The upgrading paradoxes

I wish to ferret out the truth matter-of-factly and welcome any feedbacks and comments.

Synopsis

In the May 2006 General Election, in order to win back opposition wards the ruling party’s ballyhoo was a promise to throw out hundred millions dollars to upgrade the public-housing in the wards to impinge on the constituents to vote them. The upgrading projects include face-lift, improved amenities and lifts to stop on each floor. The oppositions were ostracized for not having the wherewithal to fund the projects. They clamored vehemently the ruling party’s repugnant “hanging carrots” strategy by tying upgrading with election to vitiate their chance, claiming the ruling party using tax payers’ money to achieve political advantage and upbraided the ruling party that their constituents also paying tax why resorted to discriminate people in Singapore between opposition and ruling party camps. In the election, the unrapacious two opposition wards’ constituents were disenchanted by the blandishments. They foiled the “carrot” plot and annexation by the ruling party. It panned out that of the entire voting constituents, 66.6% chose the ruling party. After the election, the PM hailed to close ranks that got rave review.

Soon after, the minister in charge of upgrading housing projects pronounced the ruling party wards will be ahead of opposition wards on upgrading, and regardless of party concern, all public-housing upgrading projects in Singapore will be completed in 2015. This aroused the oppositions and concerned Singaporeans writing to the paper, leery of the capricious government on the one hand, hailing close ranks, and the other harboring divisive inclination.

In his reply, the minister claimed the government in deed had taken care of basic needs, and upgrading was something premium to these needs, and funded out of Budget surpluses generated by the ruling party. He insisted to fulfill the promise of those voted for the ruling party, and with the HDB-priority policy, Singaporeans’ votes would make a difference to their own lives in the HDB estates. “Only then can our system of democracy work. Only then can we stay together, and move ahead.”(The Straits Times/Forum 17 June 2006).

Paradox 1 -the benefits of upgrading

The benefits of upgrading are always inordinately overblown. There is no qualm about an upgraded estate valued more than those not upgraded. There are two kinds of benefit associated with external upgrading. First, it is the ambience benefit, gardening of the surrounding morphing a soothing realm; exercise ground for residents to upkeep their health; Children playground to exhaust the ebullient kids; Shelter to provide cover for rain and sunshine. The second benefit is pecuniary, making a windfall in a reselling market or upgrade to private property.

Let examine first the second benefit. Unless you are deft at investment like one of my friends held two properties and made a fortune and now lives in semi-detached house. The up in value probably concern you little if you have to live in it and you cannot afford to upgrade to more prestigious. My friend’s fortune was also on condition that he purchased in the very early day when public-housing was heavily subsidized. And now most public-housing are pegged to the market value. The latter incumbents gain measly little in price differential when pondering to upgrade. Secondly, in the boom day of late nineties, dint of upgrading as “carrot” to attract legion of followers is propitious. But now the residential and shop house of HDB property supplies are in excess, the so-called advantage is rather creaky.

As to the external ambience benefit, the time and frequency you spend in it is in tandem with the benefit you received. I am doubtful working adults grade this as primary benefit. Building the shelter in the estate is good; the big fluff is the design does not offer egress hitching to the external network such as to the bus stop. It is fudge. You get the aesthetics but not practicality.

For lift to stop on every floor is a double-edged sword, it gives the convenience especially to old folks and handicapped; however, unlike commercial buildings cater many lifts for passenger use, the building owners can afford to weave the lifts into a complex system incorporating intelligent functions to achieve spontaneous, flexible and optimal sense and response.

At present, the intractable problem is we do not have such smart lift in public-housing; you find it is a gnawing and frustrating experience early in the morning if you are living at 20 floor. When you are going for work; perversely, everyone is rushing for work at the same time, the lift stops at every floor. The lift door opens and closes at every floor until you reach first floor. This frustrating experience dampens your mood when you reach office. I hope this is an extreme case. My own experience of the tardy response is when I press button outside at 12 floor; the lift at nine floor cannot choose to pick me up at the most adjacent landing floor because the stupid lift responded first to the insider calling.

We had our upgrading a year ago, surprisingly; the lifts were not changed to stop on every floor. Do we have to pay again for the second upgrading because lift to stop at every floor was oblivious a year ago? It is enigma of pivotal project likes this, the accounts of upgrading projects were not elucidated to the public whether the balance is in excess or deficit; presumably the Audit General has taken care of this job. Transparency minimizes surprise when something untoward sporadically crop up.

The upgrading of wet market is another botch up, the wet market in our precinct; old market was demolished to make way for the new one. The lethal blow was many stallholders of the old market could not continue their businesses, because the rental for the new market was too high to make a living. It is satire even those who eked out with their businesses, have stopped now. The whole new market has closed down now for a month for unknown reason. Probably cannot afford the rental hike. No wonder when I read the election news, the hawkers in the opposition ward did not want to upgrade, they knew the conundrum well that upgrading meant rental hike. Their small business margin will be completely wiped out for the sharp rise of rental. The morass is it is difficult to pass the hike to consumer, because residents may go to other near-by wet markets.

Paradox 2- Budget surplus

It is an old adage in any organization, “Spend your entire budget surplus or to your disadvantage”. In the traditional budgeting system, someone with sanity likes to build slacks into the budgeting system. First, it has to get through the first cut from the Comptroller. Second, why makes own life difficult? It is not your own money, who care? I learnt these pitfalls twenty years ago when I studied management Accounting. The improved budgeting system many leading MNCs are using now is also palliative, not a panacea.

Public sector budgeting system is large in size, and operating in the same theory and malleable to the same behavioral problem. But I am quite perplexed as to who own the surplus? In the private sector, anything not spent will become shareholder equity. There is little nuance to the meaning of this residue for public sector.

The controversies arose from the evolvement of the ideology of the ruling party. Way back decades ago, if you are not oblivious, after the second generation political leader took over office, the first generation political leader did not want his successor to splurge the huge surpluses he accumulated. Understandably, he erected a framework to restrict the use of the reserves. The second generation political leader vowed not to use it and only spent the surpluses out of his tenure. These surpluses became annual give-away for the past few years when the economy was in the doldrums. And his successor the third generation leader even generous handed out progress-package of more than two billion dollars before the election. The opposition derided the so-called progress package tantamount to obsequious, pandering to the voters. The ruling party denied profusely. Few Singaporeans really rejected this quick money. The answer to who own these surpluses is if it is owned by the people of Singapore, the progress package can be construed as special dividends return to the shareholders in private sector’s sense? The real substance is the redistribution of wealth.

The big question now is the minister claimed that the surplus is “earned” by the ruling party and they have the final say how to spend it. The claim is the continued evolvement of the ideology of surpluses accumulated under whose own bat; and a step further ensnared in the web of party origin. I am not quite convinced by the frailty logic. The government pegs the ministerial pay akin to private sector; certainly we want to benchmark against the private sector. Can management tell shareholders that they have “earned” a budget surplus; therefore they have the final say what to use of the fund? I have not heard of any cases like that.

To avoid management derelict of duty, secretly spend away the surplus and motivate management to achieve greater efficiency, a best practice company is willing to share this surplus with the management in terms of higher compensation. The shareholder probably says, “I compensate you adequately. Thanks for managing the budget for me. You cannot shirk your responsibilities to pare down the expenditures.” By any of the peer standard in the world, our ministerial pay is among the top five, can I suffice to say the cabinet is adequately compensated and it is their duty rather basking in bargaining or negotiating of the residual money they saved. Besides rewarding, other reliable tools include mimicking the private sector’s resounding corporate governance practice appeal to individual integrity, professional ethics and checks and balances.

I appreciate government adopting efficiency measures, such as share services. I think most governments in developed countries are doing the same--adopting best practices in public services. Among the most successful public services are the e-services, achieving good ranking in the world.

Nowadays, to achieve budget surplus, is much easier than before. In the early days (In the sixties and seventies), our economy pie was small, the first generation political leaders ran many heavily subsidized basic need services to the public; such as HDB flats, medical services. All these ate into government budgets. Much older generation Singaporeans scrimp and save from rags to riches are stoical, enamored to show their gratitude to the first generation political leaders. The bond ties with their hardship.

And now Singaporean is more affluent than in the old days. Mindsets have changed. Though the corporate tax and personal income tax rate have reduced, the broader based GST which based on consumption largely compensated for the shortfall. The goal of the government mutates into running the country like a large corporation. Price the services and goods to the market; such as pegging the housing price with the private estates; reduced subsidies for medical services. Lop off community services to the public; All things being equal, if the economy pies grow, so do the budget surpluses.

The party’s right to the surpluses is rather mendacity. If it is true, the president of the United States Mr George W. Bush is basking in Mr Bill Clinton favour-- the budget surplus he leftover, or in a strictest sense, the Republican in the US owes the Democrat the budget surplus Mr Bill Clinton Government left behind. Bush government is overweening, does not know to accumulate surplus in good times. He proposed permanent tax cut coupled with the ballooning expenses of the Iraq war now hit a snag with no end in sight; certainly the budget deficit will snowball. When the business cycle turn the corner, i.e. passes its peak, the systemic risks will be looming large. Current account deficit is pertaining to trading and investment. Although it is unhealthy is still sustainable in the short run, because there are factors underpinning the deficit which cannot change in a short time frame. Budget deficit is contagious, breaching the bulwark of every element in the economy and precipitating the business cycle. The only help in current account deficit to budget deficit is government bonds which stave off the needs to printing monies. It is even propitious but not without risk if the bond holding parties are foreign governments. When the US sneezes, the world catches cold. Back to the discourse, I am leery of the assertion that any country in the world claims party’s rights to budget surplus.

