Dennis Chung, Contributor 
CHUNG
ONE OF the considerations accountants make when determining how to report a transaction is the substance rather than the form. This means the transaction is not taken at its face value only, for example the legal terminology it is shrouded in, but rather the commercial substance (facts) of the transaction is considered. If the substance of the transaction shows that it is different from the legal form, then it is reported differently than one would think by just looking at its appearance.
An example is the consideration of whether a company is an associate or subsidiary, where a company acquires 50 percent of another. One may, on the face of it, consider this to be a subsidiary as 50 per cent is a substantial holding, but when one examines the agreement or workings it may be determined that there is no operational control over the company, and so it is accounted for as an associate or vice versa. This is also the case in the provision for a 'shadow director' under the 2004 companies act, where one may not be listed as a director, but if it is determined that one person influences/controls the actions of other directors then they must be listed as a 'shadow director'.
MAINTAINING A LIFESTYLE
This concept came to mind over the weekend when a friend of mine was telling me about the action of some persons he knew in similar businesses. This person is a merchant who told me that business activity was much slower than in previous years downtown, and that some of his colleagues rather than adjust their lifestyle continued to seek to borrow to maintain the current one. The result is that some of them found it difficult after a while to pay their bills.
Isn't this a common problem we face in Jamaica? Many people are more concerned with the image (form) than what the actual situation is (substance). Because of this preoccupation with image we tend to not focus on the real fundamentals and in the long run when they really face us we are not prepared to deal with the challenges at that time. This certainly was a factor that caused the deficit problems we have today. For years Jamaica ignored what we could really afford as a nation and borrowed to supplement our appetite to support an image. The consequence is that people from overseas could not believe the lifestyle in our third world country, and all the time we were borrowing not only to buy the car but put gas in it also.
This is not only a problem of government but is also one of the citizenry. There are many who believe they should sink in debt just to portray an image of success. This is, of course, driven by the attitude of others to accept only those who appear successful in their inner circle. Eventually that inner circle is populated by persons who are not true successes but rather just have the appearance of success. In the long run the true situation is revealed or the person may seek less than ethical means to maintain that image. This does sound like the way we have approached the national accounts for years. What we have done is given the impression that as a country we could afford a relatively large governmental operation. When our backs are against the wall, we then for the first time truly understand that we cannot.
PERCEPTION NOT REALITY
This is what results in the inadequate expenditure for the fire services and on other social programmes and will continue for a while, as for a long time we were living beyond our means. As this reality hits home more and more, government realises that it is shrinking in importance as for years authority has been determined by the ability to control the purse, through handouts and resources behind law enforcement. This authority has never been built on the foundation of discipline so when the money leaves the result is disorder. This would be similar on the individual level where one is left out of the group because the bank has repossessed the luxury car and so the perception of success is no longer.
So too the approaches to crime and education always seem to be more preoccupied in the form rather than really tackling the underlying problem. In dealing with crime we have always taken the approach of just putting down any disturbance that may arise. We put forward statistics that show less crime overall, even though murder has increased, and gives the impression that crime is under control. In the meantime businesses and the private citizen continue to suffer at the hands of criminals. In addressing the educational problems we give high statistics on the percent of students passing CXC, but only considered the population of students who took the exam rather than the total population.
Today, similar approaches are being put forward to fight crime also. Suggestions are made about national youth service and merging the army and police into a paramilitary. If the real problems are not addressed, however, what we are going to end up doing is spending a lot of money to provide a temporary "marketing" front. We must remember that any product with good marketing can be sold at least once, but for continued sales the product fundamentals must be strong. If we merge the army and police without understanding why the police force has failed and the army maintains a good image then we may end up putting the problems of the police force in the army, ending up with a larger problem. It might be better to maintain the discipline of the army to counter the indiscipline of the police.
1990S APPROACH
I remember in the nineties the same approach of form being applied to the financial sector and stock market. Many financial entities were always preoccupied by the total assets or funds under management [and advertised as such]. In fact a friend of mine would always attest to the strength of his institution by reference to the growth in the size of assets. I used to say that the important thing is not how much assets you have but the company's value, as measured by equity.
The stock market used to be driven by the seemingly endless rise in the Bull Run in the early nineties without considering the fundamentals. It is natural for many investors to think that way. The problem was that the advisors were thinking that way also. It is refreshing to see that these attitudes have changed today and currently we have a much better run financial industry, regulated by the FSC and BOJ.
BEHAVIOUR DRIVES FINANCIALS
I have been asked why I have chosen to start writing of these qualitative issues rather than stick to more financial matters, and no doubt many will think the same about today's article. The answer is simple and is that behind all financial success is a behavioural pattern. Even if a company were to grow revenues in leaps and bounds if proper care is not taken to ensure profitability and great care in spending income this will result in bankruptcy. It is for this reason that when one is looking at a company to invest in, it is very important to understand the management and culture. This will give a pretty good indication of the approach to building the future of the company.
As an example, recently I have had an economist tell me about how much we are on target on the fiscal side and the prosperity that lies ahead. When asked about the effect of crime, however, the answer is that the economic model cannot project for that objectively. The problem, of course, is that crime and other social problems directly impact economic progress. This shows that behaviour patterns are of utmost importance going forward. It is estimated that our crime problems derive us of about four per cent of growth, which shows that behaviour significantly affects finances.
Email:
dra_chung@hotmail.com
