Category: International

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Obama and the fiscal cliff

Introduction
Proving that true honeymoons are for first timers only, President Barack Obama returned the morning after the night before to his office/home at the White House and was immediately confronted with some of the immediate challenges he would face the second time round. There is no bigger a challenge than what is referred to as the ‘fiscal cliff,’ a combination of tax increases and spending cuts which are scheduled to go into effect January 2013 and thereby result in a corresponding reduction in the budget deficit.

In an address three days after the elections, President Obama claimed, with considerable justification, that he and his opponent Mr Mitt Romney had proposed to the electorate two competing visions for the reduction of the ballooning fiscal deficit and the national debt. Obama’s “vision” explicitly included the requirement that those whose income exceeded US$250,000 per annum contribute a bit more in the form of higher taxes. Mr Romney on the other hand had campaigned for a 20% across-the-board reduction in tax rates financed in part by the removal of tax-shelters such as charitable donations and mortgage interest deductions.

The new opposition
With the political system and culture of the US being what they are, Mr Romney is now part of the political history of that country. With no elected national, state or party office, Mr Romney’s brief role as leader of the Republicans now falls on John Boehner, the Speaker of the House of Representatives. Mr Boehner too claims a popular mandate for his party which retained control of the House, helped by what is euphemistically called re-districting led by his party and/or the courts. Speaking one week before a scheduled meeting with President Obama this coming Friday, Mr Boehner said that any deal to avert the fiscal cliff should include lower tax rates, the elimination of special interest loopholes and the revision of the tax code.

Both Obama and Boehner could soon learn of the catastrophic consequences of fighting at the edge of a cliff–higher taxes, a rise in the rate of unemployment and the country falling back into recession. One would think therefore that all this pre-meeting talk is no more than bravura and that both sides – already buffeted by their respective media friends to hold out – will see the need for some compromise. In my view Obama has a much stronger mandate and need not demonstrate the excessive caution with which the cloud of re-election overshadows the acts of first-term presidents.

Bush 2
The debate really goes back to the Bush 2 era when tax rates were reduced, when the economy was in surplus and when there was no war. The reasoning of President George Bush was that there could be no better time for the reinforcement of the supply-side doctrine pronounced by the patron saint of the Republican Party, President Ronald Reagan. But soon came 9/11 and two costly wars in Iraq, since ended by Obama, and Afghanistan which Obama is committed to end in 2014.

President Obama came into office in 2008 with a pledge to reduce the deficit and the national debt. In fact, just the opposite has taken place with the national debt increasing by more than $5 trillion during his first presidency. Mr Obama sought to explain – and the electorate appears to have accepted – that the increase was largely due to the wars and the policies of his predecessor. Duly excused if not forgiven, Mr Obama must now keep good on his promise not for his legacy but for the stability of his country and the world’s economy.

The price of failure
Meanwhile, Boehner is playing the kick-the-can-down-the-road game and has suggested that no real decision be taken for another year while the Congress and the Senate work on tax reform. Obama, emboldened by both the presidential as well as the popular vote last Tuesday seems ready to take on the Republicans in what might seem to be a test of wills and of principle. It is hard to understand why and how the Republicans, still to recover from a presidential loss that has left them shell-shocked, would be willing to take the country over the cliff for the cause of tax increases on the top 1% of the population. Hopefully, Boehner, who demonstrated a spirit of compromise in discussions with Obama in his first term, will be able to take that further on this occasion. While there are some who attribute blame to Obama for the failure of those discussions, Mr Boehner now has to win over the leadership of his own party in which failed VP candidate Paul Ryan, a supply-sider has a strong influence, if not being the principal contender.

So what in fact will happen if there is no agreement between Obama and Boehner? First the tax side. In addition to some tax cuts which have already expired but which are up for renewal in 2013, there are many specific changes which will automatically take place, some of which are too detailed for this column. In essence, however, the Bush-era tax cuts are set to expire, which will bring the tax system back to 2001 levels; President Obama’s 2 per cent payroll tax cut holiday will expire, and a series of other temporary tax cuts for businesses that Obama enacted will end.

Some groups in the US estimate that more than three out of four Americans will see some form of tax increase next year with the Bush tax cuts alone affecting 100 million persons. The Tax Policy Center estimates that the average US household would face an average of a $3,500 rise in their annual tax bill.

No hyperbole
This does not appear hyperbolic since some of the taxes cut across the board and will affect lower and middle-income groups. These are the very people whose cause Obama has championed since his days as a community organiser and who voted him a second term. The loss of the Earned Income Tax Credit, a refundable credit and the “payroll tax holiday,” a 2 per cent Social Security tax cut on the first $110,000 in wages together with the expiration of the Bush tax cuts, as well as tax and college credits will have real effects. It would be an unpleasant pill for Obama to swallow in the face of the hard line taken by his political opponents.