Paradox 3-the “premium” theory

It is again a very controversial topic as there is no precedent; or it must be a doubtful provenance that government divides their services into basic need services and premium services. “Everyone will get basic need services and only those voted for the ruling party will get premium services, and that is called “democracy” . My God! It is a hidebound view. The underlying assumption of this warped judgment is no one else knows except me how to provide these services and therefore are proprietary rather than the fact of who is controlling the distribution of the resources and have the final say. The worst scenario I think is bad for Singapore is a aggrandizing, impervious to criticisms, brash, intransigent ruling party (too strong and complacent), too weak the opposition party and too dependent the Singaporean. The so called premium is brittle. Many best practices we borrowed from other countries we diligently do it to consummate is a cinch, is imitable. This kind of value creation is not sustainable in long term. So, the so-called upgrading as premium services only befogged me.

Paradox 4--statistics puzzle

The statistical puzzle is about the eligible voter voted for ruling party was 66.6%. I might be wrong I scored a C grade only for Business statistics 25 years ago. Of the 56.48% voting constituents in Singapore 66.6% voted for ruling party. It means 56.48% multiples by 66.6%. I get only about 37.28% of the voting population voted yes to ruling party. The rest of the 43.52% walk-over population is unknown statistically their voting inclination. I think it is seriously inaccurate to take a portion of the voting population as a national whole. My wild conjecture for the national wide voter supporting the ruling party is in the range of 55% to 70%. It is apposite to say that if not some unpopular and repellent events cropped up damaging the public image of the ruling party, probably the percentage of the supporters to the ruling party would be higher. Percentage wise is a representation, the pliable people’s moods could have a wild swing in the last minute even most received the progress package. Tough talk and aggressiveness could be construed as assertive, do it at the right time, right place, for the right reason and saying it rightly could yield tremendous results. Certainly the election results reflected otherwise.

Paradox 5- the talents search

My constituency was a walk-over, if I have a choice to vote, I am not sure I will vote for the ruling party? What truly concern me most is to back to the work force. I still can’t find a job after the economy recovered. Only know how to write this freebie benefit those earning million dollars “act blur parties”. The author evinces imbecile, isn’t it?

Our estate has upgraded, but it doesn’t change my life very much, because it is external uplift. I continue to burnish and upgrade myself to the minute to provide prospective employers bonus service. If I can think better, why there is none really appreciating my talent? Our society cannot move forward, because everyone is craving only to draw the same round pie, not any bigger (more value-added). Taking upgrading as an issue reflect this deterministic mindset. They look for what have been done, decided before and taking people who can draw even rounder pie.

I read “Forced Ranking” (published by Harvard Business School Press) with interest. The author advocates talent management using force ranking, categorizing talents in the organization into A, B and C. For those with the C grade, it is either buck up or get out. It seems ruthless. The inner competition in the organization is very keen, everyone stretches to their utmost to achieve good grade probably matches American individualistic society. And I think it too, will improve organization performance .But the crucial part of it is the yardsticks to categorize people reflecting deterministic or dynamic, forward looking component that decide the real success of the organization.

Taming the compliance costs

Note: Latest update from Bloomberg News on 25 May 2007

The united States Public Company accounting board that regulates Accountants has scaled back Sarbanes –Oxley Act’s auditing requirements. The board approved by 5-0 rules that will allow auditors to focus on the items most likely to trigger financial misstatements. The revised auditing standard also permits accounting firms to use more judgment, do fewer checks and eliminate unnecessary work. The new audit rules will be aligned with guidelines for company managers, approved by SEC yesterday, aimed at simplifying compliance.

What Cause Costs?

Sarbanes Oxley Acts 2002 implementation has made a radical change in American corporate landscape. The biggest enmities so far are the high compliance costs and how it stifles innovation. What is driving the expensiveness of compliance costs is section 404, the heart of Sarbanes Oxley acts which relate to internal Controls. It was reported listed company like Dow Chemical spent 100,000 man-hours on internal controls which cost the company 12m. “The economist” had quoted an econometric estimate that the net private cost amounts to $1.4 trillion. According to “The Accountant”, a CFO at pharmaceutical company describes Sarbanes-Oxley as “a classic, legally driven American nightmare which is expensive and is not going to stop people stealing money from companies.” Apparently, no system is foolproof against perpetrator committing frauds, neither Sarbanes Oxley acts can.

Compliance costs are regulatory and therefore unavoidable. The purpose of spending resources is to achieve objectives. A company spent 100,000 man-hours, or 12m in monetary value, the felicitous performance measurement is to measure against the objectives. The apocalyptic catastrophe resulted from unfettered nefarious corporate behavior and the accounting hocus-pocus in America. Sarbanes Oxley Acts was a nifty arsenal to impose good dose of comeuppance to stave off the risk of infractions from escalating. And the results speak for themselves if you compare the before to the after. Regulation was to avoid systemic failures after myriad of colossal corporate scandals. Without drastic measures, it is difficult to subjugate rampant frauds from occurring. The costs to the financial system failure are prodigious and beyond measure. The loss of confidence by the investors would make them leave the market and parked their monies for safe harbor. The country also paid the price dearly because ordinary men in the street mistrust corporate officers’ integrity and invested in the companies now have gone bust with their life savings and pension funds; they saw their personal wealth eroded overnight with helplessness. In hindsight, report showed investors voted with their feet. And these costs were not reflected in the corporate accounts.

Sarbanes Oxley is not consummate if we give our unalloyed emphasis on objectives; there are scopes to tame costs at macro and micro levels. This article is chiefly study how to contain costs.

Costs at macro level

America is a litigious country. The value system of equity builds up rules and costs of defense. We can fathom that there is no particularly right or wrong to this value system, so long as the costs incurred achieve its objective- “I got back the fairness”. Of course, it is also surreal as there is no such thing as at all costs, which leaves leeway for mitigation. It is impregnable that corporate cost curve cannot infinitely trends upward. That is one aspect of the characteristics of cost.

Another aspect is some of the costs are nebulous. What actually is the meaning of costliness? You can’t quantify it without reference, therefore in a company, we compare our spending with predetermined benchmark to calculate the variance, and we decide to take action when the variance is intolerable by statistical standard. And in actual fact, the predetermined benchmark can be a moving target depending on the nature of the cost object. Some of the cost objects are inherently difficult to set a tolerable error margin, in other words, no one is prescient that exceeding certain point is adverse, because no one know for sure where the trigger point is. Compliance cost is one of these examples.

Third, there are behavioral aspects of cost. To spend resources is discretionary when reference point is nebulous. It depends on decision maker’s predilection or political process in decision making set the bar high or low. You may have heard of some owners who are willing to spend an amount on cost object which we think is inconceivable. In other words, the bar for the particular cost object is high. On the contrary, for item like compliance costs, you can’t measure direct impact of spending or difficult to quantify the benefits to be derived. The bar will be low by standard, because it is passive cost. A passive cost incurred is resulted from non-operation objective. For passive cost, it is regarded as frittered until something seriously happen. A company implements TQM, incurred prevention costs to improve product quality, because customer can feel and respond to it immediately once the product is out of the door. The intractable part of compliance costs is; something untoward may or may not happen in the short-term horizon. People are only woefully nodding and requesting to spend more if something goes awry. This interesting phenomenon depicts the behavioral aspect of passive cost.

To be effective, we target the cause of the largest frauds occurred which were lethal; for example, if you want to show your appreciation to someone for his good deed, go direct to the person, and be substantive; certainly he can feel it strongly. Similarly, the objective of resources consumption was to prevent scandals like Enron, World Com and alike from happening. According to 1999 Committee on Sponsoring Organization of the Treadway Commission study found the CEO and CFO directed the fraud in at least 82% of the cases examined. What they had committed largely were financial statement frauds. If we had concentrated our resources focus on senior management fraud and built up the mechanism to counter it. The costs would probably be slashed more than half of what have incurred. Section 404 is like hither and thither, requires full scale internal control examination, the time to spend on documenting and testing control points, processes are arduous; and it drives the resources on two side, first on the company and subsequent on the auditor’s own examination, and the cost escalate even more when company need to develop software which comply with SOA. It is palpable all these efforts are not wasted; they are just what was mentioned earlier-passive costs, prevention costs that maintain quality of the system. When the tasks suddenly increased substantially and the resources were lagging behind, the grudge began.

Taming senior management fraud was imperative when array of scandals broke out. To contain a plethora of debacles, it has to be forceful and drastic to achieve effectiveness. SOA has achieved its objective in this respect. The counter measures such as section 302,304, 806,906, 1105, impose punitive measures, making the offence as criminal. All can achieve immediate effect to stem frauds perpetration, because the legislators have drawn a line of what is appropriate corporate behavior. In the same vein, strengthening board roles and audit committee function and external auditor independent roles achieve the similar effects of countering senior management frauds. It boils down to how to implement to achieve results.

As to section 806 whistleblower protection that target senior finance officer, I have reservation. Whistleblowers not only need protection, there must be incentive for them to do so. Apart from external factors like country culture and corporate culture play an influential role. Inner incentive is even more significant for whistleblower to pluck up enough courage to expose sordid affairs. The reality is few have very high ethic, whistleblower group is probably at the tail end of a distribution. Majority adopt neutral attitude, small wonder there is a saying, “You can’t beat them, join them”. Vicariously, who want to be nosey to expose bosses wrongdoing? These people are passive accomplice. Their purpose is not to rock the boat as if nothing happened. It goes without saying that whistleblowing requires adroit management. The cost of covering up to the company depends on the nature of the fraud and timing, the longer it takes to discover, the costly it will be.

