In 2017 my Website was migrated to
the clouds and reduced in size.
Hence some links below are broken.
One thing to try if a “www” link is broken is to substitute “faculty” for “www”
For example a broken link
http://faculty.trinity.edu/rjensen/Pictures.htm
can be changed to corrected link
http://faculty.trinity.edu/rjensen/Pictures.htm
However in some cases files had to be removed to reduce the size of my Website
Contact me at rjensen@trinity.edu if
you really need to file that is missing
New
Bookmarks
Year 2015 Quarter 4: October 1 - December 31 Additions to
Bob Jensen's Bookmarks
Bob Jensen at
Trinity University
For
earlier editions of New Bookmarks go to
http://faculty.trinity.edu/rjensen/bookurl.htm
Tidbits Directory ---
http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
Click here to search Bob Jensen's web site if you have
key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron"
enter the phrase Jensen AND Enron. Another search engine that covers Trinity and
other universities is at
http://www.searchedu.com/.
Bob Jensen's Threads ---
http://faculty.trinity.edu/rjensen/threads.htm
574 Shields
Against Validity Challenges in Plato's Cave ---
http://faculty.trinity.edu/rjensen/TheoryTAR.htm
Choose a
Date Below for Additions to the Bookmarks File
2015
October
November
December
December 31, 2015
New
Bookmarks
Year 2015 December Additions to
Bob Jensen's Bookmarks
Bob Jensen at
Trinity University
For
earlier editions of New Bookmarks go to
http://faculty.trinity.edu/rjensen/bookurl.htm
Tidbits Directory ---
http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
Click here to search Bob Jensen's web site if you have
key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron"
enter the phrase Jensen AND Enron. Another search engine that covers Trinity and
other universities is at
http://www.searchedu.com/.
Bob Jensen's Threads ---
http://faculty.trinity.edu/rjensen/threads.htm
574 Shields
Against Validity Challenges in Plato's Cave ---
http://faculty.trinity.edu/rjensen/TheoryTAR.htm
For
earlier editions of Fraud Updates go to
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to
http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to
http://faculty.trinity.edu/rjensen/bookurl.htm
Bookmarks for the World's Library ---
http://faculty.trinity.edu/rjensen/bookbob2.htm
Click here to search Bob Jensen's web site if you
have key words to enter --- Search Box in Upper Right Corner.
For example if you want to know what Jensen documents have the term "Enron"
enter the phrase Jensen AND Enron. Another search engine that covers Trinity and
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Bob
Jensen's Blogs ---
http://faculty.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called
New Bookmarks ---
http://faculty.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called
Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's
Pictures and Stories
http://faculty.trinity.edu/rjensen/Pictures.htm
All
my online pictures ---
http://www.cs.trinity.edu/~rjensen/PictureHistory/
David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics
Science"
Bob Jensen
February 19, 2014
SSRN Download:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296
MAAW's Listing of Accounting
Certifications ---
http://maaw.info/AccountingCertifications.htm
Includes Certified Public Bookkeeper (seriously)
The Tax Advisor is Free on the Web
http://www.thetaxadviser.com/
Thank you Scott Bonacker for the heads up.
Accounting History Corner
While accrual historical cost accounting evolved in accounting for ventures and
business firms, exit (liquidation) value accounting remained the tradition in
history clear up to today for personal accounts such as exit value reporting for
estates and trusts. The main reason is the purpose of the accounting.
Fair value reporting of going concerns
would be of greater interest if accountants could figure out how to report
"value in use" to investors apart from "exit value in liquidation." But
accountants have never been able to figure out how to reliably measure "value in
use" that economists in history have preferred but never helped accountants
figure out how to reliably measure in practice. The GAAP for going concerns is
now an amalgamation of accrued historical cost (not really valuation at all)
combined with some exceptions such as lower-of-cost or market for inventories
and exit value reporting of financial instruments and derivative financial
instruments. However, it all becomes exit (liquidation) value reporting when a
firm is deemed to be no longer a going concern.
In personal accounting non-going concerns
are usually the rule rather than the exception. When a person dies his or her
estate if valued on the basis of liquidation value and divided up among the
heirs. When a couple is being divorced the marriage is no longer a going
concern, and the assets and liabilities are accounted for at liquidation value.
It is interesting to look back at the
history of "personal" accounting. As you can see the line between personal and
business is very fuzzy in history.
"PERSONAL ACCOUNTS, ACCOUNT BOOKS AND
THEIR PROBATIVE VALUE: HISTORICAL NOTES, c.1200 TO c.1800," by Basil S.
Yamey, Accounting Historians Journal, Volume 39, Number 2 December 2012
pp. 1-26 ---
http://umiss.lib.olemiss.edu:82/articles/1038708.7435/1.PDF
This paper discusses a
number of topics pertaining to personal accounts in account books in the
period roughly between 1200 and 1800. The main emphasis is on two topics,
namely the use of account books as evidence in courts of law, and bad and
doubtful debts and their accounting treatment. Examples from various
countries and periods are provided to illustrate the discussion, which is
not intended to be exhaustive.
The majority of
accounts in surviving business account books of the period 1200 to 1800 in
Western Europe are personal accounts. They record dealings of the firm with
individuals, one-man businesses, partnerships, joint stock companies,
religious establishments, and government bodies. In many of the account
books there are only personal accounts, and in some there are mainly
personal accounts together with a sprinkling of non-personal accounts. This
paper considers and illustrates a selection of topics that pertain to
personal accounts in the period covered: personal accounts in single entry
and double entry bookkeeping systems; the use of account books as evidence
in law courts; how a merchant could increase the probative value of his
account books; bad and doubtful debtors and debts, and the various
accounting treatm ents given to them; and some concluding observations,
mainly about ledgers in flames.
Continued in article
"Stock Prices and Earnings: A History of Research," by
Patricia M. Dechow, Richard G. Sloan, and Jenny Zha, SSRN
(no longer available free as a download from SSRN),
Annual Review of Financial Economics, Vol. 6, pp. 343-363, 2014
December 2014 ($32 unless accessed free via your university's library
subscription)
http://www.annualreviews.org/doi/full/10.1146/annurev-financial-110613-034522
Abstract:
Accounting earnings summarize periodic corporate financial
performance and are key determinants of stock prices. We review
research on the usefulness of accounting earnings, including
research on the link between accounting earnings and firm value and
research on the usefulness of accounting earnings relative to other
accounting and nonaccounting information. We also review research on
the features of accounting earnings that make them useful to
investors, including the accrual accounting process, fair value
accounting, and the conservatism convention. We finish by
summarizing research that identifies situations in which investors
appear to misinterpret earnings and other accounting information,
leading to security mispricing.
Jensen Comment
AAA Members may want to accompany this paper with Bill Beaver's
recollections of his own pioneering research on stock prices and
earnings --- recollections given at the American Accounting Association
Annual Meetings as the 2014 Presidential Scholar.
Video (free to AAA members who are subscribed to the AAA Commons) ---
http://commons.aaahq.org/hives/8d320fc4aa/summary
It is somewhat surprising that a predictor
variable its extended versions (e.g., earnings per share) that cannot be
defined by the FASB and IASB can be an effective predictor after it no
longer can be defined. By not being definable, there is little
assurance that earnings, eps, etc. are consistently measured over time
for a single firm and across firms at a point in time.
Net earnings and EBITDA cannot be
defined since the FASB and IASB elected to give the balance sheet
priority over the income statement in financial reporting ---
"The Asset-Liability Approach: Primacy does not mean
Priority," by Robert Bloomfield, FASRI Financial Accounting
Standards Research Initiative, October 6, 2009 ---
http://www.fasri.net/index.php/2009/10/the-asset-liability-approach-primacy-does-not-mean-priority/
"Whither the Concept of Income?" by Shizuki Saito University
of Tokyo and Yoshitaka Fukui Aoyama Gakuin University, SSRN, May 17,
2015 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2607234
Abstract:
Since the 1970s, the decision-usefulness has taken center stage and
our attention has been concentrated on valuation of assets and
liabilities instead of income measurement. The concept of income,
once considered the gravitational center of accounting has lost its
primacy and become a byproduct of the balance sheet derived from the
measurement of assets and liabilities.
However, we have not been equipped with
robust conceptual foundation supporting theoretically reasoned
accounting measurement. It is not only theoretically but also
practically important to renew our seemingly waned interest in the
concept of income because ongoing reforms of accounting standards
cannot be successfully implemented without a sound understanding of
the concept of income.
Financial Statements Loss of
Quality and Predictive Power
Jensen Comment
I don't think the "The EBITDA Epidemic Takes Its Cue from Standard
Setters."
Like Professor Verrecchia currently and my accounting
Professor Bob Jaedicke decades earlier I think the "EBITDA Epidemic"
takes its cue from investors and managers that have a "functional
fixation" for earnings, eps, EBITDA, and P/E ratios --- when in fact
those metrics are no longer defined by the FASB/IASB and may have a lot
of misleading noise and secret manipulations.
"The EBITDA Epidemic Takes Its Cue from Standard Setters," by
Tom Selling, The Accounting Onion, October 13, 2013 ---
http://accountingonion.com/2013/10/the-ebitda-epidemic-takes-its-cue-from-standard-setters.html
Jensen Comment
If the FASB cannot define net earnings then it follows from cold logic
that they cannot define measures derived from net earnings like EBITDA.
However, virtually all private sector business firms compute net
earnings and some measures derived from net earnings like eps, EBITDA,
and P/E ratios.
It's doubtful whether net earnings for two different companies or
even one company over two time intervals are really comparable.
But all that does not matter when it comes to adjudicating an insider
trading case in court even if the accused may not really be an insider.
I'm reminded of why billionaire Martha Stewart went to prison because
she acted on inside information about a company --- inside information
passed on to her by the CEO of that company. It doesn't matter that the
amount of loss saved by the inside tip involved is insignificant
compared to her billion-dollar portfolio. Evidence in the case made it
clear that she did exploit other investors by acting on the inside tip
no matter how insignificant the value of that tip to her. She was hauled
off the clink in handcuffs and was released in less than five months.
But her good name and reputation were tarnished forever ---
http://en.wikipedia.org/wiki/Martha_Stewart
Mark Cuban ---
http://en.wikipedia.org/wiki/Mark_Cuban
Flamboyant billionaire Mark Cuban went on trial for very similar
reasons (although later acquitted) , although the alleged insider tip and the value of the alleged
tip is more obscure than in the Martha Stewart case. Like in the case of
Martha Stewart the loss avoided is pocket change ($750,000) relative to
Cuban's billion-dollar portfolio.
In the case of Martha Stewart the prosecution had her dead to rights
in terms of timing of the tip and her stock sales. In the case of Mark
Cuban the SEC's case is based upon an "unreliable witness who refused to
testify in person."
http://www.ottawacitizen.com/business/Lawyers+Mark+Cuban+begin+closing+arguments+billionaires/9038098/story.html
"An Accounting Lesson for Twitter," by Jonathan Weil,
Bloomberg Businessweek, October 14, 2013 ---
http://www.bloomberg.com/news/2013-10-04/an-accounting-lesson-for-twitter-.html
What Cuban failed to mention to the jury is that net earnings and
EBITDA cannot be defined since the FASB elected to give the balance
sheet priority over the income statement in financial reporting ---
"The Asset-Liability Approach: Primacy does not mean
Priority," by Robert Bloomfield, FASRI Financial Accounting
Standards Research Initiative, October 6, 2009 ---
http://www.fasri.net/index.php/2009/10/the-asset-liability-approach-primacy-does-not-mean-priority/
Bob Jensen's threads on accounting
history are at
http://faculty.trinity.edu/rjensen/theory01.htm#AccountingHistory
Business History Center
Business History ---
https://en.wikipedia.org/wiki/Business_history
Hagley Digital Archives (business and
technology history) ---
http://digital.hagley.org/
HISTORIC MILESTONE FOR CANADIAN ACCOUNTING PROFESSION ---
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=153719&utm_source=MailerMailer&utm_medium=email&utm_content=first-ever+Common+Final+Examination+(CFE)&utm_campaign=Double+Entries+21(20)
Chartered Professional
Accountants of Canada (CPA Canada) congratulates the 2,219 students who
successfully passed the profession’s first-ever Common Final Examination (CFE).
“This is both an exciting
and historic time for Canada’s accounting profession,” says Kevin Dancey,
president and CEO, with CPA Canada. He notes that three legacy accounting
designations have come together and are now operating under the Chartered
Professional Accountant (CPA) banner across the country.
Currently, Canadian
professional accountants who were grandfathered to CPA must also use their
legacy designation in combination with the CPA designation.
“The individuals being
recognized today will be among the first crop of Canadian CPAs with no
legacy designation once they have completed their practical experience,”
explains Dancey. “These history makers should be proud of their
accomplishment. They are on a career path that can offer a lifetime of
rewards.”
In addition to the technical
skills associated with the profession, the CPA certification program offers
a solid understanding of leadership, teamwork, communications and strategy.
All of this skill and knowledge is combined with a strong understanding of
what it means to be a professional and to act ethically.
“The new CPA is more than an
accounting designation - it also is a business credential, one that can open
many doors,” stresses Tashia Batstone, CPA Canada’s vice-president,
education. “The program is designed to ensure it meets the needs of
employers in all sectors of the Canadian economy.”
This year, the prestigious
Governor General’s Gold Medal along with the CPA Canada cash prize of $5,000
for the highest standing in Canada on the 2015 CFE has been awarded to Ms.
Erin Compeau from Deloitte LLP in Toronto, Ontario.
Continued in article
From the CFO Journal's Morning Ledger on December 4, 2015
Brick-and-mortar retailers struggled this
holiday as consumers chose to point-and-click their way through shopping
lists. The stampede of shoppers to the Web grew more thunderous during the
final days before Christmas, testing the limits of delivery services and
pushing retail chains into deeper, longer promotions than their e-commerce
rivals,
the WSJ reports.
E-commerce sales rose 11.8% from Nov. 26 through Dec. 20 compared with a
year ago, according to ChannelAdvisor Corp., which makes e-commerce software
and measures online transactions.
The shift to online shopping is straining
retailers and delivery networks. A few chains, including Eddie Bauer
and Pacific Sunwear, warned customers this week that their
holiday packages were delayed and
blamed what they said were broader problems at FedEx Corp. FedEx said
Wednesday
it is running operations round-the-clock to “accommodate additional
unforeseen volume from some customers,” but that its delivery network is
“performing as designed for the forecasted volumes from our major retail and
e-tail customers."
Jensen Comment
This puts a strain on sustainability accounting and the future of property taxes
for towns and cities. When I left San Antonio a huge two-story mall that had
been vacant for several years was taken over by the non-taxable school district.
The biggest mall in the capitol of New Hampshire in Concord used to have a
thriving food court that included Burger King and vendors of Italian food,
Chinese food, sandwich shops, ice cream shops, etc. now has a darkened food
court and more empty stores than stores that are still struggling. The Sears, JC
Penney, and Bon Ton Department stores cannot possibly be breaking even. Such is
the future of mall shopping.
The bill would
also temporarily bar the IRS and SEC from passing increased disclosure rules for
corporations and nonprofits
From the CFO Journal's Morning Ledger on December 4, 2015
Massive spending and tax deal advances.
U.S. lawmakers in one fell swoop produced
bills setting spending for fiscal 2016 that sweeps in hundreds of policy
prescriptions and makes dozens of business and individual tax breaks
permanent. The bill’s most contentious provision would end a four-decade ban
on oil exports, though the relentlessly low price of oil makes it
unlikely that any impact from the policy shift will materialize soon.
The bill would also temporarily
bar the IRS and SEC
from passing increased disclosure rules for
corporations and nonprofits.
Solar and wind companies scored a major victory in
the bill, when lawmakers voted to extend lucrative federal subsidies for
renewable energy.
Jensen Comment
This illustrates one the many reasons I prefer that the FASB set accounting
rules rather than the SEC. Lobbyists have influence almost everywhere but the
biggest lapdogs are in Congress.
Although Ryan gave more than he
received in the $1.8 trillion budget that President Obama drooled over when
signing the bill with Harry Reid and Nancy Pelosi cheering in the wings, there
are some things Republicans favored that aren't getting much publicity.
"White House surrenders on 'dark money'
regulation," by Katy O'Donnell, Politico, December 18, 2015 ---
http://www.politico.com/story/2015/12/white-house-dark-money-216956
The Obama
administration has thrown in the towel on cracking down on hundreds of
millions of dollars in “dark money” — funds given to advocacy groups that
claim to be social welfare organizations rather than political committees.
Closing the so-called social-welfare loophole — which exempts the groups
from federal tax and disclosure requirements — was one of the most urgent
priorities of campaign-finance reformers in the wake of the Supreme Court's
decision in the Citizens United case. But then the IRS came under fire for
holding up conservative groups applying for the social-welfare tax
exemption, and many Republicans cried foul.
By giving in to a GOP provision in the omnibus spending bill, the
administration has effectively given up on limiting the political influence
of nonprofit groups with unknown funders.
The White House declined to comment on the bill.
Top lawmakers, including Senate Finance Committee Chairman Orrin Hatch,
have repeatedly warned IRS Commissioner John Koskinen to abandon the
agency's efforts to clarify the social-welfare rule. Now they’ve forced his
hand, just as the 2016 campaign is heating up and groups like Karl Rove’s
Crossroads GPS on the right and American Bridge 21st Century Foundation on
the left are poised to dump unprecedented sums into the presidential race
and other campaigns.
Read more:
http://www.politico.com/story/2015/12/white-house-dark-money-216956#ixzz3vMavz5fJ
Permanent R&D Tax Credit a ‘Game Changer’
---
http://blogs.wsj.com/cfo/2015/12/23/permanent-rd-tax-credit-a-game-changer-expert/?mod=djemCFO_h
Christmas came early
this year for finance chiefs hoping a permanent research and development tax
credit would get President Barack Obama’s signature.
Last Friday’s move made permanent a tax credit that
leaves businesses with more money to use for investments and hiring as part
of the Protecting Americans from Tax Hikes Act of 2015.
The permanent credit “is really a game changer,”
said Yair Holtzman, a practice leader for accounting firm Anchin, Block &
Anchin LLP’s research and development tax credits group.
“It’s been unanimous,” Mr. Holtzman said – finance
executives “really like the certainty that comes with having a permanent
research credit.”
Previous R&D credits were often retroactively
renewed but uncertainty still weighed on finance chiefs’ minds, and hindered
effective planning. Finance chiefs “want to know when to deploy assets [and]
what investments to make in R&D now,” Mr. Holtzman said. When they can’t
count on the R&D tax credit, he said, “it’s very much on their minds.”
Continued in article
FASB: Technical Agenda at
the End of 2015 ---
http://www.fasb.org/technicalagenda
AICPA: The 2015 Journal of
Accountancy news quiz ---
http://www.journalofaccountancy.com/news/2015/dec/2015-accounting-news-quiz.html
Question
The accounting industry purportedly has more influence on the SEC than the
PCAOB.
What is the alleged net result (gossip or fact)?
One answer
Accounting industry and SEC hobble America’s audit
watchdog
SEC ---
https://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission
PCAOB ---
https://en.wikipedia.org/wiki/Public_Company_Accounting_Oversight_Board
December 17, 2015 message from Charles Levinson
Bob,
I wanted to share my latest Special Report, and the third and final
installment in a series on financial regulatory reform. This one looks at
how the accounting industry and the SEC have hobbled America’s audit
watchdog, the PCAOB. It tells the story of one of the more remarkable
revolving door cases in Washington. Former Senior Deloitte partner James
Schnurr was demoted at Deloitte after a string of damning inspections by the
PCAOB, but was then later appointed by Mary Jo White to be SEC Chief
Accountant, responsible for overseeing the PCAOB.
http://www.reuters.com/investigates/special-report/usa-accounting-PCAOB/
Happy Holidays,
Charles
Jensen Comment
Most people in the world think the profession of accountancy is dull. Perhaps
it's not as thrilling as the defense industry or the Mafia or the FBI, but it
does have its source material for novels on intrigue, fraud, and underhanded
dealings.
Of course the there is a lot of material on the
frauds for which accountants go to prison ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
The there are the frauds (at worst) and inept
auditing (at worst) where accounting firms settle for billions of dollars in and
are sometimes even fined (e.g. KPMG's $456 million fine by the IRS) ---
http://faculty.trinity.edu/rjensen/Fraud001.htm
But many muckrakers and novelists prefer to
write about intrigue at the highest levels of government. Here's some pretty
good source material ---
http://www.reuters.com/investigates/special-report/usa-accounting-PCAOB/
Bob
Jensen's threads on accounting and auditing professionalism ---
http://faculty.trinity.edu/rjensen/Fraud001c.htm
AICPA ---
https://en.wikipedia.org/wiki/American_Institute_of_Certified_Public_Accountants
Jensen
Comment
Probably less sensational than the above material for a novelist is the alleged
erosion of the influence of the leading
CPA association, the American Institute of
CPAs (AICPA), over the past few decades. This erosion of power took place much,
much slower and for reasons that are very complicated. One of the main suggested
reasons is the failure of the AICPA to position its leadership in the changing
times since the roaring 1990 paradigm shift in technological innovation in
commerce. For example, after all the hype the AICPA proposed innovation called
SysTrust crashed to earth like a
Apollo 5 that is all but forgotten these days since no persons were badly
hurt in a failed mission. There are of course many other examples for the demise
of the AICPA, although nobody suggests that it has crashed and burned.
"The
Center Cannot Hold: The AICPA and Accounting Professional Leadership 1997–2013,"
by R. Drew Sellers, Timothy J. Fogarty, and Larry M. Parker,
Accounting Horizons, Volume 29, Issue 3
(September 2015) ---
http://aaajournals.org/doi/full/10.2308/acch-51087
Trade associations
should play an integral role in defining and defending the legitimacy and
jurisdiction of a profession. In addition, they should provide a field upon
which individuals can rise above the confines of their organizations and
grow their professional leadership capacities. Evidence in the literature
suggests that U.S. accounting conformed to this pattern under the auspices
of the American Institute for Certified Public Accountants (AICPA). However,
various recent events have transpired that reduce the confidence that this
continues to be the case. Using network analysis on longitudinal data from
1997 to 2013, this paper documents an increasingly fragmented and isolated
leadership structure. This finding suggests the reduced influence of the
AICPA. Surprisingly, this decline has not been offset by the stronger
influences of the large international firms. Implications for the profession
are discussed.
. . .
Recent Trauma Professions
are always in a state of change, even if that change is not apparent to
outsiders. Accordingly, one would expect that the role and function of a
professional trade association would not be fixed. As noted by Fogarty
(2011), change in accounting has been breathtaking even when measured
between its 100th and 125th anniversaries. Fluctuations in the centrality of
the AICPA might reflect important recent events.
Several large and sudden
corporate failures in the 1970s had challenged the accounting profession's
ability to protect the public interest in audit engagements (Commission on
Auditor Responsibility 1978). Auditing standards were also found to be
insufficiently articulated to public expectations (Campbell and Mutchler
1988). Having already lost control over accounting standard setting for
public companies, the AICPA fought vigorously, but unsuccessfully, against
further inroads against its prerogatives in judging professional quality (Seidler
1979). These skirmishes failed to resolve underlying pressures on the
profession (Carmichael 1979) leaving mixed opinions about its ongoing value
(Zeff 2003). Prominent among the reforms of its era was the establishment of
a semi-autonomous Public Oversight Board (Journal of Accountancy 1979),
which began what would be the growing expectation of peer review not
controlled by the AICPA (Kaiser 1989; Grisdela 1987). At the same time, the
AICPA was unsuccessful at getting membership to accept its mandatory
peer-review program for nonpublic engagements (Berton 1987). Accounting
firms exhibited strong beliefs in their autonomy, rebuffing the AICPA-led
rhetoric of collective needs (e.g., Olson 1980; Larson 1983). Peer review
also revealed a significant schism between small and large accounting firms,
with the former doubting the cost/benefit justification of new
self-regulatory programs (Austin and Langston 1981). Through this period,
the AICPA mostly struggled to find a degree of proactivity with its
membership that might stave off a more intrusive external regulation.
A new era dawned in the
advent of the millennium. The robust economy of the 1990s led to pressures
to revise the traditional model of the partnership of accounting
practitioners (Zeff 2003). The AICPA became fearful that practice, as it was
currently delivered, would not be sustainable in the wake of organizational
and technological change. The AICPA launched a massive multi-year CPA Vision
Project, which sought to move the profession “further up the value chain,”
after defining a competency framework (Eddy 2001b). Essentially, a migration
toward business advisory and consulting and away from tax compliance and
traditional assurance services was strongly recommended. In retrospect, the
Vision Project had no discernible market, even if it contained an accurate
view of the trajectory of services. The large firms had already occupied as
much of this space as they could manage. The small firms enjoyed record
incomes by providing services that they had great comfort in delivering, and
could not be persuaded to do otherwise (Fogarty et al. 2006). The AICPA, in
persisting with the messages that all firm benefits had to be Vision-aligned
(Eddy 2001a) and that new CPAs also had to be “Vision-based” (AICPA 2001),
bet a good deal of its credibility on its forecasts.
AICPA motives in the wake of
the brave new world that it foretold was conflicted by other related
initiatives. The AICPA, seeing the migration of businesses to the Internet,
attempted to launch a web-trust seal (a.k.a. SysTrust), which it hoped would
nudge broader thinking about assurance services (McPhie 2002). This effort
never achieved much interest from clients of CPA firms and, in retrospect,
appears to be a misreading of the client market and practitioners abilities
(Boulianne and Cho 2009). AICPA insiders also created a web portal at this
time (CPA2BIZ.com) as a for-profit side business that attempted to broker
various professional services over the Internet. Since any profit would not
benefit the AICPA membership, nor did it further any version of the public
interest, some asserted a serious conflict of interest (Shafer and Owsen
2003).
In retrospect, the AICPA's
most egregious misstep may have been its efforts to move away from the CPA
designation. By advocating a new credential that would subsume the CPA
within a new global business advisor designation (ultimately and
unfortunately called the Cognitor), the AICPA boldly asserted the need to
invade new domains of work (Shafer and Gendron 2005). Many practitioners
resented the implication that their CPA was not sufficient, and that they
would need to migrate to a certificate that had just been imagined (Covaleski,
Dirsmith, and Rittenberg 2003). Despite an impressive national and local
campaign, the AICPA was unable to lead the membership toward its future,
suffering an embarrassing 2002 referendum defeat. Washed away in the storm
were more modest dreams for limited collaborations with the legal
professions (see Frank, Hanson, Lowe, and Smith 2001).
Whereas the Vision project
and the Cognitor proposal were instances where the AICPA outreached what the
membership wanted, a less-sympathetic and understandable posture occurred in
the wake of the wave of accounting-implicated corporate bankruptcies of
2001–2002. Traditional auditing services had been under fee pressure for
some time. This situation emboldened client demands for favorable aggressive
treatments (Zeff 2003). The large firms had largely responded by pioneering
a hybrid audit that added material consultancy elements, in the name of
creating a premier noncommodified value-added service (Toffler and Reingold
2003; Jeppesen 1998), an effort distinctly at the vanguard of the AICPA's
value chain of services. In the face of the firestorm that consumed Arthur
Andersen, with public confidence in the accounting profession at record
lows, the AICPA was unable to convincingly regain the high ground.
Suggestions that accountants were dedicated to the public interest were
compromised and ineffective (Henry and McNamee 2003; Rogers, Dillard, Yuthas
2005). The organization's previous efforts to promote a large-firm agenda,
including a largely successful effort to reduce auditors' legal liability,
made it a less than credible advocate of the public interest. Leaders of the
organization had no options but to go on the defensive, promising to get
their own house in order (Melancon 2002) and return practice to its classic
professionalism (Carmichael 2003). However, lost trust in financial circles
is difficult to restore (Unerman and O'Dwyer 2004).
As the U.S. government
undertook the official response to what had become known as “Enron et al.”
with what would be the Sarbanes-Oxley Act of 2002, the AICPA should have had
the ability to shape and negotiate a resolution that would be acceptable to
practice. However, the legislation effectively stripped the AICPA and the
profession of its remaining self-regulation function, placing public firm
practice under the direct legal control of an external body. During this
critical point, the AICPA had “no political capital” (Knoll 2006). Having
not objected to the blurring of traditional scope limitations before 2001,
the AICPA was not able to meaningfully enter into the post-2001 governmental
decision to decouple auditing and consulting service. It also stood on the
sidelines as a governmental indictment swiftly led to the dismantling of
Arthur Andersen. Much to most people's surprise, the AICPA did not even
discharge its chief executive for mismanagement, a move that many had seen
as a fore drawn conclusion (MacDonald 2002).
The loss of self-regulation,
despite the expenditure of significant lobbying resources (Thornburg and
Roberts 2008), left less for the AICPA to do. In addition to changing the
tenor of outcomes (DeFond 2010), the new regulatory regime put practitioners
into an unbuffered and unfiltered relationship with regulators that was more
likely to result in harsh consequences (Hanson 2013) and, probably, lower
practitioner prestige (Huber 2013).
The management of its
membership has always been problematic for the AICPA. Unlike other
professional trade associations, this organization is whipsawed by the
disproportionate size of accounting firms. A few large firms are capable of
exercising considerable power over the AICPA's agenda. With AICPA membership
in a long-term trend of coming from outside public accounting (Young 1995;
Grant 2008), such priorities are increasingly unacceptable, even if
complaints about them are not new (Weinstein 1987). Large firms are more
likely to pursue global issues, favor maximum flexibility in practice, and
demand rapid innovations. Smaller firms, and those without a publicly traded
audit clientele, would prefer a more conservative platform wherein more
advantage is extracted from current arrangements. The AICPA cannot assume
that its membership would even support core professional values (see Suddaby,
Gendron, and Lam 2009). How aggressively the AICPA should pursue the
collective interests of the profession also tends to be disputed in its
details (see Picard, Durocher, and Gendron 2014).
The AICPA has been slow to
recognize the needs of members to signal practice specialties, apparently
fearing erosion of the CPA as the sine qua non of professional inclusion.
Those practicing in peripheral, but growing, areas naturally felt
underserved if not neglected by the AICPA. In a sudden recent revision of
position, the AICPA has operated a program that issues management accounting
credentials to any interested member (AICPA 2011) as part of a
trans-national professional practice partnership. However, yet to be
resolved are high-potential areas such as forensic accounting. The AICPA's
willingness to move on specialized credentials seems more defensive than
proactive. Without a comprehensive answer to specialization recognition, the
AICPA risks being perceived as more of a self-interested operator that views
membership interests as a constraint, rather than as a champion of the
membership's interests.
Trade associations are known
for what they fail to do, as well as for what they accomplish. The AICPA's
largest shortfall seems to be in the articulation of practice with the
public interest. Having power to do so, the AICPA has had little to add to
the standards and enforcement of ethics and independence, topics that
garnered significant attention in the 1980s (Preston, Cooper, Scarbrough,
and Chilton 1995; AICPA 1986). Some have argued that AICPA positions on
these matters have been actually injurious to the public interest (Collins
and Schultz 1995). More recently, AICPA statements about the public interest
are more likely to be absent than bias (Reiter 2013). Although disagreement
exists as to why the AICPA has vacated this space (Hendrickson 2001), the
organization clearly no longer acts as a counterweight against the
commercialization of accounting (Suddaby et al. 2009; Carrington, Johansson,
Johed, and Ohman 2013). This new lack of interest in the public interest is
believed to contribute to a worsening collective reputation for the
profession (Carnegie and Napier 2010). The belief that the market for
professional services will always provide answers may also have silenced the
AICPA on issues such as the compatibility of services, auditor rotation, tax
reform, and international accounting standards.
Technological change
arguably presents the most revolutionary source of practice alteration. As a
former AICPA chair noted, “Technology is going to define us and how we do
business for the foreseeable future” (Eddy 2001b). The balance struck
between the pursuit of efficiency and effectiveness matters to the value of
the profession's services (Fischer and Dirsmith 1995). A profession's use of
technology can be both skilling and deskilling (Pern and Scattergood 1985),
thereby potentially damaging the idea of equality within the ranks. The
AICPA has remained relatively silent on this consequential front, except to
the extent that it offers yearly reviews of software used by tax preparers.
Thus, it implicitly promotes the belief that all technology is a movement
toward progress and greater profitability. By advocating the use of skills
that are distinctly and exclusively human, like judgment, the AICPA could
communicate the need to use new forms of information processing judiciously
and prudently. Apparently, the AICPA has not chosen to be a thought leader
in this arena.
In sum, the work of
professional trade associations is never easy. The AICPA over the last few
decades may have witnessed the proverbial “perfect storm,” with mild
governmental intrusion, followed by the pipe dreams of abundance, followed
by an unprecedented crash. Turbulence of this nature made it difficult to be
the unified front of a profession that comprises many diverse segments. Why
its membership may have found fault with the AICPA could have been grounded
in many different and sometimes opposite reasons. It may have centered upon
how a person defines the public interest and professionalism, juxtaposed
against a specific or general AICPA action or inaction. Collectively, these
prospects diminish the possibilities that the AICPA has remained central to
leadership of the profession. An individual aspiring the accounting
profession's leadership may have found new organizational vehicles or career
avenues.
Research Propositions The
above discussion supports the need to test the contribution of AICPA
involvement to the careers of those individuals who attain prominence in the
accounting profession. Several reasons exist to believe that the trade
association used by the U.S. accounting profession no longer captures the
loyalty and interest of practicing accountants. Such a decline may be
partially attributed to changes in the nature of practice, and partly due to
the shortcomings of the AICPA. By focusing on the profession's leaders, the
argument does not depend upon the behavior of the rank and file. Those with
aspirations to lead the profession would be more likely to seek roles within
the trade association, and use such associations to further their position
as a leader. This ambition can be approached in different ways. The most
intuitive approach pertains to frequency of involvements. This approach is
illustrated by the following:
RP1: The number of leaders
of the accounting profession with explicit ties to the AICPA has declined
over time.
Continued in article
Jensen Comment
This is material for a novel but probably not a blockbuster novel due to details
that are hard to explain in a way that will excite most readers shopping for
books in airports before boarding flights. There just aren't enough dead bodies
or court trial sensations (yet).
I think the paper overstates the
case for the diminished role of the AICPA. It does not give enough recognition
to the expanded role of the AICPA in Washington DC lobbying ---
http://www.thetaxadviser.com/newsletters/2015/dec/preparing-for-2016-filing-season.html
ISIS Sanctions Organ
Harvesting from Live Captives ---
http://www.newsweek.com/isis-islamic-state-organ-harvesting-islam-muslims-syria-iraq-christians-409023
Jensen Comment
One of the surprising things during my first walk in Hong Kong was watching the
selling of live animals (fish, chickens, snakes, dogs, etc.) by street vendors
selling these and other food items. Then it dawned on me that this is the way to
sell perishables when no refrigeration is available. This makes me wonder if
ISIS stores non-refrigerated live captives until an order comes in for a
harvested body part in the black market when efforts to collect ransoms fail. I
remember a movie where the kidnappers lower the price after
Bette
Midler's husband refuses to meet the kidnappers' price. Her question while
in captivity: "You mean I'm being discounted?"
This organ harvesting illustration might
be used to illustrate the calculation of the Sales Mix Variance if the organs
unused organs cannot be preserved ---
http://accounting-simplified.com/management/variance-analysis/sales/mix.html
For example, if Captive A is harvested for a kidney order and the other organs
cannot be preserved the sale is probably less profitable than when Captive B is
harvested for a heart. Cost variances are very difficult to calculate in this
illustration because there are so many joint costs before a particular organ is
harvested. But the Caliphate can make use of the sales mix variances computed by
his accounting staff. This business will be much more profitable for ISIS once
brain transplants become feasible.
"Did Fair-Value Accounting Contribute
to the Financial Crisis?"
by Christian Laux, Christian Leuz
NBER Working Paper No. 15515 Issued in November 2009
NBER Program(s): CF
The recent financial crisis
has led to a major debate about fair-value accounting. Many critics have
argued that fair-value accounting, often also called mark-to-market
accounting, has significantly contributed to the financial crisis or, at
least, exacerbated its severity. In this paper, we assess these arguments
and examine the role of fair-value accounting in the financial crisis using
descriptive data and empirical evidence. Based on our analysis, it is
unlikely that fair-value accounting added to the severity of the current
financial crisis in a major way. While there may have been downward spirals
or asset-fire sales in certain markets, we find little evidence that these
effects are the result of fair-value accounting. We also find little support
for claims that fair-value accounting leads to excessive write-downs of
banks' assets. If anything, empirical evidence to date points in the
opposite direction, that is, towards overvaluation of bank assets.
Don't Blame Fair Value Accounting Standards (except in terms of executive
bonus payments)
This includes a bull crap case based on an article by the
former head of the FDIC
http://faculty.trinity.edu/rjensen/2008Bailout.htm#FairValue
Bob Jensen's threads on fair value accounting
---
http://faculty.trinity.edu/rjensen/Theory02.htm#FairValueFails
"The History of the Black-Scholes Formula,"
Priceonomics, December 15, 2015
http://priceonomics.com/the-history-of-the-black-scholes-formula/
There is a section in the above document on how
the Black-Scholes formula was implemented by two Nobel Economists (including
Myron Scholes), their doctoral students, and a key friend into an index
fund called Long-Term Capital Management (LTCM) that very nearly caused the
entire collapse of Wall Street due to an overlooked assumption of the Formula
that that failed during an extremely unlikely collapse of the Asian securities
market. Big Wall Street firms quietly paid for the scandal to go away.
A particularly good video produced by PBS Nova
explains the Black-Scholes Formula and how it let to the demise of LTCM in a
"Trillion Dollar Bet."
The Trillion Dollar
Bet transcripts are free ---
http://www.pbs.org/wgbh/nova/transcripts/2704stockmarket.html
However, you really have to watch the graphics in the video to
appreciate this educational video ---
http://www.pbs.org/wgbh/nova/stockmarket/
"Trillion Dollar Bet"
Nobel Prize Winners (Myron Scholes from Stanford, Robert Merton from
Harvard) Must Pay Millions Due to Tax Fraud
"Judge's Ruling In LTCM Case May
Resonate," by Diya Gullapalli and Henny Sender, The Wall Street
Journal, . August 30, 2004; Page C1
A
federal judge Friday ruled against a defunct hedge fund whose
name has become synonymous with the concept of "systemic risk,"
in a decision that singled out a Nobel Prize winner for
criticism and that could have implications for other hedge funds
seeking to avoid taxes.
Judge
Janet Bond Arterton denied Long-Term Capital Management's
attempt to reclaim $40 million in taxes, ending a monthlong
civil trial involving the fund that was wound down in 1998. Her
ruling upheld an Internal Revenue Service claim that the fund
had filed improper deductions.
In a
nearly 200-page opinion from her bench in New Haven, Conn.,
Judge Arterton outlined why she believed tax shelters employed
by LTCM lacked the business purpose required to make them legal.
She ruled that the fund engaged in at least nine complex leasing
transactions that didn't have economic substance and were
instead designed mainly to create losses of $106 million to
offset LTCM's tax burden.
The
transactions, with acronyms such as CHIPS for Computer Hardware
Investment Portfolio, and TRIPS, for Trucking Investment
Portfolios, began in 1996 when LTCM swapped a stake in the fund
for preferred stock of five U.S. companies.
That
stock was owned by Onslow Trading & Commercial LLC, an entity
based in the United Kingdom that acquired the preferred stock in
exchange for what are known as lease-stripping and
sale-lease-back transactions.
Judge
Arterton's ruling means LTCM must pay roughly $16 million in IRS
penalties, or 40% of the $40 million LTCM had been trying to
reclaim. Because the U.S. tax code is enforced through civil
litigation, no criminal charges are anticipated against the LTCM
partners, who include high-profile finance whizzes such as John
Meriwether, the ex-Salomon Brothers bond boss who started the
fund and Nobel Prize winner Robert Merton.
A
lawyer for LTCM didn't return calls seeking comment.
The
tax-shelter strategies at LTCM were run mainly by Myron Scholes,
who shared the Nobel Prize with Mr. Merton. Dr. Scholes worked
on option pricing captured in the Black-Scholes model widely
used on Wall Street.
Dr.
Scholes was cast in a harsh light in Judge Arterton's opinion.
The
judge wrote that Dr. Scholes and Larry Noe, a tax director at
LTCM, were "well aware of the tax requirements of economic
substance and business purpose and discussed the need therefore
to figure out a reason independent of taxes for Long Term to
engage in a transaction."
Dr.
Scholes couldn't be reached to comment.
"This
ruling sends a message that cannot be mistaken that the
government means business when cracking down on tax shelters,"
says Itzhak Shirav, an accounting professor at Columbia Business
School in New York. "This was a clear-cut case where lame
excuses were offered and totally rejected."
Judge
Arterton's ruling is the latest criticism of tax shelters and
part of the government's broader effort to crack down on such
schemes.
Both
the IRS and Treasury Department have issued notices criticizing
transactions in which advisers used offshore insurance companies
to create tax shelters for hedge-fund investments.
Some
experts say the ruling could also provide ammunition for critics
to demand more disclosure on how often-secretive hedge funds
generate returns.
Judge
Arterton's ruling was as a sober footnote to the saga of LTCM,
which opened for business in February of 1994 with more than $1
billion in equity capital, $150 million of which came from 12
founding partners.
Those
partners included the best and the brightest of the then Salomon
Brothers bond-trading desk, led by Mr. Meriwether and Messrs.
Merton and Scholes. Within several years, the fund's capital had
swelled to $5 billion, making it bigger -- and more profitable
-- than Salomon.
LTCM
seemed to have delivered on its promise to produce stellar
returns with low risk. In 1995, its first full year of
operation, it returned almost 59%. By 1997, however, returns
were down to about 20%, as the price discrepancies the fund
looked to exploit were fast disappearing, and the Asian
financial crisis was unfolding.
To
compensate, the fund began using more borrowed money -- a
strategy that exacerbated the impact of the fund's collapse in
1998.
By
then, LTCM had assets of $100 billion but $1 trillion worth of
total exposure.
Then
came the Russian debt crisis, triggering a loss in the value of
LTCM's leveraged positions world-wide and raising the
possibility that the fund's problems could trigger a chain of
losses.
That
led the Federal Reserve Bank of New York to orchestrate an
orderly liquidation of its trades to prevent the so-called
global systemic risk.
Today,
Mr. Scholes is an emeritus professor at Stanford University's
Graduate School of Business in Palo Alto, Calif., while Mr.
Merton is on the faculty of Harvard University's Graduate School
of Business Administration.
Mr.
Meriwether is a principal and co-founder of JWM Partners LLC, an
investment firm in Connecticut.
Video:
Nobel laureate and Stanford Professor Myron S. Scholes says some
countries are likely to leave the euro so they can become more
competitive.
http://www.youtube.com/watch?v=zwGHcrjs3iE&utm_source=Stanford+Business+Re%3AThink&utm_campaign=1451d355ee-RTIssue2&utm_medium=email
Myron Scholes is also one of two Nobel laureates brought down by the
largest hedge fund failure in history (what PBS Nova called The
Trillion Dollar Bet) ---
http://faculty.trinity.edu/rjensen/FraudRotten.htm#LTCM
Jensen Question
Can the same theory apply to having California leave the dollar
zone? |
Bob Jensen's threads on the LTCM scandal ---
http://faculty.trinity.edu/rjensen/FraudRottenPart2.htm#LTCM
"How Accounting Can Help Build a Sustainable
Economy," by Eben Harrell, Harvard Business Review, December 14, 2015
---
https://hbr.org/2015/12/how-accounting-can-help-build-a-sustainable-economy
Jensen Comment
The above article would benefit from more examples and case study references. It
appears to be more hopeful thinking than realities of life as we know it today
such as focus on the short term.
However, times are changing in a ground swell
for more attention to sustainability accounting ---
http://faculty.trinity.edu/rjensen/Theory02.htm#TripleBottom
Ten Elite Schools Where Middle-Class Kids
Don't Pay Tuition ---
http://www.bloomberg.com/news/articles/2015-04-01/ten-elite-schools-where-middle-class-kids-don-t-pay-tuition?cmpid=BBWGP122315_BIZ
Children from poor families may also get deals on room, board, and other fees.
The trick is to be accepted in a very competitive admissions process that is
even more competitive for whites. These are not the only heavily endowed
universities offering free tuition and other financial aid to the middle-class
and poor students. This tends to offset the decline in merit-based financial aid
that is independent of family income.
Students who are not admitted to elite
universities or otherwise cannot attend may get windows to thousands of elite
university courses available as MOOCs ---
http://faculty.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Increasingly academic credit can also be obtained from MOOCs by paying greatly
reduced fees relative to tuition for onsite courses. There are all sorts of
opportunities worldwide for inexpensive online credit and even more
opportunities for learning without obtaining transcript credit. For example,
thousands of tutorials in math, science, and other disciplines are now available
free from Khan Academy. The point is that students who merely want to learn can
become greater experts than students who graduate from elite universities. The
key is motivation to learn by whatever means possible where the materials
available for learning are free.
The scandal in higher education is grade
inflation
Virtually all USA universities and especially the elite universities have moved
median course grades from C in the 1940s to A- in the 21st Century such that
graduating high grades no longer means as much. The coin of an education is
badly cheapened by grade inflation where students receive high grades without
much real learning ---
http://faculty.trinity.edu/rjensen/assess.htm#RateMyProfessor
Grade inflation also exists in other nations,
but many other nations are different from the USA (where slow learners can
always be admitted to some college) in that only the intellectually elite
are allowed to go to college ---
OECD Study Published in 2014: List of
countries by 25- to 34-year-olds having a tertiary education degree ---
https://en.wikipedia.org/wiki/List_of_countries_by_25-_to_34-year-olds_having_a_tertiary_education_degree
Whereas nations like Finland and Germany only
admit elite and motivated learners into colleges, what Bernie Sanders intends is
that virtually anybody who wants to can be admitted to college for free. Sanders
most likely hopes that the unmotivated and low-aptitude admissions will not
graduate, but there are not many such academic standards in this era of grade
inflation ---
http://faculty.trinity.edu/rjensen/assess.htm#RateMyProfessor
In my opinion college diplomas will mean less and less as the 21st Century
unfolds even though taxpayers will be shelling out billions for degrees not
worth the sheepskin they're printed on.
MOOC for Credit and Noncredit Updates
EdX (edX) ---
https://en.wikipedia.org/wiki/EdX
Coursera ---
https://en.wikipedia.org/wiki/Coursera
Arizona State University (ASU) ---
http://www.asu.edu/
Global Freshman Academy at ASU ---
http://techcrunch.com/2015/06/23/three-questions-for-the-asuedx-global-freshman-academy-online-program/#.mdnza8b:OlFh
Jensen Comment
Arizona State University is one of the most innovative, if not the most
innovative, large and respected universities in the USA. Innovation is so
rapid and so complex at ASU that it must be an administrative nightmare.
Academe was shocked when
Starbucks
Corporation announced a free undergraduate degree distance education fringe
benefit to be administered by ASU. Originally, only employees who had a prior
two years of college were eligible, but now virtually all full-time Starbucks
employees are eligible to study online for four years from ASU for an
undergraduate degree. This Starbucks fringe benefit is part of ASU's innovative
online distance education program that is a fee-based program instead of a free
MOOC program. For Starbucks employees their employer pays the tuition.
The University also has an innovative MOOC
sports program that the NCAA repackages via Coursera for third parties ---
http://blogs.wpcarey.asu.edu/knowit/what-lurks-beneath-the-tip-of-the-mooc-iceberg/
ASU first joined the MOOC window into courses
with a
journalism course and then expanded MOOC windows into other courses. ASU
also commenced a MOOC program as well that is a free video window into its
freshman general education core. Anybody in the world may view freshman courses
through this window and study alongside ASU campus students taking these core
courses. Initially the MOOC viewers could not get academic credit.
Global Freshman Academy at ASU
Now ASU is experimenting with making academic credit available to MOOC viewers
through edX. MOOCs can be viewed for free but academic credit is fee-based.
Bob Jensen's threads on thousands of MOOCs
from prestigious universities ---
http://faculty.trinity.edu/rjensen/000aaa/updateee.htm#OKI
"Less Than 1%," by Carl Straumsheim,
Inside Higher Ed, December 21, 2015 ---
https://www.insidehighered.com/news/2015/12/21/323-learners-eligible-credit-moocs-arizona-state-u?utm_source=Inside+Higher+Ed&utm_campaign=162e714d50-DNU20151221&utm_medium=email&utm_term=0_1fcbc04421-162e714d50-197565045
ASU has not shared how many
credit-seeking MOOC learners it hopes to enroll -- if such a goal exists.
Speaking to Inside Higher Ed in April, Philip Regier, university
dean for educational initiatives, said there were “a lot of uncertainties”
around that number. He added that he expected “maybe 25,000” to register for
some of the MOOCs. The astronomy MOOC, the largest of the first three,
attracted 13,423 registrants.
A spokesperson for the
university, in response to whether the results are satisfactory, said,
“ASU’s goal is reaching learners who want access to high-quality
college-level education. The Global Freshman Academy charts a new path in
access to higher education, and the results of the inaugural courses are a
positive first step for the GFA.”
Low completion rates are
nothing new to MOOCs. In fact, a completion rate in the low double digits --
even in the high teens -- can be seen as a success.
MOOC researchers, however,
have argued that completion rates don’t matter as much as they do in
traditional online and face-to-face courses. The open structure of MOOCs,
they say, allows learners to register for a course but only focus on a
handful of units. In other words, a low completion rate can mask the fact
that many learners got something out of the MOOC, even if they didn’t finish
it.
“In open online learning,
completion numbers provide only one small perspective on people's learning
experiences,” Justin Reich, executive director of MIT’s Teaching Systems
Lab, said in an email. “It would also be worth learning more about the
experiences of the 3,300 or the 34,000. Did they have good learning
experiences? Are they more familiar with ASU and its faculty? What public
interests or institutional interests were served by offering the course?”
Reich has
previously explored the demographics of the
learners who registered for MOOCs offered by Harvard University and the
Massachusetts Institute of Technology -- the two institutions behind edX.
His
recent research, which appeared earlier this month
in Science, found MOOCs “can exacerbate rather than reduce
disparities in educational outcomes related to socioeconomic status.” The
results build on earlier findings about MOOCs, which have suggested MOOCs
cater more to older learners with previously earned degrees instead of the
learners ASU is targeting -- high school students, international students
and students considering community college, among others.
“I'm not surprised that few
people took advantage of the credit option in the first run -- that's been
common across certificate experiments in MOOCs,” Reich wrote. “A trajectory
over time will be more useful than a snapshot. If these numbers stay very
low, it will be harder to justify continuing the program than if they grow
quickly and if the program gets more accepted and recognized.
Continued in article
"Nearly 4,000 Starbucks Employees Apply to
Arizona State (online)," Inside Higher Ed, September 3, 2014 ---
https://www.insidehighered.com/quicktakes/2014/09/03/nearly-4000-starbucks-employees-apply-arizona-state
Following Starbucks employee education benefits
with Arizona State University,
Anthem Blue Cross offers education benefits with the University of Southern New
Hampshire
"An Increasingly Popular Job Perk: Online
Education," by Mary Ellen McIntire, Chronicle of Higher Education,
June 2, 2015 ---
http://chronicle.com/blogs/wiredcampus/an-increasingly-popular-job-perk-online-education/56771?cid=wc&utm_source=wc&utm_medium=en
Wal-Mart subsidizes an entire undergraduate
degree.
"Fiat Chrysler Offers Degrees to Employee
Families (including families of dealer employees) ," Inside Higher Ed,
November 23, 2015 ---
https://www.insidehighered.com/quicktakes/2015/11/23/fiat-chrysler-offers-degrees-employee-families?utm_source=Inside+Higher+Ed&utm_campaign=b3c3eb755f-DNU20151123&utm_medium=email&utm_term=0_1fcbc04421-b3c3eb755f-197565045
Bob Jensen's threads on fee-based
distance education ---
http://faculty.trinity.edu/rjensen/CrossBorder.htm
Bob Jensen's threads on free online
education (most of which still offers free learning without college credits) ---
http://faculty.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Bob Jensen's threads on fee-based distance
education alternatives ---
http://faculty.trinity.edu/rjensen/CrossBorder.htm
"The 12 Most Popular Free Online Courses (MOOCs) For Professionals,"
by Maggie Zhang, Business Insider, July 8, 2014 ---
http://www.businessinsider.com/free-online-courses-for-professionals-2014-7
12. Johns Hopkins Bloomberg School of
Public Health's "Data
Analysis"
Read more:
http://www.businessinsider.com/free-online-courses-for-professionals-2014-7#ixzz37LiJgQ57
Update
2015: The 10 most popular free online
courses for professionals ---
http://www.businessinsider.com/most-popular-coursera-courses-of-2015-2015-12
Bob Jensen's links to free course materials,
videos, and entire courses from prestigious universities ---
http://faculty.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Tesco is paying $12 million to settle a
US case over its Ł263 million accounting black hole ---
http://www.businessinsider.com/tesco-is-paying-12-million-to-settle-a-us-case-over-its-263-million-accounting-black-hole-2015-11
And the pain is not over yet.
"New Information-Reporting Requirements
for Employers Under the Affordable Care Act," ---
http://www.thetaxadviser.com/issues/2015/dec/new-information-reporting-requirements-under-aca.html#sthash.xWeHz9Ym.dpuf
Illustrations Differences
between US GAAP and the FRF for SMEs?
AICPA in 2015: Illustrative Financial Statements Prepared Using the
Financial Reporting Framework for Small- and Medium-Entities This should set accountics scientists
rethinking about their failures to replicate each other's research
http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/PCFR/DownloadableDocuments/FRF-SME/FRFforSMEs_Illustrative_Financial_Statements.pdf
"New Evidence on Linear Regression and Treatment Effect Heterogeneity." by Tymon
Słoczyński, iza, November 2015 ---
http://ftp.iza.org/dp9491.pdf
Jensen Comment
Accountics scientists seldom replicate the works of each other ---
http://faculty.trinity.edu/rjensen/theoryTar.htm
The Tymon Słoczyński's replications of two
studies published in the American Economic Review should make accountics
scientists rethink their implicit "policy" of not replicating.
It is standard practice in applied work to rely on
linear least squares regression to estimate the effect of a binary variable
(“treatment”) on some outcome of interest. In this paper I study the
interpretation of the regression estimand when treatment effects are in fact
heterogeneous. I show that the coefficient on treatment is identical to the
outcome of the following three-step procedure: first, calculate the linear
projection of treatment on the vector of other covariates (“propensity
score”); second, calculate average partial effects for both groups of
interest (“treated” and “controls”) from a regression of outcome on
treatment, the propensity score, and their interaction; third, calculate a
weighted average of these two effects, with weights being inversely related
to the unconditional probability that a unit belongs to a given group. Each
of these steps is potentially problematic, but this last property – the
reliance on implicit weights which are inversely related to the proportion
of each group – can have particularly severe consequences for applied work.
To illustrate the importance of this result, I perform Monte Carlo
simulations as well as replicate two applied
papers: Berger, Easterly, Nunn and Satyanath (2013) on the effects of
successful CIA interventions during the Cold War on imports from the US; and
Martinez-Bravo (2014) on the effects of appointed officials on village-level
electoral results in Indonesia. In both cases some of the
conclusions change dramatically after allowing for heterogeneity in effect.
Common Accountics Science and Econometric Science Statistical Mistakes ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsScienceStatisticalMistakes.htm
How Accountics Scientists Should Change:
"Frankly, Scarlett, after I get a hit for my resume in The Accounting Review
I just don't give a damn"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
One more mission in what's left of my life will be to try to change this
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
"NBC White Paper 1980. If Japan Can...Why Can't We. Featured W. Edwards
Deming," by Jim Martin, MAAW's Blog, December 4, 2015 ---
http://maaw.blogspot.com/2015/12/nbc-white-paper-1980-if-japan-canwhy.html
Jensen Quality
When I was a kid back in the the 1950s a product label that read "Made in Japan"
was a warning that the product was most likely "Poor Quality." Decades
later that label came to signify "Top Quality."
The reason for the change is largely the work of quality control statistician W.
Edwards Deming.
Teaching IFRS versus Teaching USA GAAP
"Concepts-Based Education in a Rules-Based World: A Challenge for
Accounting Educators," by Kenneth N. Ryack, M. Christian Mastilak,
Christopher D. Hodgdon, and Joyce S. Allen, Issues in Accounting Education,
November 2015 ---
http://aaajournals.org/doi/full/10.2308/iace-51162
In this paper we discuss the challenges of teaching
U.S. GAAP and IFRS side by side. We then focus on one particular challenge
of teaching both the more detailed U.S. standards and the less specific IFRS:
the likelihood that students will “anchor” on the precise rules in U.S. GAAP
when applying the less specific guidelines under IFRS. As a part of this
discussion, we report on a classroom experiment designed to test for the
presence of anchoring on U.S. GAAP rules when applying IFRS in a lease
classification task. Our results indicate that students do anchor on the
U.S. GAAP bright-line values for lease accounting when classifying leases
under IFRS, primarily when U.S. GAAP rules provide an acceptable
quantification of IFRS' less precise guidelines. We do not find that
teaching order (i.e., teaching U.S. GAAP first versus IFRS first) directly
affects anchoring or lease classification. However, a moderation analysis
suggests the interaction between teaching order and anchoring may affect
lease classification. Our results suggest that, where possible, instructors
may wish to teach principles-based accounting prior to rules-based
accounting to mitigate potential anchoring by students and its effect on
their accounting judgments.
From the CFO Journal on June 6, 2013
FASB’s Seidman: Americans prefer rules to principles
Outgoing FASB Chairman Leslie Seidman has had plenty of time to
tackle long-standing questions about whether accounting principles are more
desirable than specific accounting rules,
writes Emily Chasan.