At the higher end, taxpayers will be hit with the Bush era tax rate changes. The two top tax brackets are set to rise from 33 and 35 per cent to 36 and 39.6 per cent respectively. Additionally, the capital gains and dividend tax rates will rise from 15 per cent while the 15 per cent dividend tax rate will equal income tax rates.

As I said above, some columnists, including Paul Krugman, a Nobel Laureate and New York Times columnist are advising Mr Obama to hang tough, that this is not the time to negotiate a “grand bargain” on the budget that snatches defeat from the jaws of his hard fought victory. His advice that Mr Obama should let the Republicans take the responsibility for driving the car over the cliff has risks, including the impact on the poor and the middle class, but Obama would no doubt recall that when Speaker Newt Gingrich did something not dissimilar on spending during the Bill Clinton presidency, the cost to the Republicans was considerable.

Mr Krugman argues that a stalemate would hurt Republican backers, corporate donors in particular, every bit as much as it hurt the rest of the country. As the risk of severe economic damage grew, Republicans would face intense pressure to cut a deal after all.

He takes a slightly less catastrophic view of the consequences of the cliff, pointing out that it is not like the debt-ceiling confrontation where terrible things might well have happened right away if the deadline had been missed. He argued that this time, nothing very bad will happen to the economy if agreement is not reached until a few weeks or even a few months into 2013.

And what about the cuts?
Following the failure of the debt ceiling debacle, the US House of Representatives appointed a Joint Committee on Deficit Reduction under the authority of the Budget Control Act of 2011 with the mandate to find a way to cut spending by $1.2 trillion over the next ten years. Unlike so many other committees which are often set up to fail, this super-committee had no such option: if it could not come to an agreement, there would be a trigger – an automatic $1.2 trillion in spending cuts would occur, half from domestic spending and the other half from the Department of Defence. The automatic spending cuts will see the first $110 billion in cuts starting January 2, 2013.

This means that the Defense Department will see per cent across-the-board cuts, while “discretionary” programmes or those that do not have earmarked funds will face cuts of about around 8%. Certain to face cuts is the government-run health care programme for seniors which would face a 2 per cent cut in Medicare payments to providers and insurance plans.

Even as a visitor to the US myself, I find it hard to say how these cuts will affect even an area with which I am familiar, given the way the individual states and the federal government operate. But it is a fair bet that across the country, infrastructure, schools, public health and homeland security would be victims of the cuts.

There are some programmes that are exempt from the cuts. Specifically identified are Social Security, Medicaid, supplemental security income, refundable tax credits, the children’s health insurance programme, the food stamp programme and veterans’ benefits, while the White House has also said military personnel would be exempt from the cuts.

Conclusion
Some months ago the US Congressional Budget Office (CBO) projected that falling over the fiscal cliff could lead the US economy into a “significant recession.“ It estimated that the economy would shrink by 2.9 per cent in the first half of 2013 and by 0.5 per cent for the whole year and that the unemployment rate would increase to 9.1 per cent. It is now 7.9%.

There are those who argue that this is a lame-duck presidency – the period between two elected officials – and that nothing should be done now. Obama is unlikely to agree. Whether he will act like his predecessor George Bush did, boasting that he had won political capital which he was prepared to spend, remains to be seen.

Next Friday’s discussion between President Obama and Speaker Boehner should be a good pointer.

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The Apple Store – a wonderment in itself

Introduction
I am unable to carry my review of the 2010 Report of the Auditor General as I am in the USA without access to all the relevant material. I will resume and conclude that review next week. Instead, today’s column is about a shopping experience I had on Friday that – to use a term consistent with today’s column – blew my mind.

I could not help but share it with the readers of Business Page and to contrast it with our antediluvian Guyana.

Ever since as Christopher L. Ram & Co. I first used a computer, around the mid-eighties, I have always gone for what are referred to as the PC, as in PC versus the Apple (formerly the Macintosh and then Mac) rather than in PC versus desktop.

No doubt influenced by my conservative embrace of habit, and given the practicalities of the wider range of software to support an accounting practice, Ram & McRae has stuck steadfastly with the PC – both the portable laptop and the desktop which, except for the monitor, survives largely unchanged in its configuration, but certainly not its capacity or speed.

