and recovery of financially distressed [2013] ZASCA 173 the Supreme Court of Appeal looked at the
companies in a manner that balances the rights and interests of meaning of the term “solvent” with respect to the interpretation
all relevant stakeholders. In turn, “rescuing the company” means of sections 79 to 81 of the Act (winding up of solvent companies).
achieving the goals set out in the definition of “business rescue”. Although the judgment was given with specific reference to these
Business rescue is defined in section 128(1(b) as “proceedings to particular sections, one may ask whether the court will follow a
facilitate the rehabilitation of a company that is financially distressed similar thought process (and perhaps reach a similar conclusion) with
by providing for: respect to the meaning of the terms “solvent” and “insolvent” used
• The temporary supervision of the company, and of the elsewhere in the Act.
management of its affairs, business and property; The court explained the difference between factual solvency
• A temporary moratorium on the rights of claimants against the (where on the balance sheet the assets exceed the liabilities) and
company or in respect of property in its possession; and commercial solvency (where the company is able to pay its debts),
• The development and implementation, if approved, of a plan and confirmed that the principle that a company’s commercial
to rescue the company by restructuring its affairs, business, insolvency is a ground that will justify an order for its liquidation has
property, debt and other liabilities, and equity in a manner that been a reality of law which has served us well through the passage of
maximizes the likelihood of the company continuing in existence time. The court continues to state that: “[W]ere the test for solvency
on a solvent basis or, if it is not possible for the company to so in liquidation proceedings to be whether assets exceed liabilities,
continue in existence, results in a better return for the company’s this would undermine there being a predictable and therefore
creditors or shareholders than would result from the immediate effective legal environment for the adjudication of the liquidation
liquidation of the company.” of companies: one of the purposes of the new Act, set out in s 7(l)
thereof.”
It should be clear from the above that business rescue is meant to be The court further stated that “it must be presumed that the
employed only where a company requires “rehabilitation”, and where legislature deliberately refrained from defining ‘solvency’. It must
there is a need to ‘rescue’ the company. If the purpose of the Act and have done so with a view to ensuring that the well-oiled machinery
the purpose of business rescue are considered, it seems unlikely that of the courts in matters of company liquidations should not stall.
a company which is factually insolvent but still able to service its debt The legislature must have been content that prevailing judicial
can be regarded as “failing” or financially distressed. interpretations of solvency and insolvency respectively should
If this approach is accepted, part (ii) of the financial distress continue to have effect. The meaning of those terms must be one that
test should consider the complete financial position of the company leads to a sensible and business-like result.”
rather than merely pure technical insolvency. In order to adhere The court explained the inter-relation between the Act and
to the purpose of the Act, and in light of the definition of business sections 344 and 345 of the 1973 Companies Act, which address
rescue, one must consider the complete financial position of the circumstances of when a company may be wound up and when
the company when determining whether there is a “reasonable” a company is deemed unable to pay its debts, and concluded that
likelihood that the company will be insolvent within six months. section 345 should be used to determine whether or not a company is
In terms of this approach a company will only be regarded as “insolvent” for purposes of section 79 of the (new) Act.
in “financial distress” where it is insolvent even after all other
circumstances were considered, including considering alternative fair CONCLUSION
values of the assets and liabilities, factoring in reasonably foreseeable If one assumes that the court will follow similar reasoning when
assets and liabilities, as per the solvency and liquidity test in section interpreting the meaning of the word “insolvent” in the definition
4, as well as considering any other proposed measures taken by of financial distress in section 128(f), it would confirm the view
management such as subordination agreements, recapitalisation or above that the legislature intended that business rescue be applied
letters of support. This approach was confirmed in a recent Supreme in instances where there is a reasonable likelihood that a company
Court decision in the United Kingdom (BNY Corporate Trustee may be commercially insolvent (unable to pay its debt) within the
Services Ltd v Eurosail [2013] UKSC 28) where the court found that immediately ensuing six months, and as such business rescue can be
the “balance sheet” test for insolvency must take account of the wider used to rescue or rehabilitate the failing company (as per section 7). ❐
Johan Erasmus is a director at Deloitte September 2014 | ACCOUNTANCY SA 19You can also read