Cost at micro level

An interesting article in “Financial Executive” mutters about work duplication by external auditor. A senior director of internal audit said, “If a certain number of quarterly reconciliations need to be done, we’d test a number to make sure they hit the key attributes. The redundancy is that the external auditor may come back and do the same level of work on the same reconciliation in order to make their assessment. Is that duplicative? Do they have to do the same amount of testing all over again?” The auditing guideline spells out circumstances an external auditor can rely on the work of an internal audit. To decode the phenomenon, there can be two conjectural situations equally inimical.

Situation one: Auditing is an evidence gathering and examination process. Evidence originated by the auditor by such means as own analysis and physical inspection is more reliable than evidence obtained from others. My first guess is in the past the external auditor has taken client schedules or internal audit work at face value to save time, iota of own analysis process was carried out, and now they are under the pressure of PCAOB to do a proper auditing job to avoid embarrassment.

Situation two: My second guess is equally negative. Auditing the auditor resulting external auditor adopts defensive routine. A defensive routine is a reaction to a threat. The psychological threat of the external auditor is being nitpicked by PCAOB. Defensive routine is negative thinking, it makes auditor less flexible, unwilling to use professional judgment and take risks. They resort to do a full scale audit to make sure their impeccable working paper pass the PCAOB’s audit. And their clients see audit fee ballooning.

Controlling compliance costs at micro level encompasses audit fee and control maintenance cost at company level. Cost of system documentation performed at company level or by auditor, they are usually a one-off project unless there are system changes or process changes, such as implementing ERP software. For company taking process improvement as their routine probably can reuse their system charts to save costs. External auditor can make use of client’s documentation of company system to perform control test. Of course, auditor has to perform walk through test to ensure the authenticity and reliability of the processes described in the charts. Auditor declined to make use of client’s system documentation is another example of defensive routine. I believe PCAOB would not be nitpicking if auditor documented the results of walk through test and the conclusion reached. But what is done cannot be undone. Defensive routine costs probably are incessant of a litigious society going forward. Doing maximum audit certainly is not of value to the shareholders.

There are several measures auditing firm can pare costs and improve productivity, and pass the cost savings to their clients.

First: Auditor has to be proactive to manage shareholder expectation to reduce audit cost and other compliance costs. Communication helps both party agree what is reasonable audit and will reduce shareholder lawsuit which in turn cut down insurance costs for both side.
One aspect of shareholder expectation is auditor’s role of discovering frauds. This issue has been debated for decades. In other part of the world, the court even ruled in favor of auditor as watch dog rather than blood hound. The reason being auditor’s duties is to express true and fair opinion of the financial statements. Therefore the evidence gather process does not design specifically to detect frauds but to satisfy the state of affairs derived. Auditor uses sampling to carry out depth test. The test does not necessary resulting fraud discovery, more often than not, it is to reach conclusion on whether sound internal control is in place. It is not jarring that auditor has to be vigilant in the process of the audit.

Certainly there is no such thing as fixed role; the auditor needs to acclimate to inexorable changes as expectation to include fraud checking increases. However, detecting fraud is a different process requires detailed checking and forensic experience; that means longer hours of time spent is expected. The outcome may not justify the cost incurred. I think the common sense approach is back to basics to use two modes. Auditor proceeds with low costs approach, only when smell something fishy then deflect to high cost mode by engaging forensic expert for a detailed audit. The risk is auditor is deluded in a perfect scam that they are thwarted to switch to mode two. One article in AICPA’s Journal of Accountancy says “The challenge is that those individuals committing wrongful acts and fraud can- and do- lie to the auditor or manager.” To reach mutual understanding and realistic expectation can avoid value destroying litigations among shareholder, auditor, board and management.

On the other hand, auditor needs to sharpen its fraud checking skills, such as watching signs of possible frauds. In US, SAS.no 99, Consideration of fraud in a Financial Statement specifies questions auditors should ask management and others in checking for fraud risk. You get only one answer for asking the management. It is the fraud detecting skills that make fraud discovery possible. To lift up to expectation, the profession should include fraud detection in CPA firm’s in house training or CPA Continuing Professional Development Program, CPA examination). Another important area is developing fraud detection auditing software. According to report, the latest development is on Continuous Assurance Audit System (CAA). The system monitors another critical application program, produces instantly audit result after the actual event occurred. It was said KPMG in UK developed CAA called KPMG On-Line Auditing (KOLA). I have reservation external auditor has the resources to monitor their clients’ activities all year round, because not all exceptions discovered are irregular activities that distracting focus and continuing attention. The software monitoring capability probably benefit internal auditor. There should be funded research to support the development of fraud detection software to sharpen auditor’s fraud detection capability. PCAOB can play an instrumental role to combine the experience of the auditor and the software developer for this project to lift the audit quality for the audit profession as a whole, rather than individual in house development.

Internal control has gone through profound changes, such as segregation of duties increase costs by hiring more people for checks and balances. Automation on the other hands helps to cut head count, such as using ERP software. This radical development also changes the way auditor examining controls. Some part of segregation has disappeared totally. Though the principles of control for EDP auditing are remaining the same; such as access control and data security; the research for new examination techniques for complementary controls still lags behind changes in business landscape. Increasingly, company stores their supplier invoice in microfilm or other digital storage. Company also receives digital invoices. All these change the way traditional auditing check the authenticity of source documents. How do you ensure these digital documents are not cooked up in the black box? Where do you seek complementary control measures because latest software development changing the work processes that part of the original control diminished? How about interlace with the changes in organization structure to cater for business needs? Probably PCAOB can collaborate with the big four to pool resources together for this new research direction and tailor their search more intelligently.

It was reported the judgment toppled down Arthur Andersen was a mistake. It reduced competition and companies have fewer choices to change auditor and the big four forms oligopoly making companies paying higher audit fee. The contrarian to Arthur Andersen’s demise is itself a value judgment. Arthur Andersen once was an excellent firm, especially their consulting services. However, too many audit failures then were associated with them. That could not be coincident; there must be something fundamentally wrong in the way they operated resulting her demise. There are few books published giving full analysis of the fall of Arthur Andersen. Notwithstanding, there are few other alternatives as a mean of egress, such as court order to reform, change leading partners, and fines. Most of the big four involved in audit failures since then were fined heavily. It is meaningful if these fines can be channeled as nest-eggs to fund research for better audit quality.

Another interesting topic is the relationship among trust, control and cost. In modern management, we advocate a high trust modus operandi. “Trusting relationships are valuable, satisfying and productive. Trust raises the level of expectation on both sides. Without trust we expend considerable energy managing how we are perceived. Trust can reduced costs over long period of time by ensuring that people more readily understand and accept current realities and priorities” Certainly, no one denies the truth of effectiveness and efficiency of trust. With trust, we can share information faster, collaborate with others, implement change, foster innovation and creativity, recognize and learn from mistakes. These savings are intangible and hence difficult to quantify.

It is said trust is culturally related and America is a high trust society. Trust can co-exist with control if you want to prevent the cost of lost trust. Misplace trust can be lethal. Enron and WorldCom debacles prove that control is an integral part of trust. There is no absolute trust; we have to accept that some elements of controls are part and parcel of our corporate life that does not mean trust does not exist. A case in point is a very recent fraud case in Singapore involved a woman Finance & Admin executive of a US company Tyco International who forged 131 cheques to siphoned off $10m in three and half years. She used the monies to buy a Mercedes-Benz, a BMW, a Honda Odyssey, two Condominium units, six watches, 10 handbags, 61 pieces of furniture. Her alibi to commit fraud was to pay for her husband $1m gambling debts (note 1). The judge rebuffed that she was driven by pure greed rather using gambling debts as a pretext and asked her how about the balance of the $9m. The woman probably passed the reference check at the time of recruitment. She might appear innocent, hardworking, and reliable. Her boss probably trusted her and never checked supplier statement’s reconciliation for the past three and half years. Who knows at certain time vicissitudes change, her greed started breeding and quietly stole $10m of company funds. Similar cases abound. Control measures must exist at all time to prevent anytime someone perverted trust. We need to balance the level of control and trust according situation warranted.

Second: underpinning internal procedures to reduce audit failures.
Audit planning: Many audit firms are oblivious or rather perfunctory on audit planning. Audit planning is the most crucial part to achieve cost efficiency. During audit planning, on top of applying analytical review to analyze reasonableness and data internal consistency of client’s financial statement. Risk based approach is the most cost effective way to help auditor to focus on material risks and design audit approach tailor to their own evaluation. This will help rather than beating the bush or mechanically filling out audit program. It makes auditing process challenging. Auditors are more proactive in auditing process.

Knowledge management: An effective audit planning cannot go without a client information database. The database consists of a permanent file including client’s history, characteristics of industry, the business model, competition, significant events, management team, accounting systems, past auditors’ remarks (compulsory updated in each audit), risk assessment, name of audit team and responsible audit partner etc. This process internalizes firm’s knowledge of client’s company and becomes firm’s intangible assets.