Yet one cannot help but admire the Apple, the brainchild of Steve Jobs, one of the world’s most influential men, and the product of its most successful company, ever. I felt strongly enough about the death of Jobs in October 2011 that I dedicated an entire column to his life and works (S/N October 9, 2011). I read Walter Isaacson’s fascinating account of the remarkable life of a man whose passion for perfection and brutal drive for excellence are credited with having revolutionised six industries: personal computers, animated movies, music, phones, tablet computing, and digital publishing. My experience last Friday suggests that there is a seventh – how to create the most successful retail outlet with annual sales of tens of millions of dollars. And to have done this when on-line shopping is now the vogue and Amazon is able to find and supply anything – well almost anything – under the sun, is an achievement without parallel.

Jobs vision
The Apple Store is Jobs’ invention even if the success belongs to Ron Johnson, the retailer’s guru, who carried out the vision, and the army of staff who make it all possible with their boundless enthusiasm, energetic drive and religious passion.

Coke as in Coca Cola, is often described as the triumph of marketing over substance. Apple is the ultimate triumph: marketing and substance.

The combination of vision, enthusiasm, drive and passion just described – and more – were on display when I visited the Apple Store in one of America’s ubiquitous malls to have them look at my son’s Apple computer.

It was early morning, but time seems never to matter to the owners of an Apple computer who even with the occasional product flop, seem to have an exceptional brand loyalty that suggests a faith that “Jobs is in charge”. America is still clawing its way out of a housing bubble that threatened to bring the economic house down – but that is hardly evident among the army of Apple fans.

To them the Apple Store is their equivalent of the fundamentalists’ mosque or church, a place to meet fellow believers in the vision, to share life changing experiences, and to learn about the next version of the ever evolving and improving products.

As Johnson said, even though Apple products can be purchased for less elsewhere, people visit Apple’s stores for the experience, not only for the products on offer.

The Apple store is a place where the faithful congregate for reassurance that the founder lives on, as much in the products as in the people. Almost invariably, the store is likely to be the busiest shop in the entire mall but still, the greeting as one enters is sincere but not intrusive, warm and signals a willingness to help.

The store is a melting pot of people of various ethnicities, gender, age and size, the attendants in their distinctive blue polo shirts each carrying the electronic version of the slate, each with access to a common data base and all integrated.

The genius bar
Having explained the purpose of my visit, I was given – electronically, of course – an appointment with the Genius Bar, the name of the in-store service centre for which only the best are recruited after more than a half dozen interviews. The occasional or new visitor might have dropped in for a specific purpose but then finds the range of products so helpfully and usefully displayed almost irresistible.

One does not leave the store without looking at all the products, from the high end computers and phones to the mundane but very effective cleaning supplies they stock. Not surprisingly, the brand name was iClean.

As I waited for the hard drive of my son’s computer to be replaced, I managed to walk around and with the help of an Asian attendant, bought two cans of iClean. I could see no cash register or cashier so, as I took out the cash to pay, I furtively looked around to see what he would do with it. Pulling an exquisitely well-hidden drawer from under one of the display tables he took the money, asked for my email address, confirmed it by showing me his handheld device, and gave me my change.

Reluctantly, but not wanting to be stopped on my way out with items but no evidence of payment, I asked for a receipt. I just emailed it to you, he said, as if that was the most obvious way to do business. It was their LCDS in practice.

Beyond service
The next surprise was to see that the store had a sign-language expert attending to the special needs of two children brought in by their parents and using the Apple programme designed for such circumstances. The attendant was competent in more than sign-language ability: she was a model of patience and understanding that we see only in a few of our teachers.

I wondered whether this is one of the things that distinguish the successful from the average businesses, the strong from the mediocre countries and the caring from the insensitive societies.

The millions who have read Isaacson’s book on – not of – Jobs, knew about his obsession in creating the perfect store, where everything is done, and redone more than once, until perfection, like Jobs’ Buddhist nirvana, is achieved.

But there must be something more that the simple elegance or the perfect symmetry of the walls meeting doors, doors blending with the ceiling and ceiling’s contrasting with floors, that would make people willing to pay more in store for a product available elsewhere.

Johnson thinks that what drives the phenomenon are the several components of the experience, the most important of which is that the staff are not focused on selling stuff, but on building relationships and trying to make people’s lives better, which is what Jobs was all about.

At the Apple stores, the remuneration of employees is not based on how much sales the employee or the store one generates. Accordingly, they do not need to encourage people to buy pricey products or services they would hardly use.

By connecting with their customers, understanding their needs and helping them figure out how to satisfy those needs, even if it is a product which Apple does not carry, the Apple store employee builds a relationship with the customer that not even Bill Gates has managed to recreate, let alone displace.

Exploit the sucker, no one is looking
At the same time I wondered about the prehistoric manner in which retailers and departmental stores do business in Guyana. Maybe I am being naive, in even entertaining the thought.

So many of our retailers pay little attention to the quality of their employees, selected after the most perfunctory of interview, in receipt of remuneration below the relevant minimum wage, let alone a living wage. They care not about the defective and shoddy products they pass on to their customers under the unlawful “goods not returnable” stipulation.