The debate over whether detailed rules and bright-line exceptions are more
or less useful than broad principles that require management judgment has
dominated her past 1o years on the board. “I think it’s undeniable that we
Americans like our rules,” Ms. Seidman said at a Financial Executives
International conference in New York
on Tuesday, where she was discussing the accounting rulemakers’
soon-to-be-completed joint project on revenue-recognition accounting. She
made the comments in her final public speech as chairman of the U.S.
accounting rulemaker.
"Study: Rules-based Accounting Shields Firms From Lawsuits," by Jr.
Deputy Accountant Adrienne Gonzalez, Going Concern, January 15, 2013 ---
http://goingconcern.com/post/study-rules-based-accounting-shields-firms-lawsuits
According to groundbreaking research by Richard
Mergenthaler, assistant professor of accounting at the University of Iowa
Tippie College of Business, shareholders are more likely to sue firms that
use principles-based accounting standards over rules-based standards.
Continued in article
Jensen Comment
I would have hypothesized that it would be the other way around on the basis
that it's really hard to nail Jello to a wall.
Principles-Based standards also complicate enforcement of regulations
There are some hurdles that have to be passed before
we’re going to be comfortable making the ultimate decision about whether to
incorporate IFRS into the U.S. reporting regime. Sticking points include the
independence of the International Accounting Standards Board and “the quality
and enforceability of standards.
Mary Shapiro, U.S. Securities and
Exchange Commission Chairman, January 5, 2012 ---
http://www.businessweek.com/news/2012-01-06/sec-s-schapiro-says-she-regrets-loss-in-investor-access-battle.html
Bob Jensen's threads on concepts-based
standards versus bright-line standards ---
http://faculty.trinity.edu/rjensen/theory01.htm#BrightLines
"Reinventing the Way We Learn Accounting," by Curtis L. DeBerg," AICPA,
December 1, 2015 ---
http://blog.aicpa.org/2015/12/reinventing-the-way-we-learn-accounting.html#sthash.TFYaWDJH.WxPwxX39.dpbs
We live in an age of short attention spans and demands for more
productivity. In my role as an accounting professor, if I don’t grab my
accounting students’ attention and immediately explain the relevancy of a
topic, they tune out.
Today’s young people have a greater aptitude for learning new skills,
especially when it comes to new technological applications. They enjoy
experimenting, and they don’t mind failing – as long as failure is just a
hurdle on the way to the reward at the finish line. Short attention spans
and the need to multi-task are not limited to college students.
The nature of today’s business environment requires CPAs to be multitaskers.
Thirty years ago when I was a CPA in public practice, we used to take CPE
courses once or twice a year to catch up on new standards and guidance.
Today, changes are taking place so quickly that we need to be learning new
material daily. Our instructional methods and learning habits need to adapt
accordingly.
Nano Learning: Breaking Instruction Into Small Pieces
Nano learning breaks instruction into self-contained modules that can last
from two to 15 minutes. These small lessons focus on one or two specific
learning objectives. Additionally, they’re typically available “on-demand”
so students and professionals can learn at their own pace, in their own
space, amid their other responsibilities. Many educators and students feel
the best way to learn, still, is face-to-face instruction in small group
settings, assuming that time is available and the instructor is motivated
and inspired. But what if in-person access is not easy, the class setting is
not personal, or the instruction is mediocre? A great instructor from a
distance who is available for live chats or video conferences might actually
be the superior option.
Blended Learning:
Stimulating Every Learning Style
Even with face-to-face instruction, technology now allows us to develop new
ways to appeal to different learning styles.
At my university, for example, Principles of Financial Accounting is the
first required course for business majors. To invigorate student engagement
in a course dreaded by many, I adopted a blended learning approach known as
a “flipped classroom.”
Students are required to watch short lecture videos before the first class
meeting each week. In the second meeting, students are broken into four
groups of 30, with each sub-group broken down into groups of three. The
breakout sections are led by four mentors, who are outstanding senior
accounting majors. Students do their “homework” during class time in their
breakout groups. Hence, what formerly was homework becomes classwork; what
was classwork now becomes homework. Performance
Continued in article
Bob Jensen's threads on Tools and Tricks of the Trade ---
http://faculty.trinity.edu/rjensen/000aaa/thetools.htm
"Do Clients Avoid “Contaminated” Offices? The Economic Consequences of
Low-Quality Audits," by Quinn T. Swanquist and Robert L. Whited, The
Accounting Review, November 2015 ---
http://aaajournals.org/doi/full/10.2308/accr-51113
This study investigates whether the market for
audit clients penalizes auditors following association with low-quality
audits. Specifically, we examine whether audit offices experience a loss in
local market share following client restatements. We document that the
frequency of restatement announcements within an office-year
(“contamination”) is inversely related to subsequent year-over-year change
in local market share. Further analysis indicates that restatements impair
the office's ability to both attract and retain audit clients. We find that
this effect is strongest in high competition markets and diminished in low
competition markets. We also examine auditor retention decisions at the
client level and find that the likelihood of auditor dismissal increases
with contamination, even for non-restating clients. We also find that, on
average, clients dismissing their auditor select less contaminated audit
offices. Taken together, our results suggest that market forces penalize
auditors for association with audit failures, thereby providing an incentive
to maintain high-quality audits and protect reputational capital.
Jensen Comment
My own opinion is that this article is misleading in that so many factors
affecting client acquisition and retention cannot be measured. Among all these
factors I doubt that restatemetns of other clients are such large factors
relative to what I consider to be more important factors like price and
expertise within the audit firms. For example, an insurance firm is going to be
more concerned with the expertise of the auditors complicated insurance
accounting and firms with lots of derivatives want auditors who know how to
spell the word derivatives. Then there are what I consider extremely important
factors such as the rapport of the client management with the top auditors such
as rapport in clubs and on the golf courses and in the synagogues.
Those of you interested in tracking The Accounting Review's
trends in submissions, refereeing, and acceptances'rejections should be
interested in current senior editor
Mark L. DeFond's annual report
at
http://aaajournals.org/doi/full/10.2308/accr-10477
This has become a huge process involving 18 editors and hundreds of referees.
TAR is still the leading accountics science journal of the American Accounting
Association. However, there are so many new specialty journals readers are apt
to find quality research in other AAA journals. TAR seemingly still does not
publish commentaries and articles without equations and has not yet caught on
the the intitiatives of the Pathways Commission for more diversification in
research in the leading AAA research journal. Virtually all TAR editors still
worship p-values in empirical submissions.
"Not Even Scientists Can Easily Explain
P-values," by Christie Aschwanden, Nate Silver's 5:38 Blog, November
30, 2015 ---
http://fivethirtyeight.com/features/not-even-scientists-can-easily-explain-p-values/
P-values have taken
quite a beating lately. These widely used and commonly misapplied statistics
have been blamed for giving a
veneer of legitimacy to dodgy study results,
encouraging
bad research practices
and promoting
false-positive study results.
But after writing
about p-values again and again, and recently issuing a correction on a
nearly year-old story over some erroneous
information regarding a study’s p-value (which I’d taken from the scientists
themselves and
their report), I’ve
come to think that the most fundamental problem with p-values is that no one
can really say what they are.
Last week, I attended
the inaugural
METRICS
conference at Stanford, which brought together
some of the world’s leading experts on meta-science, or the study of
studies. I figured that if anyone could explain p-values in plain English,
these folks could. I was wrong.
Continued in article
Jensen Comment
Why all the fuss? Accountics scientists have a perfectly logical explanation.
P-values are numbers that are pumped out of statistical analysis software
(mostly multiple regression software) that accounting research journal editors
think indicate the degree of causality or at least suggest the degree of
causality to readers. But the joke is on the editors, because there aren't any
readers.
November 30, 2015 reply from David Johnstone
Dear
Bob, thankyou for this interesting stuff.
A big
part of the acceptance of P-values is that they easily give the look of
something having been found. So it’s an agency problem, where the
researchers do what makes their research outcomes easier and better looking.
There
is a lot more to it of course. I note with young staff that they face enough
hurdles in the need to get papers written and published without thinking
that the very techniques that they are trying to emulate might be flawed.
Rightfully, they say, “it’s not my job to question everything that I have
been shown and to get nowhere as a result”, nor can most believe that
something so established and revered can be wrong, that is just too
unthinkable and depressing. So the bandwagon goes on, and, as Bob says, no
one cares outside as no one much reads it.
I do
however get annoyed every time I hear decision makers carry on about
“evidence based” policy, as if no one can have a clue or form a vision or
strategy without first having the backing of some junk science by a
sociologist or educationist or accounting researcher who was just twisting
the world whichever way to get significant p-values and a good “story”. This
kind of cargo-culting, which is everywhere, does great harm to good or
sincere science, as it makes it hard for an outsider to tell the difference.
One
thing that does not get much of a hearing is that the statisticians
themselves must take a lot of blame. They had the chance to vote off P
values decades ago when they had to choose between frequentist and Bayesian
logic. They split into two camps with the frequentists in the great majority
but holding the weakest ground intellectually. The numbers are moving now,
as people that were not born when de Finetti, Savage, Lindley, Kadane and
others first said that p-values were ill-conceived logically. Accounting, of
course, being largely ignorant of there being any issue, and ultimately just
political, will not be leading the battle of ideas.
Most Popular Tax Prof Blogs for the Week Ended
December 13, 2015 ---
http://taxprof.typepad.com/taxprof_blog/2015/12/this-.html
-
NY Times: Microaggression In The Gym — Millennial Men Struggle To Dress
In Health Club Locker Rooms
-
The IRS Scandal, Day 943
-
Harvard Law Students Issue 7-Page List Of Demands In Wake Of Racial
Unrest
-
The IRS Scandal, Day 944
-
College And University President Salaries, 2013
-
Christians: Understanding The Accidental American — Tina's Story
-
Will Technology Create More Legal Jobs Than It Destroys?
-
Congress Orders IRS To Use Private Debt Collection Companies
-
Christian University President: This Is Not A Day Care, 1 Corinthians 13
Is Not A Microaggression
-
Fleischer: Skadden As Tom Cruise — Yahoo’s Spinoff Plan Could Be Risky
Business
Question from Item 1 above
Do men and boys still swim nude in YMCA pools?
I recall visiting two such pools as a young boy when boys and men were all
swimming nude.at the same time.
"Six strange (bizarre) Australian taxes," by Chris Sheedy, CAS,
November 2015 ---
https://www.icas.com/ca-today-news/six-strange-australian-taxes
. . .
1. Queen bee levy
“Australia has over 125 different taxes, and some of these taxes are as
ridiculous as the queen bee levy. Up until recently, if you sold a queen bee
for over $20 you had to arrange a 10 cent payment to the Government. A
really big money earner for the Government!”
2. The seafarer’s tax offset
“This little present by the previous Labor government to the Maritime Union
allows those who employ seafarers a 30% tax offset for the salaries they
pay. The rationale for the introduction of this tax offset was to ‘stimulate
opportunities for Australian seafarers to be employed on overseas voyages
and to gain maritime skills’. Since its introduction, it has been claimed by
fewer than five taxpayers. Right now there is a bill before the Senate to
repeal it. But it will get blocked as in Australia you can’t even take away
handouts that no one uses.”
3. Salary-packaged cars
“The
reason we have tax concessions that encourage people to salary-package cars
is because back in 1986, when Australia introduced a fringe benefits tax to
tax benefits provided to employees by their employers, it was too difficult
to track car expenses. Also, Government wanted to continue to encourage the
thriving
4. The brandy advantage
“Unlike many countries that use volumetric taxation, where you tax the
product based on how much alcohol is in it,
Australia has a unique system where it taxes beverages based on how ‘Aussie’
they are.
Continued in article
Jensen Comment
Aside from the free toothpaste, tooth brushes, shaving crčme, extra pillows (for
Erika's back) and razors Erika and I never would think to ask for the things in
the listing below when checking into a hotel. Of course at our age, there are
some things like yoga mats that we don't have any use for, but if the
grandchildren are along I will keep this listing in mind for the future. We
don't ask for the freebies unless there's a need such as not wanting to carry a
can of shaving crčme on an airplane.
We do call ahead for a refrigerator and microwave on the morning of the day
of our arrival. Ironically, the cheaper hotels (e.g., Comfort Inn) are more apt
to have these appliances in every room whereas you have to phone ahead and hope
when checking into an expensive hotel like a Hilton or a Marriott. You can
request a microwave and refrigerator when you make the reservation, but we have
better luck when we also make a request early on the day of arrival.
There are other things that cheaper hotels do better. For example, Comfort
Inn as free quality coffee 24/7 in the lobby whereas Hilton and Marriott force
you make crummy coffee in a machine in the room or pay an outrageous price in a
restaurant. We carry a thermos pot with us to get better coffee in the lobby or
in the restaurant.
Of course there are more amenities if you pay $100 or more per day for a
premium room in an expensive hotel. We don't travel much these days, but I am
willing to pay the premium if the conference is in an expensive hotel. The best
amenities for us are at home. I guess home greater home appreciation is part of
the aging process.
17 things you should definitely ask for the next time you check in to a
hotel ---
http://www.businessinsider.com/free-things-you-can-get-at-a-hotel-2015-11
"Is $50 Billion the Price of Repo Safety? A clearinghouse operator wants
credit commitments from banks and trading firms," by Katy Burn, The Wall
Street Journal, December 9, 2015 ---
http://www.wsj.com/articles/is-50-billion-the-price-of-repo-safety-1449706582?mod=djemCFO_h
Bob Jensen's threads on repo scandals
(calling loans sales) and accounting rules ---
http://faculty.trinity.edu/rjensen/ecommerce/eitf01.htm#Repo
Question
What content to put in an Advanced Cost Accounting Course
Jensen Comment
When you search for content you find that content varies across the board.
Searches related to "Advanced Cost Accounting"
advanced cost accounting syllabus
advanced cost accounting course
advanced cost accounting problems and
solutions
advanced cost accounting midterm
advanced cost accounting jde
advanced cost
and management accounting
advanced
managerial accounting
advanced
financial accounting
Is Accounting Education Failing Students? The Case for a Skills-Based
Curriculum of 4C Plus 1
SSRN, October 15, 2015
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2692727
Journal of
the CPA Practitioner, 7(2), 5-8, 2015
Authors
Dov Fischer Brooklyn College - City University of New York (CUNY)
Hershey H. Friedman City University of New York (CUNY) - Department of
Business Management
Abstract
Accounting education has not changed enough in
response to the financial scandals and crises of the last two decades.
Employers today demand a set of skills that will enable employees to be
life-long learners, yet colleges are too narrowly focused on technical
knowledge with an increasingly short life-span. We advocate for a
skills-based curriculum of the four C’s identified as critical by employers:
Communication, Collaboration, Critical Thinking, and Creativity. We add a
fifth C for Character/Integrity which, contrary to popular belief, can be
taught.
After KPMG was paid $456 million in 2006 fines for selling phony tax
shelters, KPMG promised it would never happen again. Yeah Right!
Four KPMG partners arrested in tax evasion investigation ---
http://www.accountancyage.com/aa/news/2436814/four-kpmg-partners-arrested-in-tax-evasion-investigation
Bob Jensen's threads on KPMG ---
http://faculty.trinity.edu/rjensen/Fraud001.htm
The New Financial Planning and Analysis
Credential That's Not as Tough as the CFA or CPA Credentials
From the CFO Journal's Morning Ledger on December
22, 2015
Move over, accounting. Increasingly, the real power to boost sales and
revenue is coming from a function known as financial planning and analysis,
or FP&A,
reports Alix Stuart for CFO Journal.
Employees in these groups work on everything from forecasting sales,
earnings and buybacks to employee raises.
The specialty
appears to be coming into its own in part because of a credentialing program
launched by the Association for Financial Professionals two years ago. A
person must have two to three years of work experience to enroll. There are
no required courses, but participants spend about 72 hours preparing before
taking a two-part test that involves basic financial knowledge and free-form
spreadsheet modeling.
"In a Fake Online
Class With Students Paid to Cheat, Could Professors Catch the Culprits?' by
Brad Wolverton, Chronicle of Higher Education, December 22, 2015 ---
http://chronicle.com/article/In-a-Fake-Online-Class-With/234687?cid=wc&utm_source=wc&utm_medium=en&elq=5e53f217c61144bcb8f7be3a76e61ae2&elqCampaignId=2123&elqaid=7325&elqat=1&elqTrackId=f7b3e292feda404c8db56c657c1c5e5f
Jensen Comment
The best prevention device is still a proctoring village vicar or an employee's
supervisor.
Bob Jensen's neglected threads on
prevention and detection of online cheating ---
http://faculty.trinity.edu/rjensen/assess.htm#OnsiteVersusOnline
From the CFO Journal's Morning Ledger on December 4, 2015
Accounting standard setters and legislators in the
U.S. and abroad are gearing up for the
next set of rule changes
and regulations that will keep chief financial
officers on their toes in 2016 and beyond. From corporate tax plans to
revenue from insurance contracts, CFOs will need to make sure their
departments are sufficiently nimble to cope with the next wave of compliance
demands.
CFOs received
some breathing room when the Financial Accounting Standards Board disclosed
it would allow companies to wait an until 2018—instead of 2017—to adopt
rules governing how they account for deferred revenue from everything from
cellphone contracts to car sales to software. Still, many large firms say
they have been preparing parallel books in preparation for the rule changes,
and a delay would be costly and unnecessary. Some indicated in comment
letters to FASB that they would adopt the rule early, which FASB will allow.
And then there’s the matter of lease accounting, not to mention new
standards for insurance contracts. But perhaps some of the biggest unsettled
matters for financial chiefs as 2015 winds down are in the area of taxation.
Still on the legislative tax agenda are the roughly 50 temporary tax
provisions that expired at the end of 2014 known as tax extenders, including
the research-and-development tax credit and the “bonus depreciation” tax
break that helps companies accelerate deductions for capital investments
From the CFO Journal's Morning Ledger on December 4, 2015
The special excise on high-cost health plans known as
the “Cadillac tax” isn’t set to go into effect until 2018, but lawmakers
have already taken steps to prevent it from kicking in. Even so, with a veto
threat in the air from President Obama, its ultimate fate remains uncertain,
Kimberly S. Johnson and Maxwell Murphy report.
In a 90-10 vote, Senators voted for the inclusion of
an amendment axing the tax as part of a larger bill that would make deep
cuts to stipulations in the Affordable Care Act.
If measures to eliminate the tax are unsuccessful,
CFOs will have big decisions to make in the coming years regarding company
benefit plans, and many companies will likely struggle to renegotiate union
contracts. In some cases, companies are shifting to consumer-driven plans,
or high-deductible plans that pass more costs and responsibility for their
health-care choices to employees. The Kaiser Family Foundation in August
estimated the tax will affect roughly a quarter
of companies in its first year, nearly
doubling over 10 years. That is because the costs of health care are
generally expected to grow at quicker clip than will the penalty thresholds.
From the CFO Journal's Morning Ledger on December 4, 2015
EU hits McDonald’s with full-blown tax investigation
http://www.wsj.com/articles/eu-hits-mcdonalds-with-full-blown-tax-investigation-1449140943?mod=djemCFO_h
European Union regulators confirmed that they have
opened a full-blown probe into McDonald’s Corp.’s tax
affairs in Luxembourg, warning that a tax deal granted to the fast-food
chain in 2009 may have reduced its tax burden in violation of EU law.
The 1031 Exchange Handbook -- A Complete Guide for Legal, Accounting,
Financial and Real Estate Professionals
SSRN, November 16, 2019, Posted again November 19, 2015
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2690377
Author
Andrew G Ogden
Abstract
The 1031 Exchange Handbook provides working
professionals in law, accounting, finance and real estate with a practical
guide and complete reference source to like-kind exchanges. The 1031
Exchange Handbook covers all topics necessary to understand like-kind
exchanges of real estate and personal property, with references and
explanations of all relevant cases, federal and state statutes, and IRS
regulations, rulings and procedures. The 1031 Exchange Handbook also
explains how to structure and execute all types of exchanges, and procedures
to guarantee the security of funds held by exchange facilitators.
Connecticut Auditors Raise Questions About Pension
Calculations ---
http://www.ctnewsjunkie.com/archives/entry/auditors_raise_questions_about_pension_calculations/
Financial State of the States Report on September 2015
---
http://www.truthinaccounting.org/library/doclib/TIAFSOS9-2015.pdf
SINKHOLE STATES WITH THE WORST
TAXPAYER BURDENS
Massachusetts
Kentucky
Illinois
Connecticut
New Jersey
SUNSHINE STATES: 5 BEST TAXPAYER
SURPLUSES
South Dakota
Utah
Wyoming
North Dakota
Alaska
STATES WITH THE HIGHEST TAXPAYER
BURDEN
New Jersey (Highest)
Connecticut
Illinois
Kentucky
Massachusetts
Hawaii
California
New York
Michigan
Delaware
Pennsylvania
Louisiana
Vermont
. . .
While the financial condition of
most states appears to have improved as a result of a change in how
unfunded pension debt is calculated, the financial condition of four of
the five worst states, identified as "Sinkhole States" (New Jersey,
Connecticut, Illinois, and Kentucky), continued to deteriorate.
Massachusetts is the only sinkhole state that improved from its 2013
Taxpayer Burden during 2014, but only by a modest $600 per taxpayer.
Recognition, Measurement and Accounting Treatment of Human Resource
Accounting
SSRN, November 17, 2015
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2691896
Authors
Md. Shamim Hossain University of Dhaka - Department of Accounting &
Information Systems ; Independent
Md. Rofiqul Islam University of Dhaka
Md. Majedul Palas Bhuiyan BCS General Education Association ; Government
Safar Ali College - Department of Management
Abstract
Human Resource Accounting (HRA) involves accounting
for costs related to human resources as assets as opposed to traditional
accounting. Since the beginning of globalization of business and services,
human elements are becoming more important input for the success of every
organization. The strong growth of international financial reporting
standards (IFRS) encourages the consideration of alternative measurement and
reporting standards and lends support to the possibility that future
financial reports will include non-traditional measurements such as the
value of human resources using HRA methods. It helps the management to frame
policies for human resources of their organizations. HRA is a process of
identifying and measuring data about human resources. It will help to charge
human resource investment over a period of time. It is not a new concept in
the arena of business world. Economists consider human capital as a
production factor, and they explore different ways of measuring its
investment. Now accountants are recognizing human resource investment as an
asset. This study is build upon Recognition, Measurement and Accounting
Treatment of Human Resource Accounting in different organizations.
History Question
What company was the first business firm to value human resources on its balance
sheet?
Jensen Answer
Although I'm not certain how professional sports teams accounted for player
contracts before 1977, my research for an American Accounting Association
monograph suggested that the RG Barry Corporation was the first company to value
all of its human resources on the balance sheet. However, I could not find any
value in this "phantasmagoric" valuation.
PHANTASMAGORIC ACCOUNTING: Research and
Analysis of Economic, Social and Environmental Impact of Corporate Business
(Sarasota, FL: The American Accounting Association, 1977).
December 1, 2015 reply
from Elliot Kamlet
The idea of valuing Human Resources of a company has been intriguing to me since
I was a student.of Bikki Jaggi (http://www.business.rutgers.edu/faculty-research/directory/jaggi-bikki)
who got together with a statistician at Binghamton (Lau) and came up with a
model to value human resources. At the time, there was resistance to the math
involved. See http://www.jstor.org/stable/245105?seq=1#page_scan_tab_contents
December 2, 2015 reply
from Bob Jensen
Hi Elliot,
Not everything that can be counted, counts. And not everything that counts
can be counted.
Albert Einstein
The problems are numerous and complicated in terms of things other than the
complicated math in human resource accounting. The biggest problem arises
when there is no math whatsoever to make sense out of human resource
accounting.
Firstly, there's the problem of ownership and control. Most employment
contracts do not prevent an employee from quitting immediately or in a very
short period of time. Hence, you cannot own or lease an employee in the same
way that we conceptualize owned or leased assets.
Human resource accounting requires an entirely new conceptualization of the
left side of the balance sheet.
Secondly there's a problem of additivity where the value of individual
employees varies interactively with other employees. The higher-order joint
components of value are almost impossible to measure and may even become
negative if it were possible to put measures of value on a work force.
As an illustration, consider Ivy League tenured faculty. It's not at all
uncommon for some departments not to anticipate a tenure track opening for
10-20 years. This is problematic in terms of stagnation when there will be
zero now new blood transfusing a department's stale faculty for 10-20 years.
Every tenured faculty member is an asset. However, taken as a whole the
tenured faculty in a department may become a liability.
Consider the special problem now faced by Brown University. At one time over
90% of the assistant professors hired by Brown received tenure, thereby
leading to many departments that expect no tenure track openings for many
years. In 2015 Brown announced a very generous $100 million initiative to
hire African American, Hispanic, and Native American faculty.
But at Brown what this means is that a goodly portion of that $100 million
will be used to buy out the tenure of white faculty to create tenure track
positions for Brown's affirmative action hiring.
In other words in terms of human resource accounting positive value of
individuals becomes a negative value when their values are combined.
Also "value" of a human resource has many contexts vis-ŕ-vis value of a
milling machine. With a human resource there's value in terms of routine
assigned jobs plus positive and negative values of team contributions plus
values of potential leadership promotions plus negative values of lawsuit
risks. Milling machines do not sue for falls and slander and
microaggressions, but employees sue for millions upon millions. Human
resources also present unique fraud risks relative to physical assets.
Not everything that can be counted, counts. And not everything that counts
can be counted.
Albert Einstein
Thanks,
Bob Jensen
Bob Jensen's threads on triple-bottom
reporting, including human resource accounting, are at
http://faculty.trinity.edu/rjensen/Theory02.htm#TripleBottom
Does Mandatory Adoption of IFRS Enhance Earnings Quality? Evidence from
Closer to Home
SSRN, September 1, 2015 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2691039
Authors
Gopal V. Krishnan American University - Kogod School of Business
Jing Zhang University of Alabama in Huntsville ; McGill University -
Desautels Faculty of Management
Abstract
Canada adopted IFRS in 2011 and firms were required to provide
reconciliation from Canadian GAAP (CGAAP) to IFRS for the fiscal year before
the adoption. We run a “horse race” of earnings quality between CGAAP and
IFRS. Further, by making use of a natural experiment and a single country
focus, our study does not suffer from potential omitted variables arising
from differences in socio-economic, political, and legal environments across
sample firms. We find that on average, relative to IFRS-earnings, earnings
under CGAAP has greater association with next period cash flows. Further,
when the difference between earnings under CGAAP and IFRS is large, IFRS-earnings
is less value-relevant and less persistent. The results strongly support the
notion that higher earnings quality is associated with CGAAP. Finally, our
results indicate that differences between CGAAP and IFRS with regard to
accounting for financial instruments and investments significantly impair
the quality of IFRS-earnings.
Earnings Management Motives and Firm Value Following Mandatory IFRS Adoption
– Evidence from Canadian Companies
SSRN, November 1, 2015
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2688220
Authors
Raymond Leung University of the Fraser Valley
Abstract
When Canada already has a set of well-established
legal enforcement and investor protection mechanism to control earnings
management; and the quality of Canadian GAAP is high, I examine if the
accounting quality for Canada can still be improved since its adoption of
IFRS mandatorily in 2011. The extant literature argues that IFRS adoption
benefits firms domiciled in countries with strong legal and financial
institutions. However, when the quality of IFRS is as good as the local
standards for many Anglo-Saxon countries such as Canada, it is questionable
for these countries to receive substantial economic consequences. Following
the literature, I estimate a set of comprehensive measurements of earnings
management as the proxies of accounting quality. Empirically, I document
evidence that even though the results are mixed, there are still certain
significant improvements in accounting quality. However, I find that firms
issuing more equities are motivated to associate with lower earnings
quality. Also, firms engaging in two distinct strategic directions
(prospector vs. defender) have systemically dissimilar effects on earnings
quality in IFRS adoption. Finally, I document evidence that firm value
following IFRS adoption has been increased, but at the expense of lower
accounting quality. Overall, my study shed some lights into the literature
that accounting standards per se is not sufficient to ensure a uniform-level
of accounting quality because firm-level earnings management motives are
important factors too.
Generating Higher Value at IBM (A)
SSRN Harvard Case (not available for download and not free)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2688563
Authors
Benjamin Esty Harvard Business School - Finance Unit
Scott E. Mayfield Harvard Business School
Abstract
This case analyzes IBM's financial performance and
its capital allocation decisions over a 10-year period from 2004 to 2013,
during which IBM returned more than $140 billion to shareholders through a
combination of dividends and share repurchases. During this time, CEO Sam
Palmisano's created, announced, and then regularly updated a long-term
financial "roadmap" as part of the firm's strategic transformation. The
roadmap showed both a destination (a target EPS number) and a detailed path
to that destination in terms of revenue growth, margin expansion, and share
repurchases. After successfully achieving its first roadmap, the firm
announced a second 5-year roadmap known as the "2015 EPS roadmap". The case
is set in May 2014, just after IBM's annual investor briefing. Despite more
than 10 years of strong financial performance, IBM reported relatively weak
financial results in the first quarter of 2014. Sophia Johnson, an equity
analyst, must decide whether to revise her investment recommendation based
on what she heard that day.
This comprehensive case works well in a variety of
courses ranging from introductory financial accounting and corporate finance
courses to more advanced accounting and finance courses. The case is
designed to teach basic financial statement analysis (sources and uses of
cash, DuPont formula, financial ratio analysis, etc.) in a unique and
interesting setting. It is also designed to illustrate modern payout policy
and the various mechanisms for distributing cash to shareholders. A third
objective is to explore the advantages and disadvantages of providing
long-term earnings guidance. Finally, the case illustrates how publicly
stated, long-term financial goals can be an integral part of a corporate
transformation program.
Connecting Free Cash Flow Metrics to What Matters for Investors: Accuracy,
Bias, and Ability to Predict Value
SSRN, 2013
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2685825
Journal of
Applied Finance (Formerly Financial Practice and Education), Vol. 23, No. 2,
2013
Authors
Vidya N. Awasthi Seattle University
Niranjan Chipalkatti Seattle University - Albers School of Business and
Economics
Carlos A. De Mello e Souza Seattle University - Albers School of Business
and Economics
Abstract
We evaluate six commonly used free cash flow metrics in terms of their
accuracy, bias, and ability to predict value using a sample of 6171
valuations covering the period 1988 to 2010. We find that free cash flow
measured as cash distributed to claimholders, adjusted for
accounting distortions and
omissions, plus the net change in surplus cash, produces valuations that are
generally more accurate, less biased and closer to the true value generating
process than valuations produced by any of the five other metrics. However,
in cases where the increase in surplus cash is excessive (>12% of firm
value), we observe that free cash flow should exclude the net change in
surplus cash, which is consistent with investors anticipating agency
frictions to be associated with excessive cash balances.
Accounting for Goodwill: A Literature Review and Analysis
SSRN, October 8, 2015
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2685922
Authors
He Jennifer Wen University of Missouri-St. Louis
Stephen R. Moehrle University of Missouri at Saint Louis - Accounting
Area
Abstract
Goodwill in the accounting context represents
amounts paid in excess of the fair value of the identifiable net assets for
a business acquisition. The accounting for goodwill has long been a subject
of debate and remains so today. Indeed, the guidance for goodwill accounting
has been significantly revised twice since 2001 (2001 and 2011). Despite
these recent and significant revisions, the topic is back on the Financial
Accounting Standards Board (FASB) agenda as the FASB added a project to once
again discuss the optimal treatment for goodwill (FASB, 2015). In this
paper, we seek to inform this effort by describing the evolution of
accounting standards for goodwill and then synthesizing and analyzing the
academic literature on goodwill accounting and reporting. Based on this
historical perspective and analysis of the literature, we then assess the
strengths and weaknesses of different accounting approaches for goodwill,
highlight the factors affecting the process of standard-setting on goodwill,
and make recommendations. Our recommendations include recommendations for
the FASB about optimal guidance and recommendations for academics concerning
future academic research projects that would advance the goodwill accounting
debate. Hence, this paper should be of interest to academic researchers
interested in mergers and acquisitions and goodwill, to financial statement
preparers and users, and to standard setters.
Does the Accounting for Derivatives Affect Risk and Value?
SSRN, November 3, 2015
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2685896
Author
Spencer Pierce Florida State University - College of Business
Abstract
Financial accounting standards require derivatives
to be recognized at fair value with changes in value recognized immediately
in earnings. However, if certain criteria are met, firms may use an
alternative accounting treatment for derivatives, hedge accounting, which is
intended to decrease reported earnings volatility by altering the
recognition timing of derivative gains and losses. Using newly available
disclosures, I examine the extent to which firms use hedge accounting and
the effect of hedge accounting on financial reporting and capital markets. I
find that firms significantly decrease earnings volatility via hedge
accounting. However, inconsistent with arguments commonly given for using
hedge accounting, I find no evidence that investors’ assessment of firm risk
decreases with the decrease in reported earnings volatility from hedge
accounting. Despite this, I find evidence that firm value has a positive
association with the use of hedge accounting and the resulting decrease in
earnings volatility.
December 3, 2015 reply from
Tom Selling
I don’t need to read this paper to answer: "of
course it does!” in some cases. For (just) one thing, you can’t get hedge
accounting under GAAP or IFRS for macro hedges (e.g., hedging gross margin).
Yet, that’s the way that managers used to hedge. Now, managers can either
hedge efficiently and not get hedge accounting, or hedge less efficiently
and be able to smooth their earnings.
But, perhaps in other cases, managers may now hedge
because FAS 133 as amended permits hedge accounting, whereas under pre-FAS
133 it might not have been permitted.
I expect that this posting will raise the short
hairs on the back of Bob Jensen’s neck. So, I’m just letting you know in
advance that I may not respond to his inevitable rebuttal.
Tom
December 4, 2015 reply by Bob Jensen
Hi Tom,
In general margins and macro hedges cannot get hedge accounting special
treatment to avoid or delay earnings impacts (before hedging settlements)
for different reasons.
For hedge accounting relief the underlyings must be traded on competitive
organized exchanges like the Chicago Board of Trade (CBOT), the Chicago
Mercantile Exchange (CME), or the Chicago Board of Options Exchange (CBOE).
Typical underlyings are the prices of commodities on these exchanges,
interest rate indices like LIBOR or U.S. Treasury Rates, and foreign
currency (FX) prices. Traders that manipulate underlyings can go to prison.
Exhibit A are the Enron energy price traders that manipulated their own
markets and went to prison. Exhibit B are the LIBOR traders who more
recently went to prison.
Why can't a corn farmer near Fenton, Iowa get hedge accounting for his/her
margins equal to the price of corn minus his/her variable costs?
The farmer's local price received for a corn crop is highly correlated with
corn prices on the above commodity exchanges in Chicago. However, the
correlation is not perfect since the farmer's corn is in Iowa rather than
Chicago and his/her corn commonly does not meet all quality standards of the
above exchanges for corn price derivative contracts like options or futures
contracts. However, the correlation is usually high enough that this/her
farmer typically hedges his/her particular price of corn on the Chicago
exchanges. Hedge accounting privileges can be obtained if his/her cash flow
or fair value hedges are deemed sufficiently effective by his/her auditor.
He only can get hedge accounting privileges to the extent the
hedges are deemed effective.
The farmer can get over-the-counter derivatives from his/her local bank but
the corn price underlying must be traded on a something like the CBOT, CME,
or CBOT. Typically the farmer net settles derivative settlements for cash
such that there is no physical delivery or shipment of corn. He takes
his/her corn into a local market and sells it independently of his/her
hedging contracts.
The other component of his/her margin is variable cost. Some
components of his/her variable cost like diesel fuel price and some
chemicals are traded in commodities markets to the extent that their prices
can be hedged (with some ineffectiveness of the hedges). However, most
variable costs are not traded on exchanges like what the farmer pays for
labor and most branded chemicals not traded in the Chicago exchanges.
Why can't a corn farmer near Fenton, Iowa manipulate this/her margins
equal to the his/her price of corn minus his/her variable costs?
The farmer's local price received for a corn crop is highly correlated with
corn prices on the above commodity exchanges. However, the correlation is
not perfect since the farmer's corn is in Iowa rather than Chicago and
his/her corn commonly does not meet all quality standards of the above
exchanges for corn price derivative contracts like options or futures
contracts. However, the correlation is usually high enough that this/her
farmer typically hedges his/her particular price of corn on the Chicago
exchanges. Hedge accounting privileges can be obtained if his/her cash flow
or fair value hedges are deemed sufficiently effective by his/her auditor.
He only can get hedge accounting privileges to the extent the hedges are
deemed effective
The farmer can get over-the-counter derivatives from his/her local bank
but the corn price underlying must be traded on a something like the CBOT,
CME, or CBOT. Typically the farmer net settles derivative settlements for
cash such that there is no physical delivery or shipment of corn. He takes
his/her corn into a local market and sells it independently of his/her
hedging contracts.
The other component of his/her margin is variable cost. Some components
of his/her variable cost like diesel fuel price and some chemicals are are
traded in commodities markets to the extent that their prices can be hedged
(with some ineffectiveness of the hedges). However, most variable costs are
not traded on exchanges like what the farmer pays for labor and most branded
chemicals not traded in the Chicago exchanges.
The main reason the farmer's margins cannot
be hedged is that the farmer cannot obtain qualifying derivative contracts
on most of the components of his/her variable costs. In particular, there
are no derivative contacts from the CBOT, CME, or CBOE for most of his/her
variable cost items.
Macro hedging entails hedging of portfolios of similar items like a
portfolio of stock and bond investments.
Macro hedge accounting privileges are allowed when the portfolio items are
homogeneous (fungible), but this/her seldom happens in portfolios identified
for accounting purposes. Usually there is some investment variation in those
items such as in a diversified portfolio.
Although the ISAB made a very minor modification of hedge accounting
rules for particular kinds of portfolios, in general neither the IASB nor
the FASB allow hedge accounting relief for macro hedges. I've written about
and referenced the reasons quite extensively at
http://faculty.trinity.edu/rjensen/acct5341/speakers/cash such that there is no physical delivery or shipment of corn. He takes
his/her corn into a local market and sells it independently of his/her
hedging contracts.
The other component of his/her margin is variable cost. Some components
of his/her variable cost like diesel fuel price and some chemicals are are
traded in commodities markets to the extent that their prices can be hedged
(with some ineffectiveness of the hedges). However, most variable costs are
not traded on exchanges like what the farmer pays for labor and most branded
chemicals not traded in the Chicago exchanges.
The main reason the farmer's margins cannot
be hedged is that the farmer cannot obtain qualifying derivative contracts
on most of the components of his/her variable costs. In particular, there
are no derivative contacts from the CBOT, CME, or CBOE for most of his/her
variable cost items.
Although the ISAB made a very minor modification of hedge accounting
rules for particular kinds of portfolios, in general neither the IASB nor
the FASB allow hedge accounting relief for macro hedges. I've written about
and referenced the reasons quite extensively at
http://faculty.trinity.edu/rjensen/acct5341/speakers/cash such that there is no physical delivery or shipment of corn. He takes
his/her corn into a local market and sells it independently of his/her
hedging contracts.
The other component of his/her margin is variable cost. Some components
of his/her variable cost like diesel fuel price and some chemicals are are
traded in commodities markets to the extent that their prices can be hedged
(with some ineffectiveness of the hedges). However, most variable costs are
not traded on exchanges like what the farmer pays for labor and most branded
chemicals not traded in the Chicago exchanges.
The main reason the farmer's margins cannot
be hedged is that the farmer cannot obtain qualifying derivative contracts
on most of the components of his/her variable costs. In particular, there
are no derivative contacts from the CBOT, CME, or CBOE for most of his/her
variable cost items.
Although the ISAB made a very minor modification ofimes New Roman,serif">Thanks,
Bob Jensen
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
PS
Hedge accounting relief greatly complicated FAS 133 and added hundreds of
pages of technicalities to the standard. The FASB originally wanted to avoid
such technical complications, but business firms and finance experts quickly
convinced the FASB that without hedge accounting relief the booking of
derivatives at fair value when they are hedging contracts could greatly
distort reported earnings before derivative contracts are settled. For
example, hedged items cannot be booked under accounting traditions such as
when they are forecasted transactions or contracted purchase commitments.
Earnings distortions arise when hedged items are not
booked and the hedging contracts are booked. In such cases, firms
that hedge have much greater reported earnings volatility than firms that
speculated.
New accounting rules that required derivative contracts to be both booked
and carried at fair value made finance experts
laugh out loud if there was not hedge accounting relief for firms
that hedged rather than speculated. Hence, we have hundreds of pages of
hedge accounting technicalities in FAS 133 and IAS 39 now folded into IFRS 9
But there are very good reasons why margins and portfolios in general
cannot get hedge accounting relief even if they are hedged in some
non-qualifying manner.
Does PwC Have a Prayer?
PricewaterhouseCoopers to audit the Scandal-Ridden Vatican ---
http://www.msn.com/en-us/news/world/pricewaterhousecoopers-to-audit-the-vatican/ar-AAg3ZFX?ocid=spartanntp
Jensen Comment
This seems like a different kind of audit since the deep-down issues of the
Vatican are financial fraud. Many of those issues have probably been solved. The
hiring of PwC may mostly be to lend credibility to the solutions.
28 charts that show how America changed since the Fed gave us 0% rates
---
http://www.businessinsider.com/economic-indicators-since-great-recession-zero-interest-rate-policy-2015-12
The charts are misleading if readers attribute the all the good news to 0%
interest rates and
Quantitative Easing (essentially printing money). Certainly 0% contributed
to economic recovery but there would have been economic recovery without QE and
0% rates.
These are the good news charts. What about the bad news like the returns on
low risk savings accounts like Certificates of Deposit? In essence the Fed gave
the finger to investors who want low-risk interest rates on savings and said
either "burn your capital" or "invest is risky alternatives." The savings rate
on a 5-year locked-in Certificate of Deposit is now less than 1% per year. You
can do about as well stuffing your mattress with your cash. Now retirees must
settle for variable-rate annuities that go up and down with financial risk. Some
months retirees may do quite well and other months its stale bread and water for
breakfast, lunch, and dinner. Note that I do not recommend fixed-income
annuities for younger investors. However, after retirement age the inflation
risks and liquidity-demand needs are lower since there aren't many years left in
life.
Ben Bernanke can gloat all he wants, but what saved his reputation is that
his 0% interest rates did not make inflation soar. Reasons are complex, but the
main reason is that the USA became the tallest midget in the global economy.
Inflation did not soar in the USA because the other nations of the world were so
bad off in terms of their own economies relative to the USA. Also economic
recovery is partly due to the broken backs of folks retiring after 2008.
So what about taking on financial risks for that portion of retirement
savings that is not invested in lifetime annuities? What worked for me may not
be a good answer for other retirees, but I had good luck with insured tax exempt
funds (in my case from Vanguard). The monthly tax exempt cash flow from these
has been relatively steady. Valuation of the shares goes up and down but since I
don't intend to have to sell these shares in my lifetime I don't even track the
value other than to note that share value went up with Fed's 0% interest policy.
Value might go down if and when the Fed kicks in higher rates, but the rate
changes will be so gradual that I'm not much worried about my tax-exempt share
valuations in my lifetime. Just keep up the monthly cash flows that are tax
free.
I would have more value on paper if I had kept the Iowa farm I inherited
because the stupid government keeps requiring corn ethanol in our gas tanks. But
being a remote landlord and paying the farm income and property taxes are
headaches I do not need in my blissful retirement.
"Grant Thornton Put Auditor’s Career Above Investor Interests," by
David M. Katz, cfo.com, December 3, 2015 ---
http://ww2.cfo.com/auditing/2015/12/grant-thornton-put-auditors-career-investor-interests/?utm_campaign=CFODailyAlert&utm_nooverride=1&utm_source=CFO-email&utm_medium=email&utm_content=CFODailyAlert_Thursday_2015-12-3&utm_term=auditing&mkt_tok=3RkMMJWWfF9wsRonvarPZKXonjHpfsX56uUsX6KwlMI%2F0ER3fOvrPUfGjI4CT8JhMq%2BTFAwTG5toziV8R7XBLM1s0t4QXxPg
By allowing a poorly rated partner to continue
auditing a public company without sufficient supervision and oversight,
“Grant Thornton prioritized the career of its partner and the retention of
that partner’s clients over the interest of investors, with serious negative
consequences,” Andrew J. Ceresney, director of the Securities and Exchange
Commission’s division of enforcement, said in a Wednesday conference call
with reporters following the announcement that the accounting firm had
reached a $4.5 million settlement with the SEC.
In the case, Grant Thornton and two of its former
partners, Melissa Koeppel, 54, and Jeffrey Robinson, 63, agreed to settle
allegations “that they ignored red flags and fraud risks while conducting
deficient audits of two publicly traded companies that wound up facing SEC
enforcement actions for improper accounting and other violations,” according
to an SEC press release.
Robinson has since retired from Grant Thornton,
while Koeppel remains with the firm but in a non-auditing, non-partner role.
Grant Thornton admitted wrongdoing and agreed to
forfeit about $1.5 million in audit fees and interest, pay a $3 million
penalty, and hire an independent consultant
to review a number of its procedures.
“We are pleased to have these several years-old
matters resolved and we maintain a strong commitment to continually
improving the quality of our work,” Grant Thornton stated.
The admission by the firm follows a similar
acknowledgement of wrongdoing by BDO in a September settlement with the SEC.
The commission has of late been stressing the need to extract admissions of
guilt in its settlements with companies hit with enforcement actions.
Continued in article
"Best Case Yet For Publishing Audit Partner Names: Grant Thornton’s
Koeppel," by Francine McKenna, Re:TheAuditors.com, December 6, 2015
---
http://retheauditors.com/2015/12/06/best-case-yet-for-publishing-audit-partner-names-grant-thorntons-koeppel/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ReTheAuditors+%28re%3A+The+Auditors%29
. . .
So when Grant
Thornton’s
inspection report for 2008 was issued in July of 2009,
there were nine audits where deficiencies were
noted and Koeppel owned one of them. Of note, the Part II quality
assurance criticisms for both Grant Thornton’s 2008 and 2009
inspections reports were eventually made public by the PCAOB because
“as of July 9, 2010 and August 12, 2011, respectively, the Firm had
not addressed certain criticisms in the Reports to the Board’s
satisfaction.”
All this time
the PCAOB, Grant Thornton’s leadership, and the SEC, as a
result of the Part II disclosures, knew that Koeppel was an
accident that had already happened. How so?
One
of the restatements that led to Koeppel’s inclusion on
the partner monitoring list involved Grant Thornton’s
audit client, Koss Corporation. In June 2010, Koss
restated its financial statements for the preceding two
fiscal years because one of its vice presidents had
embezzled $31.5 million from 2005 through 2009 and would
plead guilty to criminal charges based on the
misconduct. Koeppel was the engagement partner for the
Koss audit for three of the four years of the
embezzlement. In July 2012, Grant Thornton, without
admitting any liability, paid $8.5 million to settle a
malpractice case filed by Koss.
My
objective in writing this story was to handily
contradict Grant Thornton’s self-serving
defense to the Koss
fraud. The defense supported
by some commentators:
Audits are not designed to uncover fraud and Koss did
not pay for a separate opinion on internal controls
because they are exempt from that Sarbanes-Oxley
requirement.
But punching holes in that Swiss-cheese defense is like
shooting fish in a barrel. Leading that horse to water
is like feeding him candy taken from a baby. The reasons
why someone other than American Express should have
caught this sooner are as numerous as the
acorns you can steal from a blind pig…
When Koss
sued Grant Thornton in 2010 and then
settled the lawsuit in 2013,
Melissa Koeppel’s name never came up. She was not named as
a defendant, she was not disciplined by the SEC, the PCAOB
or her firm. Instead she kept on auditing.
Continued in article
Also see
http://attestationupdate.com/2015/12/04/misbehavin-clients-misbehavin-cpas-part-1/
Bob Jensen's threads on Grant Thornton ---
http://faculty.trinity.edu/rjensen/Fraud001.htm
Journal Rankings
December 11, 2015 message from Jim Martin
There seems to be a lot on the web related
to ranking journals. Here is
some of what I have found.
Journals measured by citations SNIP (Source Normalized Impact per Paper
measures contextual citation impact by weighting citations based on the
total number of citations in a subject field), IPP (The Impact per
Publication measures the ratio of citations per article published in the
journal), and SJR (SCImago Journal Rank is a prestige metric based on the
idea that not all citations are the same.).
http://www.journalmetrics.com/display2.php
Insead Journal Rankings
http://sites.insead.edu/library/rankings/journal_rankings.cfm
Some articles related to journal rankings:
Chan, K. C., Seow, G. S., & Tam, K. 2009. Ranking accounting journals
using dissertation citation analysis: A research note. Accounting,
Organizations and Society, 34(6), 875-885.
Attaway, A. N., Baxendale, S. J., Foster, B. P., & Karcher, J. N. 2008.
Reassessing accounting faculty scholarly expectations: journal
classification by author affiliation. Academy of Educational Leadership
Journal, 12(3), 71-86.
Bonner, S. E., Hesford, J. W., Van der Stede, W. A., & Young, S. M. 2006.
The most influential journals in academic accounting. Accounting,
Organizations and Society, 31(7), 663-685.
Glover, S. M., Prawitt, D. F., & Wood, D. A. 2006. Publication Records of
Faculty Promoted at the Top 75 Accounting Research Programs. Issues in
Accounting Education, 21(3), 195-218.
Beattie, V., & Goodacre, A. 2006. A new method for ranking academic
journals in accounting and finance. Accounting and Business Research,
36(2), 65-9.
Reinstein, A., & Calderon, T. G. 2006. Examining accounting departments'
rankings of the quality of accounting journals. Critical Perspectives on
Accounting, 17(4), 457-490.
Jones, M. J., & Roberts, R. 2005. International publishing patterns: An
investigation of leading UK and US accounting and finance journals.
Journal of Business Finance & Accounting, 32(5-6), 1107-1140.
Chan, K. C., Chen, C. R., & Cheng, L. T. W. 2005. Ranking research
productivity in accounting for Asia-Pacific Universities. Review of
Quantitative Finance and Accounting, 24(1), 47-64.
Ballas, A., & Theoharakis, V. 2003. Exploring diversity in accounting
through faculty journal perceptions. Contemporary Accounting Research,
20(4), 619-644.
Bonner, S. E., Hesford, J. W., Van der Stede, W. A., & Young, S. M. 2006.
The most influential journals in academic accounting. Accounting,
Organizations and Society, 31(7), 663-685.
Prather-Kinsey, J., & Rueschhoff, N. G. 2004. An analysis of international
accounting research in U.S.- and non-U.S.-based academic accounting
journals. Journal of International Accounting Research, 3(1), 63-81.
Brown, L. D. 2003. Ranking journals using social science research network
downloads. Review of Quantitative Finance and Accounting, 20(3), 291-307.
Krogstad, J. L., & Smith, G. 2003. Assessing the influence of auditing: A
journal of practice & theory: 1985-2000. Auditing, 22(1), 195-204.
Mathieu, R., & McConomy, B. J. 2003. Productivity in 'top-ten" academic
accounting journals by researchers at Canadian Universities. Canadian
Accounting Perspectives, 2(1), 43-76.
Locke, J., & Lowe, A. 2002. Problematising the construction of journal
quality: An engagement with the mainstream. Accounting Forum, 26(1),
45-71.
Milne, Markus J. 2001. Debating accounting research journal rankings :
empirical issues from a citation based analysis and theoretical dilemmas
from Economics. University of Otago, Department of Accountancy and
Business Law.
Brinn, T., Jones, M., & Pendlebury, M. 2001. Why do UK Accounting and
Finance Academics not Publish in Top US Journals? The British Accounting
Review, 33(2), 223-232.
Marston, C., & Ayub, A. 2000. Relationship between publications in
selected journals and research assessment exercise rankings in 1996 for UK
accountancy departments. Accounting Education, 9(1), 93-102.
Brinn, T., Jones, M.J., Pendlebury, M. 1998. UK academic accountants'
perceptions of research and publication practices. The British Accounting
Review, 30(4), 313-330.
Smith, K. J., & Dombrowski, R. F. 1998. An examination of the relationship
between author–editor connections and subsequent citations of auditing
research articles. Journal of Accounting Education, 16(3-4), 497-506.
Lee, T. 1997. The editorial gatekeepers of the accounting academy.
Accounting, Auditing & Accountability Journal, 10(1), 11-30.
Brinn, T., Jones, M, Pendlebury, M. 1996. "UK Accountants' Perceptions of
Research Journal Quality", The Accounting Review, 26:3: 265-278.
Zeff, S. A. 1996. A Study of Academic Research Journals in Accounting.
Accounting Horizons, 10(3), 158-177.
Hasselback, J. R., & Reinstein, A. 1995. A proposal for measuring
scholarly productivity of accounting faculty. Issues in Accounting
Education, 10(2), 269-306.
Jolly, S. A., Schroeder, R. G., & Spear, R. K. 1995. An empirical
investigation of the relationship between journal quality ratings and
promotion and tenure decisions. Accounting Educators Journal, 7, 47-68.
Brown, L. D., & Huefner, R. J. 1994. The familiarity with and perceived
quality of accounting journals: views of senior accounting faculty in
leading U.S. MBA programs. Contemporary Accounting Research, 11(1),
223-250.
Smith, L.M. 1994. "Relative Contribution of Professional Journals to the
Field of Accounting", Accounting Educators' Journal, 6(1) 1-31.
Chung, K. H., Pak, H. S., & Cox, R. A. 1992. Patterns of Research Output
in the Accounting Literature: A Study of Bibliometric Distributions.
Abacus, 28(2), 168-185.
Chandy, P. R., Ganesh, G. K., & Henderson, G. V. 1991. Awareness and
evaluation of selected accounting journals inside and outside the
discipline: An empirical study. Akron Business and Economic Review, 22(2),
214-226.
Hall, T. W., & Ross, W. R. 1991. Contextual effect in measuring accounting
faculty perceptions of accounting journals: An empirical test and updated
journal rankings. Advances in Accounting, 9, 161-182.
Hull, R. P., & Wright, G. B. 1990. Faculty perceptions of journal quality:
An update. Accounting Horizons, 4(1), 77-98.
Morris, J. L., Cudd, R. M., & Crain, J. L. 1990. The potential bias in
accounting journal ratings: Evidence concerning journal-specific bias. The
Accounting Educators’ Journal, 3(1), 46-55.
Bricker, R. 1989. An Empirical Investigation of the Structure of
Accounting Research. Journal of Accounting Research, 27(2), 246-262.
Schroeder, R.G., Payne, D.D., & Harris, D.G. 1988. Perceptions of
accounting publications outlets: a further analysis. The Accounting
Educators' Journal, 1-17.
Smith, G., & Krogstad, J. L. 1988. A Taxonomy of Content and Citations n
Auditing: A Journal of Practice & Theory. Auditing: A Journal Of Practice
& Theory, 8(1), 108-117.
Cargile, B.R., and Bublitz, B. 1986. Factors Contributing to Published
Research by Accounting Faculties, The Accounting Review, 61(1), 158-178.
Brown, L.D., & Gardner, J.C. 1985. Using Citation Analysis to Assess the
Impact of Journals and Articles on Contemporary Accounting Research,
Journal of Accounting Research, 23(1), 84-109.
Brown, L.D., & Gardner, J.C. 1985. Applying Citation Analysis to Evaluate
the Research Contributions of Accounting Faculty and Doctoral Programs,
The Accounting Review, 60(2) 262-277.
Nobes, C. W. 1985. International Variations in Perceptions of Accounting
Journals. Accounting Review, 60(4), 702-205.
Dyckman, R.E. & Zeff, S.A. 1984. Two Decades of the Journal of Accounting
Research. Journal of Accounting Research, 22(1), 225-297.
Howard, T. P., & Nikolai, L. A. 1983. Attitude Measurement and Perceptions
of Accounting Faculty Publication Outlets. Accounting Review, 58(4),
765-776.
Toshiba Accounting Scandal Draws Record ($60 million) Fine From Regulators
---
http://www.wsj.com/articles/toshiba-accounting-scandal-draws-record-fine-from-regulators-1449472485?mod=djemCFO_h
Ernst & Young trying to figure out how
it's auditors missed a multi-year $1+ billion accounting fraud in
Toshiba's financial statements
"E&Y Japan arm launches internal probe of Toshiba audit," Reuters
Technology, July 31, 2015 ---
http://www.reuters.com/article/2015/08/01/us-toshiba-accounting-e-y-idUSKCN0Q62UD20150801
The
Japanese affiliate of Ernst & Young LLC has launched an in-house
investigation (using over 150 investigators) into its audit of
Toshiba Corp in the wake of the electronics maker's $1.2 billion
accounting scandal, a person with knowledge of the matter said.
Ernst &
Young ShinNihon LLC has established a team of about 20 executives to
investigate whether there were any problems with how it conducted
its audits of Toshiba, the person said.
The person
spoke on condition of anonymity. No one could be reached at the
company's offices in Tokyo on Saturday.
Continued in article
Jensen Comment
Audit firms traditionally defend themselves that they're not hired to be fraud
detectors unless the frauds materially affect financial statements. The Toshiba
accounting fraud had a monumental impact on financial statements.
From the CFO Journal's
Morning Ledger on July 15, 2015
Toshiba executives likely to step down over
accounting scandal
http://www.wsj.com/articles/toshiba-executives-expected-to-step-down-over-accounting-scandal-1436870307?mod=djemCFO_h
Toshiba Corp.
President Hisao Tanaka and several other executives are likely to
step down soon over an accounting scandal at the Japanese company
involving profit inflated by more than $1 billion. The other
executives that people familiar with the situation expect to leave
Toshiba include Norio Sasaki, a former president who is currently
vice chairman. The board is also likely to undergo significant
membership changes.
. . .
Toshiba has detailed a number of cases in which business units
failed to book adequate costs for executing contracts, causing
the company to overstate profit. Toshiba said in June that it
would need to
reduce operating profit for the 2009
through 2013 fiscal years by a total of Ą54.8 billion. People
familiar with the matter said the figure has now ballooned to at
least Ą150 billion ($1.2 billion). Toshiba declined to comment.
