American's Bank Failed Corporate Governance, then "V" Shape Economic Recovery? (PART II)

- relevant to P1, P3 of ACCA course

THE global economy is at a turning point but it will take at least another two years before a full recovery can be seen, economist Paul Krugman said. “On “V” shape economic recovery, he said it’s not going to happen this time. USA and the world cannot have an export-led recovery as the world’s economies are having serious difficultie. In addition the current collapse in world trade had debunked the earlier belief that Asia could decouple itself from the West.

Krugman, Nobel Laureate and professor of economics at Princeton University, said, “We have propped it (the banking system) up but not made it clean,” he said, adding that he was currently concerned not so much about the return to equities but the return of exuberance.

5 Lessons
Krugman, was speaking about the severe global financial crisis, five lessons can be learnt:-

a. Financial markets are prone to bubbles. The American recession caused 26 million unemployed! That is equal to Malaysia’s population. How long you think it takes to re-absorb them to workforce?
Comments: Well, Malaysian and neighbouring stock market has reached near record level, thinks its recovery is going to be tomorrow! I think not, but two years, at least!

b. The financial system is not safe. As described in earlier article. In terms of mindset and compensation, USA government seem to have forgotten the lessons very fast in view of surging bonuses prevailing again at US banks and that key decisions were still being made by “28-year-old guys” at the banks and major financial centres.
Comments: We are seeing unprecendented practice hiring Gen Y professionals to gamble on behalf of its senior management. Recent Obama Administration wants to curb banks excessive leveraging on loans and to split the highly risky banks from the conventional banks. So long as this is not done, the world of finance is only seeing the beginning of Economic Armegeddon.

c. Monetary policy cannot be used to resolve all problems with cheap money in low interest rate environment would help damaged confidence of investors and consumers to spend.
Comments: Look into any economic textbook, recession's medicine is always public spending to lead the economic confidence to invest and consume again.

d. Budget deficits are sometimes necessary but governments world wide know there is only a limit they can overspend.
Comments: see earlier article on world recession

e. Keynesian policies relating to the means to stimulate output and growth do work as a source of support.
Comments: Spot on comments. For the first time in modern history, governments coordinated to have massive spendings to stimulate trade and consumptions.

The business of banking should become boring again with the need for more regulations, although there appeared to be a lack of political will in this aspect.

Krugman does not think that public spending, at a maximum of about 4%-5% of GDP, would be large enough to drive the world economy to its next crisis, noting that the ballooning deficit in the United States was caused by structural imbalances such as healthcare costs.

Conclusion

Yes, economic recovery is nowhere in sight based on current statistical evidence. World class corporations have failed system of risk management which causes financial volatility. P1 (ACCA Public Accountant) becomes an ever more topic that all ACCA graduates-to-be should be very familiar. The world is in confidence crisis with wreaked corporate governance system. In my humble opinion, I think P1 is here to stay in ACCA syllabus or be absorbed into other papers as compulsory core topics. In my class, you will see how live companies and case studies of spectacular failed governance with the delayed governance code revision. You know, its just like the movies ending, after the bad guys are gone then only the police will come.

Assignment: Corporate Governance

- related to F8 (ACCA)

Bright rims Limited is a major sports rims supplier to Singapore market. It wishes to list on the stock exchange but was told that it must meet up with some governance requirements. Mr Spritzer, CEO has total dominance on Board as he is the major shareholder, with the rest owned by his brothers. He has 3 Executive Directors and 2 independent Non Executive Directors who just graduated from the ACCA. The latter were paid minimal director fee pending Mr Spritzer’s decision to hire them as internal auditors.

Ka Gee Lang Audit firm has been a trusted external auditors for Bright Rims Limited for the past 12 years. Occasionally they were given Consultancy contract to source for new factory workers.