Knowledge transfer:
Audit firm must emphasize the important of knowledge transfer. It must look into how certain part of the knowledge can be reused to achieve efficiency, such as reuse the same audit team for same industry. Even five year partner rotation rule will not affect the reuse of knowledge if they are well documented.
Many in house training only concentrate their training on topics like changes in accounting standards, using in house audit manual to brush up classroom auditing techniques. Little concern about field audit tacit knowledge transfer and it is the very important part of auditing, because field evidence gathering and examination process is the cornerstone of the audit Field audit tacit knowledge transfer teaches fledging auditor real life experience of fraud detection, how to spot irregularities and interact at different level at client’s office. Many audit managers ignore to impart this part of knowledge to their staff.

Debriefing: Debriefing is like post-mortem, and is an important learning process. New findings can be included in the audit program to improve future audit quality and also update permanent file. Many audit firms do not conduct debriefing and belittle it as time wasting. Debriefing is also a knowledge transfer and accumulation process that avoids repeating errors and sharpens focus.
Making auditing firm a learning organization will make auditing firm an exciting place for learning and growing, fresh blood will not be taken as vouching machine which in turn will help to retain quality staff and improve audit quality overall and achieve long-term cost savings.

Third: Auditor should stick their neck out and embolden to use professional judgment. Applying professional judgment is value added and innocuous. It is why others value and respect professionals. Hidebound view of defensive routine benefits nobody because auditor’s work volume increases and client’s cost ballooning. Auditor should strive to achieve a reasonable audit. A reasonable audit conforms to regulatory requirements, meeting shareholder expectation and achieve cost effective target.

Fourth, Auditor should be transparent with its cost structure. Implement target costing to achieve required margin, and reverse engineered audit processes to calculate different grades of man-hours for the job, Key processes to complete audit. Time spent for each step to complete each process and select the most effective and efficient approach to achieve the audit objectives.

At company level, Section 404 stipulated annual report filing must contain an internal control report that states management’s responsibility for establishing and maintaining an adequate system, as well as management’s assessment, as of the fiscal year ending date, of the effectiveness of internal control procedures. The onus is now on the management to attest their company internal control is in order. The real conundrum is management has to challenge itself to avow affirmatively every year. To cover every possibility is truly a hard nut to crack. The downside risk is organization limbo. This can also result in defensive routine and not to the interest of the shareholder. The management will put the agency interest above the shareholder interest to comply with section 404 by incurring substantial costs to comb every corner for the risk that is remote to protect any untoward fall out.

A reasonable approach would be for law enforcer to adopt flexible administrative measure. The law will be toughened when things run amok. The enforcer looks into documentary evidence that reasonable efforts are spent, professional judgments are made, audit committee is satisfied, external auditor has no adverse opinion to relieve management responsibility. By doing so, management is more willing to make judgment and take risks.

Company will reap benefit from section 404 implementation by taking it as a round of process improvement. Section 404 no longer is seen as compliance costs rather an investment to eliminate non-value added activities.

In a nutshell, the grist of Sarbanes Oxley Acts successfully contained systemic risk outweighed the costs of section 404 implementation. Nevertheless, resources consumption is to achieve objectives. The scope for taming compliance costs at macro level and micro level can help organization to divert more resources for R & D, which is most needed in Corporate America.

Note 1 : Her Husband was brought to court in April 2006 on his gambling debts

References:
1. The Accountant
2. Journal of Accountancy
3. Strategic Finance
4. Financial Executive
5. Asian Wall Street Journal
6. The Economist
7. Trust matters- For organization and personal success
8. Sarbanes Oxley and the internal auditing rules

Another lens to see the eruption of NKF saga

Note : I have written an epilogue, those interested in the latest developments can proceed to the end of this article. 23 March 2007

Synopsis

National Kidney Foundation (NKF), a voluntary welfare Kidney dialysis organization was in headline last week. Its CEO brought Singapore Press Holdings (SPH) and its journalist to task by suing them defamation and subsequently he retracted all the claims against the defendants in court during cross examination.

NKF vaunted its operation model was the paragon of all the voluntary welfare organizations. People from many countries come here to study its model. By aggressive fund raising campaign, such as charity show on TV, it uses its gigantic database (contain details of previous donors and contacts) to SMS or write mails appeal for donations. Each campaign they manage to garner more than 10m of donation. (It was said 2002 alone, NKF raised 67m) It used commercialized marketing tactics, to hand out lucky draw like a unit of apartment, car, or outright cash payment and use poignant scene of the kidney patients contrive to live in excruciating condition, stunt men or women performed by MediaCorp Artistes to generate breathtaking and exciting effects to lure donors to call the hotlines for their donation. It successfully accumulated 262m of reserves to date. Many voluntary welfare organizations are struggling hard to solicit funds to make ends meet. They are unique to have fabulous wealth that makes them an enviable voluntary welfare organization.

Some countrymen started questioning the necessity of the large reserves and its transparency of fund management. The Straits Times’s journalist was assigned the task to write an article about the controversies, a plumber tipping the paper that the CEO’s office bathroom installed a gold plated tap costing about $1,000. SPH checked with NKF for the truth. NKF’s reply asked for the contractor's identity and details as if the repeated incidence of the US court’s decision on the New York Times’s journalist (see note below) on the tipster. And subsequently SPH decided to publish the contractor’s account in the journalist’s article, headline, “NKF: Controversially ahead of its times?” which appeared on 19 April 2004. NKF sued the paper and the journalist for libel and boomeranged.

In the trial, there were many exposures giving shock to the public:

1. The defense lawyer noted if the NKF had to foot the entire dialysis bill of $31.6m a year (2003 total expenses in audited accounts). Its reserves can last for eight years.
2. On top of the CEO salary of S$ 25,000, he was paid ten to twelve months bonus during the past three years when economy was in the doldrums.
3. He owned Mercedes Benz 200 car for his personal and family use, the NKF paid the car’s road tax and picked up the bills for maintenance and repair. There were eight company cars provided for him and other six staff use.
4. NKF also erroneously overstated the number of kidney patients it treated.
5. The CEO was taking first-class flight on some airlines.
6. The CEO said paying $1,000 for gold plated tap was not expensive.The Defence Lawyer cross-examined the plaintiff with all the facts, at the end of cross- examination, the plaintiff retracted the suit.

What is the fatal blow of NKF saga?

Many are interested in this question. The crux of the problem is they try to change the nature of a voluntary welfare organization to a commercialized voluntary welfare organization. And it did not get the buy-in first from its biggest stakeholder—the donors.

The CEO accounted himself as CEO in the business sector. He wanted to enjoy the same treatments as if he was a business CEO. Every year the cash hoard was richer by more than 10m. He worked hard to push the marketing campaign. Shouldn’t he have the same rewards and perks as his business counterpart? I think he probably was granted by the board for all these entitlements, such as salary, bonus, privilege flying arrangements. So, we can’t say he abused his rights. He was accountable to the board. Then to whom the board was accountable? It is a private organization using its own funds to help kidney patients; the answer probably is the Commissioner of charities or external auditor doing the checks and balances. And it is imperative that they are functioning. It is interesting the swirl of corporate governance of the business sector has spun to the voluntary welfare organization. As for charitable organization, the regulatory and disclosure requirements are not as stringent as the business organization.

The Health Minister stepped in and has done all the right things necessary to contain the crisis.

Is commercialized voluntary welfare organization model workable?

The kernel of the truth for voluntary welfare organization is it is a tripartite. It is a function of the donors, the patients and the management that runs the operation and mobilizes volunteers. The goals are to extend their dialysis to every kidney patient possible; extend subsidies to financially stricken patients; and run the organization efficiently and effectively for every cent donated. I think these are fundamental intentions of all the donors. If the management want to manage the organization the way it intended, and ignore the tripartite. Any departure is resulting what is happening now to NKF.

I do not oppose voluntary welfare organization to borrow commercialized marketing tactics, but it should treat its donors as valued customers with transparency and honesty; refrain from by fair means or foul tactics. On television, It urged you to dial 1900-112-8888 (8 calls). No dollar amount was stated beside the hotline. Some donors might want to donate smaller amount, and was misled by following the hotline number and later see red about hefty telephone bill of their donation. I am not clear whether this devious tactic contravenes to Section 4 of the fair trading acts, which reads “To omit anything, if as a result a consumer might reasonably be deceived or misled.” Real life experience from the paper and my ex-neighbor’s son who chalked up more than a thousand dollars bill by keep calling the hotline at home when the mother was sweating at the factory shop floor telling me that some donors are misled to make the most expensive call flashing on the TV screen.

What is perceived also as blight is the controversial lucky-draw marketing tactic. It aggressively and repeatedly flashing on the TV ads, appealing at charity show, SMS to potential donors beckoned the donors as if they were betting for material gains. These aggravated and also tainted the motive of many donors which perceived their donations were for a good cause. The model failed to reconcile whether it is charitable act or act like betting with Singapore pools, because the original charitable nature of the campaign has changed.

Is it equitable to peg the CEO salary on par with the business CEO?

It is an interesting question. I am not a compensation expert. Some said it was peanut, other said if he (The ex-NKF CEO, a trained lawyer) had worked in the private sector, he would have earned much more. Well, the compensation he received is possible only in private sector if he is working at senior level of some top-notch legal firms. Being a lawyer is no longer that glamorous as before. Some lawyers even change their career.

Using training background as a benchmark to reward the incumbent in different trade, the rationale is the opportunity costs. This logic is especially prevalent in the public sector. That makes the government the employer of choice. No wonder my cousin, my schoolmate’s son who have just graduated from NTU, even my nephew ready for second year in NUS opted to work as teacher, prison officer. I chided their short sightedness. After contemplation, I tell myself they may not as stupid as I think. Compared with private sector, the public sector offers higher starting pay, and at this point in time higher increments (NWC, government has to take a lead), stable income, and probably the government is the last employer to retrench workers. If you don’t make stupid mistake as the ex-NKF CEO, the average whole-life income working in public sector may be higher than their in the private sector.