During
those years, the company’s combined operating profit totaled
Ą1.05 trillion, so even at the higher level, the reduction would
amount to less than 15% of the company’s operating profit over
the five years.
Continued in WSJ
article
Bob Jensen's threads on
creative accounting ---
http://faculty.trinity.edu/rjensen/Theory02.htm#Manipulation
Bob Jensen's threads on EY
---
http://faculty.trinity.edu/rjensen/Fraud001.htm
Bob Jensen's Fraud Updates
---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
TOP ACCOUNTING EDUCATORS HONORED BY AICPA
FOR INNOVATIVE TEACHING STRATEGIES ---
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=153682
. . .
The following
individuals have been recognized with the 2015 honorable mention for their
submissions:•Bea Sanders/AICPA Innovation in Teaching Award: “Introducing
Accounting: Classroom Application of the Pathways Commission Vision,"
Melissa Larson,
Brigham Young University.
•George Krull/Grant
Thornton Teaching Innovation Award:“Adding a Real-World Fraud Risk
Assessment to Your Fraud Or Auditing Class,"
Mary Jepperson,
College of Saint Benedict/Saint John's University.
•Mark Chain/FSA
Teaching Innovation Award: "Crowdsourcing Analysis of Government
Expenditures: "Armchair Auditors" - Case and Results of its Use in a
Graduate Accounting Systems Class," Daniel
O'Leary, University of Southern California.
“Bringing an Accounting Case to Life with Trained Actors: Teaching
Interviewing and Teamwork Skills," Genevieve Risner, Michigan State
University.
Ph.D Student GRE Scores by Discipline
---
https://www.windowssearch-exp.com/images/search?q=GRE+Score&FORM=RESTAB
In terms of overall GRE scores, science
and business Ph.D. students consistently score higher than most humanities and
education disciplines. GRE Scores in 2015 ---
https://www.windowssearch-exp.com/images/search?q=GRE+Scores+2015&FORM=IRMHRS
Phi Beta Kappa would have entirely different admissions profiles if this
honorary did not bar business graduates from competing.
In terms of SAT scores business and
education disciplines are near the bottom in terms of undergraduates, but this
is due in large measure to the enormous number of business majors in colleges of
lower quality, especially lower quality two-year colleges where humanities and
science are of much less interest to students relative to business and
education.
In top schools like Cornell, BYU, and
Notre Dame business undergraduates are near the top in terms of SAT scores.
In virtually all top universities with
undergraduate business programs there are gpa thresholds for majoring in
business to avoid being disproportionately overwhelmed with the number of
business majors.
December 4, 2015 message from Barbara
Scofield
I am interested in connecting with other faculty who teach partnerships in
Advanced Accounting and have used (or thought about using) Hugo Nurnberg's
article "Applying the New Accounting for Business Combinations and
Intangible Assets to Partner Admissions" in Issues in Accounting
Education (Nov2014, Vol. 29 Issue 4, p527-543.). to supplement their
teaching. I have prepared examples using his perspective (summarized below)
for both partnership formation (not directly addressed in his article) and
partnership changes, and I need another set of eyes to give me some feedback
before I add it into my regular teaching materials.
Nurnberg (2014) pointed out the following:
1. The "GOODWILL" method is non-GAAP.
2. Partnership changes will be accounted for differently depending on
whether the incoming partner is contributing a business or just net assets.
3. When an incoming partner is contributing a business, partnership changes
will be accounted for differently depending on whether the entering partner
has majority control or not.
4. There are times when GAAP requires original partnership assets to be
written up to fair value (including recognition of unbooked intangibles
and/or goodwill).
5. What types of intangible assets are recognized on partnership books
depends on whether the incoming partner is contributing a business or just
net assets.
Barbara W. Scofield, PhD, CPA
Professor of Accountancy
Washburn University -- HC 311L
Topeka, KS 66621
785-670-1804 (office)
barbara.scofield@washburn.edu
PwC: Year-end financial reporting
considerations ---
http://www.pwc.com/us/en/cfodirect/publications/in-depth/2015-year-end-accounting-financial-reporting-considerations.html
PwC: 2015 SEC comment letter
trends (by industry and economic sector) ---
http://www.pwc.com/us/en/cfodirect/publications/sec-comment-letter-trends.html
PwC: Highlights of the 2015 AICPA
National Conference on Current SEC and PCAOB Developments ---
http://www.pwc.com/us/en/cfodirect/publications/in-depth/2015-aicpa-conference-sec-pcaob-developments.html
PwC: SASB has released its
Sustainability Accounting Implementation Guide for Companies. Learn how it can
assist you with sustainability reporting.
PwC provided the link to ---
http://using.sasb.org/wp-content/uploads/2015/11/SASB_ImplementationGuide-113015.pdf?submissionGuid=61ce84d1-4e99-4f1c-8033-79ccc984abef
Bob Jensen's threads on Sustainability Accounting ---
http://faculty.trinity.edu/rjensen/Theory02.htm#TripleBottom
PwC: Preparing for the New
Revenue Standard ---
http://www.pwc.com/us/en/cfodirect/assets/pdf/preparing-for-new-revenue-standard-606.pdf
PwC: Managing Your Wealth:
Guide to Tax and Wealth Management ---
http://www.pwc.com/us/en/cfodirect/issues/tax/tax-wealth-management-guide.html
EY: The FASB proposed
eliminating, modifying and requiring new fair value measurement disclosures as
part of its disclosure framework project.---
http://www.ey.com/Publication/vwLUAssetsAL/FASBProposal_FairValue_3December2015/$FILE/FASBProposal_FairValue_3December2015.pdf
EY: PCAOB adopts final rules to
disclose name of partner and others on new form ---
http://www.pwc.com/us/en/cfodirect/publications/in-brief/pcaob-finalizes-rules-disclose-engagement-partner-accounting-firms-new-form.html
On December 15, 2015,
the Public Company Accounting Oversight Board (“PCAOB”) adopted
new rules and amendments
to its auditing standards
requiring disclosure of the name of the engagement partner and information
about other accounting firms that took part in the audit, including other
firms within the same network as the group auditor. This information will be
filed with the PCAOB on a new PCAOB form, Auditor Reporting of Certain
Audit Participants (“Form AP”) and will be searchable on the PCAOB’s
website.
The rules and amendments to
the auditing standards require disclosure for all audits of issuers,
including employee stock purchase, savings, and similar plans that file
annual reports on Form 11-K. At this time, the PCAOB is not extending the
Form AP requirements to audits of brokers and dealers unless the broker or
dealer is an issuer required to file audited financial statements.
Additionally, the PCAOB is recommending the rules and amendments to its
auditing standards apply to emerging growth companies, which will be subject
to a separate determination by the Securities and Exchange Commission (the
“SEC”), pursuant to the JOBS Act.
Disclosure
requirements and effective dates
The rules require disclosure
of:
- The name of the
engagement partner;
- The names, locations,
and extent of participation of other accounting firms that took part in
the group audit, if their work constituted 5 percent or more of the
total group audit hours; and
- The number and
aggregate extent of participation of all other accounting firms that
took part in the group audit whose individual participation was less
than 5 percent of the total group audit hours.
Subject to SEC approval,
disclosure of the engagement partner will be required for audit reports
issued on or after January 31, 2017 (or three months after SEC approval,
whichever is later), while disclosure of information about other accounting
firms that took part in the audit will be required for audit reports issued
on or after June 30, 2017.
Form AP
The filing deadline for Form
AP will be 35 days after the date the auditor’s report is first included in
a document filed with the SEC, with a shorter filing deadline of 10 days for
initial public offerings.
The filing of Form AP is
required the first time an audit report is included in a document filed with
the SEC. Subsequent inclusion of precisely the same audit report in other
documents filed with the SEC does not give rise to a requirement to file
another Form AP. Conversely, any changes to the auditor’s report, including
if it is dual-dated, requires a new Form AP even when no information on the
form, other than the date of the report, changes.
Continued in article
Raking it in a banner year: Financial
scams in China in 2015 ---
http://qz.com/576389/a-banner-year-financial-scams-in-china-nabbed-at-least-24-billion-in-2015/
The UK may force eBay and Amazon to pay for VAT
fraud ---
http://www.businessinsider.com/uk-may-force-ebay-and-amazon-to-pay-for-vat-fraud-2015-12
Bob Jensen's Fraud Updates
---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
Audit Committee ---
https://en.wikipedia.org/wiki/Audit_committee
Why there will be fewer candidates to serve
on audit committees
From the CFO Journal's Morning Ledger on December 15, 2015
Audit committees have
become the go-to group on corporate boards for many of the mounting issues
of compliance and risk that companies face,
report CFO Journal’s Richard Teitelbaum and Kimberly S. Johnson.
“We wind up loading almost everything onto the audit committee,” said
Jeffrey Sonnenfeld, a management professor at the Yale School of Management.
And that is making it more difficult to find qualified candidates for the
job.
A spotlight was thrown on
the subject last Wednesday when Securities and Exchange Commission
chairwoman Mary Jo White gave a keynote address at the American Institute of
CPAs in Washington, in which she spoke about the increased complexity of the
audit committee members’ responsibilities. And the job has become less
attractive because of increased responsibilities and legal risks associated
with the position, said Robert Willens, president of an eponymous accounting
and tax consulting firm.
Bob Jensen's threads on audit committee
professionalism ---
http://faculty.trinity.edu/rjensen/Fraud001c.htm#AuditCommittee
From the Scout Report on December 18,
2015
The Science of Lie Detection
Analysis gives a glimpse of the extraordinary language of lying
https://www.sciencenews.org/blog/culture-beaker/analysis-gives-glimpse-extraordinary-language-lying
To spot a liar, look at their hands
http://qz.com/572675/to-spot-a-liar-look-at-their-hands/
The 8 Biggest Myths About Lying According to the Best Human Lie Detector in
the World
http://www.forbes.com/sites/amymorin/2015/06/08/the-8-biggest-myths-about-lying-according-to-the-best-human-lie-detector-in-the-world/
The Curious story of how the lie detector came to be
http://www.bbc.com/news/magazine-22467640
The true history of lying
http://www.irishtimes.com/culture/books/the-true-history-of-lying-1.2081531
10 of the Biggest Lies in History
http://history.howstuffworks.com/history-vs-myth/10-biggest-lies-in-history.htm
Hi Glen,
I was fascinated by the ACM link to the
following article:
"New lie-detecting software from U-M uses real court case data," by
Nicole Casal Moore, the University Record published by the University of
Michigan, December 41, 2015 ---
https://record.umich.edu/articles/new-lie-detecting-software-u-m-uses-real-court-case-data
Jensen Comment
This is an illustration of "newness timing" in social science research. Unlike
most natural science research, social science research faces the risk that
discovery alters behavior such that the discovery is no longer as important
before people learned about the discovery.
For example, lie-detecting software may work
better on people who are not aware of the details of this software and its
research discoveries. For example, if particular types of hand movements are
indicative of lying, a savvy person will no longer use those hand
movements when lying or, worse, will deceptively use hand movements to trick the
software. This of course is one of the main findings of years of research with
lie detection machines. Some experts can easily fool the machines.
Another example is when politicians or other
criminals learn that deleting email messages or other files on computers does
not necessarily mean that the deleted bad stuff cannot be recovered by technical
experts. As a result computers are no longer contain bad stuff or, as in the
case of
Adam Lanza, hard drives are destroyed beyond hope for recovering deleted
files.
Unlike a lie detector machine where the person
is always aware that the machine is trying to detect lies, the U-M lie-detection
software can be used unobtrusively when people are not aware that they are being
observed by special software to detect lying. This of course raises some ethics
questions. Use of the software on videos of a public trial are not as
controversial as use of the software on a video of a private job interview. I
think that a job applicant should be made aware and agree to the use of lie
detection software in a job interview. Use of the software in public places,
however, is less controversial in my opinion. However, I'm not always correct.
For example, the NFL fined the New England Patriots for filming and analyzing
the hand signals of the opposing team even though those hand signals could also
be filmed and analyzed by any fan in the stadium holding a cell phone camera
pointed at the coaches using hand signals. I've not investigated details of this
case, but there may have been NFL rules for teams doing what fans are free to do
in the stands.
This begs the question of ethics when auditors
film meetings with a client's employees. I suspect that those employees should
be made aware that the videos will be analyzed by lie detection software.
One of the problems with lie detection is that
emotions vary with respect to consequences of being discovered lying. Those
little white lies about eating a Whopper instead of a salad for lunch are less
emotional lies than a confrontation over having an extramarital affair, kiting
the accounts, or strangling of a victim in an assault. Much depends on the
seriousness of the consequences in being found out.
An even bigger problem is that people vary in
the skill of lying. Some people are just very, very good at lying and are also
shrewd about rarely telling lies. Other people are just not very skilled in this
regard or repeatedly lie so often that getting caught becomes inevitable.
Here are some threads copied from
http://faculty.trinity.edu/rjensen/352wpvisual/000datavisualization.htm
Questions
Has the art and science of reading faces ever been part of an auditing
curriculum?
Have there been any accountics studies of Ekman's theories as applied to
auditing behavioral experiments?
(I can imagine that some accounting doctoral students have not experimented
along these lines?)
Paul Ekman video on how to read faces and detect lying ---
http://www.youtube.com/watch?v=IA8nYZg4VnI
This video runs for nearly one hour
Paul Ekman ---
http://en.wikipedia.org/wiki/Paul_Ekman
Ekman's work on facial expressions had its starting
point in the work of psychologist
Silvan Tomkins.[Ekman
showed that contrary to the belief of some
anthropologists including
Margaret Mead, facial expressions of emotion are
not culturally determined, but universal across human cultures and
thus
biological in origin. Expressions he found to be
universal included those indicating
anger,
disgust,
fear,
joy,
sadness, and
surprise. Findings on
contempt are less
clear, though there is at least some preliminary evidence that this emotion
and its expression are universally recognized.]
In a research project along with Dr. Maureen
O'Sullivan, called the
Wizards Project (previously named the
Diogenes Project), Ekman reported on facial "microexpressions"
which could be used to assist in lie detection. After testing a total of
15,000 [EDIT: This value conflicts with the 20,000 figure given in the
article on Microexpressions] people from all walks of life, he found only 50
people that had the ability to spot deception without any formal training.
These naturals are also known as "Truth Wizards", or wizards of
deception detection from demeanor.
He developed the
Facial Action Coding System (FACS) to taxonomize
every conceivable human facial expression. Ekman conducted and published
research on a wide variety of topics in the general area of non-verbal
behavior. His work on lying, for example, was not limited to the face, but
also to observation of the rest of the body.
In his profession he also uses verbal signs of
lying. When interviewed about the Monica Lewinsky scandal, he mentioned that
he could detect that former President
Bill Clinton was lying because he used
distancing language.
Ekman has contributed much to the study of social
aspects of lying, why we lie,
and why we are often unconcerned with detecting lies.
He is currently on the Editorial Board of Greater Good magazine,
published by the
Greater Good Science Center of the
University of California, Berkeley. His
contributions include the interpretation of scientific research into the
roots of compassion, altruism, and peaceful human relationships. Ekman is
also working with Computer Vision researcher
Dimitris Metaxas on designing a visual
lie-detector.
Research Papers Worth
Reading On Deceit, Body Language, Influence etc.. (with
links to pdfs)
Sixteen Enjoyable Emotions. – (2003)
Emotion Researcher, 18, 6-7. by Ekman, P
“Become Versed in Reading Faces”.
Entrepreneur, 26 March 2009. Ekman, P. (2009)
Intoduction: Expression Of Emotion - In RJ
Davidson, KR Scherer, & H.H. Goldsmith (Eds.) Handbook
of Afective Sciences. Pp. 411-414.Keltner, D. & Ekman, P
(2003)
Facial Expression Of Emotion. – In M.Lewis
and J Haviland-Jones (eds) Handbook of emotions, 2nd
edition. Pp. 236-249. New York: Guilford Publications,
Inc. Keltner, D. & Ekman, P. (2000)
Emotional And Conversational Nonverbal Signals.
– In L.Messing & R. Campbell (eds.) Gesture, Speech and
Sign. Pp. 45-55. London: Oxford University Press.
A Few Can Catch A Liar. - Psychological
Science, 10, 263-266. Ekman, P., O’Sullivan, M., Frank,
M. (1999)
Deception, Lying And Demeanor.- In States
of Mind: American and Post-Soviet Perspectives on
Contemporary Issues in Psychology . D.F. Halpern and
A.E.Voiskounsky (Eds.) Pp. 93-105. New York: Oxford
University Press.
Lying And Deception. – In N.L. Stein, P.A.
Ornstein, B. Tversky & C. Brainerd (Eds.) Memory for
everyday and emotional events. Hillsdale, NJ: Lawrence
Erlbaum Associates, 333-347.
Lies That Fail.- In M. Lewis & C. Saarni
(Eds.) Lying and deception in everyday life. Pp.
184-200. New York: Guilford Press.
Who Can Catch A Liar. -American
Psychologist, 1991, 46, 913-120.
Hazards In Detecting Deceit. In D. Raskin,
(Ed.) Psychological Methods for Investigation and
Evidence. New York: Springer. 1989. (pp 297-332)
Self-Deception And Detection Of Misinformation.
In J.S. Lockhard & D. L. Paulhus (Eds.) Self-Deception:
An Adaptive Mechanism?. Englewood Cliffs, NJ:
Prentice-Hall, 1988. Pp. 229- 257.
Smiles When Lying. – Journal of Personality
and Social Psychology, 1988, 54, 414-420.
Felt- False- And Miserable Smiles.Ekman, P.
& Friesen, W.V.
Mistakes When Deceiving. Annals of the New
York Academy of Sciences. 1981, 364, 269-278.
Nonverbal Leakage And Clues To Deception
Psychiatry, 1969, 32, 88-105.
"You Can't Hide Your Lying Brain (or Can You?), by Tom Bartlett,
Chronicle of Higher Education, May 6, 2010 ---
http://chronicle.com/blogPost/You-Cant-Hide-Your-Lying/23780/
Earlier this week Wired reported that a Brooklyn
lawyer wanted to use fMRI brain scans to prove that his client was telling
the truth. The case itself is an average employer-employee dispute, but
using brains scans to tell whether someone is lying—which a few, small
studies have suggested might be useful—would set a precedent for
neuroscience in the courtroom. Plus, I'm pretty sure they did something like
this on Star Trek once.
But why go to all the trouble of scanning someone's
brain when you can just count how many times the person blinks? A study
published this month in Psychology, Crime & Law found that when people were
lying they blinked significantly less than when they were telling the truth.
The authors suggest that lying requires more thinking and that this
increased cognitive load could account for the reduction in blinking.
For the study, 13 participants "stole" an exam
paper while 13 others did not. All 26 were questioned and the ones who had
committed the mock theft blinked less when questioned about it than when
questioned about other, unrelated issues. The innocent 13 didn't blink any
more or less. Incidentally, the blinking was measured by electrodes, not
observation.
But the authors aren't arguing that the blink
method should be used in the courtroom. In fact, they think it might not
work. Because the stakes in the study were low--no one was going to get into
any trouble--it's unclear whether the results would translate to, say, a
murder investigation. Maybe you blink less when being questioned about a
murder even if you're innocent, just because you would naturally be nervous.
Or maybe you're guilty but your contacts are bothering you. Who knows?
By the way, the lawyer's request to introduce the
brain scanning evidence in court was rejected, but lawyers in another case
plan to give it a shot later this month.
(The abstract of the study, conducted by Sharon
Leal and Aldert Vrij, can be found here. The company that administers the
lie-detection brain scans is called Cephos and their confident slogan is
"The Science Behind the Truth.")
"The New Face of Emoticons: Warping photos could help text-based
communications become more expressive," by Duncan Graham-Rowe, MIT's
Technology Review, March 27, 2007 ---
http://www.technologyreview.com/Infotech/18438/
Computer scientists at the University of Pittsburgh
have developed a way to make e-mails, instant messaging, and texts just a
bit more personalized. Their software will allow people to use images of
their own faces instead of the more traditional emoticons to communicate
their mood. By automatically warping their facial features, people can use a
photo to depict any one of a range of different animated emotional
expressions, such as happy, sad, angry, or surprised.
All that is needed is a single photo of the person,
preferably with a neutral expression, says Xin Li, who developed the system,
called Face Alive Icons. "The user can upload the image from their camera
phone," he says. Then, by keying in familiar text symbols, such as ":)" for
a smile, the user automatically contorts the face to reflect his or her
desired expression.
"Already, people use avatars on message boards and
in other settings," says Sheryl Brahnam, an assistant professor of computer
information systems at MissouriStateUniversity, in Springfield. In many
respects, she says, this system bridges the gap between emoticons and
avatars.
This is not the first time that someone has tried
to use photos in this way, says Li, who now works for Google in New York
City. "But the traditional approach is to just send the image itself," he
says. "The problem is, the size will be too big, particularly for
low-bandwidth applications like PDAs and cell phones." Other approaches
involve having to capture a different photo of the person for each unique
emoticon, which only further increases the demand for bandwidth.
Li's solution is not to send the picture each time
it is used, but to store a profile of the face on the recipient device. This
profile consists of a decomposition of the original photo. Every time the
user sends an emoticon, the face is reassembled on the recipient's device in
such a way as to show the appropriate expression.
To make this possible, Li first created generic
computational models for each type of expression. Working with Shi-Kuo
Chang, a professor of computer science at the University of Pittsburgh, and
Chieh-Chih Chang, at the Industrial Technology Research Institute, in
Taiwan, Li created the models using a learning program to analyze the
expressions in a database of facial expressions and extract features unique
to each expression. Each of the resulting models acts like a set of
instructions telling the program how to warp, or animate, a neutral face
into each particular expression.
Once the photo has been captured, the user has to
click on key areas to help the program identify key features of the face.
The program can then decompose the image into sets of features that change
and those that will remain unaffected by the warping process.
Finally, these "pieces" make up a profile that,
although it has to be sent to each of a user's contacts, must only be sent
once. This approach means that an unlimited number of expressions can be
added to the system without increasing the file size or requiring any
additional pictures to be taken.
Li says that preliminary evaluations carried out on
eight subjects viewing hundreds of faces showed that the warped expressions
are easily identifiable. The results of the evaluations are published in the
current edition of the Journal of Visual Languages and Computing.
Continued in article
Bob Jensen's threads on visualization ---
http://faculty.trinity.edu/rjensen/352wpvisual/000datavisualization.htm
Medicare Fraud ---
https://en.wikipedia.org/wiki/Medicare_fraud
Types of Medicare Fraud
Medicare fraud is typically seen in the following ways:
-
Phantom Billing: The medical provider bills Medicare for unnecessary
procedures, or procedures that are never performed; for unnecessary
medical tests or tests never performed; for unnecessary equipment; or
equipment that is billed as new but is, in fact, used.
-
Patient Billing: A patient who is in on the scam provides his or her
Medicare number in exchange for kickbacks. The provider bills Medicare
for any reason and the patient is told to admit that he or she indeed
received the medical treatment.
-
Upcoding scheme and unbundling: Inflating bills by using a billing code
that indicates the patient needs expensive procedures.
A 2011 crackdown on fraud charged "111 defendants in nine cities, including
doctors, nurses, health care company owners and executives" of fraud schemes
involving "various medical treatments and services such as home health care,
physical and occupational therapy, nerve conduction tests and durable
medical equipment."[3]
The Affordable Care Act of 2009 provides an additional $350 million to
pursue physicians who are involved in both intentional/unintentional
Medicare fraud through inappropriate billing. Strategies for prevention and
apprehension include increased scrutiny of billing patterns, and the use of
data analytics. The healthcare reform law also provides for stricter
penalties; for instance, requiring physicians to return any overpayments to
CMS within 60 days time
In recent years regulatory requirements tightened and law enforcement has
stepped up.]
Columbia/HCA fraud case
The
Columbia/HCA fraud case is one of the largest
examples of Medicare fraud in U.S. history. Numerous New York Times
stories, beginning in 1996, began scrutinizing Columbia/HCA's business and
Medicare billing practices. These culminated in the company being raided by
Federal agents searching for documents and eventually the ousting of the
corporation's CEO,
Rick Scott, by the board of directors.[9]
Among the crimes uncovered were doctors being offered financial incentives
to bring in patients, falsifying diagnostic codes to increase reimbursements
from Medicare and other government programs, and billing the government for
unnecessary lab tests,[10]
though Scott personally was never charged with any wrongdoing. HCA wound up
pleading guilty to more than a dozen criminal and civil charges and paying
fines totaling $1.7 billion. In 1999, Columbia/HCA changed its name back to
HCA, Inc.
In 2001,
HCA reached a
plea agreement with the U.S. government that avoided criminal charges
against the company and included $95 million in fines.[11]
In late 2002, HCA agreed to pay the U.S. government $631 million, plus
interest, and pay $17.5 million to state
Medicaid
agencies, in addition to $250 million paid up to that point to resolve
outstanding Medicare expense claims.[12]
In all, civil lawsuits cost HCA more than $1.7 billion to settle, including
more than $500 million paid in 2003 to two
whistleblowers.
The above modules from Wikipedia miss some of the most common ploys for
committing Medicare and Medicaid fraud. Many of these are more difficult to
detect, prove, and dispute. One of the most common ploys for physicians is to
make fleeting visits to rooms in nursing homes (Medicaid fraud) and therapy
hospitals (Medicaid fraud). Especially rewarding are the dementia cases that
sleep day and night. The physician walks down the hall looks in the open doors
and bills for room visits that each take less than a minute but bills like these
were consultations.
Another common fraud, especially in small hospitals needing more expensive
intensive care billings, is for emergency room doctors to recommend a night in
ICU when a regular hospital room would suffice. These types of judgment calls
are very difficult to dispute for some ER cases.
In other instances patients without insurance are treated and billed as other
patients. My wife noticed that our (then) family physician had billed a rather
large charge for a procedure that was not performed on my wife. We informed the
physician that this must have been a billing error. They physician told us it
would not matter since Medicare would be billed in either case. We later
discovered that the woman who was treated had no medical insurance. We get a ton
of feedback in the mail from Medicare regarding billings. I wonder how many
patients really look at those billings and/or become concerned when there are
billing errors that don't affect their own out-of-pocket costs.
"Seniors Need to be Wary of Medicare Fraud," by Bernard A. Krooks,
Forbes, October 4, 2012 ---
http://www.forbes.com/sites/bernardkrooks/2012/10/04/seniors-need-to-be-wary-of-medicare-fraud/
Probably the most common types of Medicare and Medicaid fraud entail running
tests and conducting a series of examinations that are really not necessary.
Once again these are judgment calls that are really difficult to dispute except
when whistleblowers come forward to reveal egregious violations.
From the CFO Journal's Morning Ledger on December 18, 2015
Cancer-care giant to pay $19.75 million to settle Medicare billing probe
Cancer-care giant 21st Century Oncology
Holdings Inc. agreed to pay $19.75 million to settle civil
allegations by the Justice Department that its doctors performed a
bladder-cancer test on Medicare patients more often than medically
necessary.
National health care may increase rather than decrease medical fraud, in
part, because payments are views as stingy. Consider Canada ---
http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3537805/
Erika's relatives in Germany tell us that physicians expect side payments for
better services if patients do not have additional private sector insurance
(that Germany allows).
Bob Jensen's Fraud Updates ---
https://en.wikipedia.org/wiki/Medicare_fraud#Types_of_Medicare_fraud
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on November 20,
2015
G-20 Leaders Set to Approve Overhaul of Corporate-Tax Rules
by: Paul Hannon and Richard Rubin
Nov 14, 2015
Click here to view the full article
on WSJ.com
TOPICS: Corporate
Taxation, International Business, International Taxation
SUMMARY: A
push to close international corporate-tax loopholes is expected to spur
competition for lower rates overseas and increase pressure in Washington for
a bipartisan deal to revamp the corporate-tax code. Leaders from the Group
of 20 largest economies are set to give their final stamp of approval to a
major overhaul of the international rules governing corporate taxes. The
change is aimed at preventing companies from using myriad tactics to shift
profits among different jurisdictions to avoid taxation. Such practices cost
governments between $100 billion to $240 billion in lost revenue each year.
The new rules apply only to companies that operate in more than one country.
Nations aren't required to adopt them, though they are expected to be put in
place widely, given the support from G-20 leaders.
CLASSROOM
APPLICATION: This
article is useful for a corporate tax class as it impacts how multinational
corporations are taxed and it could cause a change in U.S. corporate taxes.
QUESTIONS:
1. (Introductory) What is the G-20 meeting? What countries are
involved?
2. (Advanced) What area of corporate taxation is the focus of the
G-20 vote? Why are these leaders making this decision? What is the need for
this vote?
3. (Advanced) What kind of impact could this vote have on U.S.
companies? How could it affect U.S. tax law? Why?
4. (Advanced) Why do some parties favor corporate tax cuts? Why are
some parties against them? How do corporate tax rates in other countries
affect rates in the U.S.?
Reviewed By: Linda Christiansen, Indiana University Southeast
"G-20
Leaders Set to Approve Overhaul of Corporate-Tax Rules," by Paul Hannon and
Richard Rubin, The Wall Street Journal, November 14, 2015 ---
http://www.wsj.com/articles/g-20-leaders-set-to-approve-overhaul-of-corporate-tax-rules-1447452996?mod=djem_jiewr_AC_domainid
A push to close international corporate-tax loopholes is expected to spur
competition for lower rates overseas and increase pressure in Washington for
a bipartisan deal to revamp the corporate-tax code.
Leaders from the Group of 20 largest economies, meeting in Turkey on Sunday
and Monday, are set to give their final stamp of approval to a major
overhaul of the international rules governing corporate taxes.
The change is aimed at preventing companies from using myriad tactics to
shift profits among different jurisdictions to avoid taxation. Such
practices cost governments between $100 billion to $240 billion in lost
revenue each year, according to the Organization for Economic Cooperation
and Development.
The new rules apply only to companies that operate in more than one country.
Nations aren’t required to adopt them, though they are expected to be put in
place widely, given the support from G-20 leaders.
Stricter tax collection would mean governments could vie for investment and
jobs mainly by lowering corporate tax rates—potentially shining a spotlight
on the U.S. rate, which at 39% is much higher than that of other developed
countries.
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on November 20,
2015
Jury Says Ernst & Young Liable for Madoff Investor's Losses
by: Jacqueline Palank
Nov 14, 2015
Click here to view the full article
on WSJ.com
TOPICS: Auditing,
Auditor Liability, Forensic Accounting, Fraud
SUMMARY: A
Washington state court jury found Ernst & Young liable for millions of
dollars in losses a Washington investment firm took from the collapse of
Bernard Madoff's Ponzi scheme. Steven W. Thomas, attorney for FutureSelect
Portfolio Management Inc., said the jury found the Big Four auditing firm
was negligent in its work as auditor for a feeder fund that pooled
investors' cash and funneled it Mr. Madoff's way. FutureSelect claimed that
Ernst & Young, as auditor, supplied false information that FutureSelect
Portfolio Management Inc. relied on to invest with the feeder fund. "EY was
not the auditor of any Madoff entity; we were among the many auditors of
funds that chose to use Madoff as their investment adviser. While we regret
the investors' losses, no audit of a Madoff-advised fund could have detected
this Ponzi scheme," Ernst & Young's Amy Call Well.
CLASSROOM
APPLICATION: This
article is an excellent development to use in an auditing class, as well as
for forensic accounting. It will be interesting to see if audit firms will
be held liable for fraud in entities other than those they audited, as is
the case here. This could be an expensive problem for audit firms, and if it
continues and grows, could raise the fees firms would have to charge.
QUESTIONS:
1. (Introductory) What are the facts of this case? Who are the
parties to the case? What was the jury's verdict?
2. (Introductory) What is a Big Four accounting firm? What do they
do? Why are they called the Big Four?
3. (Advanced) Who is Bernard Madoff? For what actions is he famous?
How did he cause damage to some people? Where is he now?
4. (Advanced) What is Ernst & Young's connection to Mr. Madoff? How
could the firm be liable for some of the damages resulting from Mr. Madoff?
5. (Advanced) What are some potential ripple effects that could
result from the outcome of this lawsuit? How could this verdict change the
way firms do business? How could it affect what firm's charge for their
work?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED
ARTICLES:
Investor Seeks to Hold Ernst & Young Liable for Madoff
Losses
by Jacqueline Palank
Oct 15, 2015
Online Exclusive
"Jury Says
Ernst & Young Liable for Madoff Investor's Losses," by Jacqueline Palank, The
Wall Street Journal, November 14, 2015 ---
http://www.wsj.com/articles/jury-says-ernst-young-liable-for-madoff-investors-losses-1447453162?mod=djem_jiewr_AC_domainid
A Washington state court jury on Friday found Ernst & Young liable for
millions of dollars in losses a Washington investment firm took from the
collapse of Bernard Madoff’s Ponzi scheme.
Steven W. Thomas, attorney for FutureSelect Portfolio Management Inc., said
the jury found the Big Four auditing firm was negligent in its work as
auditor for a feeder fund that pooled investors’ cash and funneled it Mr.
Madoff’s way. FutureSelect claimed that Ernst & Young, as auditor, supplied
false information that FutureSelect Portfolio Management Inc. relied on to
invest with the feeder fund.
FutureSelect, of Redmond, Wash., invested approximately $200 million in a
feeder fund that sent its money to Mr. Madoff, whose 2008 arrest exposed a
massive Ponzi scheme in which investors lost more than $17 billion. In 2010,
FutureSelect sued Ernst & Young, accusing it of negligence and seeking to
recover its losses.
While FutureSelect had sought damages for the full amount of its investment,
Mr. Thomas said the jury awarded total damages of $20.3 million, which the
firm lost during the time in which Ernst & Young was the feeder fund’s
auditor. FutureSelect accepted some responsibility for the losses, so the
jury split those damages 50/50 between it and the auditing firm, Mr. Thomas
said, although he said prejudgment interest pushes Ernst & Young’s liability
above $20 million.
Reached Friday, an Ernst & Young spokeswoman said the firm is considering an
appeal and doesn’t believe it was responsible for the investors’ losses.
“EY was not the auditor of any Madoff entity; we were among the many
auditors of funds that chose to use Madoff as their investment adviser.
While we regret the investors’ losses, no audit of a Madoff-advised fund
could have detected this Ponzi scheme,” Ernst & Young’s Amy Call Well said
in an email.
The case was the first suit against an auditor of one of the Madoff feeder
funds, which funneled billions of dollars from investors all over the world
to Mr. Madoff. Mr. Madoff is currently serving a 150-year prison sentence,
and his investment firm is liquidating.
“They are the first auditor to be found liable in the Madoff case,” Mr.
Thomas said. “We are incredibly grateful to this jury for listening to the
evidence and finding that auditors are the gatekeepers, and where the
financial statements are fraudulent, it’s their job to say whether they’re
real or fake before they get to investors.”
At the start of the trial last month, Mr. Thomas said the Big Four auditing
firm failed to perform such essential auditing tasks as confirming the
existence of the securities Mr. Madoff purported to trade for investors,
which didn’t exist. Instead, he said Ernst & Young relied on information
provided by Mr. Madoff or his firm when it approved financial statements as
containing accurate information, according to a video feed of the trial
provided by Courtroom View Network.
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on November 20,
2015
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED
ARTICLES:
Kinder Morgan Deal Risks Big Tax Bills for
Investors
by Laura Saunders, Alison Sider, and Russell Gold
Aug 12, 2014
Online Exclusive
Q&A: How the Kinder Morgan Deal Affects Investors'
Taxes
by Laura Saunders
Aug 12, 2014
Online Exclusive
"Thousands
Hit With Surprise Tax Bill on Income in IRAs," by Laura Saunders, The Wall
Street Journal, November 14, 2015 ---
http://www.wsj.com/articles/thousands-hit-with-surprise-tax-bill-on-income-in-iras-1447427436?mod=djem_jiewr_AC_domainid
On Oct. 13, two days before the final 2014 tax-filing deadline, investor
Steve Goldston of Phoenix received a surprise tax bill for $24,321. It was
for units of a master limited partnership affiliated with Kinder Morgan Inc.
that Mr. Goldston held in his Roth individual retirement account. The total
included nearly $6,000 of late-filing penalties and interest.
“I was outraged,” says Mr. Goldston. “Here was a tax form, completely filled
out and signed on my behalf, saying that I owed this money and it was coming
out of my IRA—but that was the first I heard.”
Mr. Goldston wasn’t alone. According to Pershing, the custodian of Mr.
Goldston’s Roth IRA, it filed such forms for about 5,000 people who held
Kinder Morgan MLP units in IRAs. Pershing is a unit of BNY Mellon and serves
as a clearinghouse for about 800 financial firms. Kinder Morgan is a
pipeline firm based in Houston.
Master limited partnerships typically transport, store, produce and refine
energy and pass the bulk of their earnings to shareholders.
Thousands of investors holding MLPs in IRAs at other firms may owe similar
taxes that they aren’t aware of, experts say.
The unexpected bills are painful reminders that even widely held investments
such as MLPs can contain tax traps, experts say.
“People need to understand what they are investing in, especially the taxes
and fees,” says Don Williamson, an accountant who heads the Kogod Tax Center
at American University.
In this case, the traps have ensnared advisers and brokerage firms as well
as investors. Here’s why, and what investors need to know.
The rules
Under the tax code, IRAs and Roth IRAs have significant benefits—such as
tax-free growth—but they come with limits. When owners use IRA funds to
invest in partnerships, as opposed to stocks, bonds and funds, they owe tax
on certain annual income from the partnership exceeding $1,000 because of an
antiabuse provision. This levy is known as Unrelated Business Income Tax, or
UBIT, and its top rate of 39.6% can take effect at about $12,000 of taxable
income.
A further, unique twist is that when this tax is due, the IRA custodian or
trustee—such as Pershing or Charles Schwab —is responsible for obtaining a
special tax ID number and then filing and signing an IRS Form 990-T
reporting the income. The IRA owner is typically responsible for paying the
tax.
Because of this complexity, experts often caution investors to avoid putting
publicly traded partnerships into IRAs. But many, including Mr. Goldston,
were unaware of this advice.
What happened at Pershing
The 5,000 late 990-T filings by Pershing, including Mr. Goldston’s, involved
highly popular MLPs controlled by Kinder Morgan. The largest, Kinder Morgan
Energy Partners (KMP), had 465 million units with a market value of $47
billion last year. Individual investors liked its high payouts and that
taxes were deferred.
In 2014, the parent firm did a roll-up of the MLPs that triggered
long-postponed taxes for many holders and generated UBIT for many investors
holding units in IRAs. Mr. Goldston’s 1,365 units of KMP, for example,
generated net income of nearly $52,000 and tax of $18,484.
According to Pershing’s spokesman, its tax adviser found that Kinder
Morgan’s K-1 forms for investors didn’t have enough information to determine
their taxes. By the time Pershing learned this, it didn’t have time to file
for six-month automatic extension requests.
Continued in article
From the CFO
Journal's Morning Ledger on December 10, 2015
Be very careful when making up your own figures to try to explain your
business to shareholders—but maybe international rules should be allowed as
a supplement. That was the two-pronged message Securities and Exchange
Commission Chairwoman Mary Jo White offered during a conference held by the
American Institute of CPAs in Washington.
Yet at the same time, Ms. White said the SEC will be considering the
recommendation of its chief accountant, James Schnurr, that U.S. firms be
allowed to use international accounting rules as an add-on to their main
financial statements, the
WSJ’s Michael Rapoport reports.
It has “the potential to be a useful next step” in considering how the U.S.
should approach the global rules, Ms. White said.She didn’t give a timetable
for when the commission might reach a decision on the issue. But if the SEC
implements Mr. Schnurr’s recommendation, U.S. companies could provide
financial data calculated using the global rules, which differ in some
respects from U.S. rules, to supplement the main financial statements they
provide.
Jensen Comment
I don't know if she what all she intended by stating "making up your own
figures." But one interpretation is that IFRS international standards replace a
lot of white line rules with concept-based standards that allow for more fudge
factoring.
One of the moral hazards in
James Schnurr's recommendatin is that firms will provide supplemental IFRS
statements when they look better but not when they look worse.
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on November 20,
2015
Top SEC Accountant Urges Supplemental Use of Global Rules for
U.S. Companies
by: Michael Rapoport
Nov 18, 2015
Click here to view the full article
on WSJ.com
TOPICS: GAAP,
IFRS
SUMMARY: The
Securities and Exchange Commission's top accountant said he has recommended
U.S. companies be allowed to use global accounting rules to supplement their
main financial statements calculated under U.S. regulations. The
recommendation to the commission by Chief Accountant James Schnurr could
help resolve a long-standing debate over whether and how the U.S. should use
the global rules, known as International Financial Reporting Standards, or
IFRS. If Mr. Schnurr's recommendation is implemented, U.S. companies could
provide financial data calculated using IFRS, which differs in some respects
from U.S. rules, as an add-on to the main financial statements they provide.
Those financial statements would continue to be calculated under current
U.S. rules, known as generally accepted accounting principles, or GAAP.
CLASSROOM
APPLICATION: This
update regarding use of IFRS in the U.S. can be used in a financial
accounting class.
QUESTIONS:
1. (Introductory) What is IFRS? Who uses it? What is GAAP? Who uses
it?
2. (Advanced) How do IFRS and GAAP differ? What does the U.S. use?
Why does the U.S. choose that particular one instead of the other?
3. (Advanced) What did the SEC Chief Accountant recommend regarding
U.S. accounting rules? Is this recommendation significant? How will U.S.
financial statements change? Will it bring great change in U.S. accounting
rules? Why or why not?
4. (Advanced) What is the current outlook for changes in the
accounting rules in U.S.? Are the rules expected to change in the near
future? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
U.S. Companies May Gain Ability to Reconcile to
IFRS Accounting
by Emily Chasan
May 07, 2015
Online Exclusive
"Top SEC
Accountant Urges Supplemental Use of Global Rules for U.S. Companies," by
Michael Rapoport, The Wall Street Journal, November 18, 2015 ---
http://www.wsj.com/articles/top-sec-accountant-urges-supplemental-use-of-global-rules-for-u-s-companies-1447780897?mod=djem_jiewr_AC_domainid
The Securities and Exchange Commission’s top accountant said he has
recommended U.S. companies be allowed to use global accounting rules to
supplement their main financial statements calculated under U.S.
regulations.
The recommendation to the commission by Chief Accountant James Schnurr could
help resolve a long-standing debate over whether and how the U.S. should use
the global rules, known as International Financial Reporting Standards, or
IFRS.
If Mr. Schnurr’s recommendation is implemented, U.S. companies could provide
financial data calculated using IFRS, which differs in some respects from
U.S. rules, as an add-on to the main financial statements they provide.
Those financial statements would continue to be calculated under current
U.S. rules, known as generally accepted accounting principles, or GAAP.
Mr. Schnurr has publicly floated the idea in recent months, as a
middle-ground approach between a full U.S. adoption of the global rules and
no U.S. use of them at all. He said Tuesday he has now made the idea the
substance of his recommendation to SEC Chairwoman Mary Jo White about what
the commission should do about U.S. use of IFRS.
“It’s going through the rule-making process,” Mr. Schnurr told reporters at
an accounting conference in New York. The recommendation is being subjected
to an economic analysis, he said, and he had no timetable about when or
whether the SEC might propose any new regulations based on it.
The IFRS system is now in use in more than 100 countries, and
accounting-industry leaders and international rule makers have long urged
the U.S. to adopt IFRS as well, saying a single world-wide set of accounting
rules would benefit companies and investors. But the U.S. has retained GAAP
in part because of concerns over the costs and implementation of a switch,
and Mr. Schnurr has said there is little or no support among U.S. companies
for a wholesale changeover.
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on December 8,
2015
Google
Parent to Ask Subsidiaries to Pay for Corporate Services
by:
Alistair Barr
Nov 23, 2015
Click here to view the full article
on WSJ.com
TOPICS: Activity-Based
Costing, Financial Accounting, Managerial Accounting, Responsibility
Accounting
SUMMARY: Google
parent Alphabet Inc. is moving to make its disparate parts more accountable
internally for spending in an effort to ensure that its more speculative
projects are self-sustaining. Under the new system, "bet" companies such as
Google X, Google Fiber and Google Life Sciences will be charged for using
corporate services such as computing, recruiting and marketing. Under
Alphabet's new system, leaders of the bet companies will have more freedom
to develop their own services in areas like recruiting and marketing. The
companies will still be able to tap Alphabet's services, but they will have
to bear the cost internally.
CLASSROOM
APPLICATION: This
is a great article to use for coverage of activity-based costing and
responsibility accounting because it involves a company very familiar to our
students.
QUESTIONS:
1. (Introductory) What is Alphabet Inc.? What types of businesses
does it own?
2. (Advanced) What is Alphabet doing regarding the spending of its
individual companies? What is included in its plan? What are the reasons for
these changes?
3. (Advanced) What is responsibility accounting? How can it benefit
companies? How can Alphabet use responsibility accounting tools to
successfully implement this plan?
4. (Advanced) What is activity-based costing? What are the advantages
of using this tool? How could it be used by Alphabet to manage costs and to
develop internal and external reporting?
5. (Advanced) How will Alphabet's changes positively affect the
company? What other businesses or industries could be benefited by similar
changes?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Google Parent to Ask Subsidiaries to Pay
for Corporate Services," by Alistair Barr, The Wall Street Journal,
November 23, 2015 ---
http://www.wsj.com/articles/google-parent-to-ask-subsidiaries-to-pay-for-corporate-services-1448325619?mod=djem_jiewr_AC_domainid
Google parent Alphabet Inc.
is moving to make its disparate parts more accountable internally for
spending, according to people familiar with the matter, in an effort to
ensure that its more speculative projects are self-sustaining.
Under the new system, “bet”
companies such as Google X, Google Fiber and Google Life Sciences will be
charged for using corporate services such as computing, recruiting and
marketing, the people familiar with the matter said.
The changes are part of
Google’s transformation into a conglomerate, which took effect in August but
won’t be reflected in financial statements until next year. The people
familiar with the matter said executives hope to make the bet companies more
accountable for their costs, which may lead to more caution on spending.
The reorganization has two
goals. Alphabet Chief Executive Larry Page wants to boost spending on new
technologies that will take the company into areas such as transportation,
communications and health care. At the same time, Mr. Page and other
executives want to assure Wall Street that Alphabet is spending responsibly.
“After a period of big
expense build up, there was an appreciation that we needed to manage the
cadence of spend,” Chief Financial Officer Ruth Porat told investors in an
October earnings call. Ms. Porat has been instrumental in efforts to curb
spending since joining the company in May.
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on December 8,
2015
Expiring Tax Breaks Face Another Nail-Biter This Year
by:
Richard Rubin
Nov 23, 2015
Click here to view the full article on WSJ.com
TOPICS: Tax
Planning, Individual Taxation, Corporate Taxation
SUMMARY: Dozens
of tax breaks are caught in an annual Washington ritual of Congress waiting
until the last possible minute to revive a tax break that lapsed at the end
of 2014. The breaks, known as "tax extenders," include the individual
deduction for state and local sales taxes and business tax credits for wind
energy and research and development. Companies rally each fall to prod
Congress to act, and cynics see little rationale in the annual exercise
beyond a steady flow of lobbyists' expenses and campaign contributions.
CLASSROOM
APPLICATION: This
is an excellent tax-planning article for individual and corporate taxation
classes.
QUESTIONS:
1. (Introductory) What tax provisions discussed in the article have
expired? When did they expire? What are the prospects for extensions of
those tax provisions? How could they be extended?
2. (Advanced) Why does Congress approach some tax breaks in this way?
How does it impact business and individual taxpayers? How does it impact tax
planning?
3. (Advanced) What tax breaks are at issue? Should these tax breaks
be extended? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Expected Tax Breaks Don't Go Far Enough for Some
Small Firms
by Angus Loten
Dec 11, 2015
Online Exclusive
"Expiring Tax Breaks Face Another
Nail-Biter This Year," by Richard Rubin, The Wall Street Journal,
November 23, 2015 ---
http://www.wsj.com/articles/expiring-tax-breaks-face-another-nail-biter-this-year-1448230404?mod=djem_jiewr_AC_domainid
The slow pace
of legislative sausage-making in Congress is causing problems for Dan
Glier’s actual sausage-making in Kentucky.
Mr. Glier’s
ability to deduct the costs of new grinders, smokehouses and emulsifiers
depends on Congress’s ability to revive a small-business tax break that
lapsed at the end of 2014. At this point, with the 2015 tax year almost
over, the president of Glier’s Meats Inc. doesn’t know whether he can deduct
as much as $500,000 in capital costs or $25,000—or have any idea what his
taxes will look like in 2016.
“It gives me
stomach cramps, I’ll tell you,” Mr. Glier said of the inaction in
Washington. “At least by law my product has to list exactly what’s in it, in
the order of predominance. Laws are anything but that. They’re dishonest,
they’re disorganized.”
The small-business write-off is among the least controversial of dozens of
tax breaks caught in an annual Washington ritual of waiting until the last
possible minute—and then some. The breaks, known as “tax extenders,” include
the individual deduction for state and local sales taxes and business tax
credits for wind energy and research and development. Companies rally each
fall to prod Congress to act, and cynics see little rationale in the annual
exercise beyond a steady flow of lobbyists’ expenses and campaign
contributions.
On
Dec. 19, 2014, President Barack Obama signed a law extending the breaks only
through the end of 2014, and lawmakers in both parties vowed they wouldn’t
wait so long again. Now, in late-November, bipartisan talks are just getting
started.
“The whole point of tax policy is to ensure that you make decisions that
guide future behavior,” said Oregon Sen. Ron Wyden, the top Democrat on the
Senate Finance Committee. “We’ve already seen close to a year’s worth of
behavior. And you’re in effect passing tax laws to provide incentives,
purportedly, for behavior that already took place.”
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on December 8,
2015
Is
the Surge in Stock Buybacks Good or Evil?
by:
E.S. Browning
Nov 23, 2015
Click here to view the full article on WSJ.com
TOPICS: Stock
Buybacks
SUMMARY: This
year isn't on pace to surpass 2007 in total buybacks. But data show that
announcements of planned future buybacks are the highest for any year's
first 10 months, more even than in 2007. Some analysts have said for years
that the buyback pace will slow, but there is little sign of that. With
corporate cash levels near records and interest rates low, use of cash or
debt to finance buybacks is becoming widespread. Stock repurchases boost
earnings per share, even if total earnings don't change, by reducing the
number of shares. Analysts and investors typically track per-share earnings,
not overall earnings.
CLASSROOM
APPLICATION: This
is a good article about the current trends in stock buybacks, as well as
their impact on a company and its financial statements.
QUESTIONS:
1. (Introductory) What is a stock buyback? Why do some companies
choose to participate in stock buybacks?
2. (Advanced) How do stock buybacks affect a company's financial
statements? How is the transaction entered into the company's financial
records? What accounts are affected?
3. (Advanced) How is a business affected by the stock buyback? How
does it affect the company's stock price? How does it affect the company's
strategies and options for growth?
4. (Advanced) Why are stock buybacks so common now? Are certain
economic conditions encouraging this behavior at this particular time? Are
there other factors?
5. (Advanced) Why are some parties against stock buybacks? What are
possible disadvantages or negative ramifications?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Beware the Stock-Buyback Craze
by John Waggoner
Jun 19, 2015
Online Exclusive
"Is the Surge in Stock Buybacks Good
or Evil?" by E.S. Browning, The Wall Street Journal, November 26,2015 ---
http://www.wsj.com/articles/is-the-surge-in-stock-buybacks-good-or-evil-1448188684?mod=djem_jiewr_AC_domainid
Corporate stock buybacks are climbing toward a post-financial-crisis high
this year, furthering the debate about the use of hundreds of billions of
dollars in company cash to enhance quarterly earnings reports.
Stock
repurchases boost earnings per share, even if total earnings don’t change,
by reducing the number of shares. Analysts and investors typically track
per-share earnings, not overall earnings.
Buybacks
have drawn criticism from some fund managers including
Larry Fink,
chief executive of BlackRock Inc., which oversees $4.5 trillion in assets.
He has said some companies invest too much in buybacks and too little in
longer-term business growth. Repurchases also have become a political issue.
Democratic presidential candidate
Hillary Clinton
has called for more-frequent and fuller disclosure of them by the companies
involved, even as some activist investors push for more buybacks as a way of
returning cash to investors.
In the year’s
first nine months, U.S. companies spent $516.72 billion buying their own
shares, with third-quarter reports still not complete, according to Birinyi
Associates. That is the highest amount for the first three quarters since
the record year of 2007, the year before the financial crisis. It leaves
this year on track for a post-2007 high if fourth-quarter buybacks hold up.
Buybacks can have a significant impact on earnings,
as was illustrated this quarter by companies including
Microsoft
Corp.
MSFT
-0.52
%
,
Wells Fargo
WFC
0.28
%
& Co.,
Pfizer
Inc.
PFE
-0.25
%
and
Express Scripts Holding
Co.
ESRX
0.24
%
Microsoft turned a decline in
total earnings into a per-share gain by repurchasing a little more than 3%
of its shares in the past 12 months. Its total third-quarter earnings were
down 1.3% from a year earlier, but per-share earnings rose 3.1%, according
to FactSet.
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on December 8,
2015
U.S. Unveils Rules to Make Corporate Inversions More Difficult
by:
Richard Rubin
Nov 20, 2015
Click here to view the full article on WSJ.com
TOPICS: Corporate
Taxation, Inversions
SUMMARY: The
Treasury Department released new rules to restrain U.S. companies from
putting their addresses in foreign countries to reduce their tax bills. The
changes will make it harder for U.S. companies to buy a company in one
foreign country and locate the combined entity's address in a different
country. They also would limit companies' maneuvers before a merger to make
a foreign company look bigger and thus escape existing U.S. tax
restrictions.
CLASSROOM
APPLICATION: This
is an excellent update regarding tax inversion law for corporate tax
classes.
QUESTIONS:
1. (Introductory) What is a tax inversion? Who chooses to participate
in inversions? Why would a party make this choice?
2. (Advanced) What are the details regarding the new rules issued by
the Treasury Department? How comprehensive are the new rules?
3. (Advanced) How do corporate tax rates affect inversions? Were tax
rates changed by the new rules? Why or why not?
4. (Advanced) What tax-planning options do corporations have to
reduce taxes other than the type of inversions that have been popular
recently?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
'Inversion' Rule Changes Appear Minor
by Liz Hoffman
Nov 21, 2015
Online Exclusive
"U.S. Unveils Rules to Make Corporate
Inversions More Difficult," by Richard Rubin, The Wall Street Journal,
November 20, 2015 ---
http://www.wsj.com/articles/u-s-unveils-rules-to-make-corporate-inversions-more-difficult-1447970935?mod=djem_jiewr_AC_domainid
The Treasury Department on
Thursday released new rules to restrain U.S. companies from putting their
addresses in foreign countries to reduce their tax bills.
The changes will make it
harder for U.S. companies to buy a company in one foreign country and locate
the combined entity’s address in a different country. They also would limit
companies’ maneuvers before a merger to make a foreign company look bigger
and thus escape existing U.S. tax restrictions.
The new rules could have
immediate implications for Pfizer Inc. ’s attempt to merge with Allergan
PLC.
One aspect of the rules,
which limit companies’ ability to transfer foreign operations to a new
foreign parent company, will apply to future transactions by all companies
that completed inversions since Sept. 22, 2014, potentially causing problems
for those such as Medtronic PLC and Mylan NV that have already completed
their inversions.
The Treasury’s actions mark
the government’s latest attempt to deter companies from considering
corporate inversions, deals in which U.S. businesses typically put their tax
addresses in a foreign country but continue U.S. operations and management
with few or any changes.
Inversions have helped drive
mergers-and-acquisitions activity to record highs as companies, particularly
those in health care, have looked to foreign deal making for tax savings.
“It’s Treasury’s
responsibility to protect the U.S. tax base,” said Treasury Secretary Jack
Lew. “These actions further reduce the benefits of inversion and make these
transactions even more difficult to achieve.”
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on December 8,
2015
The
Big Number: Total value of goodwill write-downs in 2014
by:
Emily Chasan
Nov 25, 2015
Click here to view the full article on WSJ.com
TOPICS: Goodwill,
Goodwill Impairments, Financial Accounting
SUMMARY: U.S.
public companies recorded $25.7 billion in goodwill impairments, or
write-downs, last year, according to a study of more than 8,700 firms. The
figure is up from $21.7 billion in 2013 but still less than levels in 2012,
when impairments topped $50 billion.
CLASSROOM
APPLICATION: This
is good information for coverage of goodwill and goodwill impairments in
financial accounting classes.
QUESTIONS:
1. (Introductory) What is goodwill? What type of account is it? How
does a company acquire goodwill?
2. (Advanced) What are goodwill impairments? What does the article
report regarding goodwill and goodwill impairments? What are the associated
trends? Why is this happening?
3. (Advanced) How do goodwill impairments appear on the financial
statements? Are they improvements or problems for a company's financial
condition?
4. (Advanced) What is the forecast for impairments in the future?
What conditions could affect them?
Reviewed By: Linda Christiansen, Indiana University Southeast
"The Big Number: Total value of goodwill
write-downs in 2014," by Emily Chasan, The Wall Street Journal, November
25, 2015 ---
http://www.wsj.com/articles/the-big-number-1448342937?mod=djem_jiewr_AC_domainid
$25.7B
Total value of goodwill write-downs in 2014.
Corporate acquisitions that haven’t worked out are taking a toll on balance
sheets.
U.S. public companies recorded $25.7 billion in goodwill impairments, or
write-downs, last year, according to a study of more than 8,700 firms from
corporate financial adviser Duff & Phelps. The figure is up from $21.7
billion in 2013 but still less than levels in 2012, when impairments topped
$50 billion.