With a couple of standout exceptions – I think of Nigels and Bounty, Courts and Singers, Digicel and GT&T – the attitude of many of our retailers is that there will always be a poor sucker to be exploited the next day.

I wondered too how none of our retail companies would grant their employees a stake in their business, many of them keeping the real accounts of their business to themselves and away from the GRA.

At Apple, the employee is part owner, however modest.

The question we need to ask is not whether the Apple store model is possible in Guyana but rather whether anyone who is anybody in Guyana is interested, including the government and the consumer representatives. Our Sale of Goods Act setting out the obligations of the seller goes back to the UK of 1893; the consultation on a Consumer Protection Act took nearly a decade for it to secure passage in the National Assembly and it is anyone’s guess how long it will take to bring it into force.

Four months after the November 28 general elections, the President is yet to announce a Minister of Trade. One of the biggest businesses in Guyana over the past fifteen years is the second hand vehicle market and yet there is no law regulating them. No wonder they can sell a five million dollar vehicle on a two month warranty but with little or no paper work, including a VAT invoice. It is really unfortunate that they manage to do so without more attention from the Guyana Revenue Authority, or justice in the courts.

One lawyer representing such a business even had the courage to say that the consumer should be more careful about what they buy under the maxim caveat emptor – let the buyer beware.

Conclusion
Operating under an unregulated regime of consumer laws, an absence of consumer activism, a consumer unaware of her common law rights and a government that is far friendlier to business than it is to the consumer, our businesses have little incentive and no compulsion to upgrade their business model or the quality of their service. They do not realise that their store environments and customer service are unimaginative.

Johnson is adamant that any online store can transact, but success comes only to the stores that enrich people’s lives and add value beyond simply providing merchandise. So, how does a store accomplish those seemingly illusive objectives? They need to move, as Johnson said, from a transaction mind-set—“how do we sell more stuff?” – to a value-creation mind-set.

Perhaps the absence of a challenge from on-line stores, minimal competition and the whole environment, discourage any imagination and innovation. But as Apple shows, there is a pot of gold at the end of the rainbow.

Correction

In last week’s column I recommended under the paragraph headed Local Loans that the debts of over $13 billion shown as owing to the state by defunct or dormant public corporations such as LINMINE, the porous Guyana Power and Light and the long-dead Guyana Airways Corporation and carried in the national accounting records should be “written off and charged against the Contingencies Fund”. That should have read Consolidated Fund. The error was corrected in the on-line edition of the Sunday Stabroek. The error is regretted.

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If Mitt Romney was in Guyana, his 13.9% tax rate would have been lower

Introduction
If Governor Mitt Romney, a leading candidate for the Republican nomination in the US 2012 presidential elections thought that he would neutralise the attacks by his fellow candidates by publicising his 2010 tax returns, he was wrong.

In fact, the revelation that his effective tax rate – the percentage which the tax he pays bears to his total income – is a mere 13.9%, has served to internationalise a debate on what is a fair tax.

Fairness has been regarded as an indispensable ingredient of a proper tax system even before Adam Smith wrote it in stone as one of the canons of taxation.

It is now a hot topic and is the subject of three columns in last week’s Economist. It also made the editorial of the Stabroek News on January 26. The Trinidad and Tobago government too has announced another tax reform project, following a similar announcement by President Donald Ramotar. Let us return to Mr Romney for a moment.

Poor man
The poor man is worth a mere US$ quarter billion, and together with his wife paid about $3 million in federal income taxes on income of $21.7 million in 2010. His effective tax rate of 13.9 per cent is less than half the 35 per cent top rate of federal income tax applied to any annual income over $379,150 for most top earners.

It is no consolation to the fairer tax movement that the effective rate the Romneys will pay in 2011 is 15%.

Because so much of Mr Romney’s income comes from capital gains, dividends and interest on investments he holds in funds and stocks, he greatly benefits from America’s relatively low 15 per cent rate of capital gains tax (CGT).

Despite having a Swiss bank account and investments in the Caymans under a blind trust, there is no suggestion of impropriety by Mr Romney. He went to great lengths to point out that what he, or rather his trustees, were doing was all within the US tax code that has as many loopholes as our domestic cast net. Romney’s tax rate is below that of most wage-earning Americans because most of his income comes from capital gains on investments.

And that is part of the problem. The other part is Mr Romney’s insensitivity to the glaring income and wealth disparity at a time when there are fourteen million unemployed Americans; where poverty as defined in that country is on the increase, engendering the Occupy Wall Street movement that protested what its leaders consider the unfair share of the income and wealth that goes to the 1%.

