Letters

The truth in dispute

YOUR COLUMNIST DEIRDRE MCMURDY claims that the twisted tale of Bre-X Minerals Ltd. somehow justifies the proposal by a Toronto Stock Exchange committee to enact legislation that enhances corporate accountability for information affecting markets ("Nothing but the truth," June/July 1997, p. 13). In my opinion, nothing could be farther from the truth.

The Bre-X scandal appears to have been caused by out and out fraud on the part of one company. I'm baffled to think that this can be seen as justification for proposing legislation that makes it easier to sue the principals and advisers in companies that commit no fraud.

Since existing legislation makes it possible to sue over fraud, does it not follow that McMurdy's logic proposes punishing the innocent?

Unfortunately, this type of twisted logic has been allowed to prevail in the regulation of Canadian financial markets. That is why issuers, compelled by regulators (who, in turn, have yielded to the bleating of at least some analysts and investors), publish mounds of trivia for the financial markets. Fifty years ago, financial information could be reported in just tens of pages per annum. Now, hundreds of pages are required. What the regulators have failed to grasp is that competent analysts and intelligent investors were already getting enough information 50 years ago; incompetent analysts and unintelligent investors will never get enough.

Despite all the pious statements about not wanting to move Canada closer to the rigid, rulesobsessed US system of regulation, we will soon be there. We have already moved a considerable distance down that road. This particular suggestion by the TSE committee will move us much farther in that direction.

As for the Bre-X fiasco, it will be interesting to see whether the regulators will forcefully attack and punish the guilty or whether they will follow their past practice and punish the innocent.

Mario J. Dalla-Vicenza, FCA, CMA, MBA, FCMA

LESS SIMPLE THAN ABC

WHILE I APPLAUD JASON HERGERT IN HIS effort to highlight the connection between product costing and management decision making ("Beware of the profit killers," August 1997, p. 31), the author provides insufficient evidence to make a murder charge against activity-based costing (ABC) stick.

Hergert's central thesis is simply that relevant costs should be used for decision making. Relevant costs are those which occur in the future and are avoidable in some situations. As the author demonstrates, the allocation of some portion of an unavoidable cost to a product may distort figures needed for decision making. In contrast to this, full-absorption costing, of which ABC is one form, attempts to allocate all associated elements of cost to products. This will include overhead items which do not meet the criteria to be considered "relevant." In other words, they will not be avoidable in the short term.

Does this mean that full-absorption costing is irrelevant? Should it always be avoided, as Hergert advises in his closing sentence? The answer to both questions is "no." First, full-absorption costing is required to value inventory in financial reporting. Second, as the time horizon for any decision moves from short to long term, Hergert's relevant costs look increasingly like full costs. After all, in the long run, every cost is avoidable.

Hergert's article helps propagate the fallacy that one costing approach is universally preferable to another. In this case, relevant costs are preferable over ABC. In truth, the appropriateness of any costing technique can only be evaluated in the context of the decision that will be made based on cost information. When asked the cost of something - be it a product, a service or bar peanuts - the best response an accountant can offer is: "It depends." Indeed, anyone preparing information for decision making needs to decide which approach is appropriate under the prevailing circumstances.

Hergert falsely accuses ABC of being a profit killer. This charge can only be laid against managers who wield these tools inappropriately.

Daniel A. Szpiro, Assistant professor

Department of Accountancy

Concordia University, Montreal

A STORY OF CREATION

CREATING AN INTERNET SITE IS A LABOUR OF love, but I agree with the comments in "Net Sales" (August 1997, p. 12): a web site can be developed inexpensively and it can open up new markets for your products.

In 1996, I founded a company that markets products over the Internet. Our products have sold primarily in the United States and the Pacific rim countries, areas we wouldn't have reached without the web. The Internet has created a level playing field where the small guy can compete with the corporate giant. Both can develop sites using the same technology and for about the same cost.

We developed our site using a web-site creation program obtained through shareware. Such programs are available to a user for a specified period of time before a nominal fee is demanded. For us, the major investment was in the time required to learn the HTML (Hypertext Markup Language) code. This code allowed us to develop our site the way I had envisioned. If learning a new language isn't your thing, there are several user-friendly web creation programs on the market that can help you achieve the same results in less time, but for a little more money. The program for our site cost $20, but used approximately 120 hours of our time.

Once your site has been developed and uploaded to your ISP (Internet Service Provider), you have to think about attracting people to it. The site should be constantly updated. You should also add new web pages. You may even offer visitors incentives to entice them to return to your site. Posting advertisements on the Internet and answering e-mail as it is received are also necessary duties.

As I have already said, creating and maintaining an Internet web site becomes a labour of love. But the potential payoffs can be worthwhile.

David Hurme, CA

President, On-Line Distribution Inc.

Mississauga

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