My experience in private sector tells a different scenario. Many employers try to suppress your take home pay if the economy turns bad or you are unemployed. Many employers want to start your salary based on your last drawn if within their budget rather than taking into consideration your experience, potential contribution, your responsibility and pay you adequately. The American compensation system probably is the fairest among all if you have read American books about compensation. They spell out a list of determining factors for consideration for designing pay-package. They emphasize tying pay-package with a set performance criteria.

How should we peg the salary of the CEO in a Voluntary Welfare Organization?

The ex-board peg ex-CEO’s compensation using private sector benchmark. The new chairman said he would work for free. According to the paper, some CEOs of VWO said they were earning five to six thousand dollars a month. An intelligent MP benchmarked the CEO’s pay with the public hospital. The Health Minister tried to be objective, taking into account the size of the job.

The unblinkered truth is it is probably difficult to put a dollar amount for running a Voluntary Welfare Organization. As different people has different life goal. And it seems that pegging the pay to private sector is not acceptable to many donors. Their expectation is probably that you need to sacrifice a bit of your pecuniary needs to join a Voluntary Welfare Organization. It narrows down to a specified range in between the CEO of other VWOs and the CEOs of the public hospitals. I think many donors do not expect the CEO to work for free, they request the compensation to be transparent.

Can we in direct comparison the CEO’s job of Voluntary Welfare Organization with the private sector?

Certainly you can. This question is twisted to compare the job scope and risks and rewards .of both sector I am not to derogate the CEO of the Voluntary Welfare Organization. Many of them are great people. They have different life goals. Mercenary motive is not their prime goal. My targets of this question are towards those take material rewards as paramount importance.

I may be wrong because I have never worked in NKF. I think the main duties of CEO entail running dialysis centres in Singapore and raising funds. He does not need to manage fund in a way to maximise returns and taking unnecessary risks because he is a trustee of the donated fund. He supposes to invest the reserves in very low risk investment, such as government bonds. To free him from this duty, he can engage private fund manager as trustee to do the job.

In fact, to attribute credit for the amount of funds raised to the CEO is unjust. Fund raising is to appeal to the donor conscience and sympathy. Their act to donate is voluntary. Whereas in private sector, to persuade customer to part with their money to buy their goods; most of the time customer is passive. This makes earning in private sector so much harder. Competition also quickly erodes margin.

A case in point is Creative Technology, the CEO thought MP3 would be his secret weapon for the company success, and he said he had some tricks up his sleeve to combat the war with Apple. But he failed, not only the war with Apple was a loss, he saw his Zen MP 3 product margin quickly eroded due to keener competition. Creative Technology share price took a nosedive. The business risk for both side (VWO and private) is incomparable. Creative Technology has to run at a non-stop pace, because the product life cycle is short and they have to keep innovative to make sure some of the new products eventually will work out. They have to weather bad time for economic downturn when consumer keeps their spending habit tight. For NKF, Singaporean is generous in the sense that even bad time they have the heart to continue their support to charitable drives. So, if the CEO took the amount donated as his personal performance, I think it is not a fair performance measurement.

How much reserves are enough?

I came to know that the rule requires VWO to spend only 30% of the funds collected. I think it is rigid. Because there are factors to be taken into account, such as uncertainty of the amount to be collected, the increase of number of beneficiaries, the economic cycle etc. If you expand very fast, probably you need to be very prudent about the reserves to cater for rainy day or unforeseen circumstances. Rigid rule only resulting sometimes reserve is piling up very fast and other time cash trap. Why not let the funds expert to decide?

Going forward

Trust and confidence can diminish precipitately in a day and take long time to regain. To ameliorate, there is no magic other than to hold open and be honest tenaciously. What you do is more important than what you say at this stage.

To improve transparency, NKF needs to communicate and espouse open book management. NKF can benchmark listed company to give quarterly results. A scorecard publishes on their web including financial and non-financial indicators such as Cash flow statement, number of patient treated, number of patient to amount donated, total expenses to number of patients etc. It is all voluntary, there are no statutory disclosure requirements or accounting standards demand such disclosures.

It can concentrate just on Kidney dialysis service rather than venture into cancer treatment to compete resources with cancer Voluntary Welfare Organization. NKF can improve its services by implementing one-stop services; such as setting up clinic for Kidney patients, global sourcing for cheaper medication for kidney patients. Open itself up to use Chinese medicine to treat Kidney decease. It also can assess and offer financial aids to the needed kidney patients languishing in poverty.

Note: I quoted the New York Times journalist's case as analogy, in hindsight, the complex political context was not known to me earlier when this article was written. The case departed my original intention and the quoting was inappropriate.

Reference:The Straits Times

Epilogue--The Next chapter 23 April 2007

The NKF saga which caused a furore has moved to a new chapter, under the leadership of Gerald Ee, the NKF has undergone restructuring, a new NKF reborn. New NKF is now more professionally run. Mr Gerald Ee strengthened the governance structure, trimmed costs by eliminating redundancies, instituting new policies to replace mishmash policies, brought in new management team, brought the culprits to task and restored the public confidence. Mr Ee deserves a medal for his free contribution to reorganize the charitable organization.

NKF is only the interlude of a bigger picture. What comes to my mind to write this “The Next Chapter” is after watching “Ren Ci Charity Show” last Sunday. Venerable Ming Yi failed to elevate himself climbing to the top of City House is a harbinger of wider inherent problems. His show used to garner large part of donations in the show. But he is not god. The test of his physical strength never before put him in a dire straits. He is already forty-five years of age. How many years more he can participate in a stuntman like show to make the wonder? Unsatiable viewers want stimulations, excitements before donating their dollars. That put on higher and higher expectations on the artistes and the organizers. Because of diverse interests in viewership, and not all superstars worth inviting on a cost benefit basis and putting the burden on the venerable even make me more worrying. Many of the contribution for his performance are devotees, sympathizers, excitement searchers. My premonition is something quite amiss. What happen to the patients and employees of the hospital if one day he ceases to continue such performance? The assertion that donations will continue to pour in as before is apocryphal. Especially their settings are expanding means larger and larger amount of money will be required. Can they make it?

The only way to solve this problem is to have diverse sources of donations. There should be professionals either in-house or outside organizing fund-raising programs. The in-house fund-raising professionals will cudgel her brain to contact large organizations as co-sponsors. Many charitable organizations are entitled to issue tax-exempt receipts to the donors. As stand-by donors give assurance and promises of financial aids in case of urgent needs. Many professionals are willing to participate in charitable work. To make use of their circles and contacts, charitable organization can canvass a pool of potential find-raisers targeting at wealthy singles, rich families, and bigwigs to make some life time transfers after their lives. All these require detailed work and are being professionally run. Our fund-raising must progress to a new chapter to be responsible to the beneficiaries.

The Media Verdict

(Published on soc.culture.sg on 20 September 2004, I include the aftermath wriiten in April 2005 at the end)

The writing was on the wall. And now the time it comes. MediaWorks is to "merge" into a new company called MediaCorp TV holdings Pte Ltd. The verdict is much more politically motivated than a commercial reason by looking at the deal.

Wrong use of word- merger
By merger, we means equal partners, there is no dominance of one party to another. Because of the profuse merger and acquisition in the eighties, many companies took advantage of acquisition in the form merger to boost revenues and prevent writing off goodwill in the profit and loss account. The Standard setting authorities since have tightened merger to very restrictive use.

Clearly for the case of SPH and MediaCorp, IT IS NOT EQUAL.MediaCorp is holding 80% of share and is assigned to the management of the new company. In other words, it is dominant and should be accounted for as acquisition.

The implications of the verdict
It was said that the deal is win-win. I doubt so.
The winner-MediaCorp
It has been openly lashing out want to pin down its rival MediaWorks. And now it gets all what it wants:

1 Putting Channel U under its control, MediaCorp as management of the company can marshal all the resources, it has the ability to stultify or debilitate Channel U further development headlong.

2. Getting free cash resources 10 m from SPH while maintaining control. SPH owns 20% of the share; it was said SPH holds two, and MediaCorp holds three seats in the board.MediaCorp has the controlling interest in decision making.

3. Pulling SPH to invest in loss making business-Today.SPH is to pay 19.26m. SMRT has just gotten its foot out of the loss-making business-Today. MediaCorp has quickly roped in SPH to fill the vacancy, clearly MediaCorp is the winner.

The "betrayer"-SPH

It seems I use scathing word "betrayer" to describe SPH’s behavior towards MediaWorks.
Recently, I read a book, titled "The dark side of organization behavior" It says, "(In an organization) the psychological contract and its violation, unlike expectations, centers around ongoing exchange in a relationship..." "Within this relational context is the notion of trust..." "It is because breach and violation inherently take place in the context of a trusting relationship that its occurrence can be so damaging…"It says the first source of breach is reneging whereby purposeful breach occurs because the breaching party is aware of his or her obligation but is either unwilling or unable to fulfill some terms of the contract."

In the same vein, MediaWork’s management and artistes were inspired to form a new station to pursue their goals which are different from MediaCorp. That made a serious dent in MediaCorp talent pool and subsequently affected their viewer rate in some of the programmes; the tussle of competition between the two stations is keen.