Buffet by another name
The USA is a country of data: within days of the end of a month or quarter or year, figures on just about every quantitative measure are released by some department or the other. So it did not take long for Americans to learn that the top 1% of their households earned annually an average of US$1.2 million in 2011 while the national average was US$26,000; accounted for 17% of the income earned by all Americans; or that the top 0.1% earned 8% of the total income.

What accounts for some of the disparity is how the income is earned. The richest 1% receive half their income from wages, salaries and bonuses, a quarter from self-employment and the balance from dividends, interest and capital gains.

The problem lies in the tax treatment of the various sources of income with income from employment being taxed at a higher rate than investment income. And that is where the debate gets heated, philosophical and ideological.

In terms that could easily apply to Guyana, US President Barack Obama denounced that country’s bottom heavy tax system, arguing that persons whose annual income is a million and more should pay at least 30% tax, which is the rate paid by the average middle class household in employment. President Obama likes to cite the “Buffett Rule,” whereby the Omaha billionaire and third richest man in the world pays income tax at a lower effective rate than his secretary does, largely because so much of his income comes from investments. We too have our Buffet Rule except that it goes by another name.

Bush’s views on double taxation
In 1986, the US introduced tax reform measures eliminating the gap between the ordinary and capital gains rates. But while the gap began to widen again during President Bill Clinton’s second term, it became a chasm in 2003 when the George W Bush tax cuts sliced the top rate on dividends and long-term capital gains from 28 per cent to 15 per cent. As the share of income derived from investments has increased over that time, the gap has widened to a point where most persons, including Buffet but excluding the 1%, now believe that the situation is unsustainable and indefensible.

In seeking to justify the cuts, President Bush said he proposed to eliminate the US dividend tax saying that while “it’s fair to tax a company’s profits, it’s not fair to double-tax by taxing the shareholder on the same profits.” Not many people, including economists and almost all the G20 countries, agree with him. Ironically, Guyana and a number of countries in the Caribbean do and in 1994, the PPP/C government of Cheddi Jagan eliminated the tax on dividends received by residents from resident companies.

The argument that an income should not be taxed twice defies not only principle but practice as well, with Peter Ramsaroop’s 33⅓% income tax plus 16% VAT being a politically artful but technically incorrect case. Given that Guyana has a hybrid system of taxation, the income earned from employment is taxed at source on the Pay As You Earn basis and then again is subject to a range of expenditure taxes including most popularly the Value-Added Tax (VAT). Call it what you will, the income is taxed twice.

No surrogate
Those who support Bush’s argument miss the fundamental point that a company is in law a separate legal entity and not a surrogate for its members and shareholders. It can own property, enter into contracts, commit offences and sue or be sued in the courts. Indeed some companies in a single case, take up more of the court’s time than they pay in taxes. But the courts are not the only public goods a company uses: it uses the roads and other public physical and social infrastructure; it calls on the police for protection and security and has a whole department of government dedicated to serve it. It hardly seems unreasonable to expect the company, on its own, independent behalf to help pay for the availability and use of those public goods through taxes.

But apart from those monetary benefits there is another valuable benefit which a company enjoys and that is the benefit of limited liability.

The first UK Companies Act in 1844 was a transformational measure that was immediately embraced by the capitalist class, despite the fact that it came with high corporate and personal tax rates. One hundred and sixty-eight years later, despite several rounds of tax reform, dividends are taxable in the hands of the shareholder at rates varying from 10% to 42.5%.

Here in Guyana we do have statistics. The trouble is that they are not available to the general public and hardly ever feature in any public reports or pronouncements. It is a national embarrassment that we have to rely on the periodic reports by international organisations like the IMF and the World Bank to provide us with relevant information. It is illogical, and indeed immoral, that the capital gain on the disposal of a house is taxed at the rate of 20% but the gain on the shares in public companies is exempt. It is not as if the so-called incentives of no taxation of dividends has brought about a large number of companies or shares in which the average retiree can invest.

In fact, the incentives of no tax on dividends and the exemption from Capital Gains Tax of shares in public have spanned more than a decade in which none of our public companies has offered any shares to the public, nor has any private company gone public.

Budget 2012
As we approach the 2012 Budget and supplementaries for unfunded 2011 expenditure, the political parties on the opposition benches will be concretising the generous tax cut proposals in their 2011 elections manifestos. No doubt it will be a healthy and instructive exchange with Dr Ashni Singh under whose watch the VAT was introduced.

But before the parties start their tinkering and trading over some matters of percentages and detail to satisfy those who voted for them, it would be far more useful for the country, if not for them politically, to agree on some fundamental objectives of the changes and reforms they seek.