Required:
a) Advise the firm on improving Corporate Governance standards before seeking a listing on Stock Market. [10]
b) Explain the usefulness of independent Non-executive Directors in the context of case study. Suggest improvements based on your identified weaknesses in your answer. [6]

American's Banks Failed Corporate Governance! (Part I)

-related to P1 and P3 of ACCA, and to a certain extend American taxpayers

American Capitol Hill interviewing Top 4 largest Banks’ CEO
On January 13, 2010, four bankers of the apocalypse strode into the Congressional hearing room and formed a crooked line. They raised their hands haltingly, looking at one another as if to see whether the other guys were going to do it, too. It was one of the more indecisive swearings-in you will ever see on Capitol Hill.




Pic 01: Super-millionaires CEO taking oath






Wall Street bankers took oaths at Wednesday's hearing, from left, Lloyd Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John Mack of Morgan Stanley, and Brian Moynihan of Bank of America.


Pic 02: CEOs who are also Chairmen in their firms







Four of the nation’s highest financial fliers took their places before the 10-member Financial Crisis Inquiry Commission charged with determining the causes of the nation’s financial debacle.

The bankers — Lloyd C. Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John J. Mack of Morgan Stanley and Brian T. Moynihan of Bank of America — joined a gallery of titans who have suffered through this ritual: tobacco executives, automakers and baseball’s steroid users, among others. Few Americans remember what they said, but the images endure as cultural mug shots.

These financial leaders with their colleagues of other failed banks collectively almost brought the financial sector to a standstill where banks froze and daren’t lend to another fearing that the borrowers may go bust like Bear Sterns, Fannie May, Freddie Mac and Merrill Lynch. Since the finance sector is internationally connected, it quickly brought an economic tsunami of chain reaction, the worst seen since World War II.

What is shocking is these CEOs justifications of “We didn’t know” and superficial apologies for the great risks they took which if turns out to be profitable, they take huge bonus and if losses incurred, then the stockholders suffer with the balance paid by taxpayers. Is a case of “Heads I win, Tails you lose” scenario. For the record, Goldman Sachs bonus will increase over 80% to a staggering US$9.1billion. These guys have quickly forgotten that Taxpayers bailed them out, giving them new breathe of life and went on blatantly congratulate themselves on profit recovery with huge bonus.

Here are some issues, and see if you can apply P1 (ACCA Professional Accountant) which advocates Anglo-Saxon Corporate Governance. Interesting to note that the financial tsunami was in USA and not United Kingdom. Bear in mind that ACCA adopts principle base governance of United Kingdom instead of USA Rules base governance.

1. Failed risk management. John Mack of Morgan Stanley said that the derivatives trader high income could be matched by a risk manager. This implies that risk manager too will profit if a derivative trade turns profitable. There is serious self-interests threat as the risk manager who is suppose to watch stockholders interests would go hand in hand with traders to bet big and win big.


Pic 03 : The sharp chairman, Philip Angelides.










2. Nonsense arbitrage. Lloyd Blankfein said that when they are uncomfortable with a trade position, they would go out and buy insurance on the downside risk. The chairman, Philip Angelides, sums it so well saying, “Silly! Its like you sell a car with faulty brakes to a customer and then quickly buy insurance on it (in case the customer sues you).”

3. Failed governance. Clearly institutional investors are partly blamed since they egged these fat cats to take excessive risks in exchange for short term gains.




Pic 04: Sach's office (USA), fast way make millions using fools' (i.e. stockholders and Taxpayers) money.









4. “Smart” bankers as a veil of greedy bankers. These men claimed and even boasted that they have top talents to develop sophisticated banking intrusments to suit the market. But in truth, its plain ridiculous like how can you extend a housing loan of 110% of the purchase price? Note that the housing prices has escalated to a bubble level ie ridiculous valuation? Though warned in the market that house prices were unrealistic, they claimed that they are caught unaware of the arupt 40% drop in sub-prime properties. I don’t know if they are stupid (highly unlikely case, Mack is a banker for 40 years!)or this is plain greed of self interest.


5. Over leveraging risk. The four banks collectively holds derivative exchange rate contracts worth US$266 trillion which is 20% of world currency derivative trade. If the contracts turn against them, this time financial meltdown we saw will be peanuts. It will be Financial Armegeddon! American currency will turn valueless since no American banks can honor their contract and there is no alternative currency to flee to. We could be thrown back to Stone Age.