The biggest number of companies in at least five years took hits to
goodwill, or intangible assets, in 2014, with 341 companies reporting
write-downs, up from 274 in 2013.
“The trend is moving toward bigger impairments,” said Greg Franceschi, a
managing director at Duff & Phelps.
The energy sector, hurt by the decline in oil prices, dominated goodwill
write-downs last year with 32 companies, or 23% of the industry, reporting
charges to goodwill, according to the study. The sector tallied $5.8 billion
in goodwill write-downs in 2014, up from $2.1 billion in 2013.
Devon
Energy Corp. recorded the largest
goodwill
write-down last year,
according to Duff & Phelps. The firm took a $1.9 billion fourth-quarter
charge on a decade-old Canadian acquisition of gas assets. Devon Energy said
at the time that the noncash charge was “related to the recent drop in oil
prices.”
On
average, individual companies took charges to goodwill of about $75 million
last year, down 5% from the average in 2013, according to Duff & Phelps.
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on December 11,
2015
FASB
Issues ASU on Balance Sheet Classification of Deferred Taxes
by: Deloitte Risk Journal Editor
Dec 04, 2015
Click here to view the full article on WSJ.com
TOPICS: Deferred
Taxes, FASB
SUMMARY: A
new Accounting Standards Update (ASU) issued by FASB requires entities to
present deferred tax assets (DTAs) and deferred tax liabilities (DTLs) as
noncurrent in a classified balance sheet. Stakeholder feedback indicated
that the separate presentation of deferred taxes as current or noncurrent
provided little useful information to financial statement users and resulted
in additional costs to preparers. Therefore, the FASB issued the ASU to
simplify the presentation of deferred taxes in a classified balance sheet.
Netting of DTAs and DTLs by tax jurisdiction will still be required under
the new guidance.
CLASSROOM
APPLICATION: This
is a good update in the new Accounting Standards Update regarding deferred
tax assets and liabilities for financial accounting classes.
QUESTIONS:
1. (Introductory) What are deferred taxes? What are deferred tax
assets? What are deferred tax liabilities?
2. (Advanced) What is an ASU? Who issues ASUs? Why?
3. (Advanced) What is FASB? What is its area of authority? How does
it affect accounting in the U.S.?
4. (Advanced) What are the details of the recent ASU issued by FASB?
What are the reasons for the new rules?
5. (Advanced) How will the changes affect each of a company's
financial statements?
Reviewed By: Linda Christiansen, Indiana University Southeast
"FASB Issues ASU on Balance Sheet
Classification of Deferred Taxes," by Deloitte Risk Journal Editor, The Wall
Street Journal, December 4, 2015 ---
http://deloitte.wsj.com/riskandcompliance/2015/12/04/heads-up-fasb-issues-asu-on-balance-sheet-classification-of-deferred-taxes/?mod=djem_jiewr_AC_domainid
A new Accounting Standards
Update (ASU) issued by FASB requires entities to present deferred tax assets
(DTAs) and deferred tax liabilities (DTLs) as noncurrent in a classified
balance sheet. ASU 2015-17ą, issued on November 20, simplifies the current
guidance, which requires entities to separately present DTAs and DTLs as
current and noncurrent in a classified balance sheet. Deloitte’s “Heads Up”
newsletter provides details on key provisions of the ASU as well as an
illustrative example comparing the current and new guidance.
Background and Key
Provisions
Under current guidance (ASC
740-10-45-4˛), entities “shall separate deferred tax liabilities and assets
into a current amount and a noncurrent amount. Deferred tax liabilities and
assets shall be classified as current or noncurrent based on the
classification of the related asset or liability for financial reporting.”
Stakeholder feedback indicated that the separate presentation of deferred
taxes as current or noncurrent provided little useful information to
financial statement users and resulted in additional costs to preparers.
Therefore, the FASB issued the ASU to simplify the presentation of deferred
taxes in a classified balance sheet. Netting of DTAs and DTLs by tax
jurisdiction will still be required under the new guidance.
Noncurrent balance sheet
presentation of all deferred taxes eliminates the requirement to allocate a
valuation allowance on a pro rata basis between gross current and noncurrent
DTAs, which constituents had also identified as an issue contributing to
complexity in accounting for income taxes.
Editor’s Note: The ASU will align with the
current guidance in IAS 12ł, which requires entities to present DTAs and
DTLs as noncurrent in a classified balance sheet.
The example below compares
the classification of DTAs and DTLs under current U.S. GAAP with their
classification under the new guidance.
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on December 11,
2015
Finance Chiefs Get Ready for New Rules
by:
James Willhite
Dec 08, 2015
Click here to view the full article on WSJ.com
TOPICS: and
Corporate Tax, Financial Accounting, Insurance Contracts, Lease Accounting,
Revenue Recognition
SUMMARY: Finance
chiefs will be busy in 2016, as they gear up for key changes in regulations
in the U.S. and abroad. From corporate tax plans to revenue from insurance
contracts, chief financial officers will need to make sure their departments
are nimble to cope with the next wave of compliance demands. While some new
accounting rules are past the development process, other compliance issues
may be pegged to court cases or government action. Companies will have a few
years to become fully compliant in some cases, but it doesn't leave time for
foot-dragging. Topics include revenue recognition, lease accounting,
insurance contracts, and corporate tax.
CLASSROOM
APPLICATION: This
is a good summary of some of the accounting updates in financial and tax
accounting.
QUESTIONS:
1. (Introductory) What is a CFO? What are the duties of that
position? What experience and qualifications would be good for an aspiring
CFO?
2. (Advanced) What is FASB? What is its area of authority? What is
IASB? What is its area of authority?
3. (Advanced) What updates apply to revenue recognition? What is the
potential impact on financial statements in the short-term and the
long-term?
4. (Advanced) What changes are coming for lease accounting? What are
the reasons for those changes? How will the changes affect company financial
statements?
5. (Advanced) What are insurance contracts? What changes are
happening for insurance contracts? Why? How will insurance companies be
affected by the new rules?
6. (Advanced) What challenges are companies facing related to tax
law? What are tax extenders? Why do they exist? How do they affect tax
planning?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Finance Chiefs Get Ready for New Rules,"
by ames Willhite, The Wall Street Journal, December 8, 2015 ---
http://www.wsj.com/articles/finance-chiefs-get-ready-for-new-rules-1449533017?mod=djem_jiewr_AC_domainid
Finance chiefs will be busy
in 2016, as they gear up for key changes in regulations in the U.S. and
abroad.
From corporate tax plans to
revenue from insurance contracts, chief financial officers will need to make
sure their departments are nimble to cope with the next wave of compliance
demands.
While some new accounting
rules are past the development process, other compliance issues may be
pegged to court cases or government action. Companies will have a few years
to become fully compliant in some cases, but it doesn’t leave time for
foot-dragging.
Here are some issues that
will be a priority for CFOs in the coming year.
Revenue Recognition
CFOs received some breathing
room when the Financial Accounting Standards Board disclosed it would allow
companies to wait an until 2018—instead of 2017—to adopt rules governing how
they account for deferred revenue from everything from cellphone contracts
to car sales to software. U.S. companies have hundreds of billions of
dollars of deferred revenue on their books and the rules will determine how
much moves the top line, and when, on a case-by-case basis.
Still, many large firms say
they have been preparing parallel books in preparation for the rule changes,
and a delay would be costly and unnecessary. Some indicated in comment
letters to FASB that they would adopt the rule early, which FASB will allow.
Lease Accounting
Companies in the U.S. and
abroad will need to begin bringing their leases for offices and equipment
onto their books in 2016, even though mandatory compliance is unlikely
before 2019. Both the FASB in the U.S. and the overseas rule-maker the
International Accounting Standards Board will publish their final standard
early next year.
The new rules are aimed at
better reflecting a company’s financial condition by including lease
obligations, but it will also have the effect of making companies appear
deeper in debt. CFOs will need to explain to shareholders why debt loads
will seem bigger.
R. Harold Schroeder, a FASB
member, said that shouldn’t pose a huge problem, as most investors already
calculate those obligations on their own. “The benefit here is that instead
of a back-of-the-envelope number, you’re going to get a figure that’s much
more accurate,” he said.
Leases on balance sheets
could cause some companies to violate debt covenants, but Mr. Schroeder said
companies will have time to renegotiate those agreements. “Banks have made
it clear they’re not going to kick out good customers just because of an
accounting change,” he said.
Insurance Contracts
It’s unusual for accounting
standard setters to target a specific industry, but both IASB and FASB are
in the midst of adjustments to standards specifically for insurance
contracts. Companies across several sectors could feel the effect of those
changes.
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on December 11,
2015
Mark
Zuckerberg Tests New Philanthropic Model
by:
Richard Rubin, Laura Saunders, and Deepa Seetharaman
Dec 03, 2015
Click here to view the full article on WSJ.com
TOPICS: Business
Organizations, LLC, Taxation
SUMMARY: Facebook
Inc. founder Mark Zuckerberg is giving away his $45 billion fortune in a way
that allows him also to invest in companies and influence public policy,
while pursuing broader philanthropic aims. By creating a limited-liability
company rather than a foundation, Mr. Zuckerberg and his wife, Priscilla
Chan, can support their goals of promoting "personalized learning, curing
disease, connecting people and building strong communities," while
sidestepping some limits of tax law and public-disclosure rules.
CLASSROOM
APPLICATION: This
article is a very interesting example of how the choice of the form of
business organization affects many aspects of that organization.
QUESTIONS:
1. (Introductory) What are the details of Mark Zuckerberg's
announcement? What are he and his wife's goals?
2. (Advanced) What are the options for forms of doing business? What
are the features of each? What are the advantages and disadvantages of each
type?
3. (Advanced) What form of business did they choose? Did they offer a
reason for choosing this form of business? How will their chosen option help
them? Why weren't other options as attractive to them?
4. (Advanced) What are the financial reporting and public-disclosure
differences of the options? Why did they choose this particular business
form considering those factors?
5. (Advanced) What are the tax implications for and differences among
each of the forms of business? Could those factors have impacted the
decision in this case? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Mark Zuckerberg and Priscilla Chan to Give 99% of
Facebook Shares to Charity
by Deepa Seetharaman and Anupreeta Das
Dec 03, 2015
Online Exclusive
"Mark Zuckerberg Tests New
Philanthropic Model," by Richard Rubin, Laura Saunders, and Deepa Seetharaman,
The Wall Street Journal, December 3, 2015 ---
http://www.wsj.com/articles/zuckerberg-tests-new-philanthropic-model-1449105918?mod=djem_jiewr_AC_domainid
By creating an LLC
rather than a foundation, Facebook founder and his wife can support their
goals while sidestepping some rules.
Facebook Inc. founder Mark
Zuckerberg is giving away his $45 billion fortune in a way that allows him
also to invest in companies and influence public policy, while pursuing
broader philanthropic aims.
By creating a
limited-liability company rather than a foundation, Mr. Zuckerberg and his
wife, Priscilla Chan, can support their goals of promoting “personalized
learning, curing disease, connecting people and building strong
communities,” while sidestepping some limits of tax law and
public-disclosure rules.
The move highlights an
emerging model of philanthropy that extends beyond grant-making foundations.
The fusion of corporate and philanthropic goals and structures “reflects
part of the Silicon Valley ethos,” said Amir Pasic, dean of the Lilly Family
School of Philanthropy at Indiana University. “There is an impatience with
established forms of philanthropy.”
One model, Mr. Pasic said,
is the Omidyar Network created by eBay Inc. founder Pierre Omidyar, which
combines a limited-liability company and a foundation. Will Fitzpatrick, the
former general counsel of the network, said Mr. Omidyar started with only a
foundation and changed his approach because of the limits of that model.
Among other things, the network invests in both nonprofit and for-profit
groups, he said.
The foundation model
is “the most deeply treaded path, but it’s not the only way,” Mr.
Fitzpatrick said.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on December 18,
2015
The move highlights an
emerging model of philanthropy that extends beyond grant-making foundations.
The fusion of corporate and philanthropic goals and structures “reflects
part of the Silicon Valley ethos,” said Amir Pasic, dean of the Lilly Family
School of Philanthropy at Indiana University. “There is an impatience with
established forms of philanthropy.”
One model, Mr. Pasic said,
is the Omidyar Network created by eBay Inc. founder Pierre Omidyar, which
combines a limited-liability company and a foundation. Will Fitzpatrick, the
former general counsel of the network, said Mr. Omidyar started with only a
foundation and changed his approach because of the limits of that model.
Among other things, the network invests in both nonprofit and for-profit
groups, he said.
on December 18,
2015
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on December 18,
2015
The move highlights an
emerging model of philanthropy that extends beyond grant-making foundations.
The fusion of corporate and philanthropic goals and structures “reflects
part of the Silicon Valley ethos,” said Amir Pasic, dean of the Lilly Family
School of Philanthropy at Indiana University. “There is an impatience with
established forms of philanthropy.”
One model, Mr. Pasic said,
is the Omidyar Network created by eBay Inc. founder Pierre Omidyar, which
combines a limited-liability company and a foundation. Will Fitzpatrick, the
former general counsel of the network, said Mr. Omidyar started with only a
foundation and changed his approach because of the limits of that model.
Among other things, the network invests in both nonprofit and for-profit
groups, he said.
on December 18,
2015
Continued in article
Teaching Case
From The Wall Street Journalharge of
Corporate Audits
by: Michael Rapoport
Dec 16, 2015
Click here to view the full
article on WSJ.com
TOPICS: Auditing,
PCAOB
SUMMARY: Beginning
with audits performed in 2017, audit firms will have to name their
"engagement partner" in charge of each audit in a new form to be filed with
the Public Company Accounting Oversight Board. Supporters of the idea say it
will make auditors more accountable and give investors more information
about who is responsible for auditing the companies whose shares they hold.
Audit firms balked at that idea, saying their partners would be exposed to
lawsuits and that there would be complications and delays in the disclosure
if the names were included in an SEC filing. Once enough information has
been gathered, investors will be able to check an audit partner's track
record by looking at whether there have been any problems at the companies a
partner has audited in the past.
CLASSROOM APPLICATION: This
article offers an update for auditing courses.
QUESTIONS:
1. (Introductory) What is the PCAOB? What is it purpose? What is it
area of authority?
2. (Advanced) What new rule is the PCAOB implementing? When will it
begin? What is the purpose of the rule?
3. (Advanced) Why are supporters in favor of the new rule? What are
the critics concerns? Which position is stronger? Do the benefits outweigh
the potential issues?
4. (Advanced) What is the SEC's involvement with this rule? Why is
the SEC involved?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Name That Auditor: Regulators Close to Requiring
Individuals' Names on Corporate Audits
by Michael Rapoport
Dec 10, 2015
Online Exclusive
"Regulator Approves Naming of Audit-Firm Partners in Charge of Corporate
Audits," by Michael Rapoport, The Wall Street Journal, December 16, 2015
---
http://www.wsj.com/articles/regulator-approves-naming-of-audit-firm-partners-in-charge-of-corporate-audits-1450198985?mod=djem_jiewr_AC_domainid
The government’s audit regulator on Tuesday approved a long-in-the-works
move to require audit firms to identify their partners in charge of each
company’s audit.
Beginning with audits performed in 2017, audit firms will have to name their
“engagement partner” in charge of each audit in a new form to be filed with
the Public Company Accounting Oversight Board. The PCAOB voted unanimously
Tuesday to enact the proposal, which is still subject to Securities and
Exchange Commission approval.
Supporters of the idea say it will make auditors more accountable and give
investors more information about who is responsible for auditing the
companies whose shares they hold. Many other countries already require audit
partners to be identified.
Once enough information has been gathered, investors will be able to check
an audit partner’s track record by looking at whether there have been any
problems at the companies a partner has audited in the past.
The fact that the partner’s name will be publicly disclosed should give
audit firms a further incentive “to organize the audit team conscientiously
to give investors comfort that it is reliable,” PCAOB Chairman James Doty
said before the vote. The engagement partner’s role is “of singular
importance” to the reliability of the audit, and investors deserve to know
who that person is, he said.
In addition, the new rule approved Tuesday will require audit firms to
disclose any other firms that contributed significant amounts of work to an
audit. In many cases, firms that audit U.S.-traded multinational companies
have their foreign affiliates perform some of the work in audits, but that
involvement doesn’t have to be disclosed under current rules.
Continued in article
EY: PCAOB adopts final rules to disclose name of partner and others on new form
---
http://www.pwc.com/us/en/cfodirect/publications/in-brief/pcaob-finalizes-rules-disclose-engagement-partner-accounting-firms-new-form.html
On December 15, 2015, the Public Company Accounting Oversight Board (“PCAOB”)
adopted
new rules and amendments
to its auditing standards requiring disclosure of the name of the engagement
partner and information about other accounting firms that took part in the
audit, including other firms within the same network as the group auditor.
This information will be filed with the PCAOB on a new PCAOB form,
Auditor Reporting of Certain Audit Participants (“Form AP”) and will be
searchable on the PCAOB’s website.
The rules and amendments to the auditing standards require disclosure for
all audits of issuers, including employee stock purchase, savings, and
similar plans that file annual reports on Form 11-K. At this time, the PCAOB
is not extending the Form AP requirements to audits of brokers and dealers
unless the broker or dealer is an issuer required to file audited financial
statements. Additionally, the PCAOB is recommending the rules and amendments
to its auditing standards apply to emerging growth companies, which will be
subject to a separate determination by the Securities and Exchange
Commission (the “SEC”), pursuant to the JOBS Act.
Disclosure requirements and effective dates
The rules require disclosure of:
The name of the engagement partner;
The names, locations, and extent of participation of other accounting firms
that took part in the group audit, if their work constituted 5 percent or
more of the total group audit hours; and
The number and aggregate extent of participation of all other accounting
firms that took part in the group audit whose individual participation was
less than 5 percent of the total group audit hours.
Subject to SEC approval, disclosure of the engagement partner will be
required for audit reports issued on or after January 31, 2017 (or three
months after SEC approval, whichever is later), while disclosure of
information about other accounting firms that took part in the audit will be
required for audit reports issued on or after June 30, 2017.
Form AP
The filing deadline for Form AP will be 35 days after the date the auditor’s
report is first included in a document filed with the SEC, with a shorter
filing deadline of 10 days for initial public offerings.
The filing of Form AP is required the first time an audit report is included
in a document filed with the SEC. Subsequent inclusion of precisely the same
audit report in other documents filed with the SEC does not give rise to a
requirement to file another Form AP. Conversely, any changes to the
auditor’s report, including if it is dual-dated, requires a new Form AP even
when no information on the form, other than the date of the report, changes.
Continued in article
Jensen Comment
This is probably a tempest in a tea pot. Audit firms have been naming
engagement partners for years in Europe. Has anybody noticed?
Bob Jensen's threads on professionalism in audits ---
http://faculty.trinity.edu/rjensen/Fraud001c.htm
Teaching Case
From The Wall Street Journal Weekly Accounting Review on December 18,
2015
Financial Gifts for the Kids These Holidays...Or a Present for the
IRS?
by: Laura Saunders
Dec 12, 2015
Click here to view the full article on WSJ.com
TOPICS: Individual
Taxation
SUMMARY: Congress
enacted the kiddie tax in 1986 to prevent people from putting assets in
their children's names to reap tax savings, as children often have far lower
tax rates than their parents. Under its rules, a child's "unearned"
investment income, such as dividends, interest, and capital gains above a
certain amount - $2,100 in 2015 - is taxed at the parents' top rate. So if
the parents' dividends are taxable at 23.8%, the child's dividends are as
well, even if the child's rate would otherwise be 0%. Originally the kiddie
tax applied to children under age 14. Over time lawmakers have expanded it
to cover virtually all children under 18 and many who are older, including
full-time students up to age 24 if they can be claimed as dependents on a
parent's return.
CLASSROOM APPLICATION: This
is a good discussion of the "kiddie tax" for use in an individual income tax
class.
QUESTIONS:
1. (Introductory) What is the kiddie tax? When was it enacted? What
is the premise of the rule?
2. (Advanced) How have the kiddie tax rules changed since enactment?
Why was it changed?
3. (Advanced) How can parents minimize the kiddie tax? What tax
planning ideas could you share with clients?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Financial
Gifts for the Kids These Holidays...Or a Present for the IRS?" by Laura
Saunders, The Wall Street Journal, December 22, 2015 ---
http://www.wsj.com/articles/financial-gifts-for-the-kids-these-holidays-or-a-present-for-the-irs-1449829803?mod=djem_jiewr_AC_domainid
With the holidays here and year-end in sight, it is a good time to think
about the “kiddie tax,” Uncle Sam’s extra levy on investment income earned
by people up to 24 years old. For those making financial gifts to children
and grandchildren, these rules present both perils and planning
opportunities.
Congress enacted the kiddie tax in 1986 to prevent people from putting
assets in their children’s names to reap tax savings, as children often have
far lower tax rates than their parents. Under its rules, a child’s
“unearned” investment income, such as dividends, interest, and capital gains
above a certain amount—$2,100 in 2015—is taxed at the parents’ top rate. So
if the parents’ dividends are taxable at 23.8%, the child’s dividends are as
well, even if the child’s rate would otherwise be 0%.
Originally the kiddie tax applied to children under age 14. Over time
lawmakers have expanded it to cover virtually all children under 18 and many
who are older, including full-time students up to age 24 if they can be
claimed as dependents on a parent’s return. For more details on who’s
affected, see the
instructions for IRS Form
8615.
This levy isn’t just on the very wealthy, says Mark Nash, a partner with
PricewaterhouseCoopers LLP in Dallas: “Folks doing tax returns see it all
the time.” In 2013, the latest year for which data are available, more than
333,000 tax returns owed the tax, totaling about $1 billion.
To avoid pitfalls and maximize the exemptions, here’s what to know.
(1) The kiddie tax doesn’t affect a child’s “earned” income, such as wages
from a job. In addition, it generally doesn’t apply to a child’s investment
income if the child provides more than half his or her own support. But note
that the latter test is a tough one to meet, and the Internal Revenue
Service is alert to abuses.
(2) Under the rules, the first $1,050 of a child’s investment income is
effectively exempt from income tax, says Troy Lewis, a certified public
accountant who heads Lewis & Associates in Draper, Utah. The next $1,050 of
investment income is taxed at the child’s rate, which is often very low or
even zero. That $2,100 limit can go a long way in current markets, as it is
roughly what $100,000 invested in either the S&P 500 or a 10-year Treasury
security would produce in annual income.
Continued
in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on December 18,
2015
SEC to Consider Letting U.S. Companies Use Global Accounting Rules
as Add-On
by: Michael Rapoport
Dec 10, 2015
Click here to view the full article on WSJ.com
TOPICS: GAAP,
IFRS, SEC
SUMMARY: A
recommendation to allow U.S. companies to use international accounting rules
as an add-on to their main financial statements has "the potential to be a
useful next step" in considering how the U.S. should approach the global
rules, Securities and Exchange Commission Chairwoman Mary Jo White said. The
U.S. has stuck with its own rules-known as U.S. generally accepted
accounting principles, or GAAP-because of concerns over the costs and
implementation of a switch. There is little or no support among U.S.
companies for a wholesale changeover.
CLASSROOM APPLICATION: This
update regarding use of IFRS in the U.S. can be used in a financial
accounting class.
QUESTIONS:
1. (Introductory) What is IFRS? Who uses it? What is GAAP? Who uses
it?
2. (Advanced) How do IFRS and GAAP differ? Which does the U.S. use?
Why does the U.S. use it?
3. (Advanced) What did the SEC's chief accountant recommend regarding
U.S. accounting rules? Is this recommendation significant? How could U.S.
financial statements change? Would the change in U.S. accounting rules be
minor or substantial?
4. (Advanced) What is the current outlook for changes in the
accounting rules in U.S.? Are the rules expected to change in the near
future? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Top SEC Accountant Urges Supplemental Use of Global
Rules for U.S. Companies
by Michael Rapoport
Nov 18, 2015
Online Exclusive
QUESTIONS:
1. (Introductory) What is IFRS? Who uses it? What is GAAP? Who uses
it?
2. (Advanced) How do IFRS and GAAP differ? Which does the U.S. use?
Why does the U.S. use it?
3. (Advanced) What did the SEC's chief accountant recommend regarding
U.S. accounting rules? Is this recommendation significant? How could U.S.
financial statements change? Would the change in U.S. accounting rules be
minor or substantial?
4. (Advanced) What is the current outlook for changes in the
accounting rules in U.S.? Are the rules expected to change in the near
future? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Top SEC Accountant Urges Supplemental Use of Global
Rules for U.S. Companies
by Michael Rapoport
Nov 18, 2015
Online Exclusive
QUESTIONS:
1. (Introductory) What is IFRS? Who uses it? What is GAAP? Who uses
it?
2. (Advanced) How do IFRS and GAAP differ? Which does the U.S. use?
Why does the U.S. use it?
3. (Advanced) What did the SEC's chief accountant recommend regarding
U.S. accounting rules? Is this recommendation significant? How could U.S.
financial statements change? Would the change in U.S. accounting rules be
minor or substantial?
4. (Advanced) What is the current outlook for changes in the
accounting rules in U.S.? Are the rules expected to change in the near
future? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
U.S. Companies May Gain Ability to Reconcile to
IFRS Accounting
by Emily Chasan
May 07, 2015
Online Exclusive
"SEC
to Consider Letting U.S. Companies Use Global Accounting Rules as Add-On," by
Michael Rapoport, The Wall Street Journal, December 10, 2015 ---
http://www.wsj.com/articles/sec-to-consider-letting-u-s-companies-use-global-accounting-rules-as-add-on-1449673126?mod=djem_jiewr_AC_domainid
A recommendation to allow U.S. companies to use international accounting
rules as an add-on to their main financial statements has “the potential to
be a useful next step” in considering how the U.S. should approach the
global rules, Securities and Exchange Commission Chairwoman
Mary Jo White
said Wednesday.
Speaking at an accounting conference in Washington, Ms. White said the SEC
and its staff will be discussing the recommendation by James Schnurr, the
SEC’s chief accountant, “so that we can determine the path forward.” She
didn’t give a timetable for when the commission might reach a decision on
the issue.
If the SEC implements Mr. Schnurr’s recommendation, U.S. companies could
provide financial data calculated using the global rules, which differ in
some respects from U.S. rules, to supplement the main financial statements
they provide. Those financial statements would continue to be calculated
under current U.S. rules.
Mr. Schnurr said last month that he had
made the recommendation
to Ms. White. The proposal is a middle-ground approach between a full U.S.
adoption of the global rules—known as International Financial Reporting
Standards, or IFRS—and no U.S. use of them. Accounting-industry leaders and
international rule makers have long urged the U.S. to adopt IFRS, now in use
in more than 100 countries.
But the U.S. has stuck with its own rules—known as U.S. generally accepted
accounting principles, or GAAP—because of concerns over the costs and
implementation of a switch. Mr. Schnurr has said there is little or no
support among U.S. companies for a wholesale changeover.
In other matters, Ms. White also expressed concern about companies’ use of
their own tailored financial measures that make their earnings look better
by stripping out a variety of expenses.
Continued
in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on December 18,
2015
U.S. Corporations Increasingly Adjust to Mind the GAAP
by: Theo Francis and Kate Linebaugh
Dec 15, 2015
Click here to view the full article on WSJ.com
TOPICS: Ebitda,
Financial Reporting, GAAP, Regulation G
SUMMARY: Hundreds
of U.S. companies are trumpeting adjusted net income, adjusted sales and
"adjusted EBITDA." These adjusted measures paint a rosier picture of
corporate earnings. About one in 10 major securities filings this year
used the term adjusted EBITDA-or adjusted earnings before interest,
taxes, depreciation and amortization-up from one in 40 a decade ago.
About a quarter of earnings-related filings this year included figures
that don't comply with generally accepted accounting principles, or GAAP,
as well as more standard measures.
CLASSROOM APPLICATION: This
article addresses the issue of companies using non-GAAP measures in
their financial reporting in attempt to better explain their situation
could be confusing users of the financial information. It includes
discussions of "adjusted EBITDA" and Regulation G.
QUESTIONS:
1. (Introductory) What is a non-GAAP measure? Why do companies
use them?
2. (Advanced) What is adjusted EBITDA? How is it calculated? What
value does it offer to investors and other users of the financial
statements? What potential problems or confusion could it cause?
3. (Advanced) What is Regulation G? Why was it created? What is
its purpose? How does it address non-GAAP reporting?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Non-GAAP Numbers May Confuse Investors: SEC Chair
by Richard Teitelbaum
Dec 09, 2015
Online Exclusive
"U.S. Corporations Increasingly Adjust to Mind the GAAP," by Theo Francis and
Kate Linebaugh, The Wall Street Journal, December 15, 2015 ---
http://www.wsj.com/articles/u-s-corporations-increasingly-adjust-to-mind-the-gaap-1450142921?mod=djem_jiewr_AC_domainid
A financial obfuscation of the dot-com era is making a comeback: Hundreds of
U.S. companies are trumpeting adjusted net income, adjusted sales and
“adjusted Ebitda.”
These adjusted measures paint a rosier picture of corporate earnings.
Without them, third-quarter earnings per share fell 13% for the biggest U.S.
companies, according to Deutsche Bank research, instead of falling 0.1% with
them.
About one in 10 major securities filings this year used the term adjusted
Ebidta—or adjusted earnings before interest, taxes, depreciation and
amortization—up from one in 40 a decade ago. About a quarter of
earnings-related filings this year included figures that don’t comply with
generally accepted accounting principles, or GAAP, as well as more standard
measures, according to a Wall Street Journal analysis of 10-K, 10-Q and 8-K
filings.
The terms now crop up in quarterly earnings releases and securities filings
for companies as varied as Grape-Nuts-maker Post Holdings Inc., chemical
company Dow Chemical Co. , wireless operator AT&T Inc. and hamburger chain
Wendy’s Co.
United Technologies Corp. last week was the latest big company to embrace
adjusted earnings measures. By adhering to accounting rules, “we’re actually
confusing people more than we were helping people understand what’s going on
in the business,” said CEO Greg Hayes. “This is a simplification and really
allows the investors to more easily understand what the businesses are
doing.”
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on December 18,
2015
Boards Face Recruiting Challenges
by: Richard Teitelbaum and Kimberly S. Johnson
Dec 15, 2015
Click here to view the full article on WSJ.com
TOPICS: Audit
Committees, Auditing, Corporate Governance, Sarbanes Oxley
SUMMARY: As
the responsibilities of audit committees continue to mount, boards may be
finding it more challenging to find candidates with the talent, skills and
time to fulfill the increasingly critical role. Since the implementation of
the Sarbanes-Oxley Act in 2002, audit committees have taken on more
responsibility, including for such issues as whistle-blowing, legal
compliance, and cybersecurity.
CLASSROOM APPLICATION: This
is an excellent article to use in auditing and financial accounting classes
when covering the function of an audit committee.
QUESTIONS:
1. (Introductory) What is an audit committee? What is its area of
responsibility? Why is the work of audit committees important?
2. (Advanced) What challenges are boards facing regarding audit
committees? What are the reasons for those challenges?
3. (Advanced) How could the challenges be alleviated? Could the job
be changed or adjusted? How could supply of viable candidates be increased?
4. (Advanced) What is Sarbanes-Oxley? How does it affect the work of
and challenges surrounding audit committees?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Boards Face Recruiting Challenges," by Richard Teitelbaum and Kimberly S.
Johnson, The Wall Street Journal, December 15, 2015 ---
http://www.wsj.com/articles/boards-face-recruiting-challenges-1450148436?mod=djem_jiewr_AC_domainid
As the responsibilities of audit committees continue to mount, boards may be
finding it more challenging to find candidates with the talent, skills and
time to fulfill the increasingly critical role.
Since the implementation of the Sarbanes-Oxley Act in 2002, audit committees
have taken on more responsibility, including for such issues as
whistle-blowing, legal compliance, and cybersecurity. “We wind up loading
almost everything onto the audit committee,” said Jeffrey Sonnenfeld, a
management professor at the Yale School of Management. This is helping to
make it more difficult to find qualified candidates for audit committees.
A spotlight was thrown on the subject last Wednesday when Securities and
Exchange Commission chairwoman Mary Jo White gave a keynote address at the
American Institute of CPAs in Washington, D.C., in which she spoke about the
increased complexity of the audit committee members’ responsibilities.
“Just meeting the technical requirements of financial literacy may not be
enough to fully understand the financial reporting requirements or to
challenge senior management on major, complex decisions,” she said. “I have
growing concerns about the amount of work required of some audit
committees.”
“It’s becoming increasingly difficult,” said Robert Swieringa, professor
emeritus of accounting at Cornell University’s Johnson Graduate School of
Management. “Boards are using search firms to find them.”
The supply of qualified individuals has shrunk, he added, as the
requirements for the job have grown apace. Since audit committee workloads
have risen, candidates are increasingly loathe to commit to serving on
multiple boards as they have in the past.
Being an audit committee member has become less attractive because of
increased responsibilities and legal risks associated with the position,
said Robert Willens, president of an accounting and tax consulting firm of
the same name.
“I think tThere is a relatively shallow pool of qualified individuals from
which to select audit committee candidates,” he said. “The more demanding
the job becomes and the more risky the job is perceived to be, the more
difficult it will become to entice qualified candidates to perform this
important function.”
The difficulty in finding qualified audit committee candidates could have a
salutary effect, if it encourages boards to think outside the box. Too often
boards look for bold faced names, such as retired chief executive officers
or chief financial officers.
“There is a vast sea of people if they get beyond the usual suspects,” Mr.
Sonnenfeld said. “Many times on boards, the people who ask the best
questions are the ones who are not experts.”
If boards are being forced to look beyond the more obvious prospective
candidates, that could bring greater diversity. “I believe in
diversification, diverse backgrounds and skill sets as well as gender and
ethnicities,” said Barbara Hackman Franklin, founder of Barbara Franklin
Enterprises, a Washington, D.C., consulting firm and a former U.S. Commerce
Secretary under George H.W. Bush who has served on six audit committees,
including Aetna Inc. and Dow Chemical Co. She believes there are sufficient
numbers of qualified people to serve on audit committees, but it may take
efforts to find them. “It may take a search firm to find them,” she said.
As it stands, the usual suspects make up a big percentage of audit committee
directors. According to James Drury III, head of executive search firm
JamesDrury Partners, chief financial officers and accountants made up 29% of
audit committee memberships in 2013, the latest year for which numbers are
available. But the figures are rising.
According to Ernst & Young LLP’s Center for Board Matters, there is an
average of three “officially designated financial experts” on large company
boards today. That is up from 2.7 in 2012.
Continued in article
Humor for December 2015
Dave Barry’s 2015 Year in Review ---
http://www.miamiherald.com/living/liv-columns-blogs/dave-barry/article51119880.html
Not quite as good as the old Dave Barry
The 7 worst 'Shark Tank' pitches of 2015 ---
http://www.businessinsider.com/the-worst-shark-tank-pitches-of-2015-2015-12
The Ultimate Guide To Winning Your White Elephant Gift Exchange Using Game
Theory ---
http://fivethirtyeight.com/features/white-elephant-yankee-swap-game-theory/
Casablanca’s Hilarious Alternative Final Scene Featuring Saturday Night Live’s
Kate McKinnon: Pragmatism Carries the Day!
http://www.openculture.com/2015/12/casablancas-hilarious-alternative-final-scene.html
Buster Keaton: The Wonderful Gags of the Founding Father of Visual Comedy ---
http://www.openculture.com/2015/11/buster-keaton-the-wonderful-gags-of-the-founding-father-of-visual-comedy.html
Dad Jokes
https://www.facebook.com/Postize/photos/pcb.1020015178030536/1020014358030618/?type=3
Thank you Jason Hardin for the heads up.
Steve Martin Writes a Hymn for Hymn-Less Atheists ---
http://www.openculture.com/2015/12/steve-martin-writes-a-hymn-for-hymn-less-atheists.html
Read the CIA’s Simple Sabotage Field Manual: A Timeless, Kafkaesque Guide to
Subverting Any Organization with “Purposeful Stupidity” (1944) ---
http://www.openculture.com/2015/12/simple-sabotage-field-manual.html
Forwarded by Paula
A new business was opening, and one of the owner’s friends sent flowers for the
occasion. But when the owner read the card with the flowers, it said “Rest in
Peace”.
The owner was a little upset and called the florist to complain. After he had
told the florist about the obvious mistake, the florist said, “Sir, I’m really
sorry for the mistake, but rather than getting angry, you should imagine this:
Somewhere there is a funeral taking place today, and they have flowers with a
note saying, “Congratulations on your new location.”
CHRISTMAS WITH LOUISE
Written by Jeff Foxworthy - 1996
As a joke, my brother used to hang a pair of panty hose over his fireplace
before Christmas. He said all he wanted was for Santa to fill them. What they
say about Santa checking the list twice must be true because every Christmas
morning, although Jay's kids' stockings were overflowed, his poor pantyhose hung
sadly empty.
One year I decided to make his dream come true. I put on sunglasses and went in
search of an inflatable love doll. They don't sell those things at Walmart. I
had to go to an adult bookstore downtown.
If you've never been in an X-rated store, don't go.
You'll only confuse yourself. I was there an hour saying things like, "What does
this do? You're kidding me! Who would buy that?" Finally, I made it to the
inflatable doll section. I wanted to buy a standard, uncomplicated doll that
could also substitute as a passenger in my truck so I could use the car pool
lane during rush hour. Finding what I wanted was difficult. Love Dolls come in
many different models. The top of the line, according to the side of the box,
could do things I'd only seen in a book on animal husbandry. I settled for
Lovable Louise. She was at the bottom of the price scale. To call Louise a doll
took a huge leap of imagination.
On Christmas Eve and with the help of an old bicycle pump, Louise came to life.
My sister-in-law was in on the plan and let me in during the wee morning hours.
Long after Santa had come and gone, I filled the dangling pantyhose with
Louise's pliant legs and bottom. I also ate some cookies and drank what remained
of a glass of milk on a nearby tray. I went home, and giggled for a couple of
hours.
The next morning my brother called to say that Santa had been to his house and
left a present that had made him VERY happy but had left the dog confused. She
would bark, start to walk away, then come back and bark some more.
We all agreed that Louise should remain in her panty hose so the rest of the
family could admire her when they came over for the traditional Christmas
dinner.
My grandmother noticed Louise the moment she walked in the door. "What the hell
is that?" she asked.
My brother quickly explained, "It's a doll."
"Who would play with something like that?" Granny snapped.
I had several candidates in mind, but kept my mouth shut.
"Where are her clothes?" Granny continued.
"Boy, that turkey sure smells nice Gran" Jay said, to steer her into the dining
room.
But Granny was relentless. "Why doesn't she have any teeth?"
Again, I could have answered, but why would I? It was Christmas and no one
wanted to ride in the back of the ambulance saying, "Hang on Granny, hang on!"
My grandfather, a delightful old man with poor eyesight, sidled up to me and
said, "Hey, who's the naked gal by the fireplace?"
I told him she was Jay's friend. A few minutes later I noticed Grandpa by the
mantel, talking to Louise. Not just talking, but actually flirting. It was then
that we realized this might be Grandpa's last Christmas at home.
The dinner went well. We made the usual small talk about who had died, who was
dying, and who should be killed, when suddenly Louise made a noise like my
father in the bathroom in the morning. Then she lurched from the panty hose,
flew around the room twice, and fell in a heap in front of the sofa. The cat
screamed. I passed cranberry sauce through my nose, and Grandpa ran across the
room, fell to his knees, and began administering mouth-to-mouth resuscitation.
My brother fell back over his chair and wet his pants. Granny threw down her
napkin, stomped out of the room, and sat in the car.
It was indeed a Christmas to treasure and remember.
Later in my brother's garage, we conducted a thorough examination to decide the
cause of Louise's collapse. We discovered that Louise had suffered from a hot
ember to the back of her right thigh. Fortunately, thanks to a wonder drug
called duct tape, we restored her to perfect health!
An awful one forwarded by Paula
A tourist in Vienna is going through a graveyard when, all of a sudden, he hears
music. No one is around, so he starts searching for the source.
He finally locates the origin and finds it is coming from a grave with a
headstone that reads: "Ludwig van Beethoven, 1770- 1827".
Then he realizes that the music is Beethoven's Ninth Symphony and it is being
played backwards!
Puzzled, he leaves the graveyard and persuades a friend to return with him.
By the time they arrive back at the grave, the music has changed. This time, it
is the Seventh Symphony, but like the previous piece, it is being played
backwards.
Curious, the men agree to consult a music scholar. When they return with the
expert, the Fifth Symphony is playing, again backwards.
The expert notices that the symphonies are being played in the reverse order in
which they were composed . . . the 9th, then the 7th, then the 5th.
By the next day the word style="font-size: 12.0pt; font-family: 'Times New Roman',serif; color: black">
---
http://faculty.trinity.edu/rjensen/book15q1.htm#Humor022815
Humor January 1-31, 2015
---
http://faculty.trinity.edu/rjensen/book15q1.htm#Humor013115
And that's the way it was on December 31, 2015 with a little help from my
friends.
Bob Jensen's gateway to millions of other blogs and social/professional networks
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November 30, 2015
Bob
Jensen's New Bookmarks for November 1-30, 2015
Bob Jensen
at
Trinity University
For
earlier editions of Fraud Updates go to
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All
my online pictures ---
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David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics
Science"
Bob Jensen
February 19, 2014
SSRN Download:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296
PwC: Download:
IFRS and US GAAP: similarities and differences - 2015 edition
---
http://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-ifrs-us-gaap-similarities-and-differences-2015.pdf
Bob Jensen's Threads on Controversies in Accounting Standard Setting ---
http://faculty.trinity.edu/rjensen/theory01.htm#MethodsForSetting
Similarities and Differences - A comparison of IFRS for SMEs and 'full IFRS'
---
http://www.pwc.com/en_GX/gx/ifrs-reporting/pdf/Sims_diffs_IFRS_SMEs.pdf
Comments on Web homepage design: Things I do not like about the new
American Accounting Association (AAA) homepage ---
http://faculty.trinity.edu/rjensen/WebsiteDesign.htm
History Corner
History of the DuPont ROI Formula
"DONALDSON BROWN (1885-1965): THE POWER OF AN
INDIVIDUAL AND HIS IDEAS OVER TIME
http://umiss.lib.olemiss.edu:82/articles/1038724.7471/1.PDF
Scroll down to Page 79
Authors
Dale L. Flesher UNIVERSITY OF MISSISSIPPI
Gary John Previts CASE WESTERN RESERVE UNIVERSITY
Abstract
Donaldson Brown developed the expanded Return on
Investment (ROI) measure, or DuPont formula, in l914. However ROI was not
Brown’s only contribution to financial management. His dealer ten-day
reporting system was widely and rapidly adopted throughout the auto
industry. His ideas to support a variety of forecasting and planning
techniques supported decentralized corporate management and his pricing
processes were cutting-edge developments that others tried to emulate.
Flexible budgeting at General Motors, frequently unrecognized, also was in
place during his financial administration in the early l920s. ROI remains
Brown’s most prominent contribution and the technique achieved status as a
dominant approach to financial management in industrial corporations by the
l950s. As a national standard-ofperformance measure, it was supported by
varying sources including the American Management Association as well as in
the teaching materials of academics, especially Robert N. Anthony of the
Harvard Business School. The impact of these forms of dissemination led to
ROI being adopted eventually at the Ford Motor Company when its previously
autocratic centralized style of Ford family management was replaced by a
team known as the Whiz Kids, led by Harvard Business School alumnus Robert
McNamara and a former GM vice president, Earnest Breech. This paper asserts
the significance of the innovations developed by Brown as being among the
most important of those initiated in 20th century corporate America, and
thus among the most important in the development of 20th century accounting
and financial management thought.
Jensen Comment
I really liked the following "classic" article by Selling and Stickney:
A New
Approach," by T.I. Selling and C.P. Stickney, Accounting
Horizons, December 1990, pp. 9-17.
"Goldman Sachs Explains The 'Return On Equity' Formula That Every CFA Test
Taker Needs To Know," by Sam Ro, Business Insider, May 26, 2014 ---
http://www.businessinsider.com/cfa-dupont-roe-model-2014-5
For investors, one of the most important metrics of
a company is return on equity (ROE), which can be calculated by taking net
income and dividing it by equity.
"The decision to expand into the market of a
competitor and seek additional return is not a decision driven by the
expected profit margin, the expected return relative to the anticipated
quantity of sales,"
said Jesse Livermore, the pseudonymous author of
the Philosophical Economics blog. "Rather, it’s a decision driven instead by
the expected ROE, the expected return relative to the amount of capital that
will have to be invested, put at risk, in order to earn it."
Unfortunately, ROE alone doesn't tell you much
about a company's operating or capital structure. That's why analysts
decompose the ROE into multiple components,
including a measure of profit margin (see article).
The Chartered Financial Analyst (CFA) exam, which
will be
administered on June 7, is among the advanced Wall
Street exams that tests test-takers on at least two decompositions of ROE.
The more complicated one is the
DuPont model.
Goldman Sachs' Stuart Kaiser recently included the
formula for reference in an April 2 note sent out to its clients.
[Exhibit not shown here]
Continued in article
Bob Jensen's threads on ROI ---
http://faculty.trinity.edu/rjensen/roi.htm
Accounting History Corner
Digital Accounting Collection at Ole Miss. ---
http://umiss.lib.olemiss.edu:82/
Accounting Historians Notebook ---
http://www.olemiss.edu/depts/general_library/dac/files/ahn.html
Syllabus
The University of Mississippi Patterson School of Accountancy
ACCOUNTANCY 607 ACCOUNTING RESEARCH SEMINAR Fall, 2012
Dr. Dale L. Flesher
TEXTBOOKS:
Writing the Doctoral Dissertation, by Davis and Parker.
A History of Accounting in the USA, by Previts & Merino
Jensen Comment
Question
Does anybody else see the irony of this article on Day 911
of the IRS Scandal --- I mean the number 911 that is the universal
emergency help phone number in the USA?
"The IRS Scandal, Day 911," by Paul
Caron, TaxProf Blog, November 6, 2015 ---
http://taxprof.typepad.com/taxprof_blog/2015/11/the-irs-scandal-day-911.html
Washington Post op-ed:
The Supreme Court’s Opportunity to Tackle Sinister Trends, by George
Will:
The
IRS scandal — the denial of essential tax-exempt
status to conservative advocacy groups, thereby effectively suppressing the
groups’ activities — demonstrates this: When government is empowered to
regulate advocacy, it will be tempted to suppress some of it. And sometimes
government will think like Oscar Wilde: “The only way to get rid of
temptation is to yield to it.”
These truths should be on the Supreme Court’s nine fine minds on Friday when
they consider whether to hear a challenge to a lower court’s decision that
disregards some clear Supreme Court pronouncements pertaining to the First
Amendment. The amendment says there shall be no laws abridging freedom of
speech, but various governments are persistently trying to regulate, and
perhaps chill, advocacy. The most recent wrinkle in this disreputable
project comes from California.
Continued in article
The BBA, unique in
Australia, is specifically designed for Aboriginal and Torres Strait Islander
professionals wishing to gain a degree qualification to maximise their career
options.
Applications open for new business degree
for Indigenous students
http://www.uts.edu.au/about/uts-business-school/news/applications-open-new-business-degree-indigenous-students
CORRECT THE SYNTAX ERRORS
"How to debug Excel spreadsheets," Rayman Meservy and Marshall Romney,
Journal of Accountancy, November 1, 2015 ---
http://www.journalofaccountancy.com/issues/2015/nov/how-to-debug-excel-spreadsheets.html
The average federal employee earned $84,153 in 2014—roughly
50% more than the average worker in the private economy
How to Mislead With Statistics
From a Wall Street Journal newsletter on November 20, 2015
Mac
Zimmerman cites a Cato Institute report
showing that “the average federal employee earned
$84,153 in 2014—roughly 50% more than the average worker in the private
economy. When you include benefits like health care and pensions —
nearly 80% higher than
everyone else.”
The Editorial ---
http://www.wsj.com/articles/the-sweet-gig-of-being-a-bureaucrat-1447978181?mod=djemMER&alg=y
Jensen Comment
Comparisons like this should contrast differences in public sector versus
private sector distributions of income. Relative to the public sector the
private sector has a much larger standard deviation in a distribution that is
not at all normal (think of the millions of minimum wage workers in contrast to
a much smaller number of overpaid corporate executives). The public sector
nearly always pays more than minimum wage but even the USA President Obama's
salary is paltry compared to the highly paid corporate CEOs with all sorts of
side deals like bonus plans and stock options.
In comparison to the public sector, many private sector
employees are on potentially lucrative pay-for-performance plans such as
performance commissions and bonuses. And there are usually more overtime
opportunities in the public sector.
Anecdotally, most graduates from accounting masters degree
programs are seeking to pass the CPA examination and make a career in the
private sector. There must be a reason. A few might seek to become glamorous
pistol-packing FBI agents but most of the relatively small number of graduates
looking for public sector jobs (like joining the IRS as a staff accountant) do
so because they were passed over by the private sector. Many of those in
the public sector like those who become IRS agents are seeking opportunities to
break into higher paying jobs in the private sector.
A huge lure of the private sector is the possibility (however
remote) of rising to compensation levels well above opportunities for
above-average compensation in the public sector.
Dutch Treats Aren't What They Used to Be
http://neurope.eu/article/the-european-commission-steps-up-campaign-against-double-dutch-tax-avoidance/
Dutch media reported on Monday that the European
Commission is probing Dutch government deals with several multinational
companies including Apple, Starbucks, Pfizer, GlaxoSmithKline, Microsoft,
and Kraft Foods.
The Commission has already proclaimed the deal with
Starbucks an illegal state subsidy, ordering the Dutch government to claim
back an estimated €30 million. On Wednesday, October 21s, commissioner
Margrethe Vestager specified that deals designed to encourage tax avoidance
were illegal, including that made between the Netherlands and Starbucks. The
Dutch government was “surprised” by the ruling.
Continued in article
Laffer Curve ---
https://en.wikipedia.org/wiki/Laffer_curve
Between 1979 and 2002,
more than 40 other countries, including the United Kingdom, Belgium,
Denmark, Finland, France, Germany, Norway, and Sweden cut their top rates of
personal income tax. In an article about
this,
Alan Reynolds, a
senior fellow with the
right-libertarian
think tank
Cato Institute,
wrote, "Why did so many other countries so dramatically reduce marginal tax
rates? Perhaps they were influenced by new economic analysis and evidence
from... supply-side economics. But the sheer force of example may well have
been more persuasive. Political authorities saw that other national
governments fared better by having tax collectors claim a medium share of a
rapidly growing economy (a low marginal tax) rather than trying to extract a
large share of a stagnant economy (a high average tax)."[38]
Japanese government raised the sales tax in 1997 for the purpose of
balancing its budget, but the government revenue decreased by 4.5 trillion
yen because consumption stumbled. The country recorded a GDP growth rate of
3 percent in 1996, but after the tax hike the economy sank into recession
(although this was also the time period of the 1997 Asian Financial Crisis.)[39]
The tax revenue reached a peak of 53 trillion yen in FY 1997, and declined
in subsequent years, being still 42 trillion yen[40]
(537 billion US dollars) in 2012.
Continued in article
"Israel, the Laffer Curve, and Market-Based Reform," by
Daniel J. Mitchell, Townhall, November 17, 2015 ---
http://finance.townhall.com/columnists/danieljmitchell/2015/11/17/israel-the-laffer-curve-and-marketbased-reform-n2081727
Since I’m a big fan of
the
Laffer Curve,
I’m always interested in real-world examples
showing good results
when governments reduce marginal tax rates on productive activity.
Heck, I’m equally
interested in
real-world results when governments do the wrong
thing
and increase tax burdens on work, saving, investment, and entrepreneurship
(and, sadly,these
examples
are more common).
My goal, to be sure,
isn’t to maximize revenue for politicians. Instead, I prefer the
growth-maximizing point
on the Laffer Curve.
In any event, my modest
hope is that politicians will learn that higher tax rates lead to less
taxable income. Whether taxable income falls by a lot or a little obviously
depends on the specific circumstance. But in either case, I want policy
makers to understand that
there are negative economic effects.
Writing for Forbes, Jeremy Scott of Tax Notes
analyzes
the supply-side policies of Israel’s Benjamin Netanyahu
Netanyahu…argued that the Laffer curve worked, and that his 2003 tax cuts
had transformed Israel into a market economy and an engine of growth. …He
pushed through controversial reforms… The top individual tax rate was cut
from 64 percent to 44 percent, while corporate taxes were slashed from 36
percent to 18 percent. …Netanyahu credits these reforms for making Israel’s
high-tech boom of the last few years possible. …tax receipts did rise after
Netanyahu’s tax cuts. In fact, they were sharply higher in 2007 than in
2003, before falling for several years because of the global recession. …His
tax cuts did pay for themselves. And he has transformed Israel into more of
a market economy…In fact, the prime minister recently announced plans for
more cuts to taxes, this time to the VAT and corporate levies.
Pretty
impressive.
Though
I have to say that rising revenues doesn’t necessarily mean that the tax
cuts were completely self-financing. To answer that question, you have to
know what would have happened in the absence of the tax cut. And since that
information never will be available, all we can do is speculate.
That being said, I have
no doubt there was a strong Laffer Curve response in Israel. Simply stated,
dropping the top tax rate on personal income by 20 percentage points creates
a
much more conducive environment
for investment and entrepreneurship.
And cutting the
corporate tax rate in half is also
a sure-fire recipe
for improved investment and job creation.
Continued in article
Jensen Comment
Note that there's likely to be a relatively long lag between tax cuts and
increases in tax revenues even in circumstances that are likely to have a Laffer
Curve impact. For example, Bill Clinton allegedly was able to balance the budget
due to lags in the Regain tax cuts.
The circumstances were not decent for the George W. Bush tax
cuts because he was the most spendthrift president in USA history. Tax cuts do
not necessarily have a Laffer Curve impact when spending is significantly
increased alongside the tax cuts. The George W. Bush veto pen was still full of
ink at the end of his term of office as President of the USA.
The circumstances of Laffer Curve impact are also not good if
the economy is heading for a deep recession. Too many other variables come into
play, especially global variables.
The Miracle of Chile ---
https://en.wikipedia.org/wiki/Miracle_of_Chile
Major IRS Policy Change
"Tax ID theft victims may obtain copies of fraudulent returns," by Paul
Bonner, Journal of Accountancy, November 12, 2015 ---
http://www.journalofaccountancy.com/news/2015/nov/tax-id-theft-victims-may-obtain-bogus-returns-201513385.html#sthash.Sp4xnRjI.dpuf
The IRS posted
instructions on its website for taxpayers or their
CPA or other authorized representative to obtain copies of returns filed by
thieves using the taxpayers’ stolen identification. The new procedures
represent a change of policy for the Service, which previously had refused
to release fraudulent returns due to privacy concerns. Acknowledging that
taxpayers victimized by stolen identification tax refund fraud may have a
compelling concern to determine just what information about them was stolen
and how it was used, the IRS said it will provide copies of fraudulent
returns for the current tax year and up to six previous tax years. However,
requests for the returns must meet strict requirements, and certain
information will be redacted from the copies provided. Also, the IRS must
have resolved the underlying identity theft case before it will provide a
copy of any affected return. For now, only individual returns in the 1040
series may be requested. -
See more at:
http://www.journalofaccountancy.com/news/2015/nov/tax-id-theft-victims-may-obtain-bogus-returns-201513385.html#sthash.Sp4xnRjI.dpuf
Instructions ---
https://www.irs.gov/Individuals/Instructions-for-Requesting-Copy-of-Fraudulent-Returns
From the CPA Newsletter on November 18, 2015
The answer is not to hire a job-hopping
kangaroo!
"U of Montana Will Cut 201 Positions," Inside Higher Ed,
November 18, 2015 ---
https://www.insidehighered.com/quicktakes/2015/11/18/u-montana-will-cut-201-positions?utm_source=Inside+Higher+Ed&utm_campaign=9f5b680bec-DNU20151118&utm_medium=email&utm_term=0_1fcbc04421-9f5b680bec-197565045
Not in accounting! The faculty cuts are mostly in liberal arts programs with
declining numbers of majors.
Jensen Comment
Rolling Stone labeled the university the "most scenic campus in America."
One drawback as far as state flagship universities are concerned, this
university has never been rated very high by Princeton Review as a
flagship party school. In my days of dreaming of skiing and horse wrangling I
seriously considered an offer to be on the faculty of this university. If I had
accepted the offer I probably would never have left Missoula.
Pension Benefit Guaranty Corporation (PBGC) ---
https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corporation
If this shortfall is happening in relatively good economic times, think
of the deficits in an economic crash!
The deficit for the single-employer program rose 25% this year to $24.1 billion,
and the deficit for the multiemployer program climbed 23% this year to reach
$52.3 billion.
PBGC deficits rise in fiscal year 2015, annual report says ---
http://www.pionline.com/article/20151117/ONLINE/151119879/pbgc-deficits-rise-in-fiscal-year-2015-annual-report-says
Is this just another big government program cash pinata?
'CPA Pleads Guilty in Accounting Fraud Scheme," by Michael Cohn,
Accounting Today, November 20, 2015 ---
http://www.accountingtoday.com/news/audit-accounting/cpa-pleads-guilty-in-accounting-fraud-scheme-76480-1.html
A partner at a
New York CPA firm has pleaded guilty to participating in a
multimillion-dollar accounting fraud scheme.
Marc Wieselthier,
57, a shareholder of Curcio, Wieselthier & Cohen CPAs, pleaded guilty
Wednesday to participating in a scheme to obtain millions of dollars in
loans by making false statements and providing false and fraudulent
documents to two unidentified commercial banks in New York concerning the
financial condition of an unidentified Florida-based cosmetics company that
was one of Wieselthier’s clients.
Wieselthier, a licensed CPA in Plainview, N.Y., has
been a partner at the firm since 2009. The cosmetics company and its CEO
were clients of Wieselthier, who performed, among other things, year-end
audits of financial statements for the company.