Some of the artistes are mortified that rationalization exercise can be political and vindictive.SPH attracted them when was in need. And eager to divest the lost making unit to stop bleeding, SPH throws back the ball to their ex-employer, MediaCorp; leaves their fate to their ex-boss, is a breach of psychological contract around ongoing exchange in a relation, a breach of trust.

SPH has legitimate reason to say four years of investment with no return, enough is enough. They have to put a full stop somewhere. It raise another question that where and how to attract investors who have deeper pocket and farther vision to struggle for success in the long haul in this industry may be a concern for searching new operator.

It is very clear that the major advantage is to get rid of MediaWorks, the loss-making unit.
It is not clear whether the purchasing of 20% interest for 10m is advancing shareholder value. First, from strategic perspective, it is hardly we can see any synergy advantages for purchasing the stake or strategy advancing SPH current core business. Second, I do not have financial details I can’t judge it is worth 10m.(The public available data for MediaCorp is up to 2002,from Thomson Investment and also MediaWorks financial data is lacking)

I am confounded by its investment in Today. Today is allowed to run independently. It pays 19m for 40% stake in Today to compete with its core business with no controlling interest. First, Today is running free sheets; Second, SPH is in cut throat competition with Today on advertising dollars. There are many business opportunities out there to pursue; it is unfathomable why pointing the gun shoot at its own foot? The 19m certainly can help SPH break through growth stagnant and expand regionally.

And since both sides decide not to compete, why not let the talents of Today absorb into SPH?

The loser-MediaWork

There are two critical aspects brought down MediaWorks.

First, It was born in the wrong time when the economy was in the down cycle.That greatly affected their only life blood-advertising revenues. During economic downturn, few companies are willing to make investment in advertisement.
And now the economy recovers, will it make a difference if MediaWorks rebirth? Possible! But it is tough. This industry carries very high fixed costs.

Advertising revenues depend on several factors: first, the economic factor determines the consumers’ pocket, The propensity is to achieve marketing effectiveness to save marketing dollars in bad times; Second, putting up advertisement also depends on the advertisers’ margin, the type of product and sales volume; Third, A stable advertising revenue depends on strong advertisers and their consistent support. And there is a population size constraint.

Second, Weak business model-Advertising income also appears cyclical, fluctuate from month to month. Of course there are peripheral incomes, such as publishing magazine, programme selling, and big screen operation etc.The revenues are either small or unpredictable. To extricate from fluctuating revenue generation dilemma, we need a different business model.
What is the implication to general public? Will the future program becoming homogeneous and prosaic? I doubt so.

Channel U has set their mark and in no small feat. Eventually is the viewer who decide which station to watch and there is quid pro quo-the cable TV compete for viewership.
The new management will want to prove themselves under the watchful eyes that they can do better for channel U than under the umbrella of SPH, converge into the style of MediaCorp production will not draw more viewership.Viewers are attracted by the style and content of the production, not the other way round.

What is the implication to Media artistes? Will they get short shrift or nit-picked? I doubt so.

Singapore has a small pool of TV artistes and production crews. Especially those who have already made their marks and proved themselves in the field are very much sought after avidly.
Vicariously, everyone is in the business and behaves businesslike and there is no personal grudge. It is only how you prove your value to the new company that matters. As I mentioned, the success of the new company only make the management shine, there is no reason to take personal revenge to impede business success.

There are watchful eyes around, the rationalization exercise under the lead of independent director (Some question the effectiveness of so-called independent director, they are usually not the expert in the field, that restricts their function to question the CEO), probably weeds up only weak candidates. The question is how you define weak candidates, there will be political tussles.
Those who relish the kind of cosy, familylike working environment and culture in MediaWorks may be replaced by big organization bureaucratic culture. That may temper the MediaWorks’ staff passion.

The future of the industry

Time to cough golden eggs now and it is free, is free.
I think a more workable business model is to adopt "Pay as you watch" system, in the mean time scrap license fee and replace with leasing arrangements with operators.

I think the authority must have been recouped its infrastructure costs by now. The authority calculates a price range to cap on the maximum price charge. The formula will take into account of current license fee, the maximum hours viewer watching, maintenance and repair charges of infrastructure and put a cap for maximum price, and review the price as required. The operator can charge viewer within the price range.

The biggest advantage of this model is to stabilize the income risk of the incumbents, making the survival more viable, because there is a large pool of subscribers paying a fixed fee to buttress the operators’ income, coupled with other revenues will be able to tide over any economic conditions. Competing for the pie also increase competition of the operators, eventually benefiting the viewers; but this is also a double-edge sword.

The authority will lease out their infrastructure to the operators, and charge leasing fee to cover maintenance, repair and replacements.

Consolidation should improve competition and improve viewing quality rather than whittle it. The verdict has a sobering effect need to elucidate: Profitability is one of the important consideration, but also other criteria such as how to nurture quality and promising new incumbent to ensure their survival to make the scene in this industry vibrant, and flourishing.

The Aftermath (Written on 7 April 2005)

Half a year has passed, from hindsight; many of my views elaborate in The Media Verdict proved to be withstanding the change of times. This article is not to inscribe something of an epic. Rather, I am writing of some new thinking I hope you will share.

MediaCorp:

MediaCorp is an organization inherited the government working culture. Rather through market competition. It moves ahead with finesse to make way to achieve its goals. After the acquisition, it was said in order to clear channel U old stocks.

During the period from 1 Jan 2005 to 1 April 2005, existing programs for channel U were asked to stop and there were no new programs on show, effectively, like going through austerity program in economics term. And many of the U channel artistes moved to channel 8 playing subordinate roles or sidelined. Forcing audience switched to watch channel 8. An article in Straits Times described channel U as MediaCorp "Stepchild". There are many discriminating practices are rooted on their competitive culture and certainly is not healthy for organization growth.

An April 2005 Harvard Business review article best describes this management practice. The article categorizes this practice as "opportunist". The author says, "It is characterized by mistrust, egocentrism, and manipulative. It focuses on personal wins and sees the world and other people as opportunities to be exploited. Their approach to the outside world is largely determined by their perception of control--in other words, how they will react to an event depends primarily on whether or not they think they can direct the outcome. They treat other people as objects or as competitors who are also out for themselves. Opportunists tend to regard their bad behavior as legitimate in the cut and trust of an eye-for-an eye world. They reject feedback. Externalize blame, and retaliate harshly. "

I said the media consolidation was politically motivated, rather than a commercial transaction.

1. The government wants the TV media strictly under their control. One interesting economics article describes this choice as "traditional economics arguments"; It says government involvement is basically for two reasons: political and social.

Regulation was designed to ensure that a sufficient range and balance of programs was provided on each television channel, alongside programs that catered for minority as well as for mass audiences. The one argument "government involvement primarily will be social policy", such as MediaCorp recent promoting marriage couples, procreation programs. "There is a question about whether an unregulated market will provide the same socially correct level of programming quality and innovation."

2. The main theme of this economics article said the broadcast landscape has been altered radically by the advent of satellite and cable broadcasters and digital programming. There has been a steady drift in general attitudes away from government intervention to free market provision

The economic arguments ("traditional economics arguments") for government intervention are the existence of market failures- -They are resulting from a freely-functioning market in broadcasting will not produce the socially desirable outcome. There are three main types of market failures according to the article:

Broadcasting is a public good (It means non-excludable, no one can exclude others from consuming. And consuming of the good by one person does not decrease the amount of the good left for everyone else. Basically, we are paying license fee to watch this public good, the regulator instead of using this pool of money to sponsor the operator to shoot programs that support the government policy).

It is not enough just to use the catch-phrase that public service broadcasting must "inform, educate and entertain". The author argues: why the free market, if left unregulated, will not inform, educate and entertain? As to "inform, educate and entertain", many will share with me that the trends of increasing government’s propaganda. After a stressful day work thinking of to unwind yourself, you may want to protest but to no avail to watch this government’s propaganda. Whether it is to put the cart before the horse?

Digitization means that television signals can be encrypted; pay channel like starhub makes TV no longer non-excludable though still non-rivalries.

The broadcasting market is inherently concentrated, leading to market power. The making and broadcasting of television programs has exceptionally high fixed costs (Once these expenses are paid, there are economic of scale) and very low marginal costs. Having a small number of firms in the market is efficient, in the sense that it avoids duplication of the large fixed costs required for broadcasting and uses the scarce spectrum without interference. The down-side is that a small number of firms can allow each firm to enjoy and exercise market power.

Market power leads to deadweight loss- -It means unexploited gains from trade that reduce the social surplus from producing a good. Just like MediaCorp is concerning making profit at the expense of viewer interests, such as repeat broadcasting old stuff many times. There is little the consumer can do because of the monopolistic nature unless increase competition or subscribe for pay channel. According to the article, there is considerable anecdotal evidence that competitive market structures are more innovative than are monopolies, although economicetric evidence on the general linkage between concentration and innovative is inconclusive.

Digitization allows channel to be limitless but fixed costs of program and broad casting under digitization are still enormous.

Consumption of broadcasting is subject to externalities. Externalities mean the spill-over effects that occur when the social costs and benefits derived from some activities are different from the costs and benefits derived by the producers and consumers of that activity. For example, program with a violent content has a negative effect of more violent in society. Another argument for subject to externality is individuals are imperfectly informed about the benefits from consuming the good, there is a danger that consumers will under-invest in the development of their own taste, experience and capacity to comprehend because it is only in retrospect that the benefits of such investment become apparent.