6. Powerful lobbying. Blankfein openly and shamelessly lobbied on live television that despite the mess he and colleagues created, he pleaded, “Please do not regulate us!... Let us contribute to the economy!” Yes, that is right, they helped make 26 million Americans unemployed. Here politics are at play. Government makes craziest decision as they too are humans being arm twisted to bow to pressure from powerful lobbyists.

In my next article i will highlight the lessons we can from Krugman, Nobel Laureate and professor of economics at Princeton University on the current financial and economic recession.

Announcement: Workshop for Oxford Brookes-ACCA Degree Research Project

Pic 01: Complete degree in Applied Accounting, Oxford Brookes University (United Kingdom)

Why should all ACCA candidates do the RAP to get the BSc. In Applied Accounting in collaboration with ACCA?
1. Recognised University degree in the private sector and accounting firms. With the degree, ACCA-OBU graduates command salaries up to RM2,450 per month in Kuala Lumpur in audit firms.
2. Provide better chance of employment since candidates can have TWO qualifications of OBU and ACCA
3. Enhances students knowledge on P1 (PA), P3 (BA), P5 (APM) and P7 (AAA)depending on Research Topics choice.
4. Degree is recognised overseas employers like China, Singapore, Australia and Hong Kong.

What if my marks enable me to only obtain Third Class in BSc. Degree? Should I still enrol?
1. Yes, because it develops your soft writing skills crucial to theory papers at P-Level of ACCA.
2. If you have borderline marks, say an average score of 65% for Skills Module, and you obtain a Grade A for your research project, you can earn an “upgrade” of FIRST CLASS.
3. Also, you are still ahead of those candidates who only have ONE qualification in ACCA whereas you have TWO.
4. Demonstrates your research skills and report writing skills to your future employer, so crucial in corporate life.
5. Even if you have Third Class Degree but earns a Grade A or B, you have demonstrated proven writing skills of exceptional excellence.

What happens if I fail on the first submission?
1. You can re-submit with the guidance of mentor-in-charge at no additional tuition fees. You simply need to pay another £80 to OBU only. This is an incentive for your mentor to want you to pass on the FIRST attempt!



Program : Oxford Brookes University Research & Analysis Project
Venue :

Level 11, Kasturi School of Accountancy
Plaza First Nationwide
161 Jalan Tun H S Lee
50000 Kuala Lumpur
Tel 03-2032 3322 /2008 /3232
Fax 03-2032 3323

Location Map : http://www.ksacitycampus.com/location.html

OPTION 1
Mentor : Mr. Andrew Pang
Time : 1000 to 1300 hours
Date : 16th January, 2010

OPTION 2
Mentor : Mr. Marcus Ong
Time : 1400 to 1700 hours
Date : 16th January, 2010

Price : The above workshop has a nominal fee RM50.00 for three hours of mentoring. If student signs up, the amount will be deducted from RM3,000, which is the entire research project costs excluding the binding costs of RM35 per copy.

BIGGEST BUSINESS ON EARTH

- related to P7 (AAA) of ACCA Examination






Pictures: Food Paradise related to Illegal activities?






HAPPIEST PLACE IN MALAYSIA?

Have you been to Pavillion Mall or Starhill Complex located in Kuala Lumpur’s Golden Triangle? No doubt most of you have and may even say I can get there blindfolded. Understandable as in my opinion its better than Disney World which was dubbed the “happiest place on earth”. I begged to differ, please go to BOTH Pavillion and LOT 10 Mall respective food courts. Both combined has the highest concentration of best food. The operators are carefully selected from the region, namely Malaysia, Singapore and Hong Kong. Eat and be Happy. Heard of “a satisfied filled man is a happy thrilled man”. The happiest place!

After sumptuos fill, go window shopping in the luxury malls and you will notice goods displayed which range from Gucci, Louis Vuitton, Prada and BVLGARI (don’t know how to pronounce this brand). Buy a Gucci watch and it will set you back a cool US$8000 a piece. Equivalent to a year’s pay for a junior auditor! Who would buy them? Some people, you may say, but is there enough volume sales to cover their high expense? There is one outlet that exclusively sells ‘scarf’ and the asking price is US$550 a piece, and that is the cheapest! For a cloth, US$550?