Continued in article
Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
CNBC:
Is this the end of the E.U.?
http://www.cnbc.com/2015/11/17/this-is-what-will-kill-the-eu.html
The direct
cause is actually an extremely divisive and growing dispute about open
borders, immigration, and refugee resettlement. But that conflict just
became a lot more serious thanks to the horrific ISIS terrorist attacks in
Paris Friday night. Now, this discussion has grown and migrated, (pun
intended), from a political debate among E.U. elites to the #1 pressing
issue on the streets of Europe. When relatively smaller economic nations
like Hungary began closing their borders to migrants and Syrian refugees
last month, it could be written off as perhaps an isolated incident. But all
bets are off now that France is closing its borders in response to the
attacks, even if it is just temporarily. That's because in so doing,
President Francois Hollande has unambiguously connected the border issue
with the effort to fight the spread of terror. It's so obvious that even the
most politically uninterested person can see what it means. And just in case
the message still isn't entirely clear to everyone, one of the major stories
in Europe today is about how the alleged mastermind of the Paris attacks,
Abdelhamid Abaaoud, boasted in videos about how easily he crisscrossed the
borders of the E.U. for years.
Continued
in article
Jensen Comment
It might be time to think about accounting and business scenarios if there is a
breakup.
For example, how will this affect the IASB that depends heavily upon EU revenue
for its operations? In fact the heart, soul, and leadership if the IASB
historically has been in the EU.
What will be the impact on accounting standards? Will some nations unhappy with
IFRS go their own way?
KPMG's 2015 PCAOB Inspection Report Is Out and It's Not Good ---
http://goingconcern.com/post/kpmgs-pcaob-inspection-report-out-and-its-not-good
The 28 deficient audits were out of 52 KPMG audits
and partial audits reviewed by the Public Company Accounting Oversight Board
in its annual inspection report issued Tuesday, for a deficiency rate of
54%. That is up from a year ago, when PCAOB inspectors found 23 deficient
audits out of 50 reviewed, for a rate of 46%.
Continued in article
|
KPMG's 2014
PCAOB Inspection Report Is Out and It's Not Good
Teaching Case from The Wall Street Journal Weekly
Accounting Review on October 31, 2014
KPMG Audits Had 46% Deficiency Rate
in PCAOB Inspection
by: Michael Rapoport
Oct 24, 2014
Click here to view the full article on WSJ.com
TOPICS: Accounting
Firms, Auditing, Deficiencies, PCAOB
SUMMARY: The
23 deficient audits the Public Company Accounting
Oversight Board found in its 2013 inspection of the
firm, were out of 50 audits or partial audits
conducted by KPMG that the PCAOB evaluated - a
deficiency rate of 46%. In the previous year's
inspection, the PCAOB found deficiencies in 17 of 50
KPMG audits inspected, or 34%. The report spotlights
the PCAOB's continuing concerns about audit quality.
Overall, 39% of audits inspected in the latest
evaluations of the Big Four firms - KPMG,
PricewaterhouseCoopers LLP, Deloitte & Touche LLP
and Ernst & Young LLP - were found to have
deficiencies, compared with 37% the previous year.
CLASSROOM APPLICATION: This
is useful for an auditing class to present recent
results of PCAOB inspections.
QUESTIONS:
1. (Introductory) What is the PCAOB? What
is its function?
2. (Advanced) What are the "Big Four"
accounting firms? What are the results of the annual
inspections of the Big Four accounting firms? Did
one firm perform better than others?
3. (Advanced) What is the purpose of these
inspections? What do the inspectors do? What is a
deficiency? What do the firms do with the inspection
results?
4. (Advanced) What happens once these
results are determined? Are the financial statements
changed as a result of these inspections? Are the
firms sanctioned?
5. (Advanced) The article notes that the
PCAOB has made public what was previously secret
criticism of the firms. Why were those previous
results secret? Should this information be secret?
Why or why not?
6. (Advanced) Should these results impact
the reputations of the Big Four firms? Why or why
not? How should the firms handle these public
revelations?
Reviewed By: Linda Christiansen,
Indiana University Southeast
RELATED ARTICLES:
Inspection Finds Defects in 19
PricewaterhouseCoopers Audits
by Michael Rapoport
Jun 30, 2014
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Regulator Finds Deficiencies in 15 Deloitte & Touche
Audits
by Michael Rapoport
Jun 02, 2014
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Ernst & Young 2013 Audit Deficiency Rate 49%,
Regulators Say
by Michael Rapoport
Aug 28, 2014
Online Exclusive
"KPMG Audits Had 46% Deficiency Rate in
PCAOB Inspection," Michael Rapoport, The Wall Street
Journal, October 24, 2014 ---
http://online.wsj.com/articles/kpmg-audits-had-46-deficiency-rate-in-pcaob-inspection-1414093002?mod=djem_jiewr_AC_domainid
Audit regulators found deficiencies in 23 of the
KPMG LLP audits they evaluated in their latest
annual inspection of the Big Four accounting firm’s
work.
The 23 deficient audits the Public Company
Accounting Oversight Board found in its 2013
inspection of the firm, released Thursday, were out
of 50 audits or partial audits conducted by KPMG
that the PCAOB evaluated—a deficiency rate of 46%.
In the previous year’s inspection, the PCAOB found
deficiencies in 17 of 50 KPMG audits inspected, or
34%.
In a statement responding to the PCAOB inspection,
KPMG said, “We are always mindful of our
responsibility to the capital markets, and we are
committed to continually improving our firm and to
working constructively with the PCAOB to improve
audit quality.”
The 23 deficiencies were significant enough that it
appeared KPMG hadn’t obtained sufficient evidence to
support its audit opinions that a company’s
financial statements were accurate or that it had
effective internal controls, the PCAOB said. A
deficiency in the audit doesn’t mean a company’s
financial statements were wrong, however, or that
the problems found haven’t since been addressed.
Still, the report spotlights the PCAOB’s continuing
concerns about audit quality. Overall, 39% of audits
inspected in the latest evaluations of the Big Four
firms—KPMG, PricewaterhouseCoopers LLP, Deloitte &
Touche LLP and Ernst & Young LLP—were found to have
deficiencies, compared with 37% the previous year.
In addition, all of the Big Four have now seen the
PCAOB make public some of its previously secret
criticisms of the firms. Separately from the latest
report, the PCAOB on Thursday unsealed previously
confidential criticisms of KPMG’s quality controls
it had made in 2011 and 2012, mirroring previous
moves the board had made with regard to PwC, E&Y and
Deloitte. The unsealing amounts to a public rebuke
to KPMG for not acting quickly enough to fix
quality-control problems, in the regulator’s view.
In the unsealed passages, the board said some of the
firm’s personnel had failed to sufficiently evaluate
“contrary evidence” that seemed to contradict its
audit conclusions.
In the latest inspection report, among the areas in
which the PCAOB found audit deficiencies at KPMG
were failure to sufficiently test companies’
loan-loss reserves, testing of companies’ valuations
of hard-to-value securities, and audits of certain
kinds of derivatives transactions.
The PCAOB didn’t identify the clients involved in
the deficient audits, in accordance with its usual
practice.
PCAOB inspectors evaluate a sample of audits every
year at each of the major accounting firms—focused
on those the board believes are at highest risk for
problems. Because of that focus, the PCAOB says the
inspection results may not reflect how frequently a
firm’s overall audit work is deficient. The
inspections are intended only to evaluate the firms’
performance and highlight areas for potential
improvement, so the firms aren’t subject to any
penalties.
Only part of the inspection reports typically
becomes public. A separate portion, with the PCAOB’s
criticisms of the firm’s quality controls, is kept
confidential to give the firm an opportunity to
address any concerns. If the firm does so, that
portion of the report stays sealed permanently.
If the firm doesn’t do enough to satisfy the PCAOB
within a year, however, the board makes the concerns
public. Again, though, the unsealing doesn’t carry
any formal penalties for the firms.
Bob Jensen's
threads on the "Two Faces" of KPMG ---
http://faculty.trinity.edu/rjensen/Fraud001.htm
Jensen Comment
I keep recalling the 1990s when KPMG Executive Partner
and AICPA President Bob Elliott more than any other
accountant made a public pitch that the big accounting
firms could expand their services beyond auditing
(remember Elder Care and SysTrust) because the
auditing profession more than any other profession had a
reputation for competence, quality, and integrity.
The Big Four firms, especially KPMG, have nearly
destroyed that reputation.
http://faculty.trinity.edu/rjensen/Fraud001.htm
Maybe audit
quality really hasn't declined so much. Instead it may
be that no regulatory agencies really investigated audit
firm quality controls before the PCAOB was created. In
the good old days audit quality was mostly regulated by
separate professional boards in the 50 states. For
example, the New York Society of CPAs only suspended the
licenses for auditors convicted of drunk driving. The
same state agency that regulated audit firms in Florida
also regulated funeral parlors and para psychologists. |
|
"Corruption
in FIFA? Its Auditors Saw None," by Lynnley
Browning, The New York Times, June 8, 2015 ---
http://www.nytimes.com/2015/06/06/sports/soccer/as-fifa-scandal-grows-focus-turns-to-its-auditors.html?_r=0
. . .
Accounting firms often contend that their audits are
only as good as the information they receive from
clients, but they are supposed to recognize patterns
or anomalies that suggest they should dig a little
deeper.
A key element in the Justice Department’s case is a
$10 million payment that prosecutors say was
transferred in 2008 from FIFA to accounts controlled
by a soccer official, Jack Warner, as a bribe in
exchange for helping South Africa secure the right
to host the 2010 World Cup.
Mr. Epstein said that while the $10 million payment
could be insignificant, or immaterial in accounting
terms, given FIFA’s size, it would not be immaterial
in qualitative terms. “That’s something people would
want to know about,” he said.
KPMG had questioned another payment a decade
earlier. In a 1999 “Revised Audit Management Letter”
sent to FIFA, KPMG noted an unusual payment in
connection with the Confederations Cup — an
important tournament involving soccer’s continental
champions that is now held the year before the World
Cup.
“To cover the excess expenditure at the
Confederations Cup in Saudi Arabia, the organizer
has made an additional payment of 470,000 Swiss
francs,” the letter, obtained by the independent
journalist Andrew Jennings, says in German. “The
payment was authorized by the president of FIFA, but
without the authorization of the finance committee
or the executive committee.”
It is unclear to whom the payment was made or which
Confederations Cup in Riyadh was involved — Saudi
Arabia hosted them in 1995 and 1997, part of the
four-year financial cycle covered in the 1999
letter.
Even before the indictments, there was no shortage
of potential red flags.
In 2002, Michel Zen-Ruffinen, FIFA’s secretary
general at the time, wrote an explosive report
accusing Mr. Blatter and his lieutenants of
extensive fraud. The report, parts of which were
published in the Swiss news media, contended that
from 1999 to 2002, FIFA, which was struggling
financially, booked 336 million Swiss francs in
revenue from its sale of marketing rights to the
2006 World Cup in Germany — an unusual move for an
organization that at the time used accounting
methods that recorded income when it was received,
not in advance, according to accounting experts.
KPMG noted the move in its audit of the period. Mr.
Zen-Ruffinen’s report added that FIFA had destroyed
financial documents before 1998, a year before KPMG
was hired.
In 2008, a trial in Zug, Switzerland, of former
executives of International Sports and Leisure, a
FIFA-affiliated marketing firm that had collapsed
amid allegations of fraud and theft, fell apart
after the group’s lawyers produced internal
documents contending that FIFA was involved.
By 2012, FIFA named Michael J. Garcia, a prominent
former federal prosecutor, as the lead investigator
of its ethics committee. Mr. Garcia, who extended
his inquiry into bidding practices for the 2018
World Cup in Russia and the 2022 World Cup in Qatar,
gave FIFA his final report last September but
resigned from the role in December after FIFA
released a redacted version that Mr. Garcia
complained was erroneous and misleading.
And last November, a member of FIFA’s eight-person
audit and compliance committee, Canover Watson, was
charged in his native Cayman Islands with fraud and
money laundering in connection with procurement of a
card-swipe system for the public hospitals there.
FIFA’s most recent annual report notes that Mr.
Watson has “temporarily left the committee.”
“You’re looking for the tip of the iceberg in an
audit,” Mr. Epstein said, adding that in KPMG’s work
for FIFA, “the tip should have gotten the auditor’s
attention sometime over the years.”
|
|
Bob Jensen's threads on KPMG ---
http://faculty.trinity.edu/rjensen/Fraud001.htm
Question
What is an "earnings add-back?" and why should this concept be included in
advanced accounting and financial statement analysis courses?
"The Accounting Technique Valeant Used to
Help It Buy Company After Company," by Tracy Alloway, Bloomberg,
November 5, 2015 ---
http://www.bloomberg.com/news/articles/2015-11-05/the-accounting-technique-valeant-used-to-help-it-buy-company-after-company
“In Valeant, a financialized age has produced a
financialized pharma company,” Jim Grant, legendary contrarian investor,
wrote in March of last year. More than a year later, the wider markets are
only just beginning to unpick the complicated underpinnings behind Valeant’s
stunning run.
As the assumptions bolstering Valeant’s growth
story quickly unravel, attention has turned to the company’s deviation from
standardized accounting measures known as generally accepted accounting
principles, or GAAP. Writing for the New York Times over the weekend,
Gretchen Morgenson is the latest in a long line to underscore controversies
in Valeant’s accounting methods.
The flattery of Valeant’s bottom line arguably
helped it do two things essential to its growth: borrow billions of dollars
from bond markets at a lower cost, and continue the acquisition spree that
lay at the heart of its business model.
Nowhere was this dynamic more pronounced than in
the pharmaceutical giant’s use of earnings adjustments known as add-backs.
And while Morgenson rightly focuses on certain expenses Valeant has
subtracted from earnings, it’s also worth looking at the items the drugmaker
has added back.
Such add-backs allow companies to include expected
savings or extra revenue in their adjusted, or pro forma, earnings numbers.
They are often deployed before transformational M&A deals, and Valeant has,
to put it mildly, had a few of those. As others have pointed out, accounting
conventions assume that big deals are a rare occurrence; in Valeant’s case
they were the norm.
When Valeant agreed to buy Bausch & Lomb for $8.7
billion in 2013, for instance, it estimated that add-backs and synergies
would increase its adjusted earnings before interest, taxes, depreciation,
and amortization, or Ebitda, from $2.035 billion to $2.468 billion. The $433
million boost to earnings had the effect of dampening Valeant’s leverage, or
indebtedness, to 4.6 times earnings, according to Standard & Poor’s LCD
unit.
That was crucial, since Valeant’s lenders had
placed a limit on its debt load of 5.25 times earnings. “Valeant has some
room to issue additional debt now; the current incurrence tests allow for up
to 2.5 times senior secured debt and 5.25 times total, but that’s not
sufficient for the large fundraising contemplated here without being able to
lump in Bausch’s cash flow,” LCD reported at the time.
Continued in article
The
Sarbanes-Oxley Act greatly increased to cost of auditing internal controls
in the private sector.
No such luck in the public sector.
GAO: IRS Lacks Adequate Internal Controls ---
http://taxprof.typepad.com/taxprof_blog/2015/11/gao-irs-lacks-adequate-internal-controls.html
Question
What does the scholarly magazine called The Economist claim is the top
career choice on average in terms of salaries ten years down the road?
Answer
http://www.businessinsider.com/highest-salaries-10-years-after-entering-college-2015-10
Jensen Comment
Personally I'm still in favor of accounting for a career choice because of the
varied opportunities down the road. Entry-level jobs with great training and
experience are readily available. The reason I prefer accounting is that there
are so many varied career tracks in public accounting, business, and government.
Also accounting is one of the best tracks toward top management and highest
paying professorships ---
http://faculty.trinity.edu/rjensen/bookbob1.htm#careers
There is such a dire shortage of accounting professors, accounting Ph.D.
programs are free in terms of tuition, living expenses, and other perks.
Of course the world needs more of a lot of
specialists including teachers, doctors, nurses, many types of scientists,
engineers, etc. There are usually advantages and disadvantages to any type of
career.
From the Chronicle of Higher Education
Search for Job Openings in Higher Education ---
https://chroniclevitae.com/job_search/new
For a list of job boards for accountants see
http://maaw.info/AccountingJobBoards.htm
The Updated COSO Internal Control Framework: Frequently Asked
Questions, Third Edition
http://www.protiviti.com/en-US/Documents/Resource-Guides/Updated-COSO-Internal-Control-Framework-FAQs-Third-Edition-Protiviti.pdf
"Jury Says Ernst & Young Liable for Madoff Investor’s Losses: E&Y
found negligent in role as auditor for feeder fund," by Jacquiline Palank,
The Wall Street Journal, November 13, 2015 ---
http://www.wsj.com/articles/jury-says-ernst-young-liable-for-madoff-investors-losses-1447453162?alg=y#livefyre-comment
Thank you Tom Selling for the heads up.
Reply from Bob Jensen on November 15, 2015
Hi Tom,
What I find somewhat worrisome in the article is the following quotation
from EY:
EY was not the auditor of any Madoff entity; we
were among the many auditors of funds that chose to use Madoff as their
investment adviser. While we regret the investors’ losses, no audit of a
Madoff-advised fund could have detected this Ponzi scheme,” Ernst &
Young’s Amy Call Well said in an email.
This settlement could be a point at which an audit firm ceases to be an
audit fir firm and commences to be a financial guarantee insurance company.
The problem is that most insurance companies deal with risks estimated by
actuarial science. Actuarial science is not much help in the area of
financial forecasting --- largely because actuarial science is built upon
stationary states.
This raises questions about the extent to which an auditor must verify
third party investment, insurance, and deposit quality. Consider a
hypothetical example. When EY auditors receive a verification that their
client does indeed have casualty insurance in the amount of $10 million from
Every State Life and Casualty Company to what extent is the auditor
responsible to verify the quality of that insurance beyond verifying that
Every State is indeed licensed in every state to sell life and casualty
insurance and the auditor's reading of the insurance contract terms? The
auditors might even go a step further to determine that Every State was
indeed audited by KPMG. But KPMG is not likely to share inside working paper
information with EY regarding Every State.
To what extent is EY liable above an beyond the KPMG audit report on the
financial statements of Every State?
My guess is that EY would not be liable to FutureSelect Portfolio
Management Fund for its Madoff Losses had the Madoff Fund been properly
audited. But the Madoff Fund was not audited by a NY-licensed auditor where
the fund was headquartered. Perhaps EY is more liable in cases where EY
relied on investment verification that was not properly audited.
I am not an expert on the fine print of the rules of auditing and never
taught auditing. To what extent are auditors liable to verify the quality of
deposits in banks, receivables from third parties, insurance coverage, etc.?
Years ago, when I was a lowly staff auditor in the Denver Office of EY, I
can't recall that we went beyond verifying that the client's accounts
existed in the correct balances reported by the client.
This touches on something that always made me uneasy about test checking
inventory. One of our Denver Office audit clients was a piston manufacturer
in Pueblo, Colorado. When we showed up on Sunday mornings to count pistons
we found two types of containers at the end of each production line. The
company said one container had pistons that met quality control standards.
The other container was for rejects. But as an auditor I could not tell any
difference between a good piston and a bad piston. We simply took the
client's word that those pistons it called satisfactory were indeed
satisfactory, including the pistons that were boxed up and purportedly ready
to ship to customers. Fortunately our client was more honest than a well
known manufacturer of salad oil at the time.
It would really be interesting to know how this FutureSelect case
would have been decided for EY if the Madoff Fund had been audited by KPMG.
Thanks,
Bob Jensen
Bob Jensen's threads on Ernst & Young ---
http://faculty.trinity.edu/rjensen/Fraud001.htm
KPMG and Forbes: Audit 2020: A Focus on Change. Forbes insights in
association with KPMG
MAAW's Blog, November 5, 2015 ---
http://maaw.blogspot.com/2015/11/audit-2020.html
PwC: FASB proposes a new definition of a business ---
http://www.pwc.com/us/en/cfodirect/assets/pdf/in-brief/us-2015-38-fasb-proposes-new-definition-of-a-business.pdf
PwC: FASB finalizes effective date for the proposed impairment
standard ---
http://www.pwc.com/us/en/cfodirect/publications/in-brief/financial-instruments-impairment-standard-effective-date.html
PwC: Structured payables— could they be debt? ---
http://www.pwc.com/us/en/cfodirect/assets/pdf/in-the-loop/structured-payable-programs-cash-flows-debt.pdf
PwC: Classification and measurement of financial instruments
effective date set ---
http://www.pwc.com/us/en/cfodirect/assets/pdf/in-brief/us-2015-35-financial-instrument-classification-measurement-effective-date.pdf
PwC: Transition Resource Group (TRG) discussed four implementation
issues related to the new revenue standard ---
http://www.pwc.com/us/en/cfodirect/publications/in-transition/revenue-recognition-optional-purchases-licenses-606.html
PwC: The evolution of auditors - How skillsets are changing ---
http://www.pwc.com/us/en/cfodirect/publications/point-of-view/evolution-of-auditor-skills-technology-accounting.html
PwC: Leading from the front: Redesigning finance for the digital age
---
http://www.pwc.com/us/en/cfodirect/issues/strategy-operations/pwc-digital-finance-paper.html
EY: Consolidation and the Variable Interest Model ---
http://www.ey.com/Publication/vwLUAssetsAL/FinancialReportingDevelopments_BB3099_VariableInterestEntities_23November2015/$FILE/FinancialReportingDevelopments_BB3099_VariableInterestEntities_23November2015.pdf
To our clients and other friends
This Financial reporting developments publication
is designed to help you navigate through the Variable Interest Model.
The Variable Interest Model is complex, and knowing
when and how to apply it can be challenging. Consolidation evaluations
always begin with the Variable Interest Model, which applies to all legal
entities, with certain limited exceptions.
This publication also includes an appendix on
applying the Voting Model.
The Variable Interest Model has evolved over the
years in response to the needs of users of financial statements. The
existing model, established in 2009 in FAS 167, focuses on identifying the
reporting entity with power to make the decisions that most significantly
impact an entity’s economic performance. That power may be exercisable
through equity interests or other means. It also requires determining
whether the reporting entity with power has benefits, that is, the
obligation to absorb losses or the right to receive benefits from the entity
that potentially could be significant to the entity.
In February 2015, the FASB issued Accounting
Standard Update (ASU) 2015-02, Amendments to the Consolidation Analysis,
which makes changes to both the Variable Interest Model and the Voting Model
including the following:
• The elimination of the deferral of FAS 167,
which allowed reporting entities with interests in certain investment
funds to follow the consolidation guidance in FIN 46(R)
• The removal of certain criteria used in the
determination of whether fees paid to a decision maker or service
provider are a variable interest
• In the determination of whether an entity is
a VIE, the evaluation of power changed when determining whether, as a
group, the holders of the equity investment at risk lack the
characteristics of a controlling financial interest
• In the identification of the primary
beneficiary, a reporting entity that is determining whether it satisfies
the benefits criterion will now exclude most fees that are both
customary and commensurate
• The “related party tie-breaker” test will be
used in fewer circumstances
• The elimination of the presumption in today’s
Voting Model that a general partner controls a limited partnership
(although a general partner may consolidate a limited partnership under
the Variable Interest Model).
We have updated this edition for ASU 2015-02
and provided further clarifications and enhancements to our interpretative
guidance. These changes are summarized in Appendix I. We hope this
publication will help you understand and apply the consolidation models in
ASC 810, as amended by ASU 2015-02. We are also available to discuss any
particular questions that you may have.
EY: Our recommendations for changing Regulation S-X disclosures about
entities other than the registrant ---
http://www.ey.com/Publication/vwLUAssetsAL/TothePoint_CC0429_DisclosureEffectivenessS-X_20November2015/$FILE/TothePoint_CC0429_DisclosureEffectivenessS-X_20November2015.pdf
What you need to know
• The SEC is seeking feedback about how it can
enhance the effectiveness of disclosures required by Regulation S-X
about acquired businesses, equity method investees and subsidiary
issuers and guarantors.
• In our comment letter, we suggest ways for
the SEC to simplify the requirements and streamline the disclosures a
registrant is required to make about other entities.
• We recommend that the SEC enhance pro forma
financial information and streamline the requirements for audited
financial statements of acquired businesses.
• We also recommend that the SEC expand the use
of summarized financial information about equity method investees and
subsidiary issuers and guarantors to eliminate complexity and focus
disclosures on material information.
• The comment period ends 30 November 2015. We
encourage others to submit comments and believe the SEC will accept and
consider them after the comment period
EY: EITF Update for November 2015 ---
http://www.ey.com/Publication/vwLUAssetsAL/EITFUpdate_BB3087_13November2015/$FILE/EITFUpdate_BB3087_13November2015.pdf
EY: SEC adopts crowdfunding rules ---
http://www.ey.com/Publication/vwLUAssetsAL/TothePoint_CC0428_Crowdfunding_5November2015/$FILE/TothePoint_CC0428_Crowdfunding_5November2015.pdf
What you need to know
• The SEC adopted rules that will allow private
companies to raise equity capital using crowdfunding.
• The rules, which were mandated by the
Jumpstart Our Business Startups Act, limit both the size of these
offerings and the value of securities each investor can purchase. • The
rules also require issuers to make certain disclosures and sell their
securities through intermediaries that must register with the SEC.
• The rules will be effective 180 days after
they are published in the Federal Register.
Continued in article
From the CPA Newsletter on November
19, 2015
US ranks 14th in world for financial literacy
http://www.forbes.com/forbes/welcome/
The US ranked 14th in a survey of global
financial literacy that was conducted in more than 140 countries. The
researchers asked multiple-choice questions about topics such as interest
and diversification. Only 57% of Americans received a passing grade. Find
the AICPA's financial education resources at
360financialliteracy.org.
Forbes
(11/18)
Bob Jensen's personal finance helpers
---
http://faculty.trinity.edu/rjensen/bookbob1.htm#InvestmentHelpers
Despite an increase in revenue of $1.1 billion, the
U.S. Postal Service reported a net loss of $5.1 billion for Fiscal Year 2015,
which ended on September 30th. [...] ... "[C]ontrollable expenses" also
increased $1.3 billion, from $66.4 billion in FY2014 to $67.7 billion in FY2015.
That included a 21 million increase in workhours, even though total mail volume
declined from 155.5 billion pieces in 2014 to 154.2 billion pieces in 2015. USPS
explained that the increase in operating expenses "was the result of a
combination of factors, including higher compensation costs attributable to
increased benefits expenses and additional work...
U.S. Postal Service Lost $5.1B in FY2015 ---
http://www.cnsnews.com/news/article/barbara-hollingsworth/us-postal-service-loses-51b-fy2015-ends-9th-year-red
When should universities discourage leaves of
absence?
Most universities discourage non-tenured faculty
on tenure track from taking unpaid leaves, if they can afford to do so, since
this almost certainly can become an advantage for added time to do research and
get research journal publication hits relative to proletariat non-tenured peers
who cannot afford to take the time off.
The question I have is how to keep paid
paternity and maternity leaves from creating the same unfairness relative to
peers who do not get added time for publish or perish time deadlines?
Of course the counter argument is that having
children creates disadvantages in in the time-to-tenure deadlines.
Any thoughts on this?
Clearly it's not such an issue when leaves are short such as less than six
months. However, leaves for 1-4 years are more controversial.
In terms of game playing I know of one instance
where the newly-minted Ph.D. just did not enter the job market until her
children were school aged and her journal hits mounted up before entering the
job market.
The recent sex scandal of Stanford's business
dean reveals that Stanford University has a policy that discourages tenured and
untenured faculty for taking very long unpaid leaves. Presumably the reason is
that it's too hard to keep a tenure slot open for a professor who is gone for a
relatively long time (and may indeed not even return).
Some universities like Harvard relax this policy
when the leaves are for public service such as when Larry Summers became the top
economic advisor to the president of the USA. In the Stanford incident mentioned
above I think the woman's husband took extended leaves to work for a Silicon
Valley company (Apple?) I think he now has a lawsuit pending against Stanford
for firing him due to talking too many unpaid leaves (not because his wife had
the extramarital liaisons with the dean during his absence from Stanford where
she is still a business professor).
What made me think about this is a link provided
this morning by the Harvard Business Review Blog:
"The Impact of Paternity Leave on Fathers' Future Earnings" ---
http://www.researchgate.net/publication/258055635_The_Impact_of_Paternity_Leave_on_Fathers%27_Future_Earnings
When First-Term Senator Orders Her Senior Senator Kneel and Roll Over
Senator Warren trembles in fear that the US Tax Code might become more
competitive than the corporate tax codes of Finland and the Rest of the EU
"Elizabeth Warren’s Tax Warning: She orders Democrats not to make
the U.S. tax code more competitive," The Wall Street Journal,
November 20, 2015 ---
http://www.wsj.com/articles/elizabeth-warrens-tax-warning-1448061976?mod=djemMER
Sen. Elizabeth Warren (D., Mass.) must be getting
nervous about the chances of tax reform for U.S. businesses. On Wednesday
she fired a shot across the bow of any Democrat tempted to consider lowering
the highest corporate income-tax rate in the industrialized world. By “any”
we mean Sen. Chuck Schumer. The New York Democrat has flirted with the idea
of making the U.S. economy more competitive.
Ms. Warren showed up at the National Press Club to
pronounce that the idea that American companies are overtaxed is “not true.”
In her prepared remarks she said the strategy of “giant corporations” is to
“tell a story about high U.S. taxes, demand tax cuts from the U.S. Congress,
and threaten to leave the U.S. for good if they don’t get what they want. I
say it’s time to call their bluff.”
Call their bluff? Their bluff has been called.
They’ve shown their cards. And they’ve moved overseas. So many U.S.
companies have been moving out so quickly that last year Treasury Secretary
Jack Lew didn’t think he had time even to conduct a formal rule-making to
stop them. So Treasury slapped together a quick and dubious reinterpretation
of existing tax laws to try to bolt the door ahead of more corporate
escapes.
Continued in article
Jensen Comment
The term "moving overseas" is a bit misleading. Aren't profits earned in the USA
subject to USA's corporate income tax? Exhibit A is Shell Oil; Exhibit B is
British Petroleum. Profits parked outside the USA were earned outside the USA.
Exhibit C is Starbucks; Exhibit D is Apple; Exhibit C is Microsoft. Foreign
profits are parked where they're earned because the USA's corporate tax code is
so much tougher than than of (gulp) Finland, Denmark, and the rest of the world.
Bernie Sanders incorrectly calls Finland a socialist state ---
https://en.wikipedia.org/wiki/Taxation_in_Finland
Actually Finland is more of a capitalist nation that is easier on both its
citizens and corporations in terms of taxes ---
https://en.wikipedia.org/wiki/Taxation_in_Finland
Comparing poverty in Finland and the USA ignores many things especially the
almost non-existent flow of undocumented immigrants into Finland coupled with
the absence of an underground economy that helps feed the poor in the USA to an
estimated $2 trillion per year. Finland also does not have significant diversity
issues that are a strength and a long-standing problem in the USA. The two
economies are just not comparable due to diversity and immigration (legal and
illegal) differences.
Tertiary Education ---
https://en.wikipedia.org/wiki/Tertiary_education
Tertiary education, also referred to as third
stage, third level, and post-secondary education, is the educational level
following the completion of a school providing a secondary education. The
World Bank, for example, defines tertiary
education as including universities as well as institutions that teach
specific capacities of higher learning such as colleges, technical training
institutes, community colleges, nursing schools, research laboratories,
centers of excellence, and distance learning centers.[1] Higher education is
taken to include undergraduate and postgraduate education, while vocational
education and training beyond secondary education is known as further
education in the United Kingdom, or continuing education in the United
States.
Tertiary education generally culminates in the
receipt of certificates, diplomas, or academic degrees.
Finland has an outstanding education, but a fewer proportion of its citizens
have tertiary degrees relative to the USA, Canada, and Japan ---
https://en.wikipedia.org/wiki/Finland#Education_and_science
In tertiary education, two mostly separate and
non-interoperating sectors are found: the profession-oriented polytechnics
and the research-oriented universities. Education is free and living
expenses are to a large extent financed by the government through student
benefits. There are 20 universities and 30 polytechnics in the country.
Helsinki University is ranked 75th in the Top University Ranking of
2010.[138] The World Economic Forum ranks Finland's tertiary education No. 1
in the world.[139] Around 33% of residents have
a tertiary degree, similar to Nordics and more than in most other OECD
countries except Canada (44%), United States (38%) and Japan (37%).[140]
The proportion of foreign students is 3% of all tertiary enrollments, one of
the lowest in OECD, while in advanced programs it is 7.3%, still below OECD
average 16.5%.[141]
Conclusions
Bernie Sanders just does not know how to define socialism and makes biased
political but not academic comparisons. All the Nordic nations can put more of
their tax revenues into social benefits in large measure because they have
minimal budgets for military services and have not become a world policing force
like the USA with its gigantic navy and air force.
Run these up the flag pole
Ten management-speak phrases we love to hate ---
https://www.icas.com/ca-today-news/ten-management-speak-phrases-we-love-to-hate
1. Touching base
A recent
study found that “touching base” is one of the most overused
pieces of office jargon. It means you want to make contact
with someone or meet up, as in: “I just wanted to touch base
with you so we can discuss that proposal."
2. Look under the bonnet
This example
of office speak is used to communicate the need to uncover
facts or find out more information. Used in sentences such
as, “It could be a great funding opportunity, so let’s look
under the bonnet and see what we discover”. It’s a close
cousin of: “We need to peel back the onion."
3. Don’t let the grass grow too long
Used to
politely tell people to work faster, get on with things, or
take advantage of an opportunity. An example might be: “We’d
better not let the grass too long on that project.”
4. Low hanging fruit
Meaning to
take the easy or ‘quick wins’ at work. “Grabbing the low
hanging fruit” is about doing the simple stuff first. While
this can be all well and good, it’s important not to forget
about the more complicated things, too.
5. Idea shower
The new term
for having a brainstorming session and sharing ideas, but it
is likely to get a few raised eyebrows if actually used in
your morning catch-up.
6. Eating your own dogfood
Office speak
that means to try something out that you have made yourself,
such as using your own product to test it before you sell
it. “We should be eating our own dogfood before we launch in
September.”
7. Solutionise
‘Solutionise’ is business-speak for solving problems, as in:
“Let’s solutionise this problem over lunch.” Although it
is a word, it actually refers to the heating of metal
to form a homogeneous solid solution. We recommend you
substitute this jargon for the perfectly adequate word
“solve”.
8. Give it to me in big handfuls
Used to ask
for a high-level summary of information, rather than the
details, as in: “I don’t need to know the specifics, just
give it to me in big handfuls.”
9. Paradigm shift
An overused
phrase used to describe a change in business operations,
such as: “Our business is going through a paradigm shift.” A
word of caution with this one, as it has the potential to
sound like you don’t really know what’s going on or what the
future holds for your business.
10. Run it up the flagpole
This one
means to try something out and see what the result is. As
in, “Why don’t you run it up the flagpole and see what
happens?” Similar to this lovely example of office jargon:
“Put a record on and see who dances.”
Jensen Comment
These aren't so bad as the ones we use in the Academy that only small
subsets of faculty and students can define.
For example, "accountics scientists are in a cargo cult."
The trouble is that most academics and nearly all the people in the world
don't know what constitutes a "cargo cult."
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#CargoCult
Web English Teacher: AP & IB Resources
(literature and writing) ---
http://www.webenglishteacher.com/ap.html
Bob Jensen's helpers for writers are at
http://faculty.trinity.edu/rjensen/Bookbob3.htm#Dictionaries
"Over half of psychology studies fail
reproducibility test." "Study delivers bleak verdict on validity of psychology
experiment results." "Psychology is a discipline in crisis."
"How to Fix Psychology’s Replication Crisis," by Brian D. Earp and Jim
A.C. Everett, Chronicle of Higher Education, October 25, 2015 ---
http://chronicle.com/article/How-to-Fix-Psychology-s/233857?cid=at&utm_source=at&utm_medium=en&elq=ffdd5e32cd6c4add86ab025b68705a00&elqCampaignId=1697&elqaid=6688&elqat=1&elqTrackId=ffd568b276aa4a30804c90824e34b8d9
These and other similar headlines
followed the results of a large-scale initiative called the
Reproducibility Project, recently
published in Science magazine,
which appeared to show that a majority of findings from a
sample of 100 psychology studies did not hold up when
independent labs attempted to replicate them. (A similar
initiative is underway
in cancer biology and other
fields: Challenges with replication are
not unique to psychology.)
Headlines tend
to run a little hot. So the media’s dramatic response to the
Science paper was not entirely surprising given the
way these stories typically go. As it stands, though, it is
not at all clear what these replications mean. What the
experiments actually yielded in most cases was a different
statistical value or a smaller effect-size estimate compared
with the original studies, rather than positive evidence
against the existence of the underlying phenomenon.
This
is an important distinction. Although it would be nice if it
were otherwise, the data points we collect in psychology
don’t just hold up signs saying, "there’s an effect here" or
"there isn’t one." Instead, we have to make inferences based
on statistical estimates, and we should expect those
estimates to vary over time. In the typical scenario, an
initial estimate turns out to be on the high end (that’s why
it
ends up getting published in the
first place — it looks impressive), and then subsequent
estimates are a bit more down to earth.
. . .
To make the point a slightly different way: While
it is in everyone’s interest that high-quality, direct replications of key
studies in the field are conducted (so that we can know what degree of
confidence to place in previous findings), it is not typically in any
particular researcher’s interest to spend her time conducting such
replications.
As Huw Green, a Ph.D. student at the City
University of New York, recently put it, the "real crisis in psychology
isn’t that studies don’t replicate, but that we usually don’t even try."
What is needed is a "structural solution" —
something that has the power to resolve collective-action problems like the
one we’re describing. In simplest terms, if everyone is forced to cooperate
(by some kind of regulation), then no single individual will be at a
disadvantage compared to her peers for doing the right thing.
There are lots of ways of pulling this off — and we
don’t claim to have a perfect solution. But here is one idea.
As we proposed in a recent paper, graduate students in
psychology should be required to conduct, write up, and submit for
publication a high-quality replication attempt
of at least one key finding from the literature (ideally focusing on the
area of their doctoral research), as a condition of receiving their Ph.D.s.
Of course, editors
would need to agree to publish these kinds of submissions, and fortunately
there are a growing number — led by journals like PLoS ONE — that are
willing to do just that.
. . .
Since our
paper
was featured several weeks ago in
Nature, we’ve begun to get some constructive
feedback. As one psychologist wrote to us in an email
(paraphrased):
Your proposed
solution would only apply to some fields of psychology. It’s
not a big deal to ask students to do cheap replication
studies involving, say, pen-and-paper surveys — as is common
in social psychology. But to replicate an experiment
involving sensitive populations (babies, for instance, or
people with clinical disorders) or fancy equipment like an
fMRI machine, you would need a dedicated lab, a team of
experimenters, and several months of hard work — not to
mention the money to pay for all of this!
That much is
undoubtedly true. Expensive, time-consuming studies with
hard-to-recruit participants would not be replicated very
much if our proposal were taken up.
But that is
exactly the way things are now — so the problem would not be
made any worse. On the other hand, there are literally
thousands of studies that can be tested relatively cheaply,
at a skill level commensurate with a graduate student’s
training, which would benefit from being replicated. In
other words, having students perform replications as part of
their graduate work is very unlikely to make the problem of
not having enough replications any worse, but it has great
potential to help make it better.
Beyond
this, there is a pedagogical benefit. As Michael C. Frank
and Rebecca Saxe
have written: In their own
courses, they have found "that replicating cutting-edge
results is exciting and fun; it gives students the
opportunity to make real scientific contributions (provided
supervision is appropriate); and it provides object lessons
about the scientific process, the importance of reporting
standards, and the value of openness."
At the end of the day,
replication is indispensable.
It is a key part of the scientific enterprise; it helps us determine how
much confidence to place in published findings; and it will advance our
knowledge in the long run.
Continued in article
Jensen Comments
Accountics is the
mathematical science of values.
Charles Sprague [1887] as quoted by McMillan [1998, p. 1]
In accountics science I'm not aware of a single exacting replication of the
type discussed above of a published behavioral accounting research study.
Whether those findings constitute "truth" really does not matter much because
the practicing profession ignores accountics science behavior studies as
irrelevant and academics are only interested in the research methodologies
rather than the findings.
For example, years ago the FASB engaged Tom Dyckman and Bob Jensen to work
with the academic FASB member Bob Sprouse in evaluating research proposals to
study (with FASB funding) the post hoc impact of FAS 13 on the practicing
profession. In doing so the FASB said that both capital markets empiricism and
analytical research papers were acceptable but that the FASB had no interest in
behavioral studies. The implication was that behavioral studies were of little
interest too the FASB for various reasons, the main reason is that the tasks in
behavioral research were too artificial and removed from decision making in
real-world settings.
Interestingly both Tom and Bob had written doctoral theses that entailed
behavioral experiments in artificial settings. Tom used students as subjects,
and Bob used financial analysts doing, admittedly, artificial tasks. However,
neither Dyckman nor Jensen had much interest in subsequently conducting
behavioral experiments when they were professors. Of course in this FAS 13
engagement Dyckman and Jensen were only screening proposals submitted by other
researchers.
Accountics science research journals to my knowledge still will not publish
replications of behavioral experiments that only replicate and do not extend the
findings. Most like The Accounting Review, will not publish replications
of any kind. Accountics scientists have never
considered replication is indispensable at
the end of the day.
"The Results of the Reproducibility Project Are In. They’re Not Good,"
by Tom Bartlett, Chronicle of Higher Education, August 28, 2015 ---
http://chronicle.com/article/The-Results-of-the/232695/?cid=at
A decade ago, John P.A. Ioannidis published a
provocative and much-discussed paper arguing that
most published research findings are false. It’s
starting to look like he was right.
The
results
of the
Reproducibility Project are in, and the news is
not good. The goal of the project was to attempt to replicate findings in
100 studies from three leading psychology journals published in the year
2008. The very ambitious endeavor,
led by Brian Nosek, a
professor of psychology at the University of Virginia and executive director
of the
Center for Open Science, brought together more
than 270 researchers who tried to follow the same methods as the original
researchers — in essence, double-checking their work by painstakingly
re-creating it.
Turns out, only 39 percent of the studies withstood
that scrutiny.
Even Mr. Nosek, a self-described congenital
optimist, doesn’t try to put a happy spin on that number. He’s pleased that
the replicators were able to pull off the project, which began in 2011 and
involved innumerable software issues, language differences, logistical
challenges, and other assorted headaches. Now it’s done! That’s the upside.
Continued in article
Bob Jensen's threads on the lack of replication in accountics science in
general ---
http://faculty.trinity.edu/rjensen/TheoryTar.htm
From Quartz on October 29, 2015
Deutsche Bank
announced 29,000 job cuts and a $6.6 billion loss
The German lender will also
pull out from 10 countries
and end 6,000 external contractor positions, after it posted a record
€6-billion ($6.6-billion) third-quarter pre-tax loss.
The loss was
due to increased litigation and impairment charges;
a 20% rise in bond trading revenue
added a slight silver lining.
Jensen
Comment
This has not been a banner year for Germany. VW announced a $1 billion loss just
for openers on its diesel engine scandal. This was followed by a $6.6 announced
loss by Deutsche Bank, Then there are over a million new immigrants to shelter,
feed, educate, train, and care for in the medical system.
"Inside the Secretive World of Tax-Avoidance Experts," by Brooke
Harrington, The Atlantic, October 26, 2015 ---
http://www.theatlantic.com/business/archive/2015/10/elite-wealth-management/410842/
A sociologist realized that if she were ever going
to understand global inequality she would have to become one of the people
who helps create it. So she trained to become a wealth manager to the
ultra-rich.
Shakespeare said that all the world’s a stage, but
the sociologist Erving Goffman added that most of the interesting stuff lies
behind the scenes, in what he called the “backstage” areas of everyday life.
Having spent the past eight years doing research on
the international wealth-management profession, I have to agree with Goffman:
The most revealing information comes from the moments when people stop
performing and go off-script. Like the time one of the wealth managers I
interviewed in the British Virgin Islands lost his composure and threatened
to have me thrown out of the country. His ire arose from an unexpected
quarter: He took offense to my use of the term “socio-economic inequality”
in the two scholarly articles I had published on the profession. I thought
the articles were typically academic, which is to say, the opposite of
sensationalizing and of little interest to anyone outside my field. But my
suggestion that wealth managers might be connected to inequality in any way
seemed alarmingly radical to this gentleman.
I was lucky that he merely threatened me. A journalist
from Newsweek actually
was deported from a
different tax-haven island (Jersey) for her reporting there, and was banned
from re-entering the island, or any part of the U.K., for nearly two years.
Even though
her story was unrelated to the financial-services industry,
it was expected to bring negative publicity to the island, threatening its
reputation as a place to do business. The message was therefore quashed by
banishment of the messenger. The wealth-management industry does not mess
around.
Wealth
management is a profession on the defensive. Although many people have never
heard of it, it is well known to both state revenue authorities and
international agencies seeking to impose the rule of law on high-net-worth
individuals. Those individuals—including the 103,000 people classified as
“ultra-high-net-worth” based on having $30 million or more in investable
assets—pay wealth-management professionals hefty fees to help them avoid
taxes, debts, legal judgments, and other obligations the rest of the world
considers part of everyday life. The general public doesn’t hear much about
these professionals, since there are only a few of them worldwide (just
under 20,000 belong to the main professional society) and they strive to
keep a low profile, both for themselves and their clients.
Continued in article
"The Fake Fix for Disability Insurance," by Andy Koenig,
The Wall Street Journal, November 11, 2015 ---
http://www.wsj.com/articles/the-fake-fix-for-disability-insurance-1447285970?mod=djemMER&alg=y
Judging by their rhetoric, you might think
Republicans and Democrats have fixed Social Security. Describing the budget
deal signed into law on Nov. 2, John Boehner said it secures “significant
long-term savings from structural entitlement reform,” while President Obama
lauded the agreement for reforming Social Security “in a responsible,
balanced way.”
None of this is true. The deal tweaks the
soon-to-be-bankrupt Social Security Disability Insurance program—but only
shaves off between 1% and 1.5% of the program’s long-term shortfall. All
Congress really did was delay insolvency by siphoning money from the rest of
Social Security. Put another way, lawmakers “solved” the problem by bailing
out one failing program with money from another failing program.
Created in 1956, Social Security Disability
Insurance (SSDI) is supposed to provide monthly payments to workers with
debilitating conditions. The repeated loosening of eligibility standards
from the 1960s to the 1980s led to a rapid growth in SSDI’s participants and
costs.
Program rolls doubled between 1990 and
2008, growing another 18% during the Obama administration. More than 10
million Americans are now on SSDI. The number is certain to keep growing.
But even now the American taxpayer can’t keep up. SSDI benefits cost a
staggering $141.7 billion in 2014, up more than fivefold since 1990. Losing
money for the past decade, SSDI was on track to mark its 60th birthday next
year with bankruptcy.
This crisis is what the budget deal purports to
avoid. It laudably eliminates some loopholes and requires that disability
reviews be conducted by medical professionals. However, the Congressional
Budget Office estimates that the reforms will save $4.4 billion out of
SSDI’s 10-year $340 billion projected shortfall.
To cover up those structural problems, the budget
deal transfers $117 billion from the Social Security Old Age and Survivors
Insurance Trust Fund. This is a new twist on the government tradition of
robbing Peter to pay Paul. It also hastens the retirement trust fund’s own
insolvency, which was expected to happen in 2035.
Lawmakers still need to reform the failing SSDI
program. They should start with the administrative law judge system, where
disability applicants seek to overturn earlier denials. According to recent
research by Mark Warshawsky and Ross Marchand at the Mercatus Center, judges
have issued wrongful decisions over the past decade that will cost taxpayers
at least $72 billion.
Continued in article
Jensen Comment
Disability insurance is probably the USA's largest government pińata, along with
the Pentagon, for massive fraud originating between crooked claimants, crooked
attorneys, and crooked physicians all working in conspiracy. In most instances
claimants also get Medicare benefits sometimes decades ahead of the Medicare
eligibility age of 65.
Bob Jensen's threads on entitlements ---
http://faculty.trinity.edu/rjensen/Entitlements.htm
Meaning of Net Income and Shareholders’ Equity (in Spanish)
SSRN, October 22, 2015
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2676802
Authors
Pablo Fernandez University of Navarra - IESE Business School
Isabel Fernández Acín University of Navarra
Alberto Ortiz Pizarro University of Navarra, IESE Business School
Abstract
A version in Spanish of this document may be
downloaded in:
http://ssrn.com/abstract=2252485
The recent history of Madera Inc. makes us think
about the meaning of shareholders´ equity and net income, and also about the
impact of two different strategies on the cash flows and the financial
statements of the company.
10 issues that may change the net income in 2012
are presented. The reported net income for 2012
was $56 million, but it could have been $58.8 million higher or $112 million
lower: net income for 2012 could have ranged between -$56 and $114,8 million.
Similarly, the shareholders' equity reported in
2012 was $292 million, but could have ranged between $180 and $350.8
million.
These accounting changes do not alter “cash and
equivalents” nor the financial debt nor the cash flows of the company. It
ends with the following questions: What is the net income? What is
shareholders' equity? Do dividends come from the net income?
Jensen Question
Is there a materiality issue here?
Commentaries on Big Data's Importance for Accounting and Auditing
SSRN, October 25, 2015
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2679099
Accounting Horizons, Vol. 29, No. 2, 2015
Editors
Paul A. Griffin University of California, Davis - Graduate School of
Management
Arnold Wright Northeastern University - Accounting Group
Abstract
The commentaries in this forum on Big Data confront
one of our profession’s most pressing challenges. How should we respond to
Big Data? Big Data and business analytics now permeate almost all aspects of
major companies’ decision making and business strategies. A large U.S.
company, for example, might process a billion data elements every day to
understand its competitive environment. Moreover, by its very nature, Big
Data cannot avoid running head-on into the traditional systems of accounting
and auditing that have served our profession so well in the past. What are
the threats and opportunities for accounting and auditing generated by this
fundamentally different way of understanding information and reporting by
business organizations? This issue presents eight commentaries by expert
academics and business professionals who have studied and thought much about
the core issues and challenges. Collectively, these commentaries not only
define and frame the important issues for accounting and auditing but, also,
they identify many feasible, yet difficult, pathways forward, wherein Big
Data and traditional accounting and auditing might meld to better serve
firms, stakeholders, and the public.
Plenary Session Video:
Building Bridges from the Academy to the Business Community
Stanford University Professor Charles M. C. Lee
American Accounting Association 2015 Annual Meetings
http://commons.aaahq.org/posts/79da0665ee
I suspect this video is available only to subscribers to the AAA Commons that is
free only to members of the American Accounting Association
Jensen Comment
Actually this video is quite good about how academic accounting researchers
should get closer to the real-world profession, a profession that he defines
more broadly than the accounting profession. Much of the video is focused on the
the profession of finance and its real world decision makers.
The best quote in the video is a borrowed quote from Mark Wolfson.
"Risky research is doing research that everybody else is doing."
To this I might add "using tools, like some variation of regression research,
that everybody else is using."|
To this I might add is "using purchased databases that everybody else is doing."
My limited study of this is that over 90% of the recent research in The
Accounting Review entails using purchased databases that enable the accounting
researcher to avoid having to creatively invent ways of collecting data. ---
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics
Science"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsWorkingPaper450.06.pdf
In his presentation Professor Lee shows a hilarious clip of accounting
workers from the Broadway Play The Producers ---
https://en.wikipedia.org/wiki/The_Producers_(musical)
In the presentation reference is made to the book Escape from the Ivory
Tower by Nancy Baron ---
http://www.escapefromtheivorytower.com/
One thing that Professor Lee failed to stress is that replication is a
necessary condition for relevancy of scientific research findings. In the case
of accountics science replication is such a rare event that we have to question
the relevancy of nearly all the research findings ---
http://faculty.trinity.edu/rjensen/TheoryTar.htm
An Evaluation of the General vs. Specialist Nature of Top Accounting
Journals
SSRN, October 21, 2015
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2677443
Authors
Scott L. Summers Brigham Young University - School of Accountancy
David A. Wood Brigham Young University - School of Accountancy
Abstract
Academic research has a role in advancing and
enlightening society in broad areas of study. Many forces interact to
influence the direction, topics, and methodologies used in research. In this
paper, we explore and discuss the relationship between the “Top” general
interest and specialist accounting journals. We test whether Top journals
(e.g., Top 3 or Top 6), relative to a set of high quality but specialist
journals, (1) are perceived to be general in what they will consider to
publish, (2) have historically published a diverse set of articles, (3) have
a diverse set of interests and skills on their editorial board, and (4)
attract the most highly cited articles by topic area and methodology. The
results suggest that some of the Top journals are not as general as their
mission statements suggest and that the most highly cited articles in some
topic areas and methodologies are not necessarily published in these Top
journals. The results may help institutions consider whether “counting” only
the Top journals is appropriate to judge their research and faculty. If they
want to promote research in a broad range of accounting topics and issues in
the profession, the results suggest that accepting articles in the Top
journals alone will be problematic.
Jensen Comment
One of the myths about top academic accounting journals is that they are "too
technical" for practitioners. This is so with respect to their many equations,
mathematics, and statistical inferences. However, the accounting issues in those
articles are often trivial and the outcomes of the research are of little, if
any, interest to practitioners. Practitioners interested in technical accounting
such as accounting for derivatives, real estate accounting, insurance
accounting, foreign currency accounting, lease accounting, revenue accounting,
etc. are almost certainly not going to eagerly await the next publication of
TAR, JAE, or JAE.
I experienced this years ago when I submitted two technical articles on SFAS
133 accounting to academic journals. The editors admittedly could not find any
professors in their sets of referees who had the expertise to referee the
papers. The editors flatly refused to even have the two papers refereed. A
practitioner journal eventually refereed and published the papers.
In another instance I wrote a comment/amendment on a technical paper by Smith
and Kohlbeck published in Issues in Accounting Education that had some
errors. The IAE editor could not find any professors to referee the paper. He
did send it out to two practitioners who recommended that my comment be
published. However, the IAE editor, Kent St. Pierre, decided my comment/ammendment
was too technical for an academic audience. He did, however, allow me to publish
generous quotations of the of the original Smith and Kohlbeck article in my
"amendment" published at my Website.
Bob Jensen’s Amendment to the Teaching Note prepared by Smith and
Kohlbeck for the following case: “Accounting for Derivatives and Hedging
Activities Comparisons of Cash Flow Versus Fair Value Accounting,” by Pamela
A. Smith and Mark J. Kohlbeck
Issues in Accounting Education, Volume 23, Number 1, February
2008, pp. 103-118
Bob Jensen's Amendment is at
http://faculty.trinity.edu/rjensen/CaseAmendment.htm
My point is that the phrase "Specialist Nature of Top Accounting Journals"
can be interpreted in various ways. There are academic journals that have
"specialist nature" such as the AAA's Journal of Information Systems and
the The Journal of the American Taxation Association. However, there are
also hundreds of practitioner journals that sometimes have even more of a
"specialist nature." See for example, the publications more of interest to
practitioners that are mentioned at
https://tax.thomsonreuters.com/products/brands/checkpoint/ria-wgl/?ID=TDVN
Also note where Ira Kawaller publishes his papers on derivatives risk
strategies and accounting for derivatives. Ira teaches workshops for KPMG on
accounting for derivatives and hedging activities, but his papers are too much
of a "specialist nature" to appear in an academic journal. He writes for
technical practitioners in accounting and finance ---
http://kawaller.com/about/
My criticism of the Summers and Wood SSRN paper is that these authors leave
out the hundreds of what I would call truly "specialist" accounting journals
that are mainly of interest to practitioners and are only occasionally (seldom?)
of interest to accounting students and faculty like me who mostly ignore those
truly "specialist" journals.
When cash is not a fungible item
The last time I saw $2 bills was in the Navy. The Navy always paid us in cash
even aboard our battleship (the USS Wisconsin). It was common in those days to
have $2 bills alongside the piles of $1, $5, $10, and $20 bills. In those days
each $2 bill was worth two $1 bills.
Bob Jensen
"Accounting class lesson on $2 bill leads to silver screen:
Fair-value accounting lesson at MIT has a starring role in upcoming documentary
film," by Amy MacMillan Bankson, MIT Sloan School of Management October 28,
2015 ---
http://news.mit.edu/2015/accounting-lesson-on-2-dollar-bill-leads-to-documentary-1028
Typically, a student might answer — correctly —
that the bill is worth $2. Noe will agree, but points out that his 1976 bill
is nearly 40 years old.
“By this time [in class], someone has looked it up
on eBay, and will tell me that it’s worth about $8 as a collectible,” Noe
says. “You can use the $2 value or the purported $8 value, but what’s more
appropriate?”
Jensen Comment
It's probably a waste of time for auditors doing cash counts to have the added
task of searching for most collectables. Usually the collectables like $2 bills
and silver dollars will be filtered out long before the auditors do cash counts
such as the pre-filtering done by knowledgeable bank tellers. The hardest thing
to detect even for tellers are the rare coins such as those 1933 San
Francisco-mint pennies. Searching every penny date and mint mark for this rare
coin is wasted time even in a bank since the odds of finding one are less than
epsilon.
SEC ANNOUNCES ENFORCEMENT RESULTS FOR FY 2015 ---
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=153637
The SEC has announced that in fiscal year 2015, it
continued to build a strong record of first-of-their-kind cases that spanned
the spectrum of the securities industry.
In the fiscal year that ended in September, the SEC filed 807 enforcement
actions covering a wide range of misconduct, and obtained orders totaling
approximately $4.2 billion in disgorgement and penalties. Of the 807
enforcement actions filed in fiscal year 2015, a record 507 were independent
actions for violations of the federal securities laws and 300 were either
actions against issuers who were delinquent in making required filings with
the SEC or administrative proceedings seeking bars against individuals based
on criminal convictions, civil injunctions, or other orders.