A challenge for both sides is to stem the widening deficit we experienced under the Jagdeo administration, accustomed to debt-write off, sale of public assets and ever increasing tax revenues.

The apparent endless stream of debt write-off has come to an end, and while tax collections continue to rise, they cannot compensate for the spending over-drive into which the Jagdeo-Singh team has taken us.

Conclusion
The evidence from the Reagan/Bush years to the experiences of Greece, Italy and others is that deficit reduction has to have at least an equal mix of increased taxes and spending cuts.

Tax concessions are considered in economics as a form of expenditure. They need to be re-evaluated and reduced.

We have both central and regional systems of government. We do not need the large number of ministries and ministers.

We have a number of statutory bodies charged with responsibilities which previously fell on the ministries. Some rationalisation seems inevitable.

Jagdeo, who saw himself as the country’s economist-in-chief for nearly two decades, did so much tinkering with the tax system in matters both great and small that a more comprehensive review is now overdue. Guyana is a republic committed to equality and the rule of law but with a constitution which places one person above our supreme law.

And the two leading justices who would be expected to rule on tax cases in the courts were granted exemption from tax on their emoluments during the Jagdeo administration.

There must be other and better ways to reward all our judges. We are a republic without republicans. Mr Romney may seriously consider becoming the first.

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The death of an I-con – Steve Jobs

Introduction
“The world has lost a visionary. And there may be no greater tribute to Steve’s success than the fact that much of the world learned of his passing on a device he invented,” US President Barack Obama said in a statement.

Lest I offend anyone, I will not call any names. But I do believe that among the 125 billion or so people who have lived on this earth, only a handful would have impacted the lives of others as much as Steve Jobs – technologist and culture shaper – who passed away this past week. Steve Jobs was a giant not only of his time but of all times. The unbelievable story of his adoption, his brief time as a college (university) drop-in and drop-out, his firing from the company he created (Apple), his capacity to re-engineer himself, his creative genius, his address at the Stanford University 2005 commencement, the unique products he created and his legacy are sure to be the subject of books, research and analysis for years to come.

Whether one’s interest is his story-book beginning, his technological brilliance, his marketing genius or the marvellous products he created, the sadness of his life cut short by cancer was as palpable as that experienced with the recent passing of Michael Jackson. Lest we forget he created the Apple Macintosh, iPad, an iPhone and iPod products, products which others can only copy, proving that imitation is the sincerest form of flattery. For the spiritually minded his embrace of Buddhism and his vegetarian lifestyle would attract a special affinity and emotion. His death has generated a viral explosion of email across the world and we now are reminded that when he stepped down as CEO and President of the most valuable company in America, his annual salary was $1 per year.

Dots, love and loss and death
In his Stanford commencement speech, Jobs spoke not of the great products he had created or the big ideas he had but only of three simple everyday things – connecting the dots, love and loss, and thirdly, death.

In 2004 Jobs was diagnosed with an incurable type of pancreatic cancer that could end his life in three to six months. Despair turned to joy when his doctors thought, somewhat prematurely that the strain of cancer was in fact curable, leading Mr Jobs to state one year later that he was looking forward to living for a few more years. That was, sadly, not to be and all he had was five more years.

He told his audience in 2004 that “Death is very likely the single best invention of Life. It is Life’s change agent. It clears out the old to make way for the new … time is limited, so don’t waste it living someone else’s life,” he advised the young people.

Failure
Who was this man Jobs and what was so special about him? So profound and respected was Jobs that one day after his death, he was on the cover page of that other iconic publication – The Economist – which said in its Obituary page that Jobs “stood out in three ways – as a technologist, as a corporate leader and as somebody who was able to make people love what had previously been impersonal, functional gadgets.”

That Jobs failed academically is simply a demonstration of how non-typical and revolutionary he was. He proved that there are other things besides degrees and education: ambition, vision, energy, focus and resilience. Education for some people only is a hindrance.

Jobs liked to see himself as a hippy, permanently in revolt against the establishment, but ended up being hailed by many of those corporate giants as one of the greatest chief executives of his time. He used the limitation of not being an engineer to great advantage. Not for himself but for millions of persons around the world who were not mere consumers of his inventions but adoring followers. His obsession with product design and aesthetics, and with making advanced technology simple to use was legendary. The genius in him allowed him to transform a technical idea or some half-invention into a user’s dream.

Those who have used his product simply could not understand why others would deny themselves the privilege of owning or using one of his products – whether it is a digital music player, the smartphone or the tablet computer. While the traditional players in the industry may have been riled with the audacity of his ideas, they all marvelled at the way he transformed music, telecoms and the news business.

Surviving and succeeding from failure
He lived by some simple precepts including the one about the dots. “You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future,” reflecting how a casual course in calligraphy led to the exciting fonts introduced into the Mac Apple was designing.