MediaCorp is keen to expand regionally. However, they are not ready for such an effort. Their immediate task is to continuing restructuring. The process includes assessing market segments-- local and overseas and followed by critically self-evaluating its core competency to ascertain the gap between market needs and current competency. For oversea programs there are more hurdles, such as cultural and political reception etc and of course program quality. Country has stronger culture, political and economic influence usually has the upper hand in terms of receptivity, such as Korean, Japan, and American.

Another aspect is to develop talent pool, as this industry basically depends heavily on people to perform. This requires a conducive environment that promotes creativity and technical excellence. To achieve this, a change of organization culture is imminent. A mix of technical and administrative experts is elected to the top echelon to balance technical and management excellence.

It can keep project management on top of every executive daily task. Other best practices to achieve operation excellence include:
Continue to source talent locally and overseas. Develop talents with star potential.
Consider instituting training programs to support continuous improvement initiatives.
Liaise with local university to set up courses, lifting the status of the profession and offering the artistes a career.
Institute performance measurement to align with the organization goals and improvement targets.
Promote team spirit, as many operations are project-based.
Use Activity-based management to control program budgets.

SPH:
As to SPH, it eventually lopped off loss-making MediaWorks. However, their share performance is still lackluster. Analyst is not convinced of the company’s advertising revenue potentials. The characteristics of SPH are
It is a large cash hoard with no investment opportunities.

It is monopolistic housing many papers publication under one roof. On the one hand, it achieves economic of scale by sharing the fixed assets and updating the latest technology. It also promotes certain extent of internal competition among the evening papers. Basically are the Chinese papers Sin Ming daily competes with Lian He Wan Pao. As to Lian He Zhao Pao, the Chinese morning paper and Straits Times face little competition. Until lately the new comer "Today" a free sheet which gives close fight to Straits Times in term of advertising revenue. Sitting on the cash hoard, the company faces little motivation to improve operation efficiency to improve shareholder value.

There are restrictions facing the company to expand regionally. Basically, The Company publishes Chinese, English, Malay, and Indian language papers. It is difficult if not impossible for them to put their foothold in the region because media is under local government control. If you can’t liberalize your paper at your own home, it is hard to convince the host country to accept your investments. I should say this practice is universal. The difference is internal competition.

What SPH can do is to:

Redefine it business boundary. They are not in the paper business. They are in publishing business, looking for adjacent business opportunities. This will give more business scope.

Restructure existing business, spin-off unprofitable businesses through buy out, implement share services charge out system rather than cross subsidies to promote operation efficiencies.

Gallery 4(Thailand & Cambodia)

Thailand

I attached a map of Thailand and Cambodia.You can double click on the picture for better view. If you have problem viewing the picture, please double clich on it.



I spent a week backpacked following the route starting from Phuket by air, and spent few hours taking tuktuk (a motor transport) around the island, and in the evening, I changed to coach bus taking about 12 hours passing Hua Hin heading north to Bangkok. At Bangkok, I spent a day visiting Wat Sai floating market of river Chao Phraya and the city.

The next day, I took a train going north to the historical site Ayutthaya. After visiting several temples, I got a bus to visit the Temple of Buddha's footprint. After the visit, I changed to train going North again to Sukhothai province, Lop Buri, I could remember vividly that it was Chinese New Year, because I could hear fire crackers sound waking me up early in the morning. I spent a day visiting historical temples and took a coach going North to Chiangmai.

Chiangmai's weather was coolly. The famous spots are Wat Phra Singh , Doi Suthep and the market place. After Chiangmai. I headed North again, I took a bus to Fang, changed to a mini-bus to Tha Thon pier for raft to Chiang Rai, and traveling down hundred km by boat of Kok river. This gives me a chance to soak up a rich diversity of typical northern landscape which I never get on the speeding bus.

Chiang Rai is a place adjacent to Laos and Myanmar. A famous spot to visit is Doi Tung. I reached there was evening time. The weather changed to icy. On the same day. I took a night coach back to Bangkok.

This time I headed West by train to Kanchanaburi province. The notorious spots are River Kwai, the film "the bridge over River Kwai" made river Kwai a famous spot but really looks quite ordinary. The material for the bridge were brought from Java by the imperial Japanese army. The Death Railway to Myanmar is also site of wartime reminder. It is estimated that 16,000 POWs died while building the Death Railway to Myanmar of which the bridge is only a small part. The strategic objective of the railway was to secure an alternative supply route for the Japanese conquest of Myanmar and other Asian countries to the west. The Japanese army forced the POW to complete the 415km railway suppose to build in five years to only 16 months. The labors, POW , many from Thailand, Myanmar, Malaysia and Indonesia estimated around 90,000 to 100,000 laborers died in the area. Other war reminders are The war cemetery and The Jeath war Museum. Erawan National park is another main sight notorious for its seven-tier waterfall. It was a day at Kanchanaburi and then back to Bangkok and headed home.

Puket

Phuket is Thailand largest island, and remains the wealthiest province in Thailand. Basically, its main business activities is
Tourism. It offers a huge range of water sports and magnificent diving facilities to make the most of the clear and sparkling seas. The famous spots are Ao Patong which is 15km from Phuket town, , the most developed and expensive, with a nightlife verging on the seedy. The picture shows three tourist spots Ao Karon beach, is slightly nicer, and adjacent Kata Yai (big kata Bay) beach and Kata Noi beach (small kata bay) the kata is the smallest and least spoilt of the trio. If you are really looking for peace and quiet you should turn instead to some of the beaches on the far northwest coast, such as Hat Nai Thon or Hat Nai Yang. Besides beach going, Laem Phrom thep is a popular place to view sunset. You can also go up Khoo Rang Phuket hill to have a bird-eye view of the City.

Ayutthaya

Ayutthaya, 80km north from Bangkok was founded by U Thong in1351, and rose rapidly by expanding trade route with China and India. It stepped into the political vacuum left by the decline of the Khmer empire at Angkor (In Cambodia) and the first Kingdom at Sukhothai. Ayutthaya by the mid-fifteenth century controlled an empire covering most of the area of modern-day Thailand. In 1767, this 400 years long prosperous dynasty was captured by the Burmese, and many wats (temples) were in ruin. And now it resembles a graveyard for temples, grand, brooding red-brick ruins rise out of the fields, satisfyingly evoking the city's bygone grandeur.
This picture is Wat Yai Chai Mongkol. The reclining Buddha represents the Buddha's dying moment when he attained Parlnibbana or ultimate nirvana. The Wat was established by King Ramathibodi in 1357 as a meditation site for monks returning from study in Sri Lanka. You can also visit Wat Phanan Cheong (the oldest temple in town) and Wat Phra Si Sanphet (the largest in its time).

This picture is Wat Phra Mahathat . The name "Mahathat" indicates that the temple was built to house remain of the Buddha himself (according to royal chronicles). King Ramesuan(1388-95) was looking out of his palace one morning when ashes of the Buddha materialized out of thin air here. A gold casket containing the ashes was duly enshrined in a grand 38m high prang. You can climb what remains of the prang to get a good view of the broad grassy complex, with dozens of bricks spires tilting at impossible angles and headless Buddha scattered around like spare parts in a scrapyard



This picture is Wat Phra Phutthabat (Temple of Buddha's footprint) (You can refer the footprint from the picture), is the most important pilgrimage site in Central Thailand. I was attracted by the interesting story. The place is at 17 miles Southeast of Lop Buri along Western site of the highway.

The legend dates back to the beginning of 17 century when King Song Tham of Ayutthaya sent some monks to Sri Lanka to worship the famous Buddha's footprint of Sumunkut. To the monk's surprise, the Sri Lankans asked them why they had bothered to travel all the way going there when according to the ancient pali scriptures, the Buddha has passed through Thailand and had left his footprint in their own backyard. As soon as King Song Tham heard this he instigated a search for the footprint which was finally discovered in 1623 by a hunter name Pram Bun when a wounded deer disappeared into a hollow and emerged miraculously healed. The hunter pushed aside the bushes to discover a foot-shaded trench filled with water which immediately cured him of his terrible skin decease. A temple was built on the spot but was destroyed by the Burmese in 1765. The present buildings date from the Bangkok era. Ah! Not forget to tell you, the footprint is five feet long. Imagine how large is the Buddha body!

Sukhothai Province

Prior to 13 century, the land now known as Thailand was divided into a collection of petty principalities. Most of which owed their allegiance to the Khmer empire and its administrative centre at Angkor in Cambodia. With the Khmer's power on the wane. Two Thai generals joined forces in1238 to oust the Khmers from the northern plains, founding the kingdom of Sukhothai( It means dawn of happiness in Pali) under the regency of one of the generals Intradit. Intradit's youngest son Ramkhamhaeng laid the foundations of a unique Thai identity by establishing Theravada (Hinayana) Buddhism as the common faith and introducing the forerunner of the modern Thai Alphabet; of several inscriptions attributed to him. Ramkhamhaeng turned Sukhothai into a vibrant spiritual and commercial centre. The border pushed as far south as to peninsula Malaya. By second half of 14 century, Sukhothai became a vassal state of the newly emerged kingdom of Ayutthaya in1438, and finally was forced to relinquish all vestiges of its independent identity. Traditionally, the Sukhothai era has always been viewed as the golden age of Thai history.
This picture is Wat Mahathat at Lopburi. The Wat Mahathat compound, packed with the remains of scores of monuments and surrounded , like a city within a city, by a moat. This was the spiritual focus of the city, the king's temple and symbol of his power, successive regents, eager to add their own stamp, restored and expanded it so that by the time it was abandoned in the sixteenth century it numbered ten viharns and the bot dominate the present scene, their soldierly ranks of pillars which formally supported wooded roof directing the eye to the Buddha images seated at the far western end.