In fiscal year 2014, the SEC filed 755 enforcement actions and obtained
orders totaling $4.16 billion in disgorgement and penalties. Of the 755
enforcement actions filed in fiscal year 2014, 413 were independent actions
for violations of the federal securities laws and 342 were either actions
against issuers who were delinquent in making required filings with the SEC
or administrative proceedings seeking bars against individuals based on
criminal convictions, civil injunctions, or other orders.
The agency’s first-of-their-kind cases included the first action involving:
a private equity adviser for misallocating
broken deal expenses; an underwriter for
pricing-related fraud in the primary market for
municipal securities; a
“Big Three” credit rating agency; violations
arising from a
dark pool’s disclosure of order types to its
subscribers; an
FCPA action against a financial institution; an
admissions settlement with an auditing firm; and
an SEC rule
prohibiting the use of confidentiality agreements
to impede whistleblower communication with the SEC.
“Vigorous and comprehensive enforcement protects investors and reassures
them that our financial markets operate with integrity and transparency, and
the Commission continues that enforcement approach by bringing innovative
cases holding executives and companies accountable for their wrongdoing
sending clear warnings to would-be violators,” said SEC Chair Mary Jo White.
“The Enforcement Division’s leveraging of data, quantitative analytics and
the expertise of our other divisions contributed significantly to this
year’s very strong results.”
“The Division’s hard work, tremendous energy, and efficiency uncovered
significant misconduct during the past fiscal year, and helped bring a
significant number of high-impact, first-of-their-kind actions,” said Andrew
J. Ceresney, Director of the SEC’s Enforcement Division. “I continue to be
proud of the Division’s record of accomplishments, and we have already
continued to pave new ground in the new fiscal year.”
Further details of the SEC enforcement actions are available in the
press release.
Bob Jensen's
Fraud Updates
---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
Secret IRS policy hides identity theft from
victims ---
http://www.wthr.com/story/30389540/secret-irs-policy-hides-identity-theft-from-victims-illegal-immigration
Jensen Comment
I agree. When I tried to file my 2014 tax return the IRS refused to accept it
and indicated that my return had already been filed. However, out of fear I
mailed in a paper copy of my return that had all the important 1099 forms
attached. The IRS accepted this paper return and doubled my refund. Never once,
however, did the IRS inform me that I was a victim of identity theft. Who knows
for sure? I think an ID thief did steal my SS Number and IRS Pin in the big
breach of 2013 Turbo Tax users who filed electronically via TurboTax in 2014.
Misleading
Statistics
Top USA Business Schools That Are the Hardest to Get Into
http://www.business2community.com/us-news/the-top-25-hardest-business-schools-to-get-into-rankings-01377924
Jensen
Comment
Any rankings of schools based on acceptance rates among applicants are
misleading without more detailed comparisons of
applicants.
For
example, one obvious consideration is the pool of applicants between a very
expensive program (Stanford) and an inexpensive program (Arizona State
University). In fact the above article is now out of date since there is no data
yet about the impact of the MBA program at Arizona State becoming tuition free.
I suspect that ASU in the future will become the hardest MBA program in the
world to get into based on its acceptance rate.
There are other barriers to application that affect pools of applicants. One is
living costs. Subsidized housing costs (such as affordable apartments for
candidate families) may be limited, especially in some of the most expensive
business programs and most expensive outside housing such as those business
programs like Columbia, NYU, SMU, Harvard, Babson, Bently, Stanford,
Chicago, etc.
Other
barriers to application can be the spousal job market. Some business candidates
will depend upon spousal income while in the business program. In some locales
the job market is very good for most any spouse such as the job markets in New
York City, Boston, Chicago, Dallas, Seattle, Phoenix, and Silicon Valley. The
spousal job market is not so great in Hanover, Ithaca, Iowa City, East Lansing,
Lincoln, etc.
Other barriers to application are the job markets for business graduates. Some
applicants will beg, borrow, and steal enormous amounts to get into the business
programs like those of Harvard, Stanford, Chicago, Wharton, and Dartmouth having
very high average salaries of business graduates. These top prospects may not
even apply to business programs where the average salaries for business
graduates are significantly lower.
My
point is that acceptance rate statistics based upon pools of applicants are
misleading if those pools of applicants themselves differ greatly between
programs.
Make Your Own College Rankings ---
http://chronicle.com/article/Make-Your-Own-College-Rankings/151473/?cid=inline-promo
Bob Jensen's threads on ranking
controversies in general are at
http://faculty.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings
This is probably also true of some legal services, but we hope that medical
clinics and hospitals are more consistent
"Big Four Audit Quality Can Differ Widely- Even at the Same Firm," by
Louis H. Ferguson, Marketwatch, November 17, 2015 ---
http://www.marketwatch.com/story/big-four-audit-quality-can-differ-widely-even-at-the-same-firm-2015-11-17
Many investors around the world felt the economic
losses associated with the accounting and auditing scandals 15 years ago at
companies such as Enron, WorldCom and Adelphia. The fallout from these
scandals included the failure of Arthur Andersen, one of the largest global
accounting networks in the world. Some investors realized for the first time
how much a bad audit could cost them.
In response, the U.S. Congress created the Public
Company Accounting Oversight Board to oversee the audits of all public
companies trading on U.S. exchanges, whether those companies are domestic or
foreign. A big part of our job at the PCAOB is inspecting the auditors of
those companies.
For global companies that make up most of the Dow
Jones Industrial Average, S&P 500 and other indices, this can mean an audit
is performed by many individual affiliates around the world in addition to
the U.S.-based Big Four firm that signs the report.
It would be a mistake to presume that an audit
firm’s inspection results in the United States necessarily speak to the
quality of its global network. There can be a real difference among audit
deficiency findings for the firms in the United States and what we see at
their affiliates around the globe.
Sometimes even as we see inspection results
improving at the U.S. firm, their affiliated firms around the world appear
to be struggling, or vice versa.
In my role as chair of the International Forum of
Independent Audit Regulators (IFIAR), I oversaw the publication of three
annual inspection reports on the compiled findings of IFIAR regulators in
their national inspection regimes.
It has been a very useful exercise to look at the
aggregated information included in these reports and also a frustrating one.
We find we have to put a lot of caveats around the information because
members do not inspect the same audits of public companies or other issuers,
or even audit firms, each year. Moreover, variations in members’ inspection
methodologies and focus areas further complicate the comparability of the
results.
The survey is also a lagging indicator as it
compiles the results of inspections of audits that were conducted as many as
three years before the survey is published so it may not be a very accurate
reflection of the state of the auditing profession at the current time.
We caution each year when we publish the report
that it is not really a good measure of year-over-year audit quality, at
least not yet. But we do use the results to inform our thinking about which
are the most common findings, and to confirm that rates of deficiencies are
unacceptably high around the world.
In my opinion, the PCAOB faces many similar
challenges in drawing meaningful conclusions about its inspection findings
year-over-year. Nonetheless, I believe the aggregated information is
interesting and useful to review and consider.
Further, I think investors and other stakeholders
benefit from our efforts to be as transparent as possible about our work.
That is why I want to present data on our inspections of the six largest
network firms in the United States, and also for our inspections of those
firms’ affiliates outside the United States.
Continued in article
"An Analysis Of The 2012 Financial Performance Of The
World’s Largest Accounting Firms," Big Four Blog,
January 2013 ---
http://www.big4.com/wp-content/uploads/2013/01/The-2012-Big-Four-Firms-Performance-Analysis.pdf
EXECUTIVE SUMMARY
Deloitte, Ernst & Young, KPMG
and PwC: 2012 Revenues Increase to Historic Levels
2012 was a banner year for the Big Four
accounting firms: Deloitte & Touche, Ernst & Young (E&Y), KPMG and
PricewaterhouseCoopers (PwC) following strong growth in 2011, and
erasing the impacts of subdued performance of 2009 and 2010. 2009
combined revenue for the four firms of $94 billion fell 7% from
2008’s record of $101 billion, but stabilized in 2010 as revenue
increased 1.4% to $95 billion. 2011 revenue rose a further 9% to
historic high levels of $103 billion, setting a new record.
Another new record was set in
2012, with strong growth momentum in all service lines and
geographies continuing from 2011, helped by emerging countries,
improvements in global economic profiles and increased business deal
activity. Combined 2012 revenue for the four firms rose to a record
historic high level of $110 billion, up 6% from 2011. With all
global economies, except those in Europe, showing continued growth
in 2012, the Big Four firms had outstanding performance in 2012,
with revenues rising in all geographies, service lines and
industries. KPMG revenues grew the slowest at 1.4%, Ernst & Young at
6.7%, PwC increased 7.8% and
Deloitte posted the highest
rate at 8.6%. PwC grew slower than Deloitte yet reported 2012
revenues of $31.5 billion, just $200 million more than Deloitte,
thus maintaining its leadership position as the largest accounting
firm on the planet. KPMG’s modest growth is well out of line with
peers. Our analysis shows three factors: Europe is 50% of global
revenues and was negatively impacted by US dollar appreciation
versus the Euro,
Advisory service line had
modest growth and Audit presumably lost some relative market share.
In terms of geography, Americas have 40% and falling share of global
combined revenues. From 2011 to 2012 however, Americas had a strong
performance growth of 9.2%. Europe has 43% of combined firm revenues
and increased 3.3% from 2011 to 2012, growing the slowest due to
regional uncertainty. Asian revenues have more than doubled from $7
billion in 2004 to $18.5 billion in 2012, 17% of the total, and grew
a strong 8.0% from 2011 to 2012.
By service line, Audit
accounts for 45% of total revenues and grew 2.9% from 2011 to 2012.
Tax services are 23% of total revenues and also rose 5.6% from 2011
to 2012. Advisory services have been the fastest growing service
line for several years increasing share from 22% of total revenues
in 2004 to 33% in 2012. Advisory revenues grew a strong 12.2% from
2011 to 2012.
The Big Four firms
cumulatively employ more than 690,000 staff globally, with a total
of 37,000 partners overseeing a steep pyramid of about 530,000
professionals. Net employment increased by 39,000 from 2011 to 2012.
The outlook for 2013 and
beyond is quite optimistic, revenue is expected to grow at a good
pace, with help from strong emerging markets, Advisory services,
Dodd-Frank and other regulations, conversions to IFRS and favorable
economic conditions. 2013 will also prove whether PwC can continue
to be the leader and whether KPMG can attempt to narrow its gap with
E&Y.
A detailed analysis can be downloaded at
http://www.Big4.com/analysis
.
Auditing Bibliography by James Martin
---
http://maaw.info/AuditingMain.htm
Bob Jensen's threads on the largest accounting and auditing firms
---
http://faculty.trinity.edu/rjensen/Fraud001.htm
Bob Jensen's threads on audit firm professionalism ---
http://faculty.trinity.edu/rjensen/Fraud001c.htm
In Accounting We Call it EIEO ---
Everything In, Everything Out
"Cranking Out Credentials — but What
About Quality?" by Katherine Mangan, Chronicle of Higher Education,
November 17, 2015 ---
http://chronicle.com/article/Cranking-Out-Credentials-/234228?cid=wc&utm_source=wc&utm_medium=en&elq=e04cc3e81c37409fa69422fd0133d152&elqCampaignId=1874&elqaid=6943&elqat=1&elqTrackId=befc899056144718b79a868368dc3c88
Jensen Comment
Exhibit A is comprised of all graduate programs that only give A or B grades to
any student who makes an effort --- some B grades go to students who make an
effort but would not have a chance in a competency-based examination. For
example, increasingly law schools are now both admitting and graduating a large
number of students who do not have a chance of passing the BAR examination. Many
accounting graduates are afraid to even take the CPA examination. California's
Two-Year Colleges now want to fire their accreditor and bring in an easier
accrediting agency.
The EIEO phenomenon is linked to grade
inflation and the power students now have over teacher performance ratings ---
http://faculty.trinity.edu/rjensen/assess.htm#RateMyProfessor
Diploma Mill Fraud
EDMC is the nation's
second-largest for-profit college system and the parent company of four higher
education systems: Argosy University, The Art Institutes, Brown Mackie College,
and South University. It was acquired by Goldman Sachs in 2006, which retains
40% ownership in the company today.
"College accused of being a 'high-pressure
recruitment mill' agrees to a record $95.5 million settlement," by Abby
Jackson, Business Insider, November 16, 2015 ---
http://www.businessinsider.com/for-profit-college-edmc-settled-civil-lawsuit-for-955-million-2015-11
Jensen Comment
For-profit universities tend to have no admission standards.
The good news is that any student who can pay
the tuition has a chance, especially online alternatives for degrees.
The bad news is that for-profit universities
have had a race for the bottom in recruiting students who have little aptitude
for higher education, little time to devote to learning (e.g. a parent with
three pre-school toddlers), and an low prospects of ever completing a program.
The bad news with the political plans for free
undergraduate education for every student in the USA is that the non-profit
colleges and universities may commence a scramble for government-paid tuition is
that hey may commence a race for the bottom in recruiting students who have
little aptitude for higher education, little time to devote to learning (e.g. a
parent with three pre-school toddlers), and an low prospects of ever completing
a program.
Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
From the CFO Journal's Morning Ledger on November 23, 2015
How should a CFO fairly present a financial statement
during periods of intense foreign-exchange volatility? That is the question
faced by finance chiefs since the dollar surged after the yuan’s devaluation,
CFO Journal’s Emily Chasan reports.
Analysts, and some finance chiefs, argue that
stripping out the impact of currency from corporate financial reports
doesn’t tell the full story about the health of the business.
“The reality
is we’re getting a positively biased perspective,” said George Sutton, a
stock analyst and co-director of research at Craig-Hallum Capital Group LLC
in Minneapolis. “A few years ago, when the dollar was weak, it was fairly
rare for companies to point out that they were doing so well because of the
currency.”For
companies reporting a currency impact on quarterly calls, about 48% fielded
questions from analysts about their foreign-exchange strategy in the past
six quarters, according to FiREapps, a currency risk consulting firm. That
is up from about 26% in the prior six quarters. “This quarter isn’t an
outlier—this is the new market we need to deal with,” said Wolfgang Koester,
chief executive of FiREapps.
Remember those old song lyrics:
If you got it you don't need it
If you need it you don't got it
From the CFO Journal's Morning Ledger on November 17, 2015
Ohio power companies, consumers spar over paying for spare electricity
http://www.wsj.com/articles/ohio-power-companies-consumers-spar-over-who-pays-for-spare-electricity-1447701133?mod=djemCFO_h
Ohio’s American Electric Power Co.
and FirstEnergy Corp. have sparked criticism by proposing
that consumers and businesses in the state should cover the cost of
operating seven old, unprofitable plants to keep surplus power available.
From the CFO Journal's Morning Ledger on November 17, 2015
Revenue-recognition accounting changes could have long tentacles
http://blogs.wsj.com/cfo/2015/11/16/revenue-recognition-accounting-changes-could-have-long-tentacles/?mod=djemCFO_h
Sweeping revisions to revenue-recognition rules set to
take effect in 2018 are already wreaking havoc in corporate finance
departments. Corporate controllers and their financial staffs are
re-evaluating everything from contracts to commission structures in
anticipation of new
rules that will change how companies report their
top-line numbers.
From the CFO Journal's Morning Ledger on November 18, 2015
Rivals take aim at UPS, FedEx with services focus
http://www.wsj.com/articles/ups-fedex-rivals-take-services-focus-1447788645?mod=djemCFO_h&alg=y
Online purchases of bulky items like furniture are up sharply, creating
opportunities for delivery companies able to provide home dropoffs with
services such as set up, installation and removal of old goods.
From the CFO Journal's Morning Ledger on November 18, 2015
House subcommittee testimony calls conflict minerals rule a failure
http://blogs.wsj.com/cfo/2015/11/17/house-subcommittee-testimony-calls-conflict-minerals-rule-a-failure/?mod=djemCFO_h
Rules regarding conflict minerals are “a failure,”
according to a
Tuesday
hearing of the House Financial Services Monetary Policy and Trade
Subcommittee. Emily Chasan reports that a Government Accountability Office
report published for the hearing found that 67% of companies were unable to
determine whether the minerals in their supply chain came from the
Democratic Republic of the Congo and surrounding region.
From the CFO Journal's Morning Ledger on November 17, 2015
SEC commissioner blasts conflict minerals, pay ratio rules
http://blogs.wsj.com/cfo/2015/11/16/sec-commissioner-blasts-conflict-minerals-pay-ratio-rules/?mod=djemCFO_h
The U.S. corporate-disclosure regime “has been
hijacked” by social activists, Securities and Exchange Commissioner Michael
Piwowar charged
on Monday.
Emily Chasan reports that Mr. Piwowar cited recent mandates from Congress
that focus more on thwarting social problems than assisting investors.
Clawback ---
https://en.wikipedia.org/wiki/Clawback
From the CFO Journal's Morning Ledger on November 11, 2015
Study: Clawback rules could influence restatements
http://blogs.wsj.com/cfo/2015/11/10/coming-clawback-rules-may-influence-restatements-study/?mod=djemCFO_h
As finance chiefs prepare for coming rules designed to
claw back executive pay, a study suggests they will take a harder look at
financial restatements that could force them to part with prior incentives,
Maxwell Murphy reports.
From the CFO Journal's Morning Ledger on November 12, 2015
Former SEC head: Investors want more from sustainability reports
http://blogs.wsj.com/cfo/2015/11/12/investors-want-more-from-sustainability-reporting-says-former-sec-head/?mod=djemCFO_h
It is still a challenge for investors to get the
information they need on environmental, social and governance issues, said
former SEC Chairman Mary Shapiro. Emily Chasan writes that investors who
want to use such information say the information they are getting is often
difficult to compare between companies and tough to incorporate into
forecasts.
Bob Jensen's threads on sustainability accounting ---
Journal of Accountancy Summary of the FASB's New Leasing Standard ---
http://www.journalofaccountancy.com/news/2015/nov/fasb-leases-standard-201513356.html
From the CFO Journal's Morning Ledger on November 12, 2015
Investors may be in for a jolt once new
lease-accounting rules take effect, the
WSJ’s Michael Rapoport reports.
That’s because the new requirement, agreed to in
principle by rule makers Wednesday,
will make many firms appear more indebted than they do right now. The change
must still go through some technical and administrative steps, and it won’t
take effect until 2019. But once lease obligations are added to the balance
sheet, supporters say, investors will get a much fuller and more accurate
portrait of companies’ true situation.
The rule change doesn’t create any new obligations for companies, and
ratings firms and investors who watch financial statements closely have long
adjusted their numbers to account for companies’ leases. But putting leases
on the balance sheet is expected to make it easier for the average investor
to see the effect they have on a company’s finances. Some companies have
tens of billions of dollars in lease-payment obligations, effectively akin
to debt, but under current rules they aren’t carried on the balance
sheet—they’re disclosed only out of the spotlight, in the footnotes to a
company’s financial statements.
From the CFO Journal's Morning Ledger on November 11, 2015
Some of America’s best-known companies likely will
soon have to effectively boost the debt they report on their balance sheets
by tens of billions of dollars, the
WSJ’s Michael Rapoport reports.
The total possible impact for all companies: as much
as $2 trillion. Within a few years, companies may have to add to their books
the cost of many leases for real estate, aircraft and other items that
aren’t already carried there.
U.S. rule makers are
set to vote
Wednesday
on whether to approve in principle long-awaited new rules requiring
companies to make that addition, though the move wouldn’t take effect until
at least 2018. Once the rules are finalized, companies are likely to get a
better handle on what their balance sheets might look like going forward.
Drugstores, large retailers, restaurants and supermarkets are likely to be
most affected under the rules because of significant real-estate leases. But
lease-accounting changes will also have a big impact on banks that lease
space for their retail branches, airlines that lease planes and shipping and
utilities companies that lease their vehicle fleets
EY: A comprehensive guide to Lease accounting,
Revised August 201 5 ---
Click Here
http://www.ey.com/Publication/vwLUAssetsAL/FinancialReportingDevelopments_BB1793_LeaseAccounting_14August2015/$FILE/FinancialReportingDevelopments_BB1793_LeaseAccounting_14August2015.pdf
From the CPA Newsletter on March 23, 2015
Profits may look higher under IASB's lease accounting model
http://r.smartbrief.com/resp/gBhNBYbWhBCNxqePCidKtxCicNTVMx?format=standard
The International Accounting Standards Board's forthcoming model for lease
accounting will make companies with material off-balance sheet leases look
more profitable compared with the Financial Accounting Standards Board's
model, according to an IASB
comparison.
Companies will amortize leased assets differently under the two models.
"Accordingly, the IASB expects the carrying amount of lease assets, as well
as reported equity, to be higher under the FASB model than under the IASB
model, although those effects are not expected to be significant for most
entities," the IASB found.
Compliance Week/Accounting & Auditing Update blog
(3/20)
Bob Jensen's threads on lease accounting ---
http://faculty.trinity.edu/rjensen/theory02.htm#Leases
LIBOR and the LIBOR Scandal ---
https://en.wikipedia.org/wiki/Libor
From the CFO Journal's Morning Ledger on November 6, 2015
Jury delivers first U.S. Libor manipulation convictions
http://www.wsj.com/articles/new-york-jury-convicts-former-rabobank-traders-in-libor-trial-1446742694?mod=djemCFO_h&alg=y
The first U.S. jury to hear evidence about a sprawling scheme to manipulate
a key benchmark interest rate convicted two former Rabobank
traders.
Bob Jensen's
Fraud Updates
---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
Sustainability Accounting ---
http://en.wikipedia.org/wiki/Sustainability_accounting
From the CFO Journal's Morning Ledger on November 5, 2015
Stock exchange group sets guidelines for sustainability disclosures
http://blogs.wsj.com/cfo/2015/11/04/stock-exchange-group-sets-guidelines-for-sustainability-disclosures/?mod=djemCFO_h
A group of the world’s largest stock exchanges,
on Wednesday,
released guidelines for the types of environmental, social, and
governance-related metrics it says are important for companies to release to
investors, Emily Chasan reports. The guidelines could push stock exchanges
to require listed companies to report on more than 30 metrics, such
as energy consumption, employee turnover, human rights, and gender and board
diversity, though exchanges can voluntarily choose to adopt some, if any, of
these standards.
"Update on Social Accounting - Sustainability Reporting," by Jim
Martin, MAAW's Blog, May 1, 2015 ---
http://maaw.blogspot.com/2015/05/update-on-social-accounting.html
Bob Jensen's threads on sustainability accounting ---
http://faculty.trinity.edu/rjensen/theory01.htm#ResearchVersusProfession
From the CFO Journal's Morning Ledger on October 29, 2015
The House
passed a two-year budget deal that would extend
the government’s borrowing limit less than a week before the Treasury risks
being unable to pay its bills. But companies with corporate pensions will
end up paying a price if it becomes law,
Vipal Monga reports. According to the proposed
budget, companies that have defined-benefit pension plans would have to
increase the fees they pay to the Pension Benefit Guaranty Corp. by about
25%. Companies with pensions will pay $80 per person in their plans by 2019,
up from $64 in 2016. Those fees will apply to companies regardless of funded
status.
Meanwhile, companies that are underfunded, meaning the
value of the assets in their plans doesn’t match the expected liabilities,
will have to pay a penalty that jumps to 4% in 2019 from 3% today. The
increases come on top of regular increases that are tied to inflation. That
means a company with a pension that is $100 million underfunded would pay at
least $4 million in penalties in 2019.
“The total PBGC fees that a pension plan sponsor is
facing over the life of the fund, is now material,” said Caitlin Long, head
of the pension solutions group at Morgan Stanley. “Most
executives do not expect that this is the last increase.”
From the CFO Journal's Morning Ledger on October 29, 2015
IASB offers new draft guidance on materiality
http://blogs.wsj.com/cfo/2015/10/28/international-accounting-regulator-offers-new-guidance-on-materiality/?mod=djemCFO_h
The International Accounting Standards Board, or IASB,
on Wednesday published draft guidance that
aims to help companies understand when a piece of information qualifies as
material. The deadline for comments is
Feb. 26.
International accounting rules require firms to
disclose any “material” information, but they also factor in the idea that
what counts as material varies from situation to situation and company to
company. That can leave finance departments scratching their heads over when
to talk or keep quiet.
In an effort to clarify matters, the International
Accounting Standards Board, or IASB, which sets International Financial
Reporting Standards, or IFRS, today is publishing draft guidance that aims
to help companies understand when a piece of information qualifies as
material.
The draft guidance is intended to complement an
amendment made in 2014. The deadline for comments is Feb. 26, 2016.
“Financial statements are meant to be a means of
communication, and should not be viewed as a mere compliance exercise,” said
IASB Chairman Hans Hoogervorst in a press release. “Management needs to take
a step back and consider whether they are providing the right level of
information in the financial statement and whether it is useful.”
A spokeswoman said the draft guidance is part of a
larger effort on IASB’s part to improve disclosures, and that the input
received until the deadline in February will be factored in to their final
form.
From the CFO Journal's Morning Ledger on October 29, 2015
LifeLock reaches agreements to settle lawsuits
In its suit, the Federal Trade Commission
alleged identity-theft-protection provider LifeLock Inc.
failed to establish a comprehensive security program, didn’t meet
record-keeping requirements and made false advertisements about its
services. LifeLock’s subscription services provide features such as identity
alerts, surveillance of criminal websites and remediation services. The
proposed FTC settlement doesn’t require any changes to the company’s
products, services or business practices, including marketing and
advertising. Neither settlement is final yet.
From the CFO Journal's Morning Ledger on October 29, 2015
LifeLock reaches agreements to settle lawsuits (the one that advertises
a lot on television)
In its suit, the Federal Trade Commission
alleged identity-theft-protection provider LifeLock Inc.
failed to establish a comprehensive security program, didn’t meet
record-keeping requirements and made false advertisements about its
services. LifeLock’s subscription services provide features such as identity
alerts, surveillance of criminal websites and remediation services. The
proposed FTC settlement doesn’t require any changes to the company’s
products, services or business practices, including marketing and
advertising. Neither settlement is final yet.
Factoring of Accounts Receivable ---
https://en.wikipedia.org/wiki/Factoring_(finance)
Questions
How does "supply chain financing" as described below differ from factoring of
accounts receivable?
Is there a difference in the bookkeeping that we learned years ago as accounting
for factored receivables?
From the CFO Journal's Morning Ledger on
October 27, 2015
Big
companies often started taking longer to pay their suppliers in the years
after the recession, as a way to help them manage their cash flow. That left
the smaller suppliers in a lurch as they waited longer for payments to
arrive. But more banks are stepping in to fill that gap with a roundabout
method of providing cash known as supply-chain financing,
Vipal Monga and Ruth Simon report.
Though the banks have shown a limited appetite for
making small loans in a direct fashion, supply-chain financing lets the
banks earn some interest, while the smaller companies are able to receive
payments more quickly.
Here’s how it
works: A bank buys the receivables of a company’s smaller supplier, and then
pays those bills early. The supplier might get its cash in 30 days, for
example, for bills due in 60 days. The bank charges the supplier interest in
exchange for the early payment, but at a preferential rate. With the
cooperation of the bigger company, the bank bases the interest charge on
that company’s credit rating, rather than on that of the supplier.
"What is the Difference between Morals and
Ethics?" by Steven Mintz, Ethics Sage, October 27, 2015 ---
http://www.ethicssage.com/2015/10/what-is-the-difference-between-morals-and-ethics.html
Many people bristle at the word “morality” but are
quite comfortable using the term “ethical”, and insist there’s some crucial
difference between the two. For instance, some people say ethics are about
external, socially imposed norms, while morality is about individual
conscience. Others say ethics is concrete and practical while morality is
more abstract, or is somehow linked to religion. Among philosophers there’s
no clear agreed distinction, and most philosophers use the two terms more or
less interchangeably.
I like to think about it this way: Morals is about
how we deal with people we know while ethics is about how we deal with
people we do not know. The Golden Rule is instructive and applies to both:
We should treat others the way we want to be treated. For those we know, we
expect to be treated with respect and with empathy. For those we don’t know
we expect to be treated fairly, a more subjective standard of behavior.
Now, there is no question that morality and ethics
cross paths and intersect at integrity. That is, if we are moral and ethical
people we will act based on principled behavior following virtues such as
honesty, respect, responsibility, and loyalty to the truth as we see it; not
so much to a person who might ask us to do something we sense is wrong but
to an objective sense of what is right and what is wrong in a particular
circumstance.
Moral questions tend to deal with issues such as
abortion, capital punishment, and the like that pertain to how we view
others’ behavior. Our morals are formed by core values such as how we see
the right to life or the right of a woman to choose what she does with her
body.
Ethical questions tend to deal with deciding
correct conduct. For example, let’s assume your neighbor is growing organic
vegetables and has more land than the eye can see. You think about
“harvesting” some of these vegetables for your own use. Now, if you decide
to stay off your neighbor’s land, you have acted ethically. You considered
the interests of your neighbor and acted based on the universal ethical
principle known as the Categorical Imperative. It holds that we should act
in a way that we would want others to act if faced with similar conditions.
In other words, I wouldn’t want my neighbor to use my property and what I
grow for her own selfish needs so I should not do that to my neighbor. Thus,
ethical action takes on a universal appeal; however we can imagine all kinds
of "moral" viewpoints on the right to life versus a woman’s right to choose.
Continued in article
"SAT's Racial Impact," by Scott Jaschik,
Inside Higher Ed, October 27, 2015 ---
https://www.insidehighered.com/news/2015/10/27/study-finds-race-growing-explanatory-factor-sat-scores-california?utm_source=Inside+Higher+Ed&utm_campaign=9100c271bb-DNU201510027&utm_medium=email&utm_term=0_1fcbc04421-9100c271bb-197565045
Large and growing gaps in SAT scores, by race and ethnicity, are nothing new. The College Board and educators alike have acknowledged these gaps and offered a variety of explanations, with a focus on the gaps in family income (on average) and the resources at high schools that many minority students attend. And indeed there is also a consistent pattern year after year on SAT scores in that the higher the family income, on average, the higher the scores.But a new, long-term analysis of SAT scores has found that, among applicants to the University of California's campuses, race and ethnicity have become stronger predictors of SAT scores than family income and parental education levels.
. . .
The solution, for Geiser, is
to go back to what the University of California did when it adopted the SAT,
but which the state's voters have barred it from doing today: considering
race in admissions. He writes that if public universities are going to
consider SAT scores in a serious way, they should also consider race and
ethnicity.
Continued in article
California's school test scores reveal gaping racial
achievement gap," by Sharon Noguchi, San Jose Mercury News, September
9, 2015 ---
http://www.mercurynews.com/california/ci_28782503/califs-test-scores-reveal-yawning-achievement-gap
The first results of a new test on student
performance in California schools revealed a majority of students failed to
meet state standards in math and English -- with a stark racial achievement
gap despite decades of efforts to close it.
Of more than 3.1 million public school students
tested in English statewide, only 44 percent met or exceeded standards; in
math, only 33 percent met that threshold, according to the state Department
of Education, which released the new scores. Scores at Bay Area schools
generally mirrored the statewide results, as performance correlated with
family and community wealth, language ability and ethnicity.
Continued in
article
Jensen Comment
Asians now outscore whites on SAT and ACT examinations. Also there are now more
Hispanics in California than whites among the younger generations. There is also
a very large and growing Asian population all along the Pacific-bounded states.
Times are changing in terms of white dominance on most anything with
Californians leading the way. Affirmative action based on racial quotas
may eventually benefit whites in California, Oregon, and Washington.
Vancouver is now the most expensive city in all
of North America mainly due to wealthy Chinese buying up of real estate. San
Francisco is right behind. More Chinese wealth is pouring into Canada, however,
due to the Canadian policy of selling citizenship.
Bob Jensen's threads on affirmative action
---
http://faculty.trinity.edu/rjensen/HIGHerEdControversies2.htm#AcademicStandards
Kickback (bribery) ---
https://en.wikipedia.org/wiki/Kickback
"U.S. Sen. Warren: ‘Kickbacks’ Create Conflicts for Annuity Sales Agents,"
by Leslie Scism, The Wall Street Journal, October 27, 2015 ---
http://www.wsj.com/articles/u-s-sen-warren-kickbacks-create-conflicts-for-annuity-sales-agents-1445961871?mod=djemCFO_h
Jensen Comment
I always thought that "kickback" was a form of bribery to non-employees such as
kickbacks to customers and government agents such as bribing a government agent
or paying or paying a customer's purchasing agent under the table to agree to
make a purchase. Kickbacks are common, albeit often illegal, when vendors pay
under-the-table to sell such things as military equipment and supplies to the
Pentagon. A common and illegal or unethical type of kickback arises when
pharmaceutical companies off free cruises and condos as incentives for
physicians to prescribe branded merchandise that is usually overpriced relative
to generic alternatives.
In this context, what Sen. Warren calls
"kickbacks" to employees really are just other forms of compensation such as
giving out prizes in lieu of cash bonuses to sales employees for outstanding
performances. Such prizes are taxable to employees and must be reported at fair
values to the IRS. There are some advantages to paying non-cash prizes such as
vacation hotel rooms. Employers can often negotiate lower prices for such prizes
due to such deals as volume discounts from hotel chains and block purchases of
cruise liner tickets. By "lower price" I mean less that an employee would pay
for such a prize if purchased separately out of a cash bonus. It'sis quite
traditional to give non-cash prizes to sales staff in most industries.
As long as this non-cash compensation is all
above board and satisfies IRS requirements I see nothing unethical or illegal
about it.
The risk lies more with incentives the employees have to act unethically when
selling products and services that are overpriced and/or inferior. However, such
risk is perhaps even greater if the compensation is in the form of cash bonuses
rather than non-cash prizes to employees.
Sometimes non-cash prizes become hedonistic with
lavish parties in luxury hotels where premium whiskey and wine encourages
inebriation while very expensive bands and singers perform, Sometimes things get
out of hand with added alternatives for prostitutes that are not likely to be
reported on W-2 forms. Perhaps Sen. Warren is being influenced by reported
hedonism of non-cash prizes to annuity sales agents.
When I bought various lifetime annuities from
TIAA I was not even offered a free lunch, and the TIAA representative was a
young mother who did not seem likely to be wanting lavish parties and
prostitutes.
"FASB’s Proposed Materiality “Clarifications” are Backfiring,"
by Tom Selling, The Accounting Onion, October 25, 2015 ---
http://accountingonion.com/2015/10/fasbs-proposed-materiality-clarifications-are-backfiring.html
Something must
have happened between my
post
criticizing the FASB’s proposals to
reduce materiality to a legal
exercise and last week’s meeting of
the SEC
Investor Advisory Committee.
Just prior to
the meeting, discussion of the
proposals became an agenda item.
Apparently, Chair White, dispatched
Chief Accountant James Schnurr to
engage in damage control.
According to
the press coverage of the meeting,
Mr. Schnurr was not successful.
Francine McKenna wrote a fairly
restrained account for
Market Watch,
while David
Dayen in
Naked Capitalism
was more
strident. Both articles left the
distinct impression that IAC members
were as I, adamant that investors
were being given the short end of
the stick.
I wish I could
have been at the meeting to see for
myself how the SEC staff handled the
criticism. However, one observer
kindly shared practically verbatim
notes with me. With the caveat that
they are by
[Read More...]
Jensen Comment
Tom has never made it clear, at least to me, what he thinks would be a better
solution.
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 23, 2015
As
Conservation Cuts Electricity Use, Utilities Turn to Fees
by:
Rebecca Smith
Oct 20, 2015
Click here to view the full article on WSJ.com
TOPICS: Cost
Behavior, Degree of Operating Leverage, Fixed Costs, Pricing, Variable Costs
SUMMARY: Electric
utilities across the country are trying to change the way they charge
customers, shifting more of their fixed costs to monthly fees.
Traditionally, charges for generating, transporting and maintaining the grid
have been wrapped together into a monthly cost based on the amount of
electricity consumers use each month. Some utilities also charge a basic
service fee of $5 or so a month to cover the costs of reading meters and
sending out bills. Now, many utility companies are seeking to increase their
monthly fees by double-digit percentages, raising them to $25 or more a
month regardless of the amount of power consumers use. The utilities argue
that the fees should cover a bigger proportion of the fixed costs of the
electric grid, including maintenance and repairs.
CLASSROOM
APPLICATION: This
is an interesting example of cost behavior and degree of operating leverage
for a managerial accounting class. Utility companies are in an industry with
high fixed costs, and pricing is changing in response to increasing energy
conservation.
QUESTIONS:
1. (Introductory) What is cost behavior? What are fixed costs and
what are variable costs? What is a mixed cost? How are these various costs
analyzed differently?
2. (Advanced) How are many electric utility companies attempting to
change their pricing structure? What are the reasons for these changes?
3. (Advanced) What would be the impact of the proposed changes on
customers? How do the pricing changes affect a customer's fixed and variable
expenses?
4. (Advanced) What is degree of operating leverage (DOL)? How is it
calculated? How does DOL affect how a company plans and how it analyzes
financial information?
5. (Advanced) Relative to other industries, what do you think the DOL
is for the power industry - high or low? How does that affects the pricing,
analysis, and planning the companies do?
6. (Advanced) What other companies and industries have cost
structures similar to the power industry?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Utilities' Profit Recipe: Spend More
by Rebecca Smith
Apr 20, 2015
Online Exclusive
"As Conservation Cuts Electricity Use, Utilities Turn to Fees," by Rebecca
Smith, The Wall Street Journal, October 20, 2015 ---
http://www.wsj.com/articles/as-conservation-cuts-electricity-use-utilities-turn-to-fees-1445297729?mod=djem_jiewr_AC_domainid
Double-digit percentage increases for distribution,
maintenance anger power consumers
Electric utilities across the country are trying to
change the way they charge customers, shifting more of their fixed costs to
monthly fees, raising the hackles of consumer watchdogs and conservation
advocates.
Traditionally, charges for generating, transporting
and maintaining the grid have been wrapped together into a monthly cost
based on the amount of electricity consumers use each month. Some utilities
also charge a basic service fee of $5 or so a month to cover the costs of
reading meters and sending out bills.
Now, many utility companies are seeking to increase
their monthly fees by double-digit percentages, raising them to $25 or more
a month regardless of the amount of power consumers use. The utilities argue
that the fees should cover a bigger proportion of the fixed costs of the
electric grid, including maintenance and repairs.
“The [electricity] grid is becoming a more complex
machine, and there needs to be an equitable sharing of its costs,” said Lisa
Wood, a vice president of the Edison Foundation, the nonprofit arm of the
utility industry’s trade group Electric Electric Institute. A typical
American household pays $110 a month for electricity, she said; more than
half goes to cover fixed costs.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 23, 2015
Investor Seeks to Hold Ernst & Young Liable for Madoff Losses
by:
Jacqueline Palank
Oct 15, 2015
Click here to view the full article on WSJ.com
TOPICS: Auditing,
Fraud
SUMMARY: In
2010, FutureSelect, which lost all of its investment, filed suit in a court
in Washington state against Ernst & Young, one of the feeder funds'
auditors, alleging negligence and seeking to recover millions of dollars in
losses. The plaintiff alleges the Big Four auditing firm failed to perform
such essential auditing tasks as confirming the existence of the securities
Mr. Madoff purported to trade for investors. Nor did it look at the
credentials of Mr. Madoff's auditor, "one man in a little office."
CLASSROOM
APPLICATION: This
article is good for use in an auditing class or a forensic accounting class
regarding the issue of auditor responsibilities for detecting fraud and
possible liability.
QUESTIONS:
1. (Introductory) What are the facts of the case featured in the
article? Who is the plaintiff and who is the defendant?
2. (Advanced) What are the Big Four accounting firms? What are their
areas of business? Why are they called the Big Four?
3. (Advanced) How was Ernst & Young involved in Madoff's case? How
was the firm connected to FutureSelect? How could the firm be liable in this
case?
4. (Advanced) What responsibility do auditors have to detect fraud?
Should accounting firms have exposure to liability in these kinds of cases?
Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Investor Seeks to Hold Ernst & Young Liable for Madoff Losses," by
Jacqueline Palank. The Wall Street Journal, October 15, 2015 ---
http://www.wsj.com/articles/investor-seeks-to-hold-ernst-young-liable-for-madoff-losses-1444854695?mod=djem_jiewr_AC_domainid
Court papers show FutureSelect invested about $200
million
Ernst & Young failed to serve as a gatekeeper for a
Washington investment firm that sank millions of dollars into Bernard
Madoff’s investment firm and should be held liable for its losses, the
firm’s lawyer told a jury Wednesday.
“I’m going to prove to you that Ernst & Young had a
job. I’m going to prove to you that Ernst & Young didn’t do their job,” said
Steven W. Thomas, a lawyer representing FutureSelect Portfolio Management
Inc.
Court papers show FutureSelect, of Redmond, Wash.,
invested approximately $200 million in feeder funds that pooled investors’
cash and funneled it Mr. Madoff’s way, until his arrest in 2008 exposed a
massive Ponzi scheme in which investors lost some $17 billion.
In 2010, FutureSelect, which lost all of its
investment, filed suit in a court in Washington state against Ernst & Young,
one of the feeder funds’ auditors, alleging negligence and seeking to
recover millions of dollars in losses.
James Bennett, an attorney for Ernst & Young, on
Wednesday told the jury that “Ernst & Young did its job, full stop,”
according to a video feed of the trial’s first day provided by Courtroom
View Network.
“We regret, we sympathize with anybody who lost
money as a result of that fraud. But Ernst & Young is not the cause of those
losses,” Mr. Bennett said.
In his opening statement to the jury, Mr. Thomas
said the Big Four auditing firm failed to perform such essential auditing
tasks as confirming the existence of the securities Mr. Madoff purported to
trade for investors.
Nor did it look at the credentials of Mr. Madoff’s
auditor, “one man in a little office,” said Mr. Thomas.
Instead, Mr. Thomas said Ernst & Young relied on
statements from Mr. Madoff, who is serving a 150-year prison sentence, or
his investment firm, which is liquidating, when it blessed various financial
statements related to investments overseen by Mr. Madoff as containing
accurate information.
“Ernst & Young should have never signed its name
and issued that opinion,” Mr. Thomas said.
Mr. Bennett said the fraud went undetected by
regulators, banks, sophisticated investors and multiple auditors for several
decades. He said the onus was on investors like FutureSelect to research its
investments, and he said they could have concluded that the returns that Mr.
Madoff’s firm offered “were too good to be true.”
Continued in article
"Jury Says Ernst & Young Liable for Madoff Investor’s Losses: E&Y
found negligent in role as auditor for feeder fund," by Jacquiline Palank,
The Wall Street Journal, November 13, 2015 ---
http://www.wsj.com/articles/jury-says-ernst-young-liable-for-madoff-investors-losses-1447453162?alg=y#livefyre-comment
Thank you Tom Selling for the heads up.
Reply from Bob Jensen on November 15, 2015
Hi Tom,
What I find somewhat worrisome in the article is the following quotation
from EY:
EY was not the auditor of any Madoff entity; we
were among the many auditors of funds that chose to use Madoff as their
investment adviser. While we regret the investors’ losses, no audit of a
Madoff-advised fund could have detected this Ponzi scheme,” Ernst &
Young’s Amy Call Well said in an email.
This settlement could be a point at which an audit firm ceases to be an
audit fir firm and commences to be a financial guarantee insurance company.
The problem is that most insurance companies deal with risks estimated by
actuarial science. Actuarial science is not much help in the area of
financial forecasting --- largely because actuarial science is built upon
stationary states.
This raises questions about the extent to which an auditor must verify
third party investment, insurance, and deposit quality. Consider a
hypothetical example. When EY auditors receive a verification that their
client does indeed have casualty insurance in the amount of $10 million from
Every State Life and Casualty Company to what extent is the auditor
responsible to verify the quality of that insurance beyond verifying that
Every State is indeed licensed in every state to sell life and casualty
insurance and the auditor's reading of the insurance contract terms? The
auditors might even go a step further to determine that Every State was
indeed audited by KPMG. But KPMG is not likely to share inside working paper
information with EY regarding Every State.
To what extent is EY liable above an beyond the KPMG audit report on the
financial statements of Every State?
My guess is that EY would not be liable to FutureSelect Portfolio
Management Fund for its Madoff Losses had the Madoff Fund been properly
audited. But the Madoff Fund was not audited by a NY-licensed auditor where
the fund was headquartered. Perhaps EY is more liable in cases where EY
relied on investment verification that was not properly audited.
I am not an expert on the fine print of the rules of auditing and never
taught auditing. To what extent are auditors liable to verify the quality of
deposits in banks, receivables from third parties, insurance coverage, etc.?
Years ago, when I was a lowly staff auditor in the Denver Office of EY, I
can't recall that we went beyond verifying that the client's accounts
existed in the correct balances reported by the client.
This touches on something that always made me uneasy about test checking
inventory. One of our Denver Office audit clients was a piston manufacturer
in Pueblo, Colorado. When we showed up on Sunday mornings to count pistons
we found two types of containers at the end of each production line. The
company said one container had pistons that met quality control standards.
The other container was for rejects. But as an auditor I could not tell any
difference between a good piston and a bad piston. We simply took the
client's word that those pistons it called satisfactory were indeed
satisfactory, including the pistons that were boxed up and purportedly ready
to ship to customers. Fortunately our client was more honest than a well
known manufacturer of salad oil at the time.
It would really be interesting to know how this FutureSelect case
would have been decided for EY if the Madoff Fund had been audited by KPMG.
Thanks,
Bob Jensen
Bob Jensen's threads on Ernst & Young ---
http://faculty.trinity.edu/rjensen/Fraud001.htm
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 23, 2015
---
Beware of Tax Surprises Lurking in Mutual Funds
by: Laura Saunders
Oct 17, 2015
Click here to view the full article on WSJ.com
TOPICS: Capital
Gains, Individual Taxation, Mutual Funds, Tax Planning
SUMMARY: Investors
who holds mutual funds in a taxable account could be in for a nasty shock
next year at tax time. By law, each year mutual funds must pay out to
investors nearly all their income, which includes interest, dividends and
net realized capital gains - in short, the profits on their trades minus
offsetting losses. These annual payouts can bring surprise tax bills for
investors holding funds in taxable accounts. The tax surprises are usually
caused by the funds' capital-gains payouts, which can vary greatly from year
to year.
CLASSROOM
APPLICATION: This
is a good article to illustrate tax planning issues related to capital gains
from mutual funds.
QUESTIONS:
1. (Introductory) What are capital gains? How are they taxed?
2. (Advanced) How can ownership of mutual funds result in surprises
for taxpayers? How can investors prepare for those surprises? What should
investors do to plan for tax liability in those cases?
3. (Advanced) How does owning mutual funds result in different tax
issues, as opposed to owning individual stocks? Which investment option
offers more tax certainty? What are the non-tax investment benefits of
owning mutual funds vs. individual stocks?
4. (Advanced) How can investors split investments between taxable
accounts and retirements accounts to reduce the impact of these tax issues?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
When Funds Insult Their Investors
by Jason Zweig
Dec 26, 2014
Online Exclusive
Mutual Fund's Overhaul Hits Investors With Big Tax
Bill
by Dasiy Maxey
Oct 03, 2015
Online Exclusive
When Funds Insult Their Investors
by Jason Zweig
Dec 26, 2014
Online Exclusive
"Beware of Tax Surprises Lurking in Mutual Funds," by Laura Saunders, The
Wall Street Journal, October 17, 2015 ---
http://www.wsj.com/articles/beware-of-tax-surprises-lurking-in-mutual-funds-1444987800?mod=djem_jiewr_AC_domainid
Capital-gains payouts could
deliver a blow at tax time; what you can do now to blunt the pain
If
you’re an investor who holds mutual funds in a
taxable account, you could be in for a nasty
shock next year at tax time.
Here’s why: By law, each year mutual funds must
pay out to investors nearly all their income,
which includes interest, dividends and net
realized capital gains—in short, the profits on
their trades minus offsetting losses.
These annual payouts don’t pose a problem for
millions of savers who hold mutual funds in
tax-sheltered retirement accounts such as IRAs
and 401(k) plans. But they can bring surprise
tax bills for investors holding funds in taxable
accounts. Just over 30% of mutual-fund assets
are held by individuals in taxable accounts,
according to the Investment Company Institute.
The tax surprises are usually caused by the
funds’ capital-gains payouts, which can vary
greatly from year to year. In 2012, for example,
mutual funds paid out only about $37 billion in
capital gains to individuals with taxable
accounts despite robust market growth, because
fund managers still had losses from the
financial crisis to offset many gains.
But in 2014, these
capital-gains payouts more than tripled to $132
billion, as the market rose and there were fewer losses to offset them.
Investors at the time had to pay Uncle Sam his due—even if they were recent
buyers who didn’t own the fund when some of the gains occurred.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 23, 2015
FASB
Simplifies Accounting for Business Combination Adjustments
by:
Deloitte Risk Journal Editor
Oct 16, 2015
Click here to view the full article on WSJ.com
TOPICS: Business
Combination, FASB, Financial Accounting
SUMMARY: As
part of the FASB's simplification initiative, it has issued an accounting
standards update related to measurement-period adjustments recorded for
business combinations. ASU 2015-16 responds to stakeholder feedback that
restating prior periods to reflect adjustments made to provisional amounts
recognized in a business combination adds cost and complexity to financial
reporting but does not significantly improve the usefulness of the
information provided to users.
CLASSROOM
APPLICATION: This
article is appropriate for use in a financial accounting class when covering
business combinations.
QUESTIONS:
1. (Introductory) What is FASB? What is its purpose and area of
authority?
2. (Advanced) What are business combinations? What is a
measure-period adjustment? How is the accounting treatment addressed in this
ASU?
3. (Advanced) What benefits does this ASU provide to the accounting
for business combinations? Why did FASB make these changes?
Reviewed By: Linda Christiansen, Indiana University Southeast
"FASB Simplifies Accounting for Business Combination Adjustments," vy
Deloitte Risk Journal Editor. The Wall Street Journal, October 16, 2015
---
http://deloitte.wsj.com/riskandcompliance/2015/10/16/fasb-simplifies-accounting-for-business-combination-adjustments/?mod=djem_jiewr_AC_domainid
As part of the FASB’s
simplification initiative,ą it has issued an
accounting standards update related to
measurement-period adjustments recorded for
business combinations.
ASU 2015-16˛ responds
to stakeholder feedback that restating prior
periods to reflect adjustments made to
provisional amounts recognized in a business
combination adds cost and complexity to
financial reporting but does not significantly
improve the usefulness of the information
provided to users.
Key
Provisions of the ASU
Under the ASU, issued
on September 25, 2015, an acquirer must
recognize adjustments to provisional amounts
that are identified during the measurement
period in the reporting period in which the
adjustment amounts are determined. The effect on
earnings of changes in depreciation or
amortization, or other income effects (if any)
as a result of the change to the provisional
amounts, calculated as if the accounting had
been completed as of the acquisition date, must
be recorded in the reporting period in which the
adjustment amounts are determined rather than
retrospectively.
The ASU also requires
that the acquirer present separately on the face
of the income statement, or disclose in the
notes, the portion of the amount recorded in
current-period earnings by line item that would
have been recorded in previous reporting periods
if the adjustment to the provisional amounts had
been recognized as of the acquisition date. The
appendix below illustrates the application of
accounting for measurement-period adjustments
under the ASU.
Continued in article
Also see Tom Selling's post ---
http://accountingonion.com/2015/06/what-is-the-fasbs-simplification-initiative-really.html
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 23, 2015
How
to Address FCPA Risks in Emerging Market M&A Deals
by:
Deloitte CFO Journal Editor
Oct 19, 2015
Click here to view the full article on WSJ.com
TOPICS: FCPA,
Foreign Corrupt Practices Act, Mergers and Acquisitions
SUMMARY: Foreign
Corrupt Practices Act risks, such as successor liability, do not
automatically translate into deal-breakers for M&A transactions. However,
potential buyers still need to exercise caution when it comes to foreign
acquisitions, performing thorough due diligence and making careful decisions
regarding disclosures to the U.S. Department of Justice.
CLASSROOM
APPLICATION: This
article can be used in class during coverage of mergers and acquisitions.
QUESTIONS:
1. (Introductory) What is the FCPA? What does it prohibit?
2. (Advanced) How does the FCPA relate to accounting? How could
accountants be punished under this law?
3. (Advanced) How can the accounting system and internal controls be
used to prevent and detect violations of the FCPA?
4. (Advanced) How can the FCPA negatively affect a merger or
acquisition deal? What does the article recommend to potential buyers in
these types of situations?
Reviewed By: Linda Christiansen, Indiana University Southeast
"How to Address FCPA Risks in Emerging Market M&A Deals," Deloitte CFO
Journal Editor, The Wall Street Journal, October 19, 2015 ---
http://deloitte.wsj.com/cfo/2015/10/19/how-to-address-fcpa-risks-in-emerging-market-ma-deals/?mod=djem_jiewr_AC_domainid
Foreign Corrupt Practices Act (FCPA) risks, such as
successor liability, do not automatically translate into deal-breakers for
M&A transactions. However, potential buyers still need to exercise caution
when it comes to foreign acquisitions, performing thorough due diligence and
making careful decisions regarding disclosures to the U.S. Department of
Justice (DOJ).
Every year, a number of potential buyers abandon
what might appear to be promising deals in emerging markets due to hints of
FCPA infractions, such as questionable payments to third parties,
entertainment of government officials or donations to government entities.
After all, unaddressed FCPA exposures may subject a buyer to successor
liability for the seller’s prior violations, which may create negative
publicity and reputation damage, and diminish the value of the acquired
company. The purchaser may also have to investigate and remediate corruption
issues at significant costs and sometimes under the watchful eye of U.S. or
foreign regulators.
“Whether the potential buyer is a corporation or a
private equity firm, they do not want to deal with a reputation issue,” says
Hernan Marambio, Deloitte Advisory partner in Deloitte & Touche LLP. “This
regulatory roadblock is increasingly hard to avoid since everyday business
functions in all industries, from building warehouses to exporting goods,
typically involve government touch points,” Mr. Marambio adds.
DOJ Opinion Procedure Release 14-02: A Case Study
One recent example of this conundrum: A U.S.-based
company planned to acquire a foreign manufacturer and distributor. Working
with an experienced forensic accounting team, the U.S. buyer discovered more
than $100,000 in suspicious payments to government officials at the target
company, and recordkeeping deficiencies that made it impossible to determine
the actual purpose of these payments.
When the U.S. buyer sought an opinion on its
potential FCPA liability from the DOJ, it learned that it would not be
subject to successor liability. In fact, in the DOJ Opinion Procedure
Release No. 14-02, the DOJ concluded that the potentially improper payments
were not subject to U.S. jurisdiction. The end result: The company had to
establish policies and processes to ensure the target company’s FCPA
compliance post-acquisition, but was able to purchase the target with no
fear of FCPA-related repercussions resulting from the target company’s
historical activities.
While FCPA violations are a serious issue, DOJ
Opinion 14-02 indicates that FCPA successor liability depends on the facts
and circumstances, and violations may not always be as problematic as they
might seem. In addition, DOJ Opinion 14-02 suggests that proactive and
forthright acquirers may be able to avoid successor liability even when the
DOJ does have jurisdiction over the target company.
DOJ Opinion 14-02 also highlighted a long-standing
but often-forgotten fact: The DOJ generally does not have authority over
companies that do not operate or issue securities in the U.S. In the case
referenced previously, DOJ Opinion 14-02 states that none of the payments
occurred in the U.S., and no U.S. person or securities issuer was identified
as being involved. Additionally, no bribery tainted contracts or assets
would remain in operation post-acquisition to potentially benefit the U.S.
acquirer.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 30, 2015
IRS
Would More Easily Audit Large Partnerships Under Proposal
by:
Richard Rubin
Oct 27, 2015
Click here to view the full article on WSJ.com
TOPICS: Partnership
Taxation, Partnerships, Tax
SUMMARY: The
Internal Revenue Service would have an easier time auditing large
partnerships, including private-equity firms and hedge funds, with proposed
legislation. The proposal would revamp a 33-year-old law that sets the rules
for partnership audits and requires the IRS to pass additional taxes to each
of the partners. That task has proven difficult for the IRS and has made the
biggest and most complex multitiered partnerships extremely tough to audit.
CLASSROOM
APPLICATION: This
is a good update for partnership taxation.
QUESTIONS:
1. (Introductory) In general, how are partnerships taxed? How does
this compared with the taxing of other forms of doing business?
2. (Advanced) What proposal did members of Congress make regarding
taxation? How will this impact the IRS? How will it impact partnerships? How
will it impact individual taxpayers?
3. (Advanced) What is tax compliance? What are the IRS challenges
regarding compliance? How do those challenges affect collections of taxes?
How can changes in the law and the IRS increase compliance?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Budget Deal Stirs Anger on the Right
by Kristina Peterson and Nick Timiraos
Oct 28, 2015
Online Exclusive
"IRS Would More Easily Audit Large Partnerships Under Proposal," by Richard
Rubin, The Wall Street Journal, October 29, 2015 ---
http://www.wsj.com/articles/irs-would-more-easily-audit-large-partnerships-under-proposal-1445962611?mod=djem_jiewr_AC_domainid&alg=y
The Internal Revenue Service would have an easier
time auditing large partnerships, including private-equity firms and hedge
funds, under a provision in the bipartisan budget deal announced late Monday
night.
The proposal, built on ideas from both parties,
would revamp a 33-year-old law that sets the rules for partnership audits
and requires the IRS to pass additional taxes to each of the partners. That
task has proven difficult for the IRS and has made the biggest and most
complex multitiered partnerships extremely tough to audit.
A Government Accountability Office study last year
found the IRS audited just 0.8% of large partnerships—those with at least
100 partners and $100 million in assets—compared with a 27.1% audit rate for
corporations with at least $100 million in assets. Most of those partnership
audits resulted in no additional taxes, and the GAO said it wasn’t sure
whether that was because of high compliance or the agency’s inability to
find noncompliance.