His philosophical outlook was also extended to the loss of the job at the company he created. He was only thirty at the time, riding on the crest of the wave of success from the release of the Macintosh, described by Jobs as Apple’s greatest invention. Not that he did not take the firing hard at the time; he said he felt he had let the previous generation of entrepreneurs down. But he then used that disappointment to turn getting fired from Apple into the best thing that could have ever happened to him. Success at Apple had come early, but at a heavy price. The break in his relationship with Apple made him into a beginner again – free enough to allow him to enter one of the most creative periods of my life.

The return of the master
He started the company named NeXT and then Pixar which went on to create the world’s first computer animated feature film, Toy Story. Pixar became the most successful animation studio in the world and in 1996 Apple bought NeXT and with it Steve Jobs and NeXT’s technology that was at the heart of Apple’s renaissance.

His achievements after his return are an inspiration to any businessperson whose career has taken a turn for the worse. The way in which Mr Jobs revived the company he had co-founded and turned it into the world’s biggest tech firm, (bigger even than Bill Gates’ Microsoft, the company that had outsmarted Apple so dramatically in the 1980s), is the story of fiction, except that it is true.

Adoration
But what was perhaps most astonishing about Mr Jobs was the fanatical loyalty he managed to inspire in customers.

The users show off his products by bumper stickers, have fan clubs and see themselves as part of a community, with Mr Jobs as its leader. There was that bond or relationship that came from his obsession that he was only concerned about what his users wanted: simplicity, functionality and elegance.

Steve Jobs had been ailing for some months and had handed over the reins of the company to his deputy. During the last few months of his life he was regularly in pain, too weak to climb stairs.

Yet he wanted his children to understand why he wasn’t always there for them and commissioned a biography that is destined to be a bestseller.

‘I want them to know me’
“I wanted my kids to know me,” Jobs was quoted as saying by biographer Pulitzer Prize nominee Walter Isaacson, when he asked the Apple Inc co-founder why he authorized a tell-all biography after living a private, almost ascetic life.

“I wasn’t always there for them, and I wanted them to know why and to understand what I did,” Jobs told Isaacson in their final interview at Jobs’ home in Palo Alto, California.

I started this column with a tribute from President Obama the politician. Here is Microsoft’s Bill Gates speaking of Jobs: “For those of us lucky enough to get to work with him, it’s been an insanely great honor.”

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Making the audit report more useful and the auditor more accountable

Introduction
Even though auditors sell their services, the profession of auditing – certainly of the financial kind rather than the forensic type – is unlikely to feature in the list of top one hundred most sexy professions in the world. Not because auditors themselves are not attractive or because they live boring lives. I am sure that a thorough research into the profession over the past seventy years will uncover a few auditors who have been involved in interesting activities, vocations and affairs of a non-financial nature. But the first problem is that a researcher is more likely to be attracted to a thesis on the why babies cry than on the life and times of an auditor. The second is that auditors seem to reserve their shenanigans to financial affairs that in extreme circumstances can result in the break-up of more than a domestic family. This was the case with Arthur Andersen LLP, up to 2001 one of the ‘Big Five’ but which in 2002 voluntarily surrendered its licences to practise as auditors after being found guilty of criminal charges relating to the firm’s handling of the auditing of Enron. It was subsequently cleared by the US Supreme Court but by then all its clients had fled to safer havens.

A profession whose major identifiable product – the audit opinion – remains fundamentally unchanged for seventy years has to attract the rare ISTJ type of personality and can hardly be expected to be anything but boring. In fact I recall at an Annual General Meeting a couple of years ago the Chairman, a member of the self-described learned profession no less, proposed that the auditor’s report be “taken as read” since the reading of the report by the Secretary would “turn members off.” Little does he know that that kind of disrespect for our professional output is one of the principal reasons why the audit fee always includes a premium, akin to damages for defamation!

The Americans
If the American audit regulator PCAOB (the Public Company Accounting Oversight Board) – set up under the Sarbanes-Oxley Act of the USA in response to the Enron/Andersen fiasco – has its way, the auditor’s opinion is likely to undergo its first major overhaul in seventy years, probably unique for any profession. But not before the auditor feels compelled to divert from poring over some unfathomable trial balance which s/he is ticking with a green or purple ink pen (the preserve of the profession) to write several letters stoutly defending the status quo. It is easy to imagine the accounting profession inventing the aphorism “if it ain’t broke, don’t fix it”!