It may not surprise you that some of these outlets are not be in retail business catered to society but really is related to illegal activities such as drug trade. How? Lets look at the business first.

ILLEGAL DRUG TRADE – BIGGEST BUSINESS ON EARTH
The illegal drug trade is a global black market consisting of the cultivation, manufacture, distribution and sale of illegal controlled drugs. The UN report said the global drug trade generated an estimated $321.6 billion in 2007 and close to US$500 billion in 2008. Most jurisdictions prohibit trade, except under license, of many types of drugs by drug control laws. In Malaysia, found with drugs like cocaine, marijuana and related drugs, the sentence is death by hanging!

The illicit drug trade operates similarly to other underground markets. Various drug cartels specialize in the separate processes along the supply chain, often localized to maximize production efficiency and minimize damages caused by law enforcement. Depending on the profitability of each layer, cartels usually vary in size, consistency, and organization. The chain ranges from low-level street dealers who may be individual drug users themselves, through street gangs and contractor-like middle men, up to multinational empires that rival governments in size.

Consumption of illegal drugs is widespread globally. While consumers avoid taxation by buying on the black market, the high costs involved in protecting trade routes from law enforcement lead to inflated prices.

MONEY LAUNDERING – MAKING MONEY CLEAN
One way the government stems the trade is to prohibit drug traders from enjoying the ill-gotten gains. Since they are illegal, traders cannot declare them for taxation purpose or openly purchase goods and services. So they need a way to ‘legalise’ their funds leading to Money Laundering which ACCA Code of Ethics define it as:
“Criminals conceal true origin and ownership of funds from criminal acitivities, allowing controls over proceeds and ultimately cover their income source.”

Money laundering is the process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking, originated from a legitimate source. It is a crime in many jurisdictions with varying definitions.

HOW IS MONEY LAUNDERING DONE?
As clothes go into laundry turns out clean, similarly money too can be clean with methods like:

Cashing up – Smurfing
A business taking large amounts of small change each week (e.g. a convenience store) needs to deposit that money in a bank. If its deposits vary greatly for no obvious reason this can draw suspicion; but if the transactions are regular and roughly the same the suspicion is easily discounted. This is the basis of all money laundering, a track record of depositing clean money before slipping through dirty money.

Captive business using Shell Companies
Another method is to start a business whose cash inflow cannot be monitored, and funnel the small change into it and pay taxes on it. But all bank employees are trained to be constantly on the lookout for transactions that seem to be trying to get around reporting requirements. To avoid suspicion, shell companies should deal directly with the public, perform some service (not provide physical goods), and have a business that reasonably would accept cash as a matter of course. Dealing directly with the public in cash gives a plausible reason for not having a record of customers. It is of course also possible to invent customers, purely for the purpose of accepting money from them.

Other methods in brief:
 Offshore banks that gives anonymity (late President Marcos of Philippines stashed US$20billion in Swiss Banks)
 Alternative Banking – “Quick Money” (Fai Chin) schemes based on trust amongst Chinese Community.
Professional crooks will likely use a combination of the above.

HOW DOES IT AFFECT AUDITORS?



It’s a crime! Even if you as auditors unwittingly overlook the Money Laundering schemes in the process of your professional work on clients. Yes,Ignorantia juris non excusat (ignorance of the Law is no excuse!) Crimes give rise to prosecution and jail term! In my P7 (ACCA- Advance Audit and Assurance), you will know:
= how to detect Money Laundering?
= what actions to take & who to tell in the firm?
= identify and process of reporting to authorities?

= But wait a minute, can auditors tell on clients to authorities in view of the strict confidentiality code?

Listen carefully to my P7 lectures in Kasturi School of Accountancy, Kuala Lumpur (web link: http://www.ksacitycampus.com/), for you don’t want to stay in high security accommodation, courtesy of State Government!

PS: Money Laundering topic carries 4-10 marks in P7 (ACCA) examinations.