Under the bill, the IRS would apply changes in
audits to the partnership itself, not individual partners. Small
partnerships with fewer than 100 partners could exempt themselves from the
new regime, which would begin in 2018.
The tax-compliance measures in the budget bill—this
and one other item—would raise $11.2 billion over the next decade, according
to the Congressional Budget Office.
“It looks at this point like a meaningful
improvement on current law” that would limit “sleight of hand” by
sophisticated taxpayers and include procedural fairness, Ron Wyden of
Oregon, the top Democrat on the Senate Finance Committee, said in an
interview.
Republicans generally oppose tax increases to pay
for additional spending, but they’re more open to measures that raise
revenue by enhancing tax compliance.
There were versions of the partnership audit
proposal in former Ways and Means Chairman Dave Camp’s tax plan last year
and in the Obama administration’s budget. The latest version was introduced
earlier this year by Rep. Jim Renacci, an Ohio Republican who complained in
a statement Tuesday about “legislative commandeering” that short-circuited
discussion of his plan by forgoing hearings and appending it to a deal
written in secret by congressional leaders.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 30, 2015
Don't Overlook Employees When Evaluating Supply Chain Fraud, Abuse
by:
Deloitte CFO Journal Editor
Oct 22, 2015
Click here to view the full article on WSJ.com
TOPICS: Forensic
Accounting, Fraud, Internal Controls, Supply Chain
SUMMARY: Employees
were identified as the top source of supply chain fraud risk, followed by
vendors and other third parties, including subcontractors and their vendors.
The article includes warning signs for supply chain fraud, waste and abuse.
CLASSROOM
APPLICATION: This
is a good article for any classes covering internal controls and fraud.
QUESTIONS:
1. (Introductory) What is supply chain fraud? Please provide some
examples.
2. (Advanced) What are the top sources of this type of fraud? What is
surprising about the top source of supply chain fraud? What can companies to
reduce, prevent, or detect that kind of fraud?
3. (Advanced) What are internal controls? What are the purposes of
internal controls? Please provide some examples of internal controls.
4. (Advanced) What are some warning signs of supply chain fraud? How
can internal controls address these issues?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Don't Overlook Employees When Evaluating Supply Chain Fraud, Abuse," by
Deloitte CFO Journal Editor, The Wall Street Journal, October 22, 2015
---
http://deloitte.wsj.com/cfo/2015/10/22/dont-overlook-employees-when-evaluating-supply-chain-fraud-abuse/?mod=djem_jiewr_AC_domainid
Employees (22.9%) were identified as the top source
of supply chain fraud risk, followed by vendors (17.4%) and other third
parties (20.1%), including subcontractors and their vendors, according to a
poll conducted by Deloitte Financial Advisory Services LLP among 2,060
professionals from the banking and securities, technology, retail and
distribution, process and industrial products and consumer products
sectors.*
“Although it might be hard to believe that the
source of supply chain fraud could come from inside a company, outside
forces aren’t always to blame. Employees often leverage transactions
involving vendors and third parties to their own benefit via supply chain
fraud—and when collusion is involved, detection and prevention are quite
difficult,” notes Mark Pearson, Deloitte Advisory principal with Deloitte
Financial Advisory Services LLP.
In addition, more than one-quarter of professionals
polled (28.9%) also say their organizations experienced supply chain fraud,
waste or abuse during the past 12 months, yet nearly as many (26.8%) have no
program currently in place to prevent and detect those risks.
“When we ask executives overseeing supply chains
why fraud risk management isn’t more top of mind, we’re consistently told
that compliance resource constraints are to blame,” says Larry Kivett,
Deloitte Advisory partner in Deloitte Financial Advisory Services LLP. “With
reputational, litigation and regulatory repercussions hanging in the
balance, companies can’t afford to dismiss supply chain fraud prevention and
detection. Schemes constantly evolve and come from every direction, making
vigilance crucial,” he adds.
Warning signs for supply chain fraud, waste and
abuse can include:
—Bidding and/or procurement processes that are not
robust or independent;
—Lack of sufficient clarity in third-party invoice
details;
—Poor or strained relationships with certain third
parties;
—Infrequent or non-existent “right-to-audit”
assessments of suppliers and licensees’ practices;
—Little-to-no oversight into proper administration
of agreements with third parties; and
—Use of third-party agreements that are
sole-sourced without a clear explanation or are constructed as cost-plus
agreements without clear definitions of cost and other relevant terms.
About two-thirds (65.3%) of respondents reported
their company conducts at least some due diligence on their third parties.
Nearly half as many (29%) evaluate the supply chain fraud risks that third
parties present on an annual or more frequent basis.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 30, 2015
UPS
Plans to Avoid the Holiday Blues
by:
Laura Stevens
Oct 28, 2015
Click here to view the full article on WSJ.com
TOPICS: Business
Segments, Cost Management, Managerial Accounting, Mixed Costs
SUMMARY: United
Parcel Service Inc. says this holiday season will be different. UPS is under
pressure to prove to Wall Street this year that it can better manage the
holidays. UPS spent about $200 million more than it expected in each of the
last two years; first as it was deluged with unexpected packages in 2013 and
then as it spent to overhire and overcompensate last year, during periods
that turned out to be slower than expected. Its plans include last-minute
hiring-bringing workers on just days before they're needed, dubbed
"just-in-time labor." UPS also said it would eliminate some package sorting
shifts. At the same time, the company reported a slight dip in third-quarter
revenue due to lower fuel surcharge revenues, currency effects and a weaker
economy. Yet it posted a 3.5% increase in profit due, in part, to growth in
its international segment.
CLASSROOM
APPLICATION: This
article would be good for a managerial or cost accounting class. It show how
a company can use important factors of cost management to contain costs and
improve profitability.
QUESTIONS:
1. (Introductory) What challenges did UPS face in the past two
holiday seasons? What were the causes of those challenges? What did the
company do to address those challenges?
2. (Advanced) What is the company planning to do for the 2015 holiday
season to address these challenges? How do these plans differ from its
previous plans?
3. (Advanced) What is cost behavior? How can analysis using cost
behavior help management run a company and increase profitability?
4. (Advanced) What are business segments? What is segment analysis?
How can they be used by management?
5. (Advanced) How is UPS using cost behavior analysis to manage the
company? How is management using segment analysis? How are they segmenting
the business? What other types of managerial analysis could they use?
Reviewed By: Linda Christiansen, Indiana University Southeas
"UPS Plans to Avoid the Holiday Blues," by Laura Stevens, The Wall Street
Journal, October 28, 2015 ---
http://www.wsj.com/articles/ups-reports-surprise-revenue-dip-1445947423?mod=djem_jiewr_AC_domainid
On Tuesday the Atlanta-based package delivery giant
said it expects a 10% increase in packages over the holidays, but outlined
how it will handle the surge this time without another overrun on costs or
being caught short-handed.
Its plans include last-minute hiring—bringing
workers on just days before they’re needed, dubbed “just-in-time labor.” UPS
also said it would eliminate some package sorting shifts.
At the same time, the company reported a slight dip
in third-quarter revenue due to lower fuel surcharge revenues, currency
effects and a weaker economy. Yet it posted a 3.5% increase in profit due,
in part, to growth in its international segment.
UPS is under pressure to prove to Wall Street this
year that it can better manage the holidays. UPS spent about $200 million
more than it expected in each of the last two years; first as it was deluged
with unexpected packages in 2013 and then as it spent to overhire and
overcompensate last year, during periods that turned out to be slower than
expected.
This year, UPS said it expects to deliver more than
630 million packages between Black Friday and New Year’s Eve, compared with
about 572 million a year ago.
“In regards to cost containment in the fourth
quarter, we’re certain that we can adjust the network and be flexible enough
to take the cost out,” said Myron Gray, head of U.S. operations, on an
earnings call with analysts.
UPS is reducing the number of special
holiday-season package sorting shifts to 40 from 49 and starting some later
due to a 6% increase in capacity this year as it added new hubs and
technology. It also plans to bring its 95,000 seasonal hires on just two or
three days before they’re needed instead of for the full peak season, CFO
Richard Peretz said in an interview.
“We’ll bring the labor on as we need it and not all
at one time,” Mr. Peretz said.
UPS is again working with customers to try to
predict and control volume, something it likens to running a control tower
at an airport. If the package isn’t urgent, for example, it might be shipped
Tuesday instead of Monday, when packages have built up over the weekend.
It’s a gamble. A harsh winter storm or an
unexpected surge in online sales could throw UPS’s delicately balanced plan
off kilter. Add to that, a storm usually keeps more consumers in their
homes, fueling online sales.
The company has a special team in place it will
send out to tackle weather or other emergencies, Mr. Peretz said.
Both UPS and rival FedEx Corp. —which said Monday
it expects holiday volumes will increase by 12% this year to 317 million
deliveries—are casting votes of confidence in the U.S. economy and consumers
at a time when retailers are sitting on high levels of inventory and other
freight companies have reported weak demand for shipments leading up to the
holidays.
Some of that is due to the strong growth projected
for e-commerce, which may come at the cost of traditional brick-and-mortar
retail, Mr. Peretz said.
“Obviously the economic news has been mixed, but at
the end of the day—even on the consumer side—you see a larger, faster paced
strength in the e-commerce space as compared to retail,” Mr. Peretz said.
“Every online survey shows again that that’s going to be high demand and all
the online commerce companies are planning for that.”
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 30, 2015
IBM
Says SEC Investigating Accounting of Some Revenue
by:
Chelsey Dulaney
Oct 28, 2015
Click here to view the full article on WSJ.com
TOPICS: Financial
Accounting, Revenue Recognition, SEC, Stock Buybacks
SUMMARY: International
Business Machines Corp. disclosed that the Securities and Exchange
Commission is investigating how it accounts for certain revenue from
transactions in the U.S., U.K. and Ireland. Companies that sell a wide
variety of technology services like IBM can find it difficult to allocate
revenue appropriately. "You're selling, in effect, multiple services, and
the accounting says that you need to do the best you can to break out those
services and recognize it."
CLASSROOM
APPLICATION: This
article on revenue recognition and stock buybacks could be used in a
financial accounting class.
QUESTIONS:
1. (Introductory) What are the facts of the IBM disclosure? What
issues is IBM facing?
2. (Advanced) What is the SEC? What is its area of authority? Why is
it involved in investigating IBM?
3. (Advanced) What aspect of IBM's business model adds additional
challenges to revenue recognition? How can the company address these
challenges?
4. (Advanced) What is a stock buyback? Why do companies do them? How
does a company book such a transaction? How does the transaction affect a
company's financial statements?
Reviewed By: Linda Christiansen, Indiana University Southeast
"IBM Says SEC Investigating Accounting of Some Revenue," by Chelsey Dulaney,
The Wall Street Journal, October 28, 2015 ---
http://www.wsj.com/articles/ibm-adds-4-billion-to-stock-buyback-program-1445962013?mod=djem_jiewr_AC_domainid
International Business Machines Corp. disclosed
Tuesday that the Securities and Exchange Commission is investigating how it
accounts for certain revenue from transactions in the U.S., U.K. and
Ireland.
IBM said it learned of the investigation in August.
The news was disclosed in the quarterly report IBM filed with the SEC on
Tuesday. IBM said it is cooperating with the SEC.
The Armonk, N.Y., company said it was confident
that its results had been reported properly according to accounting rules.
“IBM has a rigorous and disciplined process for the preparation of its
financial statements and the reporting of revenue,” the company said
Tuesday.
IBM shares ended the day down 4% at $137.85.
An SEC spokesman declined to comment.
Two years ago, the SEC opened an investigation into
IBM’s cloud computing revenue recognition. It was dropped a year later with
no enforcement action by the SEC.
Companies that sell a wide variety of technology
services like IBM can find it difficult to allocate revenue appropriately,
said Norman J. Bartczak, an adjunct professor at Columbia University who
teaches and writes about financial regulations. “You’re selling, in effect,
multiple services, and the accounting says that you need to do the best you
can to break out those services and recognize it.”
Separately on Tuesday, IBM said it added $4 billion
to its stock-buyback program, bringing its total authorization to $6.4
billion. IBM has long been one of the most active corporate-share
repurchasers.
Through Sept. 30, IBM had bought back $3.85 billion
in shares this year, including $1.54 billion in the third quarter.
IBM is struggling with declines in hardware sales
and the stronger dollar. The company has been shedding unprofitable hardware
businesses as it reorganizes itself around a set of emerging cloud, security
and data-analytics businesses that Chief Executive Virginia Rometty has
dubbed the company’s “strategic imperatives.”
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 30, 2015
International Accounting Regulator Offers New Guidance on Materiality
by:
James Willhite
Oct 28, 2015
Click here to view the full article on WSJ.com
TOPICS: IASB,
IFRS, International Accounting, Materiality
SUMMARY: International
accounting rules require firms to disclose any "material" information, but
they also factor in the idea that what counts as material varies from
situation to situation and company to company. That can leave finance
departments scratching their heads over when to talk or keep quiet. In an
effort to clarify matters, the International Accounting Standards Board, or
IASB, which sets International Financial Reporting Standards, or IFRS, is
publishing draft guidance that aims to help companies understand when a
piece of information qualifies as material.
CLASSROOM
APPLICATION: This
article is appropriate for coverage of materiality.
QUESTIONS:
1. (Introductory) What is the IASB? What is its area of
responsibility?
2. (Advanced) What is IFRS? What counties use IFRS? What does the
U.S. use? How does IFRS relate to accounting in the U.S.?
3. (Advanced) What is materiality? Why is materiality important in
accounting? How does it help accountants? How does it affect users of the
financial statements?
4. (Advanced) What is the IASB doing regarding materiality? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
"International Accounting Regulator Offers New Guidance on Materiality," by
James Willhite, The Wall Street Journal, October 28, 2015 ---
http://blogs.wsj.com/cfo/2015/10/28/international-accounting-regulator-offers-new-guidance-on-materiality/?mod=djem_jiewr_AC_domainid
International accounting rules require firms to
disclose any “material” information, but they also factor in the idea that
what counts as material varies from situation to situation and company to
company. That can leave finance departments scratching their heads over when
to talk or keep quiet.
In an effort to clarify matters, the International
Accounting Standards Board, or IASB, which sets International Financial
Reporting Standards, or IFRS, today is publishing draft guidance that aims
to help companies understand when a piece of information qualifies as
material.
The draft guidance is intended to complement an
amendment made in 2014. The deadline for comments is Feb. 26, 2016.
“Financial statements are meant to be a means of
communication, and should not be viewed as a mere compliance exercise,” said
IASB Chairman Hans Hoogervorst in a press release. “Management needs to take
a step back and consider whether they are providing the right level of
information in the financial statement and whether it is useful.”
A spokeswoman said the draft guidance is part of a
larger effort on IASB’s part to improve disclosures, and that the input
received until the deadline in February will be factored in to their final
form.
Teaching Case
From The Wall Street Journal Weekly Accounting Review on November 6, 2015
Taxes Drive Potential Merger of Pfizer, Allergan
by:
Liz Hoffman, Richard Rubin, and Jonathan D. Rockoff
Oct 30, 2015
Click here to view the full article on WSJ.com
TOPICS: Corporate
Taxation, Tax Inversions
SUMMARY: Pfizer
is in early talks to acquire Ireland's Allergan PLC, a $100 billion-plus
pursuit. The deal could be structured as a so-called inversion, in which a
U.S. company buys a smaller foreign rival to move its legal home to a
lower-tax jurisdiction abroad. American firms have seized on these
transactions, drawing a regulatory crackdown last year and widespread
political opposition. Pfizer Chief Executive Ian Read was unapologetic about
his desire to reduce Pfizer's tax rate, saying that U.S. corporate tax rates
have put the company at a disadvantage to its foreign rivals. Pfizer's
pursuit places it squarely at the center of an intensifying debate over the
U.S. corporate tax rates, among the highest in the world.
CLASSROOM
APPLICATION: This
is an excellent update on the use of tax inversions to reduce corporate
taxes.
QUESTIONS:
1. (Introductory) What is an inversion? How are inversion structured?
2. (Advanced) Why are inversions attractive to U.S. companies? Why
are some parties against inversions?
3. (Advanced) Why do tax rates vary so much across countries? What
impact does that have on corporate plans and strategies?
4. (Advanced) Should U.S. corporate tax rates be changed? Why or why
not?
5. (Advanced) What are the facts of the Pfizer deal? What are the
benefits of the merger? What are the differences in tax rates?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
U.S. Treasury Moves to Curb Inversions
by Sarah Krouse and Maureen Farrell
Sep 23, 2015
Online Exclusive
New Tax Rules Will Slow, Not Halt, Inversion Deals
by John D. McKinnon, Liz Hoffman, and Hester Plumridge
Sep 25, 2014
Online Exclusive
New U.S. Inversion Rules Drag Down Shares of Deal
Targets
by Hester Plumridge, Shayndi Raice, and Alex MacDonald
Sep 22, 2014
Online Exclusive
Obama Administration Issues New Rules to Combat Tax
Inversions
by John D. McKinnon, Damian Paletta
Sep 22, 2015
Online Exclusive
Foreign Takeovers See U.S. Losing Tax Revenue
by Liz Hoffman and John D. McKinnon
Mar 06, 2015
Online Exclusive
Taxes Drive Potential Merger of Pfizer, Allergan," by Liz Hoffman, Richard
Rubin, and Jonathan D. Rockoff, The Wall Street Journal, October 30, 2015
http://www.wsj.com/articles/allergan-confirms-pfizer-talks-1446126062?mod=djem_jiewr_AC_domainid
Pfizer Inc. is pursuing what could be the biggest
overseas takeover to lower U.S. corporate tax liability, showing that
efforts in Washington to stem such deals have amounted to little.
Company officials confirmed Thursday a Wall Street
Journal report that it was in early talks to acquire Ireland’s Allergan PLC,
a $100 billion-plus pursuit that thrusts Pfizer, the maker of Advil and
Viagra, into the rancorous debate over corporate taxes.
It isn’t clear what terms New York-based Pfizer has
in mind, but the deal could be structured as a so-called inversion, in which
a U.S. company buys a smaller foreign rival to move its legal home to a
lower-tax jurisdiction abroad. American firms have seized on these
transactions, drawing a regulatory crackdown last year and widespread
political opposition.
Pfizer Chief Executive Ian Read was unapologetic
about his desire to reduce Pfizer’s tax rate, saying Thursday that U.S.
corporate tax rates have put the company at a disadvantage to its foreign
rivals.
“We’re fighting with one hand tied behind our
back,” Mr. Read said in an interview. While declining to comment on the
Allergan talks, he said Pfizer was “doing what we need to do to ensure that
we can continue to innovate.”
Such a takeover would create a pharmaceutical
colossus, with a market value likely exceeding $300 billion. It would rank
as one of the largest corporate mergers ever and push this year’s
deal-making further into record territory.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on November 6, 2015
Samsung Sells More Phones - But For Less Money
by:
Jonathan Cheng
Nov 01, 2015
Click here to view the full article on WSJ.com
TOPICS: Business
Segments, Financial Accounting, Managerial Accounting, Margin, Profitability
SUMMARY: Samsung
Electronics Co. is selling more smartphones than it was this time last year,
but there are fewer reasons to celebrate. Samsung has been selling more
cheaper smartphones, and fewer high-end premium devices, than it did even
compared to Samsung's rocky 2014.
CLASSROOM
APPLICATION: This
article offers a good example of how change in sales among business segments
can impact profitability.
QUESTIONS:
1. (Introductory) What is the good news and the bad news does this
article report for Samsung Electronics? How does this news affect the
companies net income?
2. (Advanced) What is business segment analysis and reporting? Why is
it a valuable tool for management to use in business planning, strategy, and
analysis?
3. (Advanced) What Samsung segments are discussed in the article?
What are the differences between the segments? How have sales of the
segments changed? How do those changes affect the company's profitability?
4. (Introductory) What can Samsung do to increase profitability? How
could the company make changes to the segments? What other actions could the
company take?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Samsung Says Mobile Is on the Mend
by Jonathan Cheng and Min-Jeong Lee
Oct 30, 2015
Online Exclusive
"Samsung Sells More Phones - But For Less Money," by Jonathan Cheng, The
Wall Street Journal, November 1, 2015 ---
http://blogs.wsj.com/digits/2015/11/01/samsung-sells-more-phones-but-for-less-money/?mod=djem_jiewr_AC_domainid
Samsung Electronics Co. is selling more smartphones
than it was this time last year. But under the hood, there are fewer reasons
to celebrate.
Last week, the South Korean smartphone giant
celebrated its first quarter of year-on-year mobile profit growth since
2013.
Samsung has been selling more cheaper smartphones,
and fewer high-end premium devices, than it did even compared to Samsung’s
rocky 2014, according to numbers from data firm Counterpoint Technology
Market Research.
Samsung doesn’t separately disclose smartphone
sales numbers.
Samsung shipped 84 million smartphones in the third
quarter of 2015, 6.3% more than during the same stretch last year and more
than the No. 2 and No. 3 players, Apple Inc. and Huawei Technologies Co.,
combined, according to Counterpoint.
But while 55% of its smartphones were priced at
$301 per unit or more at this time last year, that high-end segment has
fallen to just 40% of Samsung’s overall smartphone sales, Counterpoint said.
Phones priced $200 or below now account for 38% of
total units shipped at Samsung, versus 30% this time last year.
So while Samsung is indeed shipping more
smartphones, it isn’t charging as much for them — or making as much money
from them as it may have during the salad days of 2012 and 2013.
But the numbers also suggest that Samsung is
willing and able to take the fight to the low-cost Chinese competitors that
emerged in 2013 and 2014, eating away at its market share and profits.
Initially, some analysts and market watchers
expressed concern that Samsung wasn’t slashing its prices on mid- and
lower-end phones enough to face up to Xiaomi Corp., Huawei, Lenovo Group
Ltd. and other Chinese companies who were offering competitive handsets at
lower prices.
But the numbers suggest that Samsung is willing to
get its hands dirty. Much of the credit goes to the new Galaxy J series of
low-end phones, which Samsung priced aggressively and packed with decent
features and specifications, and which has been selling well, according to
Counterpoint.
According to Tom Kang, an analyst at Counterpoint,
the Galaxy J series outsold any other lineup of Samsung phones in the third
quarter of the year, including the flagship Galaxy S6, the popular and
pricey Galaxy Note series or the mid-range Galaxy A series.
Indeed, the Galaxy J5 was one of the bestsellers
for Samsung in September, which “helped Samsung recover market share in
markets like India where it had been experiencing market share loss,” Mr.
Kang says.
The success of the J series also underlines the
company’s formidable strength in the traditional offline distribution
channels that it has been nurturing for years — in contrast to some of its
upstart Chinese rivals who, like Xiaomi, have famously stuck to an
online-only strategy to sell to customers.
But it’s not clear how long this low-end resurgence
will last for Samsung. Adds Mr. Kang’s colleague Neil Shah, “Chinese brands
are already hitting very hard in this price segment in online channels.”
Samsung’s success, Mr. Shah says, “could become a
temporary uptick… It remains to be seen if Samsung can continue volume
momentum in next few quarters to translate these shipments into sales
consistently in this highly price-competitive segment.”
Of course, even if Samsung is successful in hanging
on to its market share in the mid- and low-tier price segment, it’s not
clear this would be any more than a hollow victory.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on November 6, 2015
Shift to Benefits From Pay Helps Explain Sluggish Wage Growth
by:
Eric Morath and Jeffery Sparshott
Nov 02, 2015
Click here to view the full article on WSJ.com
TOPICS: Cost
Behavior, Financial Accounting, Managerial Accounting, payroll, Taxation
SUMMARY: The
move toward benefits over pay provides a few clues that help explain a chief
mystery of the current expansion: the unusually sluggish growth in wages.
Some of the move toward benefits reflects a workforce that puts a high value
on flexibility, health insurance, time off and other things besides wages.
The share of worker compensation that comes in the form of wages or salaries
has slipped over the past decade, with the decline accelerating since the
recession ended. In the second quarter, 31% of total compensation came in
the form of benefits such as vacation time, health insurance and bonuses, up
from 29% a decade earlier.
CLASSROOM
APPLICATION: This
article is appropriate for several areas of accounting - financial,
managerial, and tax - and would be helpful for our students to see how all
areas of accounting and business are interrelated. It is also good to show
how accounting information can be used by management to make wise strategic
decisions.
QUESTIONS:
1. (Introductory) What does the article offer as reasons for sluggish
wage growth? How does that affect employees?
2. (Advanced) What journal entry would a company use to record paid
compensation? What is the journal entry to record employee benefits? What
journal entry is used to record employment taxes?
3. (Advanced) What is cost behavior? Why is cost behavior analysis an
important and valuable tool for management? Which types of compensation and
benefits are fixed costs? Which are variable? Which are one-time costs,
rather than continuing or reoccurring? How should these factors influence
management's compensation decisions?
4. (Advanced) How does tax law impact the various forms of
compensation? Why types of compensation (of any kind) are deductible for the
employer? What type of compensation are taxable for the employee? What types
are not taxable? How could the Affordable Care Act affect the taxation of
compensation and benefits? How does all of these tax influences cause
incentives and disincentives of various types of compensation?
5. (Advanced) What are employment taxes? What types of compensation
and benefits are subject to employment taxes? How could this factor impact
compensation decisions?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
U.S. Employment Costs Rise 0.6%, Suggesting New
Wage Pressure
by Kate Davidson
Nov 01, 2015
Online Exclusive
"Shift to Benefits From Pay Helps Explain Sluggish Wage Growth," by Eric
Morath and Jeffery Sparshott, The Wall Street Journal, November 2, 2015
---
http://www.wsj.com/articles/shift-to-benefits-from-pay-helps-explain-sluggish-wage-growth-1446406818?mod=djem_jiewr_AC_domainid
U.S. employers, slow to reward workers with higher
pay, have been quicker in recent years to offer signing bonuses, more paid
time off and other perks.
The move toward benefits over pay provides a few
clues that help explain a chief mystery of the current expansion: the
unusually sluggish growth in wages.
Some of the move toward benefits reflects a
workforce that puts a high value on flexibility, health insurance, time off
and other things besides wages.
But the shift also highlights the fragility of an
expansion in which employers remain hesitant to commit to higher wages and
are turning instead to more revocable perks. That could have broader
repercussions if consumers aren’t able to tap bigger paychecks and boost
their spending.
The share of worker compensation that comes in the
form of wages or salaries has slipped over the past decade, with the decline
accelerating since the recession ended. In the second quarter, 31% of total
compensation came in the form of benefits such as vacation time, health
insurance and bonuses, up from 29% a decade earlier.
“It’s a structural shift that is going on,” said
Andrew Chamberlain, chief economist at recruiting website Glassdoor.com.
“Across the labor market, it’s pretty significant shift of dollars from
wages to benefits.”
Companies began offering health insurance to skirt
wage controls during World War II. Now they are getting more creative,
offering gym memberships, cappuccino machines, free cellphones and
dog-friendly workplaces.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on November 6, 2015
The
Big Number: 24% Share of S&P 500 companies that discussed criteria used to
evaluate auditors this year
by:
Maxwell Murphy
Nov 03, 2015
Click here to view the full article on WSJ.com
TOPICS: Auditing,
Audit Committees
SUMMARY: Corporate
audit committees are providing more details about how they evaluate their
auditing firms. And that's a good thing for shareholders and boards of
directors. Nearly a quarter, or 24%, of S&P 500 companies detailed in their
proxy statements the criteria they use to judge their outside auditors.
CLASSROOM
APPLICATION: This
article can be used in an auditing class when covering audit committees and
selection of auditing firms.
QUESTIONS:
1. (Introductory) What is auditing? Why do companies hire firms to
audit?
2. (Advanced) What is an audit committee? What is its area of
responsibility? Why is the work of audit committees important?
3. (Advanced) What does the article report regarding the trends in
company reporting? Why is this considered to be a positive trend? Should
this reporting be a requirement for all public companies? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
:"The Big Number: 24% Share of S&P 500 companies that discussed criteria used
to evaluate auditors this year," by Maxwell Murphy, The Wall Street Journal,
November 3, 2015 ---
http://www.wsj.com/articles/the-big-number-1446502915?mod=djem_jiewr_AC_domainid
24%
Share of S&P 500 companies that discussed criteria
used to evaluate auditors this year.
Corporate audit committees are providing more
details about how they evaluate their auditing firms.
And that’s a good thing for shareholders and boards
of directors.
Nearly a quarter, or 24%, of S&P 500 companies
detailed in their proxy statements the criteria they use to judge their
outside auditors, says a coming study from the Center for Audit Quality, a
nonpartisan public policy group, and research firm Audit Analytics.
That’s triple the percentage that did so last year.
The spike is “one part of a broader, positive
trend,” said Cindy Fornelli, the center’s executive director.
“Audit committees are working harder than ever at
financial reporting systems, and that includes enhanced efforts to work with
the external auditors and improve transparency,” said Michael Young, a
partner with law firm Willkie Farr & Gallagher LLP and chairman of its
securities-litigation and enforcement practice.
Eli Lilly & Co., Archer Daniels Midland Co., McGraw
Hill Financial Inc. and Vertex Pharmaceuticals Inc., are among the companies
that added the information to this year’s proxies.
McGraw Hill Chief Financial Officer Jack Callahan
said his company holds “management, internal and external audit to a very
high standard,” and the board’s audit committee is in frequent contact with
its outside accountants.
A spokesman for Lilly said the company reviews its
audit disclosures annually, and added more information about its review of
outside auditors to this year’s proxy because it “believed the information
was important to shareholders.”
ADM and Vertex declined to comment.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on November 6, 2015
Firms, Regulators Try to Sort Out What's Worth Disclosing to Investors
by:
Emily Chasen and Samuel Rubenfeld
Nov 03, 2015
Click here to view the full article on WSJ.com
TOPICS: FASB,
Financial Accounting, IASB, Materiality
SUMMARY: Finance
chiefs are preparing for changes in one of their most fundamental tasks:
figuring out what's important enough to tell shareholders. Regulators in the
U.S. and abroad are tinkering with the concept of "materiality," or how to
determine what information is necessary for companies to disclose publicly.
For companies, the sorting process is costly and complex, partly because
what's considered "material" varies from regulator to regulator. Congress
and the Supreme Court also have their own ideas.
CLASSROOM
APPLICATION: This
article offers an excellent look at the different definitions of materiality
and the challenges associated with determining what is material.
QUESTIONS:
1. (Introductory) What is materiality? What are some examples of
situations in which materiality would apply?
2. (Advanced) Why is materiality important in accounting? How does it
help accountants? How does it affect users of the financial statements?
3. (Advanced) Why are companies so challenged in determining what is
material? What parties or organizations have determined a definition of
materiality and what are the various definitions in each of those cases? How
do the definitions differ?
4. (Advanced) Why have so many parties defined materiality? Why do
those definitions vary?
5. (Advanced) What could be done to create more consistency between
the materiality definitions? What party or parties could work to unify the
definition?
6. (Advanced) What is the IASB? What is its area of responsibility?
What is FASB? What is its purpose? What are its areas of authority? Why are
these parties involved in the defining materiality?
7. (Advanced) How has preparation of financial statements changed in
recent years? How has the use of financial statements by outside parties
changed? How does this affect materiality?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Definition of Materiality Depends Who You Ask
by Emily Chasan
Nov 03, 2015
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International Accounting Regulator Offers New
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by James Willhite
Oct 28, 2015
Online Exclusive
FASB Proposes Changes to 'Materiality'
by Emily Chasan
Sep 24, 2015
Online Exclusive
"Firms, Regulators Try to Sort Out What's Worth Disclosing to Investors," by
Emily Chasen and Samuel Rubenfeld, The Wall Street Journal, November 3,
2015 ---
http://www.wsj.com/articles/firms-regulators-try-to-sort-out-whats-worth-disclosing-to-investors-1446511890?mod=djem_jiewr_AC_domainid
Finance chiefs are preparing for changes in one of
their most fundamental tasks: figuring out what’s important enough to tell
shareholders.
Regulators in the U.S. and abroad are tinkering
with the concept of “materiality,” or how to determine what information is
necessary for companies to disclose publicly.
For companies, the sorting process is costly and
complex, partly because what’s considered “material” varies from regulator
to regulator. Congress and the Supreme Court also have their own ideas.
“A lot of [companies] find it difficult to work
with the concept of materiality,” said Hans Hoogervorst, chairman of the
London-based International Accounting Standards Board. Last week the board
proposed allowing corporate executives to exercise more of their own
judgment on what’s crucial to include in public filings.
At least a half-dozen standard setters, including
accounting rule makers, the Securities and Exchange Commission and various
stock exchanges, have guidelines on the subject. Some of them want companies
to sharpen their focus to avoid overwhelming investors with useless
information.
The U.S. Financial Accounting Standards Board
announced plans in September to do away with its own standard and instead
defer to one set by the U.S. Supreme Court in 1976. The board said it wanted
to clarify that “materiality is a legal concept.” The SEC is also working on
its own project to improve the usefulness of corporate disclosures and is
seeking input from the public through the end of November.
Business groups including the U.S. Chamber of
Commerce say they plan to press the issue this year because of the growing
complexity of deciding what information is crucial to keeping shareholders
in the loop.
“Disclosure may be straying from its core purpose,”
said John Hayes, chief executive of packaging company Ball Corp, who heads
the Business Roundtable’s corporate governance group. “If we thought these
things were material to having our investors make informed decisions, we’d
be talking about them already. But it actually gets in the way.”
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on November 13, 2015
News
Corp Earnings Boosted by Tax Benefit
by:
Lukas I. Alpert
Nov 06, 2015
Click here to view the full article on WSJ.com
TOPICS: Corporate
Taxation, Financial Accounting, Financial Reporting, Foreign Currency
Reporting
SUMMARY: News
Corp boosted its net income for the September quarter because of a one-time
tax benefit related to the sale of its digital-education business, but
revenue fell 4% due to foreign currency fluctuations and print advertising
weakness. Income from continuing operations rose to $143 million, or 22
cents a share, from $109 million, or 15 cents a share, in the year-ago
period.
CLASSROOM
APPLICATION: This
article offers examples regarding how a one-time tax benefit and accounting
for foreign currency fluctuations, among other issues, appear in corporate
financial reporting.
QUESTIONS:
1. (Introductory) What are the facts regarding News Corp's most
recent quarterly financial reports? Is the company's financial situation
improving?
2. (Advanced) The article mentions a one-time tax benefit. What is
that? How are they treated for financial accounting purposes?
3. (Advanced) What transaction caused News Corp's one-time tax
benefit? How did it affect the company's financial results?
4. (Advanced) What are continuing operations? Why is income from
continuing operations reported on the income statement? What value does it
add for the users of the financial statements? Why was News Corp's income
from continuing operations reported in this article?
5. (Advanced) The article reports News Corp's earnings before
interest, taxes, depreciation and amortization. How valuable information
does that provide? What did the article say about News Corp's earnings
before interest, taxes, depreciation and amortization? What was the reason
for the drop? Should investors and creditors be concerned? What can
management do to address this issue?
6. (Advanced) How do companies account for foreign currency
fluctuation? How do those fluctuations affect a company's financial
statements?
7. (Advanced) How have News Corp's financial statements been affected
by foreign currency fluctuations? Is it a favorable or unfavorable affect?
What could News Corp do to minimize this impact?
Reviewed By: Linda Christiansen, Indiana University Southeast
"News Corp Earnings Boosted
by Tax Benefit," by Lukas I. Alpert, The Wall Street Journal, November 6,
2015 ---
http://www.wsj.com/articles/news-corp-earnings-boosted-by-tax-benefit-1446761584?mod=djem_jiewr_AC_domainid
News Corp boosted its net
income for the September quarter because of a one-time tax benefit related
to the sale of its digital-education business, but revenue fell 4% due to
foreign currency fluctuations and print advertising weakness.
Income from continuing
operations rose to $143 million, or 22 cents a share, from $109 million, or
15 cents a share, in the year-ago period, the media company said. Excluding
certain items, adjusted earnings were 5 cents a share in the latest period.
Revenue declined to $2.01
billion from $2.11 billion a year earlier as the company saw an 11% drop in
revenue at the news and information services segment, which accounts for
two-thirds of News Corp’s total revenue.
Analysts polled by Thomson
Reuters had expected total revenue of $2.09 billion in the quarter and
adjusted per-share earnings of 6 cents.
“While we have
experienced understandable challenges in a couple of our businesses this
quarter, we remain confident in our overall plans for digital and global
expansion,” News Corp Chief Executive Robert Thomson said on a call with
analysts.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on November 13, 2015
Michael
Kors Reports Higher Retail Sales
by:
Suzanne Kapner
Nov 05, 2015
Click here to view the full article on WSJ.com
TOPICS: Business
Segments, Managerial Accounting, Segment Analysis
SUMMARY: Michael
Kors Holdings Ltd. reported higher retail sales helped by new store
openings, but it lowered growth forecasts for sales and profit as shoppers
turn to smaller handbags that cost less. Sales were hurt by a trend toward
purchasing smaller handbags, such as cross-body satchels that are less
expensive. Mr. Idol also said the company's watch business had suffered and
fewer shoppers were going to stores, in part due to a falloff in tourists
visiting the U.S. in the face of a strong greenback.
CLASSROOM
APPLICATION: This
article offers a good example of how changes in profitability of certain
segments of a business impact profitability of the company. This particular
article offers a variety of business segments, including small vs. large
handbags, handbags vs. watches and other items, and types of customers.
QUESTIONS:
1. (Introductory) What did Michael Kors Holdings Ltd. report
regarding its recent retail sales? What was its report regarding its
forecast for sales and profit?
2. (Introductory) What reasons did the company offer for the changes
in its forecasts? Is this impacting only Kors, or are other companies
affected by the conditions as well?
3. (Advanced) What is a business segment? What is segment analysis?
What tools can management use to analyze segments? What information can that
provide? What is the value of that information? What can management do with
it? What benefits could result?
4. (Advanced) What business segments of Kors were addressed in the
article? Name as many as possible. How have conditions changed for these
segments? How are these changes affecting the company?
5. (Advanced) Use business segmenting tools to analyze and address
changes in Kors' business and financial reporting. What can management do to
address this situation? How can the company improve forecasts and
profitability?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Michael Kors Reports Higher Retail Sales," by Suzanne Kapner, The Wall
Street Journal, November 5, 2015 ---
http://www.wsj.com/articles/michael-kors-beats-expectations-as-revenue-rises-1446642705?mod=djem_jiewr_AC_domainid
Michael Kors Holdings Ltd. on Wednesday reported
higher retail sales helped by new store openings, but it lowered growth
forecasts for sales and profit as shoppers turn to smaller handbags that
cost less.
Its retail sales in the latest quarter rose 7.5%
from a year earlier to $532.8 million. Kors opened 116 new stores in the
past 12 months, bringing its total to 589 locations around the world.
Excluding store openings and closings, retail sales fell 8.5%.
Kors Chief Executive John Idol said sales were hurt
by a trend toward purchasing smaller handbags, such as cross-body satchels
that are less expensive. Mr. Idol also said the company’s watch business had
suffered and fewer shoppers were going to stores, in part due to a falloff
in tourists visiting the U.S. in the face of a strong greenback.
Handbag makers like Kors and Coach have faced a
slowing market as consumers spend more money on restaurants, travel and
entertainment as opposed to goods like accessories and handbags. Growth in
handbags sales has been decelerating in the past few years, according to
Barclays.
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on November 13, 201
Pfizer Piles Profits Abroad
by:
Richard Rubin
Nov 09, 2015
Click here to view the full article on WSJ.com
TOPICS: Corporate
Taxation, Effective Tax Rate, Financial Accounting, Financial Reporting
SUMMARY: Pfizer
Inc. told investors it had a 25.5% global tax rate in 2014. The company
could have cut that rate to 7.5% if it reported its foreign earnings the way
most U.S. corporations do. Pfizer's accounting methods raise its reported
tax rate, without increasing the actual taxes the company pays. More than
two-thirds of the company's 2014 tax expense - $2.2 billion out of $3.1
billion - was money the company will actually pay only if and when it
chooses to repatriate foreign profits. Pfizer's case shows how the effective
tax rates reported to investors can be of limited use in analyzing what a
company actually pays to governments. It also complicates the company's
claim that it is suffering under the U.S. tax system. Corporate tax returns
are private, and securities filings don't show explicitly how much each
company paid each government for each tax year. Companies based in the U.S.
must pay the full 35% corporate tax on the profits they earn around the
world. However, they get tax credits for payments to foreign governments,
and they don't have to pay the U.S. until they bring the money home.
CLASSROOM
APPLICATION: This
is an interesting article about how income taxes are presented for corporate
financial reporting purposes.
QUESTIONS:
1. (Introductory) What is an effective tax rate? What is the basic
calculation? The article discusses a corporate effective tax rate. Do
individuals also have them?
2. (Advanced) What did Pfizer report as its effective tax rate? Why
is that number particularly important at this time? What plans does the
company have that impacts its tax rates?
3. (Advanced) What is the law regarding tax liability for U.S.
companies earning foreign income? What are the rules regarding income earned
in other countries?
4. (Advanced) What choices does Pfizer have for calculating its
effective tax rate? Which option does the company choose to report? Why?
5. (Advanced) Why do companies disclose effective tax rates? What are
the benefits of calculating them using Pfizer's method? What are potential
problems? What are the benefits of using the other options? Should one of
the methods be required? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Taxes Drive Potential Merger of Pfizer, Allergan
by Liz Hoffman, Richard Rubin, and Joanthan D. Rokoff
Oct 30, 2015
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"Pfizer
Piles Profits Abroad," by Richard Rubin, The Wall Street Journal,
November 9, 2015 ---
http://www.wsj.com/articles/pfizer-piles-profits-abroad-1447031546?mod=djem_jiewr_AC_domainid
Pfizer
Inc. told investors it had a 25.5% global tax rate in 2014. The company
could have cut that rate to 7.5% if it reported its foreign earnings the way
most U.S. corporations do.
The pharmaceutical company,
which is exploring a merger with Allergan PLC that could put the combined
company’s legal address outside the U.S., has been complaining that the U.S.
tax system hobbles its ability to compete globally. But Pfizer’s accounting
methods raise its reported tax rate, without increasing the actual taxes the
company pays. More than two-thirds of the company’s 2014 tax expense—$2.2
billion out of $3.1 billion—was money the company will actually pay only if
and when it chooses to repatriate foreign profits.
“It gives a distorted
picture of how much tax they’re paying,” said Marty Sullivan, chief
economist at Tax Analysts, the nonprofit publisher of Tax Notes. “Their tax
situation is one of the most advantageous of any major U.S. corporation.”
Joan Campion, a spokeswoman
for Pfizer, said the company complies with rules and regulations. “Our aim
is to level the playing field with foreign competitors and to have more
resources to accomplish our purpose of bringing more innovative therapies to
patients,” she said. “We are focused on continually improving the way we do
business while maintaining the highest standards of compliance.”
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on November 13,
2015
What
Is the Interest Coverage Ratio?
by:
Simon Constable
Nov 09, 2015
Click here to view the full article on WSJ.com
TOPICS: Financial
Statement Analysis, Interest Coverage Ratio
SUMMARY: The
interest coverage ratio is a measure of how affordable a company's debt is
given the company's earnings. Or put another way, how much cushion a firm
has to withstand hiccups in the business and still make its debt payments-an
important consideration for investors. The ratio can be calculated by
dividing operating income-typically defined as earnings before interest and
taxes, or EBIT-by its interest expense. (There are variations, but this is
the simplest.) Higher interest rates for corporate borrowing will push
coverage ratios down unless profits increase.
CLASSROOM
APPLICATION: Coverage
of this ratio is particularly timely, given the looming increase in interest
rates, Use this article to show students how the markets, regulation, and
other external forces impact a company's financial reporting, financial
condition, and strategy.
QUESTIONS:
1. (Introductory) How is the interest coverage ratio calculated? What
does it communicate?
2. (Advanced) Why is the interest coverage ratio a valuable part of
financial statement analysis? What strengths can it show about a business?
What problems can it expose?
3. (Advanced) Why is it important for investors to consider the
interest coverage ratio at this particular time? What coming changes could
negatively impact some businesses?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Fed's Williams: Next Step for Fed Is to Raise
Rates, Data Decides When
by Michael S. Derby
Nov 09, 2015
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"What Is
the Interest Coverage Ratio?" by Simon Constable, The Wall Street Journal,
November 9, 2015 ---
http://www.wsj.com/articles/what-is-the-interest-coverage-ratio-1447038108?mod=djem_jiewr_AC_domainid
What
is the interest coverage ratio, and why might it matter for investors?
The interest coverage ratio is a measure of how
affordable a company’s debt is given the company’s earnings. Or put another
way, how much cushion there is for a firm to withstand hiccups in the
business and still make its debt payments—an important consideration for
investors.
The ratio can be calculated by dividing operating
income—typically defined as earnings before interest and taxes, or EBIT—by
its interest expense. (There are variations, but this is the simplest.)
Journal Report Insights from The Experts Read more
at WSJ.com/WealthReport
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Plan for Investors How to Be Smarter With a ‘529’ Check Your 401(k) Fees
Want to Be a Sustainable Investor? U.S.-Stock Funds Rose 6.2% in Month . “If
your coverage ratio is 1, then you have no cushion,” says Dan Gode,
accounting professor at the New York University Stern School of Business.
Simply: When a company’s operating earnings are equal to its borrowing costs
(giving it a coverage ratio of 1.0), there is no margin for error. If the
business meets a rough patch and earnings drop, then the company might not
be able to pay the interest on its loans. “If the ratio is north of 3 or 4,
then you have some cushion,” Prof. Gode adds.
Speculation over the Federal Reserve’s
interest-rate intentions comes into play. Higher interest rates for
corporate borrowing will push coverage ratios down unless profits increase.
For some companies, that won’t matter much; for others, it will make an
already heavy debt burden harder to bear.
“Overall corporate debt might not be high, but that
masks great variation” among firms, Prof. Gode says. He points to Apple Inc.
as a cash-rich company with relatively little debt. “And then there are
plenty that have huge levels of debt,” including some energy companies and
hospitals.
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on November 13,
2015
U.S.
Targets Pharmacies Over Soaring Claims to Military Health Program
by:
Joseph Walker
Nov 09, 2015
Click here to view the full article on WSJ.com
TOPICS: Forensic
Accounting, Fraud, Internal Controls
SUMMARY: Federal
prosecutors in at least four states are mounting investigations into what
they describe as widespread fraud by compounding pharmacies in claims to the
health-insurance program that covers 9.5 million U.S. military members and
their families. In the latest move, four Florida pharmacies agreed to pay
$12.8 million combined to settle civil allegations that they falsely billed
the insurance program Tricare for expensive pharmaceutical creams and gels
to treat pain, scars and other ailments. Some prescriptions in the Tricare
case were illegitimate because they weren't based on genuine doctor-patient
relationships, a violation of the federal False Claims Act.
CLASSROOM
APPLICATION: This
article can be used as an example of fraud, as well as to show how internal
controls and fraud analysis can be instituted for fraud prevention and/or
detection.
QUESTIONS:
1. (Introductory) What are the facts of the cases presented in the
article? Who are the parties involved in these cases? What are the estimated
losses?
2. (Advanced) What laws could apply to fraudulent activities? What
laws are involved in the cases detailed in the article? What are some
potential penalties for these activities?
3. (Advanced) What are internal controls? What are the purposes of
internal controls?
4. (Advanced) What internals controls were in place in these
situations? What fraudulent actions were they able to prevent or detect?
What internal controls were not in place but should have been? What should
be added to prevent and/or detect this kind of fraud in the future?
Reviewed By: Linda Christiansen, Indiana University Southeast
"U.S.
Targets Pharmacies Over Soaring Claims to Military Health Program," by Joseph
Walker, The Wall Street Journal, November 9, 2015 ---
http://www.wsj.com/articles/u-s-targets-pharmacies-over-soaring-claims-to-military-health-program-1447032619?mod=djem_jiewr_AC_domainid
Federal
prosecutors in at least four states are mounting investigations into what
they describe as widespread fraud by compounding pharmacies in claims to the
health-insurance program that covers 9.5 million U.S. military members and
their families.
In the latest move, four Florida pharmacies last
month agreed to pay $12.8 million combined to settle civil allegations that
they falsely billed the insurance program Tricare for expensive
pharmaceutical creams and gels to treat pain, scars and other ailments,
according to A. Lee Bentley III, the U.S. attorney for the Middle District
of Florida.
Two of the compounding pharmacies, which make
customized medicines by mixing pharmaceutical ingredients, employed
salespeople who paid doctors to write prescriptions to Tricare
beneficiaries, prosecutors said. In some cases, doctors would conduct
telephone consultations with beneficiaries and then write them
prescriptions, despite having not met with the beneficiaries in person,
prosecutors said. Those prescriptions were illegitimate because they weren’t
based on genuine doctor-patient relationships, a violation of the federal
False Claims Act, the prosecutors said.
One of the pharmacies had paid commissions of up to
58% of the amount paid by Tricare to marketers who promoted their drugs to
physicians, prosecutors alleged in settlement agreements. The commissions
amounted to improper kickbacks in exchange for referring business to a
government agency, the prosecutors said.
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on November 20,
2015
Coming to a Balance Sheet Near You: $2 Trillion in Leases
by:
Michael Rapoport
Nov 11, 2015
Click here to view the full article on WSJ.com
TOPICS: FASB,
Financial Accounting, Lease Accounting
SUMMARY: Accounting
rule makers agreed in principle to require companies to add to the balance
sheet most of the leases they use, a long-awaited move that could swell
balance sheets by as much as $2 trillion and make some companies look more
leveraged to the average investor than they do now. The vote by the
Financial Accounting Standards Board, which sets accounting rules for U.S.
companies, will affect any company that pays to lease real estate, office
equipment, aircraft or other items. It is expected to have the biggest
impact on companies that use lease financing as a key part of their
business, like airlines that lease the planes they use, and retailers and
restaurant chains that lease real estate for their locations.
CLASSROOM
APPLICATION: These
articles and the following questions offer lease accounting updates for
financial accounting classes.
QUESTIONS:
1. (Introductory) What changes did FASB make to lease accounting? How
does this differ from the previous accounting treatment for leases?
2. (Advanced) How will each of the four financial statements be
affected by the changes in lease accounting? What types of companies will
have improved financial results? Companies in what situations will have less
favorable financial results under the new rules?
3. (Advanced) What is FASB? Why did it have the authority to make
this change?
4. (Advanced) The article states rating firms and investors have long
adjusted corporate numbers to take into account companies off-the-book lease
obligations. What does that mean? What adjustments would that require? How
will this change in lease accounting affect the actions of these rating
firms and investors?
5. (Advanced) How will cash flows be affected by the rule change?
Why?
6. (Advanced) What are the concerns of those critical of the new
rules? Are these concerns legitimate? Should the rule have been changed? Why
or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Coming to a Balance Sheet Near You: $2 Trillion in Leases," by Michael
Rapoport, The Wall Street Journal, November 11, 2015 ---
http://www.wsj.com/articles/leases-to-put-new-weight-on-corporate-balance-sheets-1447200831?mod=djem_jiewr_AC_domainid
Some of America’s best-known companies—names
such as AT&T Inc., CVS Health Corp. and Delta Air Lines Inc. —likely
will soon have to effectively boost the debt they report on their
balance sheets by tens of billions of dollars. The total possible impact
for all companies: as much as $2 trillion.
Within a few years, companies may have to add
to their books the cost of many leases for real estate, aircraft and
other items that aren’t already carried there. U.S. rule makers are set
to vote Wednesday on whether to approve in principle long-awaited new
rules requiring companies to make that addition, though the move
wouldn’t take effect until at least 2018.
If approved, as many observers expect, that
change could dramatically boost the reported leverage for retailers,
restaurant chains, airlines, package-delivery companies and other
companies that use leases heavily. Companies must already disclose their
lease obligations, but it is done in the footnotes to their financial
statements; they aren’t included in the balance-sheet numbers to which
investors pay the most attention.
The proposed move by the Financial Accounting
Standards Board could help investors more clearly see the true health of
companies that owe a lot of money through lease commitments but
currently don’t have to reflect those commitments in their balance-sheet
numbers, said FASB Chairman Russell Golden. It “will give investors,
lenders and others a more accurate picture of the financial condition of
the companies to which they provide capital.”
The change won’t create any new obligations for
companies, and it isn’t expected to drastically change companies’
earnings or book value. But it could change some financial ratios, such
as return on assets. That is because companies will be adding assets to
their balance sheets as well as obligations to reflect the impact of the
leases. As assets rise, the return as a percentage of those assets would
decline.
The proposed rules have been in the works for a
decade, and are “very much needed,” said J. Edward Ketz, an associate
professor of accounting at Penn State University. Companies have often
structured the terms of their leases to enable them to keep from
officially counting many leases on their books, regulators and critics
have said.
Ratings firms and investors who closely watch
balance sheets have long adjusted their reading of corporate numbers to
take into account companies’ off-the-books lease obligations. But the
average small investor could be in for a surprise when companies start
officially counting billions of dollars in leases on their balance
sheet, Mr. Ketz said.
“You have sophisticated people, knowledgeable
people in the area who have been doing it. The small investors do not,”
he said.
AT&T had $31 billion in operating-lease
obligations—those not currently carried on the balance sheet—as of the
end of 2014, according to its latest annual report. Adding those
obligations to the balance sheet would significantly increase its
liabilities; the company has long-term debt of $76 billion.
An AT&T spokesman noted the company’s leases
are already disclosed in its annual report’s footnotes, and he said the
new rule would simply “change the presentation of this information
without giving investors and analysts significant new information beyond
what we already provide.”
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on November 20,
2015
Some of America’s best-known companies—like AT&T,
CVS and Delta—likely will soon have to effectively boost the debt they
report on their balance sheets
Some of America’s best-known companies—names such
as AT&T Inc., CVS Health Corp. and Delta Air Lines Inc. —likely will soon
have to effectively boost the debt they report on their balance sheets by
tens of billions of dollars. The total possible impact for all companies: as
much as $2 trillion.
Within a few years, companies may have to add to
their books the cost of many leases for real estate, aircraft and other
items that aren’t already carried there. U.S. rule makers are set to vote
Wednesday on whether to approve in principle long-awaited new rules
requiring companies to make that addition, though the move wouldn’t take
effect until at least 2018.
If approved, as many observers expect, that change
could dramatically boost the reported leverage for retailers, restaurant
chains, airlines, package-delivery companies and other companies that use
leases heavily. Companies must already disclose their lease obligations, but
it is done in the footnotes to their financial statements; they aren’t
included in the balance-sheet numbers to which investors pay the most
attention.
The proposed move by the Financial Accounting
Standards Board could help investors more clearly see the true health of
companies that owe a lot of money through lease commitments but currently
don’t have to reflect those commitments in their balance-sheet numbers, said
FASB Chairman Russell Golden. It “will give investors, lenders and others a
more accurate picture of the financial condition of the companies to which
they provide capital.”
The change won’t create any new obligations for
companies, and it isn’t expected to drastically change companies’ earnings
or book value. But it could change some financial ratios, such as return on
assets. That is because companies will be adding assets to their balance
sheets as well as obligations to reflect the impact of the leases. As assets
rise, the return as a percentage of those assets would decline.
The proposed rules have been in the works for a
decade, and are “very much needed,” said J. Edward Ketz, an associate
professor of accounting at Penn State University. Companies have often
structured the terms of their leases to enable them to keep from officially
counting many leases on their books, regulators and critics have said.
Ratings firms and investors who closely watch
balance sheets have long adjusted their reading of corporate numbers to take
into account companies’ off-the-books lease obligations. But the average
small investor could be in for a surprise when companies start officially
counting billions of dollars in leases on their balance sheet, Mr. Ketz
said.
“You have sophisticated people, knowledgeable
people in the area who have been doing it. The small investors do not,” he
said.
AT&T had $31 billion in operating-lease
obligations—those not currently carried on the balance sheet—as of the end
of 2014, according to its latest annual report. Adding those obligations to
the balance sheet would significantly increase its liabilities; the company
has long-term debt of $76 billion.
Continued in article
Bob Jensen's threads on lease accounting ---
http://faculty.trinity.edu/rjensen/Theory02.htm#Leases
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on November 20,
2015
G-20 Leaders Set to Approve Overhaul of Corporate-Tax Rules
by: Paul Hannon and Richard Rubin
Nov 14, 2015
Click here to view the full article on WSJ.com
TOPICS: Corporate
Taxation, International Business, International Taxation
SUMMARY: A
push to close international corporate-tax loopholes is expected to spur
competition for lower rates overseas and increase pressure in Washington for
a bipartisan deal to revamp the corporate-tax code. Leaders from the Group
of 20 largest economies are set to give their final stamp of approval to a
major overhaul of the international rules governing corporate taxes. The
change is aimed at preventing companies from using myriad tactics to shift
profits among different jurisdictions to avoid taxation. Such practices cost
governments between $100 billion to $240 billion in lost revenue each year.
The new rules apply only to companies that operate in more than one country.
Nations aren't required to adopt them, though they are expected to be put in
place widely, given the support from G-20 leaders.
CLASSROOM
APPLICATION: This
article is useful for a corporate tax class as it impacts how multinational
corporations are taxed and it could cause a change in U.S. corporate taxes.
QUESTIONS:
1. (Introductory) What is the G-20 meeting? What countries are
involved?
2. (Advanced) What area of corporate taxation is the focus of the
G-20 vote? Why are these leaders making this decision? What is the need for
this vote?
3. (Advanced) What kind of impact could this vote have on U.S.
companies? How could it affect U.S. tax law? Why?
4. (Advanced) Why do some parties favor corporate tax cuts? Why are
some parties against them? How do corporate tax rates in other countries
affect rates in the U.S.?