So what exactly is the PCAOB recommending? Before addressing the question it may be useful to note that the audit report presented to shareholders is not the only product of the audit. In fact while that is the statutory output, the discussions which the auditor has with the client during the course of the audit, and the advice and recommendations contained in what is referred to as a management letter, are of immense if not greater benefit to the client. In the USA the auditors are required to communicate with the Audit Committee of the Board on several specific, high level issues, such as disagreements with management, consultations with other accountants on auditing and accounting issues, major issues discussed with management prior to retention and difficulties encountered in performing the audit.

They also send to the management a letter, unimaginatively called a management letter, in which they set out the findings arising from the audit, the implications of those findings to the operations and the financial statements and the auditors’ recommendations thereon. These are mainly intended to improve the efficiency and effectiveness of the client’s operations.

Guyana
Guyana subscribes to international rather than US standards, the former of which also have two separate standards on communicating following the audit, one named Communication with Those Charged with Governance and the other Communicating Deficiencies in Internal Control to Those Charged with Governance and Management.
My experience is that the two sets of issues are merged into a single management letter which goes initially as a draft to management for its comments which are incorporated into the final version of the management letter to the directors.

International
Almost simultaneously as the US has begun its initiative, the International Auditing and Assurance Standards Board (IAASB), which is supported by the International Federation of Accountants and whose pronouncements the Institute of Chartered Accountants of Guyana subscribes to, has come out with its own Consultation Paper Enhancing the Value of Auditor Reporting: Exploring Options for Change. This paper once again discusses the age old question of the expectation gap, that is the difference between what users expect from the auditor and the financial statement audit, and the reality of what an audit is.

The current consultation both in the US and internationally goes beyond this expectation gap. There is a perception that there should be more transparency about the entity and its financial statements, particularly key financial reporting risks and how they are being addressed; and how the audit is performed, including key areas of audit risk. One only has to consider the case of Enron in the US and our own Enrons such as Stanford and Clico to appreciate how inadequate a bald audit report and inadequate communications by auditors are to the users of financial information.

The information gap
Serious users of corporate financial information – not the little old ladies and gentlemen for whom attendance at an AGM is a highpoint of their social calendar – point to the existence of an information gap, described by the IAASB as the information users believe they need to make informed investment and fiduciary decisions, and what is available to them through the entity‘s audited financial statements or other publicly available information.

Any deficiency in the existence or presentation of such information could have serious implications for the efficiency of capital markets and the cost of capital – matters which are like oxygen to the capitalist world. For everyone, this information gap increases the challenges of understanding how corporate financial information, including the audited financial statements and related disclosures, reflects the overall picture of the entity‘s financial condition, performance and sustainability of its business.

Bridging the gap
What then do they believe can help? In a concept release the PCAOB has come up with four Approaches to Changing Auditor’s Report. A fact sheet released by the Board of PCAOB states that the four potential changes, which it describes as “alternatives,” are not mutually exclusive, so that any revised auditor’s report could include one or a combination of the alternatives, elements within the alternatives, or alternatives not currently presented in the concept release. The four are:

An Auditor’s discussion and analysis (AD&A) as a supplemental narrative report to the auditor’s report in which the auditor discusses his or her views regarding significant matters, such as audit risks identified in the audit, audit procedures and results, and auditor independence.

Required and expanded use of emphasis paragraphs. This would require inclusion of an expanded emphasis paragraph (currently optional) in all audit reports. The emphasis paragraph would highlight the most significant matters in the financial statements and identify where these matters are disclosed in the financial statements.

Auditor assurance on other information outside the financial statements. This would require auditors to provide assurance on information outside the financial statements, such as management’s discussion and analysis (MD&A) or other information (for example, non-GAAP information or earnings releases).

Clarification of language in the standard auditor’s report. This would involve clarifying what an audit represents and auditor responsibilities. Language and concepts that the PCAOB believes could be clarified include: reasonable assurance, auditor’s responsibility for fraud, auditor’s responsibility for financial statement disclosures, management’s responsibility for the preparation of the financial statements, auditor’s responsibility for information outside of the financial statements, and auditor independence.

The discussion paper put out by the IAASB lists eight issues of which the first is the risk facing the business while others include changes to accounting policies that have a significant impact on the financial statements, the methods and the judgments made in valuing assets and liabilities and significant unusual transactions.

Conclusion
It is early days yet and any decision will be some time in coming since the process has to consider the range of opinions and submissions which the PCAOB and the IAASB will receive, many of them self-serving and representative of vested interests. Both the Americans and the international board have set a time of September 2011 for the submission of comments. I hope that the Guyanese accounting profession that has distinguished itself by its avoidance of any issue of substance or significance will make some contribution to the discussion, even if it does so as part of the regional umbrella body.

Of course no one should draw the wrong inference: the fundamental nature of the audit opinion will remain the same – to report on the truth and fairness of the financial statements. What will change are the contents of the report which should just make auditors a bit more accountable and their product more useful.