The principal chedi complex which houses the Buddha relic built on an east-west axis in an almost continuous line with two viharns. Its elegant centre piece follows a design termed lotus-bud chedi and is classic late Sukhothai in style. Lotus bud represent the purity of Buddha thoughts battling through the clammy swamp and bursting into flower. The chedi stands are surrounded by eight smaller towers on a square platform decorated with a procession of walking Buddha-like monks. Others famous temples are Wat Si Sawai, Wat Trapang Ngoen and Wat Sra Sri, Ramkhamhaeng monument.

Chiangmai

Chiang Mai manages to preserve some of the atmosphere of an ancient settlement alongside its urban sophistication. The people here are more easy going, and speak more slowly than their cousins in the capital. Burmese influence is still strong-not just art and architecture, but also in the rich curries and soups serve here. There are two major temples worth visiting in Chiangmai. One is Wat Phra Singh. The Buddha came from Sri Lanka. The temple was built in 1345.

This picture is part of the temple called Doi Suthep. the mountain which rises steeply at the City's 16km western edge of Chiangmai which dominate the hillside gives a towering view over the town. Doi Suthep was established in 1383. A naga (Dragon headed serpent) staircase of 300 steps lead to the Wat at the end of the winding up the mountain. This is the North hottest shrine which takes its pre-eminence from a magic relic enshrine in its chedi and the miraculous legend of its founding.

The interesting story about this temple is the original chedi here was built by King Ku Na at the end of 14 century after the growing relic of Wat Suan Dork had self-multiplied just before being enshrined. A place had to be found for the clone, so King Ku Na put it in a traveling shrine on the back of a white elephant and waited to see where the sacred animal (the elephant) would lead. It eventually climbed Doi Suthep, trumpeted three times , turned around three times, knelt down and died, thereby indicating that this was the spot for the temple.

You can have magnificent view of whole Chiangmai at the temple's lower terrace .For going to upper terrace you have to remove your shoes.

Chiang Rai
The northernmost tip of Thailand, stretching from the Kok River and Chiang Rai to the border. On the west it is adjacent to Myanmar, on the east to Laos. What you can see is a sanitized presentation of the golden Triangle's opium fields and colorfully dressed hill people performing artificial folkloric rituals.

Doi Tung, is about halfway between Mae Chan and Mae Sai. At Doi Tung , you can look down over Thailand, Laos, Myanmar and China. Doi Tung means "Flag peak" from the northern Thai words. King Achutaraj of Ngon Yang ordered a giant flag to be flown from the peak to mark the spot where two chedis were constructed in 911AD. The Chedis are still there. The road up the hill is winding steep and narrow. Along the way are Shan, Akha and Musoe (Lahu) diverse ethnics' villages. Myanmar is a short trek from the peak and many travelers have cross over the border to view the large poppy fields guards by hill tribes people and KMT soldiers. At the peak 1800 m above sea level is Wat Phra That Doi Tung. Pilgrims to the Wat earn them good fortune by clanging the rows of dissonant bells around the temple compound.

This picture is The Royal Villa and Mae Fa Luang Garden,12 km up the summit then left up a side road, it was the home of the princess mother in her later years. It is an attractive site with many beautiful flowers in the garden. You can appreciate from the picture the colorful flowers blossoming in the chilling weather.

Kanchanaburi
Thism picture is Erawan National park. It is 65 km northwest of Kanchanaburi. The seven-tier waterfall, topped by a triple cascade is etched into the national imagination not just for its beauty, but also for its alleged resemblance to a three headed elephant. This elephant (Erawan in Thai) is the formal national symbol. The park covers 550 square kilometers. There are seven levels for the waterfall. Each level comprises a waterfall feeding a pool of invitingly clear water partly shaded by bamboos, rattans, lianas and other clotted vegetation. It is fairly easy to climb up to the fifth stage, but the route to the sixth and seventh level get steep and slippery. The best pool for swimming is at level two.

Cambodia

I had opportunities to visit Cambodia due to job requirement. Basically, in Phnom Penh, you can visit the Royal Palace, Wat Phra Keo,Toul Sleng Holocaust museum displays pictures and tools of how Khmer route tortured their own people during their reining in Cambodia. Once a neighborhood school, the building was seized in1975 by Pol Pot's Khmer Route and turned into a prison; during its four years of operation as an interrogation center, some 20,000 Cambodians were tortured here. Fewer than 10 prisoners survived. The bodies of those that died under torture were tossed into the school's garden and playing fields; those that survived the torture went to the extermination camp outside of town called Choeung Ek, now known as the Killing Fields. The killing field, 14km Southwest of Phnom Penh, you see urn that contains many skulls and skeletons and mass graves. I will not show you these tragic pictures of the harrowing experience of the Cambodia people. I choose Angkor Wat instead at Siem Reap to represent Cambodia.

The Cambodian (Khmer) most glamorous times was the Khmer empire between 9th to the 13th Century, Cambodia developed a complex society based first on Hinduism and then on Buddhism. After the decline of the Khmers and the ascendancy of the Siamese, Cambodia was colonized by the French in the 19th century. That is why the French still has the affection towards the Khmers. During the tenure of my job in Cambodia, The French President Chirac ever had a short stay in our Hotel. And many of our Hotel staff have great respect to the French managers. Shortly after the end of World War II, during which the Japanese had occupied Cambodia, independence became the rallying cry for all of Indochina. Cambodia became a sovereign power with a monarchy and an elected government.

In the early 70s , the destabilizing consequences of the Vietnam War led Cambodia's political factions to take up arms. A very bloody civil war ensued. Khmer Rouge, under the French-educated Pol Pot, emerging as victors. A regime of terror followed. Under a program of Mao Tse Tsung-inspired re-education centered around forced agricultural collectives, hundreds of thousands of Cambodian died through torture and execution or from malnutrition and exhaustion in the camp. You will get a better picture of these tragic times by visiting Toul Sleng Holocaust museum museum I mentioned above.

Vietnam, unified under the Hanoi government , eventually intervened, partially defeated the Khmer Rouge, and brought back Prince Sihanouk as head of the state (Now Sihanouk has abdicated from the helm, and passed to his youngest son). The United Nations was brought in as a peace-keeping force, I was working in a hotel during those period, and in1996 a government was formed through democratic elections. In 1997, Hun Sen toppled the elected government, but political pressure forced new election-monitored by the international communities-in late summer 1998. Hun Sen won a plurality amid charges of election rigging and, resort to finesse and sordid politics,through coercive tactics, formed a government. After the death of Pot Pol in mid-1998, the Khmer Rouge presence and its threat to the country's stability diminished. It remains to be seen whether foreign investment and the development of tourism will follow, whether domestic problems will be solved. As far as what I follow up after I quit the job, the living of the Cambodian people is stultifying, has hardly any ameliorating. Life still in a shamble, poverty, corruption, crime, money laundering, prostituting....I am very sympathizing the Cambodian people still limping ahead for a blissful life>.(At this time , Cambodia is experiencing booming in their economy. It successfully attracted 8 billion (US$) of foreign direct investments in 2007. The largest investor is from South Korea, followed by China. GDP growth is 9.6% in 2007 and has foreign exchange reserves of 16 billion (US$) The 42 levels of twin towers of Golden plaza at central of Phnom Penh city epitomises new era of Cambodia that rising as fast growing emerging country. Phnom Penh, Siem Reap and Sihanouk harbours are three hotspots in property development, the land and house price are soaring. Main drivers of source of income are from tourism, oilfield,natural gas, textile and agriculture. Update at May 1 2008)

Angkor Wat



If Angkor had been discovered before the late 19th century, it certainly would have been classified as one of the seven wonders of the world. The Khmer empire reached the zenith of its power, influence, and creativity from the 9th to 13th centuries, and Angkor, the seat of the Khmer kings, was one of the largest capitals in Southeast Asia. In all there are some 300 monuments scattered in all directions through the surrounding jungle. Besides Angkor Wat, there are Angkor Thom, Ta Prohm, Banteay Srei. I am giving details of Angkor Wat.

In the typical architectural art of the Khmers, the plan of Angkor Wat is simple and audacious. The five towers are the central element of the complex, forming a lotus bud ( the emblem of the Cambodia flag). Angkor Wat was founded at the beginning of the 12th century and is the best preserved of the Khmer temples. It was erected by King SuryavarmanII (reigned 1112-52) and dedicated to the Hindu god Vishnu. Like all the major monuments at Angkor, the buildings form a complex representing the Hindu (and Buddhist) Universe. The central shrines symbolize Mt. Meru, while the gates and cloisters depict the successive outer reaches of cosmic reality. Moats represent the seven oceans that surround Mt. Meru.

Angkor Wat is reached by an impressive causeway, an avenue lined with balustrades in the form of serpents. The complex itself rises in three concentric enclosures and you must wander around the terraces marveling at the Hindu deities and Buddha images, many of which lost their heads to looters. The other amazing collections of the images is sculpted on the 1 km long open colonnaded gallery. This collection tells the Hindu epics and Suryavarman's earthly deeds, both of which are celebrated by dancing apsaras.

Architecture and the fine relief symbolize the richness, power, and prosperity of the Khmer empire during this period, but such was the tremendous outlay required to build Angkor Wat that it nearly bankrupted the empire. It took 30 years to recover, and it was King Jayavarman VII who had the energy to revitalized the kingdom. Veering away the established Hindu god, he adopted Buddhism.