Reviewed By: Linda Christiansen, Indiana University Southeast
"G-20 Leaders Set to Approve Overhaul of Corporate-Tax Rules," by Paul Hannon
and Richard Rubin, The Wall Street Journal, November 14, 2015 ---
http://www.wsj.com/articles/g-20-leaders-set-to-approve-overhaul-of-corporate-tax-rules-1447452996?mod=djem_jiewr_AC_domainid
A push to close international corporate-tax
loopholes is expected to spur competition for lower rates overseas and
increase pressure in Washington for a bipartisan deal to revamp the
corporate-tax code.
Leaders from the Group of 20 largest economies,
meeting in Turkey on Sunday and Monday, are set to give their final stamp of
approval to a major overhaul of the international rules governing corporate
taxes.
The change is aimed at preventing companies from
using myriad tactics to shift profits among different jurisdictions to avoid
taxation. Such practices cost governments between $100 billion to $240
billion in lost revenue each year, according to the Organization for
Economic Cooperation and Development.
The new rules apply only to companies that operate
in more than one country. Nations aren’t required to adopt them, though they
are expected to be put in place widely, given the support from G-20 leaders.
Stricter tax collection would mean governments
could vie for investment and jobs mainly by lowering corporate tax
rates—potentially shining a spotlight on the U.S. rate, which at 39% is much
higher than that of other developed countries.
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on November 20,
2015
Jury
Says Ernst & Young Liable for Madoff Investor's Losses
by:
Jacqueline Palank
Nov 14, 2015
Click here to view the full article on WSJ.com
TOPICS: Auditing,
Auditor Liability, Forensic Accounting, Fraud
SUMMARY: A
Washington state court jury found Ernst & Young liable for millions of
dollars in losses a Washington investment firm took from the collapse of
Bernard Madoff's Ponzi scheme. Steven W. Thomas, attorney for FutureSelect
Portfolio Management Inc., said the jury found the Big Four auditing firm
was negligent in its work as auditor for a feeder fund that pooled
investors' cash and funneled it Mr. Madoff's way. FutureSelect claimed that
Ernst & Young, as auditor, supplied false information that FutureSelect
Portfolio Management Inc. relied on to invest with the feeder fund. "EY was
not the auditor of any Madoff entity; we were among the many auditors of
funds that chose to use Madoff as their investment adviser. While we regret
the investors' losses, no audit of a Madoff-advised fund could have detected
this Ponzi scheme," Ernst & Young's Amy Call Well.
CLASSROOM
APPLICATION: This
article is an excellent development to use in an auditing class, as well as
for forensic accounting. It will be interesting to see if audit firms will
be held liable for fraud in entities other than those they audited, as is
the case here. This could be an expensive problem for audit firms, and if it
continues and grows, could raise the fees firms would have to charge.
QUESTIONS:
1. (Introductory) What are the facts of this case? Who are the
parties to the case? What was the jury's verdict?
2. (Introductory) What is a Big Four accounting firm? What do they
do? Why are they called the Big Four?
3. (Advanced) Who is Bernard Madoff? For what actions is he famous?
How did he cause damage to some people? Where is he now?
4. (Advanced) What is Ernst & Young's connection to Mr. Madoff? How
could the firm be liable for some of the damages resulting from Mr. Madoff?
5. (Advanced) What are some potential ripple effects that could
result from the outcome of this lawsuit? How could this verdict change the
way firms do business? How could it affect what firm's charge for their
work?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED
ARTICLES:
Investor Seeks to Hold Ernst & Young Liable for
Madoff Losses
by Jacqueline Palank
Oct 15, 2015
Online Exclusive
"Jury Says Ernst & Young Liable for Madoff Investor's Losses," by Jacqueline
Palank, The Wall Street Journal, November 14, 2015 ---
http://www.wsj.com/articles/jury-says-ernst-young-liable-for-madoff-investors-losses-1447453162?mod=djem_jiewr_AC_domainid
A Washington state court jury on Friday found Ernst
& Young liable for millions of dollars in losses a Washington investment
firm took from the collapse of Bernard Madoff’s Ponzi scheme.
Steven W. Thomas, attorney for FutureSelect
Portfolio Management Inc., said the jury found the Big Four auditing firm
was negligent in its work as auditor for a feeder fund that pooled
investors’ cash and funneled it Mr. Madoff’s way. FutureSelect claimed that
Ernst & Young, as auditor, supplied false information that FutureSelect
Portfolio Management Inc. relied on to invest with the feeder fund.
FutureSelect, of Redmond, Wash., invested
approximately $200 million in a feeder fund that sent its money to Mr.
Madoff, whose 2008 arrest exposed a massive Ponzi scheme in which investors
lost more than $17 billion. In 2010, FutureSelect sued Ernst & Young,
accusing it of negligence and seeking to recover its losses.
While FutureSelect had sought damages for the full
amount of its investment, Mr. Thomas said the jury awarded total damages of
$20.3 million, which the firm lost during the time in which Ernst & Young
was the feeder fund’s auditor. FutureSelect accepted some responsibility for
the losses, so the jury split those damages 50/50 between it and the
auditing firm, Mr. Thomas said, although he said prejudgment interest pushes
Ernst & Young’s liability above $20 million.
Reached Friday, an Ernst & Young spokeswoman said
the firm is considering an appeal and doesn’t believe it was responsible for
the investors’ losses.
“EY was not the auditor of any Madoff entity; we
were among the many auditors of funds that chose to use Madoff as their
investment adviser. While we regret the investors’ losses, no audit of a
Madoff-advised fund could have detected this Ponzi scheme,” Ernst & Young’s
Amy Call Well said in an email.
The case was the first suit against an auditor of
one of the Madoff feeder funds, which funneled billions of dollars from
investors all over the world to Mr. Madoff. Mr. Madoff is currently serving
a 150-year prison sentence, and his investment firm is liquidating.
“They are the first auditor to be found liable in
the Madoff case,” Mr. Thomas said. “We are incredibly grateful to this jury
for listening to the evidence and finding that auditors are the gatekeepers,
and where the financial statements are fraudulent, it’s their job to say
whether they’re real or fake before they get to investors.”
At the start of the trial last month, Mr. Thomas
said the Big Four auditing firm failed to perform such essential auditing
tasks as confirming the existence of the securities Mr. Madoff purported to
trade for investors, which didn’t exist. Instead, he said Ernst & Young
relied on information provided by Mr. Madoff or his firm when it approved
financial statements as containing accurate information, according to a
video feed of the trial provided by Courtroom View Network.
Continued in article
"Jury Says Ernst & Young Liable for Madoff Investor’s Losses: E&Y
found negligent in role as auditor for feeder fund," by Jacquiline Palank,
The Wall Street Journal, November 13, 2015 ---
http://www.wsj.com/articles/jury-says-ernst-young-liable-for-madoff-investors-losses-1447453162?alg=y#livefyre-comment
Thank you Tom Selling for the heads up.
Reply from Bob Jensen on November 15, 2015
Hi Tom,
What I find somewhat worrisome in the article is the following quotation
from EY:
EY was not the auditor of any Madoff entity; we
were among the many auditors of funds that chose to use Madoff as their
investment adviser. While we regret the investors’ losses, no audit of a
Madoff-advised fund could have detected this Ponzi scheme,” Ernst &
Young’s Amy Call Well said in an email.
This settlement could be a point at which an audit firm ceases to be an
audit fir firm and commences to be a financial guarantee insurance company.
The problem is that most insurance companies deal with risks estimated by
actuarial science. Actuarial science is not much help in the area of
financial forecasting --- largely because actuarial science is built upon
stationary states.
This raises questions about the extent to which an auditor must verify
third party investment, insurance, and deposit quality. Consider a
hypothetical example. When EY auditors receive a verification that their
client does indeed have casualty insurance in the amount of $10 million from
Every State Life and Casualty Company to what extent is the auditor
responsible to verify the quality of that insurance beyond verifying that
Every State is indeed licensed in every state to sell life and casualty
insurance and the auditor's reading of the insurance contract terms? The
auditors might even go a step further to determine that Every State was
indeed audited by KPMG. But KPMG is not likely to share inside working paper
information with EY regarding Every State.
To what extent is EY liable above an beyond the KPMG audit report on the
financial statements of Every State?
My guess is that EY would not be liable to FutureSelect Portfolio
Management Fund for its Madoff Losses had the Madoff Fund been properly
audited. But the Madoff Fund was not audited by a NY-licensed auditor where
the fund was headquartered. Perhaps EY is more liable in cases where EY
relied on investment verification that was not properly audited.
I am not an expert on the fine print of the rules of auditing and never
taught auditing. To what extent are auditors liable to verify the quality of
deposits in banks, receivables from third parties, insurance coverage, etc.?
Years ago, when I was a lowly staff auditor in the Denver Office of EY, I
can't recall that we went beyond verifying that the client's accounts
existed in the correct balances reported by the client.
This touches on something that always made me uneasy about test checking
inventory. One of our Denver Office audit clients was a piston manufacturer
in Pueblo, Colorado. When we showed up on Sunday mornings to count pistons
we found two types of containers at the end of each production line. The
company said one container had pistons that met quality control standards.
The other container was for rejects. But as an auditor I could not tell any
difference between a good piston and a bad piston. We simply took the
client's word that those pistons it called satisfactory were indeed
satisfactory, including the pistons that were boxed up and purportedly ready
to ship to customers. Fortunately our client was more honest than a well
known manufacturer of salad oil at the time.
It would really be interesting to know how this FutureSelect case
would have been decided for EY if the Madoff Fund had been audited by KPMG.
Thanks,
Bob Jensen
Bob Jensen's threads on Ernst & Young ---
http://faculty.trinity.edu/rjensen/Fraud001.htm
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on November 20,
2015
Thousands Hit With Surprise Tax Bill on Income in IRAs
by:
Laura Saunders
Nov 14, 2015
Click here to view the full article on WSJ.com
TOPICS: Individual
Taxation, Master Limited Partnerships, Roth IRA, UBIT, Unrelated Business
Income Tax
SUMMARY: Under
the tax code, IRAs and Roth IRAs have significant benefits-such as tax-free
growth - but they come with limits. When owners use IRA funds to invest in
partnerships, as opposed to stocks, bonds and funds, they owe tax on certain
annual income from the partnership exceeding $1,000 because of an antiabuse
provision. This levy is known as Unrelated Business Income Tax, or UBIT, and
its top rate of 39.6% can take effect at about $12,000 of taxable income. A
further, unique twist is that when this tax is due, the IRA custodian or
trustee - such as Pershing or Charles Schwab - is responsible for obtaining
a special tax ID number and then filing and signing an IRS Form 990-T
reporting the income. The IRA owner is typically responsible for paying the
tax. Because of this complexity, experts often caution investors to avoid
putting publicly traded partnerships into IRAs.
CLASSROOM
APPLICATION: This
is a good cautionary tale for individual tax classes.
QUESTIONS:
1. (Introductory) What is a Roth IRA? In general, what is the tax
treatment of income generated in a Roth IRA?
2. (Introductory) What is a master limited partnership? How is income
from an MLP taxed?
3. (Advanced) What is unrelated business income tax? What is the
reason for this tax? How is the tax calculated?
4. (Advanced) Why does the UBIT sometimes catch investors by
surprise? What can investors do to avoid that tax surprise?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED
ARTICLES:
Kinder Morgan Deal Risks Big Tax Bills for
Investors
by Laura Saunders, Alison Sider, and Russell Gold
Aug 12, 2014
Online Exclusive
Q&A: How the Kinder Morgan Deal Affects Investors'
Taxes
by Laura Saunders
Aug 12, 2014
Online Exclusive
"Thousands Hit With Surprise Tax Bill on Income in IRAs," by Laura Saunders,
The Wall Street Journal, November 14, 2015 ---
http://www.wsj.com/articles/thousands-hit-with-surprise-tax-bill-on-income-in-iras-1447427436?mod=djem_jiewr_AC_domainid
On Oct. 13, two days before the final 2014
tax-filing deadline, investor Steve Goldston of Phoenix received a surprise
tax bill for $24,321. It was for units of a master limited partnership
affiliated with Kinder Morgan Inc. that Mr. Goldston held in his Roth
individual retirement account. The total included nearly $6,000 of
late-filing penalties and interest.
“I was outraged,” says Mr. Goldston. “Here was a
tax form, completely filled out and signed on my behalf, saying that I owed
this money and it was coming out of my IRA—but that was the first I heard.”
Mr. Goldston wasn’t alone. According to Pershing,
the custodian of Mr. Goldston’s Roth IRA, it filed such forms for about
5,000 people who held Kinder Morgan MLP units in IRAs. Pershing is a unit of
BNY Mellon and serves as a clearinghouse for about 800 financial firms.
Kinder Morgan is a pipeline firm based in Houston.
Master limited partnerships typically transport,
store, produce and refine energy and pass the bulk of their earnings to
shareholders.
Thousands of investors holding MLPs in IRAs at
other firms may owe similar taxes that they aren’t aware of, experts say.
The unexpected bills are painful reminders that
even widely held investments such as MLPs can contain tax traps, experts
say.
“People need to understand what they are investing
in, especially the taxes and fees,” says Don Williamson, an accountant who
heads the Kogod Tax Center at American University.
In this case, the traps have ensnared advisers and
brokerage firms as well as investors. Here’s why, and what investors need to
know.
The rules
Under the tax code, IRAs and Roth IRAs have
significant benefits—such as tax-free growth—but they come with limits. When
owners use IRA funds to invest in partnerships, as opposed to stocks, bonds
and funds, they owe tax on certain annual income from the partnership
exceeding $1,000 because of an antiabuse provision. This levy is known as
Unrelated Business Income Tax, or UBIT, and its top rate of 39.6% can take
effect at about $12,000 of taxable income.
A further, unique twist is that when this tax is
due, the IRA custodian or trustee—such as Pershing or Charles Schwab —is
responsible for obtaining a special tax ID number and then filing and
signing an IRS Form 990-T reporting the income. The IRA owner is typically
responsible for paying the tax.
Because of this complexity, experts often caution
investors to avoid putting publicly traded partnerships into IRAs. But many,
including Mr. Goldston, were unaware of this advice.
What happened at Pershing
The 5,000 late 990-T filings by Pershing, including
Mr. Goldston’s, involved highly popular MLPs controlled by Kinder Morgan.
The largest, Kinder Morgan Energy Partners (KMP), had 465 million units with
a market value of $47 billion last year. Individual investors liked its high
payouts and that taxes were deferred.
In 2014, the parent firm did a roll-up of the MLPs
that triggered long-postponed taxes for many holders and generated UBIT for
many investors holding units in IRAs. Mr. Goldston’s 1,365 units of KMP, for
example, generated net income of nearly $52,000 and tax of $18,484.
According to Pershing’s spokesman, its tax adviser
found that Kinder Morgan’s K-1 forms for investors didn’t have enough
information to determine their taxes. By the time Pershing learned this, it
didn’t have time to file for six-month automatic extension requests.
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on November 20,
2015
Top
SEC Accountant Urges Supplemental Use of Global Rules for U.S. Companies
by: Michael Rapoport
Nov 18, 2015
Click here to view the full article on WSJ.com
TOPICS: GAAP,
IFRS
SUMMARY: The
Securities and Exchange Commission's top accountant said he has recommended
U.S. companies be allowed to use global accounting rules to supplement their
main financial statements calculated under U.S. regulations. The
recommendation to the commission by Chief Accountant James Schnurr could
help resolve a long-standing debate over whether and how the U.S. should use
the global rules, known as International Financial Reporting Standards, or
IFRS. If Mr. Schnurr's recommendation is implemented, U.S. companies could
provide financial data calculated using IFRS, which differs in some respects
from U.S. rules, as an add-on to the main financial statements they provide.
Those financial statements would continue to be calculated under current
U.S. rules, known as generally accepted accounting principles, or GAAP.
CLASSROOM
APPLICATION: This
update regarding use of IFRS in the U.S. can be used in a financial
accounting class.
QUESTIONS:
1. (Introductory) What is IFRS? Who uses it? What is GAAP? Who uses
it?
2. (Advanced) How do IFRS and GAAP differ? What does the U.S. use?
Why does the U.S. choose that particular one instead of the other?
3. (Advanced) What did the SEC Chief Accountant recommend regarding
U.S. accounting rules? Is this recommendation significant? How will U.S.
financial statements change? Will it bring great change in U.S. accounting
rules? Why or why not?
4. (Advanced) What is the current outlook for changes in the
accounting rules in U.S.? Are the rules expected to change in the near
future? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
U.S. Companies May Gain Ability to Reconcile to
IFRS Accounting
by Emily Chasan
May 07, 2015
Online Exclusive
"Top SEC Accountant Urges Supplemental Use of Global Rules for U.S.
Companies," by Michael Rapoport, The Wall Street Journal, November 18,
2015 ---
http://www.wsj.com/articles/top-sec-accountant-urges-supplemental-use-of-global-rules-for-u-s-companies-1447780897?mod=djem_jiewr_AC_domainid
The Securities and Exchange Commission’s top
accountant said he has recommended U.S. companies be allowed to use global
accounting rules to supplement their main financial statements calculated
under U.S. regulations.
The recommendation to the commission by Chief
Accountant James Schnurr could help resolve a long-standing debate over
whether and how the U.S. should use the global rules, known as International
Financial Reporting Standards, or IFRS.
If Mr. Schnurr’s recommendation is implemented,
U.S. companies could provide financial data calculated using IFRS, which
differs in some respects from U.S. rules, as an add-on to the main financial
statements they provide. Those financial statements would continue to be
calculated under current U.S. rules, known as generally accepted accounting
principles, or GAAP.
Mr. Schnurr has publicly floated the idea in recent
months, as a middle-ground approach between a full U.S. adoption of the
global rules and no U.S. use of them at all. He said Tuesday he has now made
the idea the substance of his recommendation to SEC Chairwoman Mary Jo White
about what the commission should do about U.S. use of IFRS.
“It’s going through the rule-making process,” Mr.
Schnurr told reporters at an accounting conference in New York. The
recommendation is being subjected to an economic analysis, he said, and he
had no timetable about when or whether the SEC might propose any new
regulations based on it.
The IFRS system is now in use in more than 100
countries, and accounting-industry leaders and international rule makers
have long urged the U.S. to adopt IFRS as well, saying a single world-wide
set of accounting rules would benefit companies and investors. But the U.S.
has retained GAAP in part because of concerns over the costs and
implementation of a switch, and Mr. Schnurr has said there is little or no
support among U.S. companies for a wholesale changeover.
Continued in article
Teaching
Case
From The Wall Street Journal Weekly Accounting Review on November 20,
2015
Humor for October 2015
From the Harvard Business Review
Strategic Humor: Cartoons from the December 2015 Issue ---
https://hbr.org/2015/11/strategic-humor-cartoons-from-the-december-2015-issue
The 10 funniest 'Dilbert' comic strips about
idiot bosses ---
http://www.businessinsider.com/dilbert-comics-on-bosses-2015-10
'Calvin and Hobbes' just turned 30 —
here's the history of the strip and its mysterious creator Bill Watterson ---
http://www.businessinsider.com/calvin-and-hobbes-just-turned-30-heres-the-history-of-the-strip-and-its-mysterious-creator-bill-watterson-2015-11
"Stealing is punishable by the law,"
the sign reads. "If you are caught stealing the bathroom tissue from dispenser,
you will be barred permanently from all New York Public Libraries."
http://lisnews.org/attention_library_toilet_paper_thieves_youve_been_warned
Unless you're visiting from Venezuela --- then God Bless You!
Jensen's Advice --- Bring your own from the hotel
There should not be protests on this campus
since administrators have heavier loads
Ryerson U students reveal that administrators'
bathrooms feature two-ply, while everyone else has one-ply
https://www.insidehighered.com/news/2015/11/02/student-newspaper-reveals-inequitable-toilet-paper-distribution?utm_source=Inside+Higher+Ed&utm_campaign=a93b96438a-DNU20151102&utm_medium=email&utm_term=0_1fcbc04421-a93b96438a-197565045
Jensen Question
Did one of the administrators leak this?
21 Badly Placed Advertisements
---
http://www.lifedaily.com/21-badly-placed-adverts-guaranteed-to-make-you-chuckle/#utm_medium=referral&utm_source=yahoo&utm_campaign=YH-BadAdvert
When a middle aged couple named Stake had an
unexpected son was the choice of the the name Michael Irwin Stake intentional?
Bob Jensen
A computer made up stories about these
13 photos and the results are hilarious ---
http://www.businessinsider.com/robot-wrote-hilarious-love-stories-about-internet-images-2015-11
I don't think this writer is ready for the big time.
Forwarded by Paula
The Irish Furniture Dealer
Murphy, a furniture dealer from Dublin,
decided to expand the line of furniture in his store, so he decided to go to
Paris to see what he could find.
After arriving in the ‘City of Lights’,
he visited with some manufacturers and selected a line that he thought would
sell well back home.
To celebrate the new acquisition, he
decided to visit a small bistro and have himself a nice glass of wine. As he sat
enjoying his drink, he noticed that the small place was actually quite crowded
and that the other chair at his table was the only vacant seat in the house.
Before long a very attractive young
Parisienne walked up to his table and asked him something in French. Murphy did
not understand a word, but anyway pointed to the vacant chair and invited her to
sit down. He tried to communicate with her in English, but she did not speak his
language. After a couple of hapless minutes, he took a napkin and drew a picture
of a wine glass and showed it to her. She nodded, so he ordered some wine for
her. After sitting together at the table for a while, he took another napkin,
and drew a picture of a plate with food on it and she nodded once again.
They left the bistro and found a quiet
cafe that featured a trio playing romantic music. They ordered dinner, after
which he took another napkin and drew a picture of a couple dancing. She nodded,
and they got up to dance They danced until the cafe closed and the band was
packing up.
Back at their table, the woman, with a
sensual smile on her lips took a napkin and drew a picture of a four-poster bed.
To this day, Murphy has no idea how she figured out he was in the furniture
business.
Bob Hope quotations forwarded by James Don
Edwards
ON TURNING 70
'I still chase women, but only downhill.'
ON TURNING 80
'That's the time of your life when even your birthday suit needs pressing.'
ON TURNING 90
'You know you're getting old when the candles cost more than the cake.'
ON TURNING 100
'I don't feel old. In fact,
I don't feel
anything until
noon.
Then it's time for my nap.'
ON GIVING UP HIS EARLY
CAREER, BOXING
'I ruined my hands in the ring. The referee kept stepping on them.'
ON NEVER WINNING AN
OSCAR
'Welcome to the Academy Awards, or, as it's called at my home, 'Passover.'
ON GOLF
'Golf is my profession. Show business is just to pay the green fees.'
ON PRESIDENTS
'I have performed for 12 presidents but entertained only six.'
ON WHY HE CHOSE SHOWBIZ
FOR
HIS CAREER
'When I was born, the doctor said to my mother,
Congratulations, you have an eight pound ham.'
ON RECEIVING THE
CONGRESSIONAL GOLD MEDAL
'I feel very humble, but I think I have the strength of character to fight it.'
ON HIS FAMILY'S EARLY
POVERTY
'Four of us slept in the one bed. When it got cold, mother threw on another
brother.'
ON HIS SIX BROTHERS
'That's how I learned to dance. Waiting for the bathroom.'
ON HIS EARLY FAILURES
'I would not have had anything to eat if it wasn't for the stuff the audience
threw at me.'
ON
GOING TO HEAVEN
'I've done benefits for ALL religions.
I'd hate to blow the hereafter on a technicality.'
Forwarded by Paula
Ramblings of a Retired Mind
I found this timely, because today I was in a
store that sells sunglasses, and ONLY sunglasses. A young lady walks over to me
and asks, "What brings you in today?" I looked at her, and said, "I'm interested
in buying a refrigerator". She didn't quite know how to respond. Am I getting to
be that age?
I was thinking about how a status symbol of
today is those cell phones that everyone has clipped onto their belt or purse. I
can't afford one. So I'm wearing my garage door opener.
You know, I spent a fortune on deodorant before
I realized that people didn't like me anyway.
I was thinking that women should put pictures of
missing husbands on beer cans!
I was thinking about old age and decided that
old age is when you still have something on the ball but you are just too tired
to bounce it.
I thought about making a fitness movie for folks
my age and call it 'Pumping Rust'.
When people see a cat's litter box they always
say, "Oh, have you got a cat?" Just once I want to say, "No, it's for company!"
Employment application blanks always ask who is
to be called in case of an emergency. I think you should write, "An ambulance."
I was thinking about how people seem to read the
Bible a whole lot more as they get older. Then it dawned on me: They were
cramming for their finals.
As for me, I'm just hoping God grades on a
curve.
Birds of a feather flock together and then poop
on your car.
The older you get the tougher it is to lose
weight because by then your body and your fat have gotten to be really good
friends.
The easiest way to find something lost around
the house is to buy a replacement.
Did you ever notice: The Roman Numerals for
forty (40) are XL.
The sole purpose of a child's middle name is so
he can tell when he's really in trouble..
Did you ever notice: When you put the 2 words
'The' and 'IRS' together it spells 'Theirs...'
Aging: Eventually you will reach a point when
you stop lying about your age and start bragging about it.
Some people try to turn back their "odometers."
Not me. I want people to know 'why' I look this way. I've traveled a long way
and some of the roads weren't paved.
You know you are getting old when everything
either dries up or leaks.
Ah! Being young is beautiful but being old is
comfortable.
And finally: "Lord, please keep your arm around
my shoulder and your hand over my mouth."
Humor September 1-30, 2015
---
http://faculty.trinity.edu/rjensen/book15q4.htm#Humor093015
Humor August 1-31, 2015
---
http://faculty.trinity.edu/rjensen/book15q3.htm#Humor083115
Humor July 1-31, 2015
---
http://faculty.trinity.edu/rjensen/book15q3.htm#Humor073115
Humor June 1-30, 2015
---
http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015
Humor May 1-31, 2015
---
http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015
Humor April 1-30, 2015
---
http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015
Humor March 1-31, 2015
---
http://faculty.trinity.edu/rjensen/book15q1.htm#Humor033115
Humor February 1-28, 2015
---
http://faculty.trinity.edu/rjensen/book15q1.htm#Humor022815
Humor January 1-31, 2015
---
http://faculty.trinity.edu/rjensen/book15q1.htm#Humor013115
Humor December 1-31, 2014
---
http://faculty.trinity.edu/rjensen/book14q4.htm#Humor123114
Humor November 1-30, 2014
---
http://faculty.trinity.edu/rjensen/book14q4.htm#Humor113014
Humor October 1-31, 2014
---
http://faculty.trinity.edu/rjensen/book14q4.htm#Humor103114
Humor September 1-30, 2014
---
http://faculty.trinity.edu/rjensen/book14q3.htm#Humor093014
Humor August 1-31, 2014
---
http://faculty.trinity.edu/rjensen/book14q3.htm#Humor083114
Humor July 1-31, 2014---
http://faculty.trinity.edu/rjensen/book14q3.htm#Humor073114
And that's
the way it was on November 30, 2015 with a little help from my friends.
Bob
Jensen's gateway to millions of other blogs and social/professional networks ---
http://faculty.trinity.edu/rjensen/ListservRoles.htm
Bob
Jensen's Threads ---
http://faculty.trinity.edu/rjensen/threads.htm
Bob
Jensen's Blogs ---
http://faculty.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called
New
Bookmarks ---
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Current and past editions of my newsletter called
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Current and past editions of my newsletter called
Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
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http://faculty.trinity.edu/rjensen/resume.htm#Presentations
Free
Online Textbooks, Videos, and Tutorials ---
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http://faculty.trinity.edu/rjensen/Bookbob2.htm#Tutorials
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http://faculty.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://faculty.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Bob
Jensen's Resume ---
http://faculty.trinity.edu/rjensen/Resume.htm
Bob
Jensen's Homepage ---
http://faculty.trinity.edu/rjensen/
Accounting
Historians Journal ---
http://www.libraries.olemiss.edu/uml/aicpa-library and
http://clio.lib.olemiss.edu/cdm/landingpage/collection/aah
Accounting Historians Journal
Archives---
http://www.olemiss.edu/depts/general_library/dac/files/ahj.html
Accounting History Photographs ---
http://www.olemiss.edu/depts/general_library/dac/files/photos.html
|
For an elaboration on the reasons you should join a ListServ (usually
for free) go to http://faculty.trinity.edu/rjensen/ListServRoles.htm |
|
AECM (Accounting Educators)
http://listserv.aaahq.org/cgi-bin/wa.exe?HOME
The AECM is an email Listserv list which
started out as an accounting education technology Listserv. It has
mushroomed into the largest global Listserv of accounting education
topics of all types, including accounting theory, learning, assessment,
cheating, and education topics in general. At the same time it provides
a forum for discussions of all hardware and software which can be useful
in any way for accounting education at the college/university level.
Hardware includes all platforms and peripherals. Software includes
spreadsheets, practice sets, multimedia authoring and presentation
packages, data base programs, tax packages, World Wide Web applications,
etc
Roles of a ListServ --- http://faculty.trinity.edu/rjensen/ListServRoles.htm
|
|
CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down)
CPAS-L provides a forum for discussions of
all aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just monitoring
the list. You qualify for a free subscription if you are either a CPA or
a professional accountant in public accounting, private industry,
government or education. Others will be denied access. |
|
Yahoo (Practitioners)
http://groups.yahoo.com/group/xyztalk
This forum is for CPAs to discuss the
activities of the AICPA. This can be anything from the CPA2BIZ portal
to the XYZ initiative or anything else that relates to the AICPA. |
|
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as accounting
software, consulting, financial planning, fixed assets, payroll, human
resources, profit on the Internet, and taxation. |
|
Business Valuation Group
BusValGroup-subscribe@topica.com
This discussion group is headed by Randy Schostag
[RSchostag@BUSVALGROUP.COM] |
Concerns That Academic Accounting Research is Out of Touch With Reality
|
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the twin
dangers of fossilization and scholasticism (of three types: tedium,
high tech, and radical chic)
From
http://faculty.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of the
shift from Gemeinschaft to
Gesellschaft. Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue
to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
What went wrong in accounting/accountics research?
How did academic accounting research become a pseudo science?
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong
Avoiding applied research for practitioners and failure to attract
practitioner interest in academic research journals ---
"Why business ignores the business schools," by Michael
Skapinker
Some ideas for applied research ---
http://faculty.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession
Clinging to Myths in Academe and Failure to Replicate and
Authenticate Research Findings
http://faculty.trinity.edu/rjensen/theory01.htm#Myths
Poorly designed and executed experiments that are rarely, I mean
very, very rarely, authenticated
http://faculty.trinity.edu/rjensen/theory01.htm#PoorDesigns
Discouragement of case method research by leading journals (TAR,
JAR, JAE, etc.) by turning back most submitted cases ---
http://faculty.trinity.edu/rjensen/000aaa/thetools.htm#Cases
Economic Theory Errors
Where analytical mathematics in accountics research made a huge
mistake relying on flawed economic theory and interval/ratio scaling
http://faculty.trinity.edu/rjensen/theory01.htm#EconomicTheoryErrors
Accentuate the Obvious and Avoid the Tough Problems (like fraud) for
Which Data and Models are Lacking
http://faculty.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Financial Theory Errors
Where capital market research in accounting made a huge mistake by
relying on CAPM
http://faculty.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Philosophy of Science is a Dying Discipline
Most scientific papers are probably wrong
http://faculty.trinity.edu/rjensen/theory01.htm#PhilosophyScienceDying
|
September
17, 2015 message from Sudipta Basu
Dear Bob:
Don't know if you have come across this paper by
Gow, Larcker and Reiss, but given your interest in methodological issues,
you will probably find this interesting.
http://research.chicagobooth.edu/~/media/90CF65A6E20D44C6A70C579937A9778C.pdf
Best wishes,
Sudipta
Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites
---
http://faculty.trinity.edu/rjensen/AccountingNews.htm
Accounting
Professors Who Blog ---
http://faculty.trinity.edu/rjensen/ListservRoles.htm
Cool
Search Engines That Are Not Google ---
http://www.wired.com/epicenter/2009/06/coolsearchengines
Free
(updated) Basic Accounting Textbook --- search for Hoyle at
http://faculty.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
CPA
Examination ---
http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle ---
http://cpareviewforfree.com/
Bob Jensen's Pictures and Stories
http://faculty.trinity.edu/rjensen/Pictures.htm
Bob
Jensen's Homepage ---
http://faculty.trinity.edu/rjensen/
October 31, 2015
Bob
Jensen's New Bookmarks for October 1-31, 2015
Bob Jensen
at
Trinity University
For
earlier editions of Fraud Updates go to
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to
http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to
http://faculty.trinity.edu/rjensen/bookurl.htm
Bookmarks for the World's Library ---
http://faculty.trinity.edu/rjensen/bookbob2.htm
Click here to search Bob Jensen's web site if you
have key words to enter --- Search Box in Upper Right Corner.
For example if you want to know what Jensen documents have the term "Enron"
enter the phrase Jensen AND Enron. Another search engine that covers Trinity and
other universities is at
http://www.searchedu.com/
Bob
Jensen's Blogs ---
http://faculty.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called
New Bookmarks ---
http://faculty.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called
Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's
Pictures and Stories
http://faculty.trinity.edu/rjensen/Pictures.htm
All
my online pictures ---
http://www.cs.trinity.edu/~rjensen/PictureHistory/
David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics
Science"
Bob Jensen
February 19, 2014
SSRN Download:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296
PwC: Download:
IFRS and US GAAP: similarities and differences - 2015 edition
---
http://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-ifrs-us-gaap-similarities-and-differences-2015.pdf
Bob Jensen's Threads on Controversies in Accounting Standard Setting ---
http://faculty.trinity.edu/rjensen/theory01.htm#MethodsForSetting
Similarities and Differences - A comparison of IFRS for SMEs and 'full IFRS'
---
http://www.pwc.com/en_GX/gx/ifrs-reporting/pdf/Sims_diffs_IFRS_SMEs.pdf
Comments on Web homepage design: Things I do not like about the new
American Accounting Association (AAA) homepage ---
http://faculty.trinity.edu/rjensen/WebsiteDesign.htm
From the Chronicle of Higher Education
Search for Job Openings in Higher Education ---
https://chroniclevitae.com/job_search/new
Arizona State University School Offers a Free Full-Time, Two Year Onsite
MBA to All Students Who are Admitted
"This School Will Give You a Completely
Free MBA," by Sarah Grant, Bloomberg, October 15, 2015 ---
http://www.bloomberg.com/news/articles/2015-10-15/this-school-will-give-you-a-completely-free-mba?cmpid=BBD101515_BIZ
Students who applied to Arizona State University’s
W.P. Carey School of Business will be pleasantly
surprised to hear that the school is making its
two-year, full-time MBA program completely free.
Thanks to a $50 million gift from the W.P. Carey
Foundation, Arizona State's business school is
awarding up to 120 scholarships to students accepted
into its full-time MBA program—which amounts to a
tuition-free MBA for at least one class of students.
Arizona State is one of the
highest-ranked (No. 67)
and largest business schools in the U.S., according
to Bloomberg’s Business School Rankings.
"This is risk-taking," said
W.P. Carey Dean Amy Hillman. "The more conservative
thing would have been to name some scholarships that
look for a specific type of applicant, but our fear
was that we wouldn't have the kind of impact we're
able to have with this. While helping a few
individuals is important, this is more important."
Any chance at a free MBA is
noteworthy considering the
increased cost of business
school. This fall, some top MBA programs raised
tuition as much as 10 percent. Among top 20 schools
surveyed by Bloomberg
Business last year,
University of Maryland's Smith School of Business had
the biggest tuition jump, 9.9 percent for
out-of-state residents.
Arizona State's business school is in the midlevel
price category for MBA programs, ranging from
$54,000 for in-state students to $90,000 for
international ones, according to a spokesperson for
the school. Prior to this year, the school awarded
17 full-tuition scholarships per class.
Continued in article
Jensen Comment
This should not be confused with the Thunderbird International School of
Global Management that, following a financial crisis,
is now a part of Arizona State University in 2015 ---
https://en.wikipedia.org/wiki/Thunderbird_School_of_Global_Management
Thunderbird focuses more on international management and international students.
The School of Accountancy and other
"business programs" have various top onsite and online undergraduate and masters
degrees that are not free. ASU is a very large university with multiple campuses
---
https://students.asu.edu/colleges
Starbucks employees get huge
discounts when taking ASU online courses (not just in business) ---
http://chronicle.com/article/A-Year-After-Starbucks-Offered/233415?cid=wc&utm_source=wc&utm_medium=en&elq=7e720a49b36e406998c4b99364a0cf9a&elqCampaignId=1625&elqaid=6593&elqat=1&elqTrackId=5e64efce97544f2aa2e60bbc0a82df71
WileyCPAExamExcel: Free CPA Lesson: Types and Principles of
Accounting Controls from Dan Stone at the University of Kentucky ---
http://blog.efficientlearning.com/cpa/free-cpa-lesson-types-principles-accounting-controls
WileyCPAExamExcel: CPA Exam Students’ Study Tips ---
http://blog.efficientlearning.com/cpa/cpa-exam-stories/cpa-exam-study-tips
We’ve devoted a lot of our recent video lectures to
the FAR section of the CPA Exam because, as you know, it covers an unbelievable
amount of information. Second only to FAR in terms of breadth is BEC. So, this
time we’re featuring a great Deep Dive video lecture on the crucial topic of
Cost Concepts.
WileyCPAExamExcel: Cost Concepts
http://blog.efficientlearning.com/cpa/cpa-exam-deep-dive-cost-concepts
"Comparing CPA Review Courses," by Junior Deputy Accountant
Adrienne Gonzalaz ---
http://goingconcern.com/2011/03/comparing-cpa-review-courses/#more-27710
How a 17-Year-Old Female Passed the CPA Exam ---
http://blog.efficientlearning.com/cpa/cpa-exam-stories/17-year-old-passed-cpa-exam
Bob Jensen's CPA Exam Helpers ---
http://faculty.trinity.edu/rjensen/bookbob1.htm#010303CPAExam
October 21, 2015 message from Glen Gray
This was in InformationWeek Daily. An interesting selection of books. One
book is:
Friggin'
Beancounters: Navigating the BS Infested Cubicles of the Accounting
Department
10 Books To Turn IT Pros
Into Business Pros
Nobody doubts that as an IT professional you know your field. But how much
do you know about business? If the answer is "not enough," it's time to
start learning. Here are 10 books to help turn IT pros into business ninjas.
http://www.informationweek.com/it-life/10-books-to-turn-it-pros-into-business-pros/d/d-id/1322440?_mc=NL_IWK_EDT_IWK_daily_20151020&cid=NL_IWK_EDT_IWK_daily_20151020&elq=f21f8c2f5dcd43129117095706657177&elqCampaignId=17278&elqaid=64574&elqat=1&elqTrackId=15f2864a81594bf7af10c0b750b161ac
Glen L. Gray, PhD, CPA
Dept. of Accounting & Information Systems
David Nazarian College of Business & Economics
California State University, Northridge
18111 Nordhoff ST
Northridge, CA 91330-8372
818.677.2461
http://www.csun.edu/~vcact00f
How to Mislead With Statistics
"Women with MBAs face a gender-based pay divide that starts as
soon as they graduate, and plagues them throughout their careers," by
Natalie Kitroeff and Jonathan Rodkin, Bloomberg, October 20,
2015 ---
http://www.bloomberg.com/news/articles/2015-10-20/the-real-cost-of-an-mba-is-different-for-men-and-women?cmpid=BBWGP102115_BIZ
As far as investments go, business school is an
unimpeachable bet for young professionals who can muster $100,000. MBAs, who
are typically in their early 30s and have already spent a few years in the
workforce, saw their salaries triple within eight years of graduation. They
also report consistently high levels of job satisfaction and career growth,
according to a survey of thousands of alumni conducted by Bloomberg
Businessweek as part of the magazine’s annual ranking of business schools.
But that general contentment hides a troubling divide: Within a few years of
graduation, women with MBAs earn lower salaries, manage fewer people, and
are less pleased with their progress than men with the same degree.
Each year, we rank business schools by polling
students on topics such as academics, career services, and campus climate.
We also ask employers about skills they seek in MBA hires and which schools
best prepare their graduates. This year, for the first time, we surveyed
alumni who graduated six to eight years ago, asking them how well their
degrees had delivered on the promise of a fulfilling, well-paid job. The
12,773 responses we collected offer a wealth of salary information and other
data on MBAs working in a variety of industries.
The inclusion of the alumni responses helped propel
Harvard Business School to the top of the 2015 rankings. HBS alums reported
the largest gains in compensation and many attributed their success to their
alma mater. Last year’s No. 1, Duke Fuqua School of Business, slipped to
eighth overall, partly because of a comparatively lackluster job placement
rate of 86.1 percent, which is below the 87.9 percent rate overall.
Women and men start their post-MBA careers earning
almost the same money—$98,000 for women and $105,000 for men—according to
our survey of those who graduated from 2007 through 2009. But the gap then
widens sharply. By 2014 men hauled in a median of $175,000 and women,
$140,000. That means employers pay women 80 percent of what men with the
same degree take home.
Continued in article
Jensen Comment
I want to start out by saying that I believe there are differences in
compensation levels by gender. However, the article above, and virtually every
other related article I've ever encountered, does not probe very deep to uncover
possible reasons for the so-called gender salary gap. First I want to compliment
the authors for using medians rather than mean averages. This is the first thing
I look for because means can be skewed by outliers more easily than medians.
Let me begin by noting that what are outliers in
smaller populations can also be outliers in large populations but there are
randomly more such outliers in large populations. It was always surprising in
the NBA when the Houston Rockets imported
Yao Ming, a 7-foot 6 inch Chinese center. In both the USA and China Yao Ming
is an outlier in terms of height ---
https://en.wikipedia.org/wiki/Yao_Ming
In terms of population the USA has an
estimated population of slightly over 320 million people. China has an
estimated 1,376 million people. People over seven feet tall are outliers in both
the USA and China. However, the odds of having many more people over seven feet
tall are much greater in China than the USA due to the sheer difference in the
populations of these two nations.
In a random sample of 320 female MBA graduates and a random sample of 1,376
male graduates one would expect that the mean and median salaries of the men
would be higher than the women due to random chance because there are many more
high-salaried outliers in the larger sample of males. Since the lower salaried
men and women are bounded by zero the means
and medians of the random samples are driven upward by the higher salaried men
and women. Suppose we designated a high salary as anything over $200,000. One
would expect more high salaried men than women in these two samples due to the
difference in the sample sizes.
It's the bottom part of the salary distribution where gender analysis becomes
more complicated. In a random world one would expect to find more zero-salaried
men than women in the above samples due to the sample size differences. However,
here is where the real world is not random because statistically female MBA
graduates in reality have a higher probability of not entering or soon dropping
out of the work force to devote full time or nearly full time to mothering their
new babies.
As a result statistical analysis showing higher mean or median salaries among
the 1,376 males is not probably as much due to hiring and promotion bias due to
gender as it is to such complications as having more male MBA graduates than
female graduates and the higher probability that a female will leave the
full-time work force at least during the early years of raising children.
Of course all of this becomes more complicated when the number of female
graduates becomes larger relative to male graduates. I think there are still
more male MBA graduates, but in terms of accounting graduates the number of
females now exceeds the number of male graduates. Also the large public
accounting firms are hiring more female than male graduates. Carried to extremes
suppose that we randomly sample 1,376 female accounting graduates and 321 male
accounting graduates. My hypothesis is that the mean and median salaries of the
females will exceed those of the males after five years of employment. Of course
these averages may differ for the entire populations of accounting graduates
because the gender differences among all accounting graduates is closer to 50/50
than 1,376/321.
There are other complications in this analysis. My opinion is that
newly-hired male and female graduates joining a given local office of a Big Four
firm will earn the same starting compensation. However, the new hires in the San
Francisco local office will have higher salaries than the San Antonio office of
a given firm based upon huge differences in costs of living in these two cities.
To do a complete gender analysis we would have to factor in whether there are
gender differences based upon cost of living in local offices. Do mothers tend
to prefer or avoid San Francisco vis-a-vis San Antonio? It's certainly more
complicated to both work full time and raise young children in San Francisco
where rents are now higher than anywhere in the USA. Hence one would expect
mothers to prefer San Antonio relative to San Francisco. One would expect more
females moving away from the San Francisco office once they became mothers.
My point is that one has to be very careful when it comes to inferring gender
bias causality in most any type of statistical analysis beyond the usual problem
of spurious correlation. I think most studies of gender differences in salaries
do not delve deeply enough into the really complicated factors affecting
statistical analysis outcomes.
But I do still believe there is gender bias against mothers of young children
in terms of employment and compensation. I'm not convinced there's such a degree
of bias against those women who are not mothers of young children.
"The 100 Best Companies For Working Moms," by Jacquelyn Smith,
Working Mothers Magazine via Business Insider, September 16, 2014 ---
http://www.businessinsider.com/best-companies-for-working-moms-2014-9
The largest CPA firms are among the best places for moms to be employed.
Bob Jensen's threads on careers ---
http://faculty.trinity.edu/rjensen/Bookbob1.htm#careers
Bob Jensen's threads on the histories of women in the professions ---
http://faculty.trinity.edu/rjensen/Bookbob2.htm#Women
"38 Percent Of Women Earn More Than Their Husbands," by Mona Chalabi,
NPR via Nate Silver's 5:38 Blog, February 8, 2015 ---
http://fivethirtyeight.com/datalab/38-percent-of-women-earn-more-than-their-husbands/
Times are changing for professional women at work. The big CPA firms now hire
more female accounting graduates than male accounting graduates. There are also
cracks in the glass ceiling. Deloitte, one of the top Big Four firms, just
appointed a woman CEO.
-
-
- Ole yust does not
yet vant Lena to be da boss
Women CEOs are rare in Norway and Sweden even though these
nations are highest in terms of gender equality on other
criteriaChief Executive Officer (CEO) ---
http://en.wikipedia.org/wiki/Chief_executive_officer
. .
.
In some European Union countries,
there are two separate
boards, one executive board
for the day-to-day business and one supervisory board for
control purposes (selected by the shareholders). In these
countries, the CEO presides over the executive board and the
chairman presides over the supervisory board, and these two
roles will always be held by different people. This ensures
a distinction between management by the executive board and
governance by the supervisory board. This allows for clear
lines of authority. The aim is to prevent a conflict of
interest and too much power being concentrated in the hands
of one person.
Women on Board The Norwegian Experience (June
2010) ---
http://library.fes.de/pdf-files/id/ipa/07309.pdf
- Norway was the first country to
introduce a quota for women on company boards. Since its
introduction in 2003, the number of women on board has
reached 40 per cent as required by law.
- In several European countries,
Germany being one of them, a debate has begun on how to
increase the number of women in leading positions in
business. The question of whether or not quota legislation
is needed to reach this goal is highly contested.
- The Norwegian experience reveals
that a quota is the key to a successful implementation. Not
only does it create the pressure needed for fundamental
change but it also triggers a public debate at the core of
which are questions of gender equality in wider society
Ole yust does not yet vant Lena
to be da boss (Norway is not
in the 28-Member European Union)
From the Harvard Business Review Blog on December 30,
2014
Norwegian Companies Morph to
Avoid Gender-Balance Law
One of the consequences of Norway’s
law mandating that at least 40% of the directors of public
limited companies be female is that numerous firms have
switched their organizational form, sometimes at significant
cost, so that they are no longer public limited companies,
say Řyvind Břhren and Siv Staubo of Norwegian Business
School. Among the companies in that category when the law
was passed in 2003, 51% chose to become private
limited-liability firms by the time it became binding five
years later. However, Norway may further extend the
board-representation rule to other corporate forms.
SOURCE:
Does mandatory gender balance work? Changing organizational
form to avoid board upheaval
http://links.mkt3142.com/ctt?kn=14&ms=MTAyNjY5MjMS1&r=MTkyODM0MDg0MAS2&b=0&j=NDQyMzY1ODgzS0&mt=1&rt=0
Germany since passed quota (30% in 2016) legislation for
publically-traded companies but rejected similar quotas
for private corporations ---
http://www.spiegel.de/international/germany/cdu-and-spd-agree-on-gender-quota-in-german-boardrooms-a-934155.html
Jensen Comment
In the USA the CEO generally has enormous power is choosing
the slate of board members voted on by the shareholders. Also
shareholders uninterested in voting often give voting proxies to
the CEO. Hence the election of board members is not exactly an
example of great democracy in action. For public relations
purposes and for purposes of competency, however, CEOs are
increasingly attempting to get women on corporate boards. Also
corporate boards for sometimes complicated reasons, including
competency, are increasingly trying to appoint women as CEOs.
Gender Equality ---
http://en.wikipedia.org/wiki/Gender_equality
Global Gender Gap Report (2013) ---
http://en.wikipedia.org/wiki/Global_Gender_Gap_Report
Gender Inequality Index ---
http://en.wikipedia.org/wiki/Gender_Inequality_Index
Note that this index is based on multiple criteria and is
not a measure of business executive power or executive
compensation.
Female Labor Force in the Muslim World ---
http://en.wikipedia.org/wiki/Female_labor_force_in_the_Muslim_world
More at
Bob Jensen's threads on the histories of women in the
professions ---
http://faculty.trinity.edu/rjensen/Bookbob2.htm#Women
"U of Florida Cancels Huge Pearson Contract,"
Inside Higher Ed, October 22, 2015 ---
https://www.insidehighered.com/quicktakes/2015/10/22/u-florida-cancels-huge-pearson-contract?utm_source=Inside+Higher+Ed&utm_campaign=fc286db93b-DNU201510022&utm_medium=email&utm_term=0_1fcbc04421-fc286db93b-197565
The University of Florida on Wednesday announced that it is terminating a huge 11-year deal for Pearson to build and manage the university's online programs. The announcement came in an internal email obtained and published by Politico Florida. The email says the university will be better able to serve online students by including them in general university operations and obtaining some new specialized help for some areas, such as marketing.The size of the deal (Pearson could have earned $186 million if it met all goals) has made it a target of criticism from some on campus. The agreement included a provision stating that Florida could withdraw or renegotiate if certain goals weren't met. And out-of-state enrollment goals weren't met, giving the university the option it is now exercising. A month ago, both sides said they were in discussions that could have led to the agreement being modified, not ended.
Pearson released the following statement: "In November 2013, Pearson and the University of Florida signed a landmark agreement to deliver UF Online. In that time, Pearson made a significant up-front investment in this program, shouldering much of the risk, including building a Florida-based staff and developing the marketing effort around the program. We are disappointed that the university has decided not to move forward with this partnership. There are always challenges when launching innovative, multifaceted programs such as this, especially at highly competitive institutions and on such a tight timeline. It is important to note there have been successes. UF saw an 84 percent increase in UF Online student enrollment this fall when compared to fall 2014 and continues to expand the number of online undergraduate programs with a total of 19 majors from six colleges slated to be offered by next fall. Due to the reduced in-state tuition offered through UF Online, Florida students have saved over $3.5 million in tuition since the inception of the program. Pearson is proud to offer programs that make higher education more accessible and affordable for students. Pearson's online program management services have been successful at a number of colleges and universities across the U.S. We have learned a great deal from the UF partnership that can be applied to helping both Pearson and other university customers improve their delivery of online options for students."
Jensen Comment
These online courses from Pearson were fee-based and apparently had a condition
that they would attract out-of-state and well as in-state students. Out-of-state
tuition at $500 per credit is substantially higher than $112 for in-state
students. Out-of-state students had little incentive to pay the higher prices
when there own in-state universities offered much less expensive and possibly
better online credits. And the Pearson courses did not have the high performance
rankings of other in-state online programs ranked by US News at
http://www.usnews.com/education/online-education
Also Pearson did not fully cover the most
popular programs such as most of the University of Florida courses in
accounting, finance, and business in general
What Went Wrong?
The Stanford University Endowment Experiment Endowment Experiment ---
http://www.ai-cio.com/channels/widescreenstory.aspx?id=2147493424
Jensen Comment
Harvard's endowment also did not perform as well as those of Yale, Notre Dame,
Columbia, and MIT.
Corporation ---
https://en.wikipedia.org/wiki/Corporation
A Brief History of the Corporation: 1600 to
2100 by Venkatesh Rao ---
http://www.ribbonfarm.com/2011/06/08/a-brief-history-of-the-corporation-1600-to-2100/
Links to accounting history over the same time periods ---
http://faculty.trinity.edu/rjensen/theory01.htm#AccountingHistory
On Sat, Oct 3, 2015 at 7:34 PM, Jagdish Gangolly <gangolly@gmail.com> wrote:
Bob,
I am not a historian. But I did know that British
East India Company is not the oldest. In fact some of the oldest companies
are not British at all. The oldest is a Japanese construction company, Kongo
Gumi Co. Ltd, which was established in 578AD. It continues to operate to
this day, since 2006 as a subsidiary of Takamatsu Construction Group.
It is possible that Kongo Gumi was not a stock
corporation as we know. But then British East India probably can not be
considered a company as we know them. It was just an association of
merchants in the city of London during the first 40 years or so of its
existence.
You can see the list of oldest companies at
https://en.wikipedia.org/wiki/List_of_oldest_companies#Before_1300
If you adopt a narrower definition of joint stock,
the following has a good list of old companies. Here too British East India
Company happens to be a relative newcomer.
https://en.wikipedia.org/wiki/Joint-stock_company
However, BEIC is "special" in some sense. It is
probably one of the earliest to use charter as a sort of passport. It also
was the first to conquer and run a large country. It also was probably the
first company to provide employment for sons of peer and landed gentry who
had lost out because of primogeniture.
Regards
Jagdish
Jagdish S. Gangolly
Department of Informatics College Engineering & Applied Sciences
State University of New York at Albany
1400 Washington Ave Albany, NY 12222
Bloomberg Terminal ---
https://en.wikipedia.org/wiki/Bloomberg_Terminal
Fair Value
"How the Bloomberg Terminal Made History—And Stays Ever Relevant," by
Harry McCracken, FastCompany, October 2015 ---
http://www.fastcompany.com/3051883/behind-the-brand/the-bloomberg-terminal
The Computer History Museum is making room for an
innovative gadget that arrived in 1982 and has never stopped evolving.
By definition, any computing platform invented in
the first half of the 1980s that has survived until 2015—and is an enormous
business—has accomplished something remarkable. There's the Windows PC,
which traces its heritage back to the original IBM PC announced in August
1981. There's the Mac, which famously debuted in January 1984.
And then there's the Bloomberg Terminal, which hit
the market in December 1982.
Unlike the PC or the Mac, the Terminal has always
catered to a niche—investors and other finance professionals—which is why
most people have never seen one in person. But it's one of the industry's
few truly enduring successes. It's mattered so much that a current Bloomberg
Terminal setup is one of a handful of artifacts in "Tools of the Trade," a
new display at Silicon Valley's Computer History Museum that traces the
history of financial technology, beginning with the tokens used by ancient
Sumerians to track the trading of items such as sheep, which eventually led
to the invention of the clay tablet.
"We start the story 10,000 years ago, which is why
we have the clay tokens," says Computer History Museum Curator Dag Spicer.
"There’s a reason we put them right beside the Bloomberg Terminal, to give
you the alpha and omega of trading. Trading, as a human activity, is
something that’s been with human civilization since the beginning."
This is the Bloomberg Terminal's second museum
appearance this year: The Smithsonian's National Museum of American History
included two Terminal keyboards in an exhibit on American enterprise,
including one that belonged to legendary bond trader Bill Gross.
Continued in article
Hubbard and Jensen show how to value interest rate swaps from yield curves
derived from a Bloomberg Terminal and how to account for those swaps under FAS
133 accounting rules ---
http://faculty.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm
SMEs ---
https://en.wikipedia.org/wiki/Small_and_medium-sized_enterprises
SPEs ---
What's Right and What's Wrong With
(SPEs), SPVs, and VIEs ---
http://faculty.trinity.edu/rjensen//theory/00overview/speOverview.htm
SMEs increasingly turn to leasing (via SPEs)
http://www.assetfinanceinternational.com/index.php/global-news/americas/news-americas-2/12457-smes-increasingly-turn-to-leasing?utm_source=newsletter_9560&utm_medium=email&utm_campaign=us-auto-and-equipment-finance-news-sponsored-by-chp-consulting
Thank you Bill Bosco for the heads up.
"Democratic Economists vs.
Elizabeth Warren," by James Freeman, The Wall Street Journal, October
2, 2015 ---
http://www.wsj.com/articles/democratic-economists-vs-elizabeth-warren-1443785001
. . .
At least some
Democrats are resisting Sen. Elizabeth Warren’s purge of the liberal
intelligentsia. This week Ms. Warren succeeded in forcing the resignation of
respected scholar Robert Litan from the Brookings Institution after he
revealed that a new Labor Department regulation could cost investors
billions. Now five Democratic economists have authored a letter to protest
Warren’s bullying. Robert Lawrence of Harvard’s Kennedy School and Bowman
Cutter of the Roosevelt Institute are among those writing “to express our
concern over our colleague Bob Litan’s treatment at the hands of the
Brookings Institution and Senator Elizabeth Warren.” Also signing the letter
are Everett Ehrlich, Joseph Minarik and Hal Singer.
Continued in
article
Goldman, JPMorgan Said to Fire 30 Analysts for Cheating on Tests ---
http://www.bloomberg.com/news/articles/2015-10-16/goldman-sachs-said-to-dismiss-20-analysts-for-cheating-on-tests
Goldman Sachs Group Inc. is dismissing about 20
analysts globally in offices including London and New York after discovering
they had breached rules on internal training tests, said people familiar
with the matter.
The employees, who had been working in the
investment bank’s securities division, have either already been dismissed or
are in the process of leaving the bank, said the people, who asked not to be
identified as the matter is private. The junior-banker title doesn’t refer
to research analysts who recommend stocks to investors. JPMorgan Chase &
Co., the biggest U.S. bank, fired 10 employees for similar offenses last
month, a person briefed on the matter said Friday.
“This conduct was not just a clear violation of the
rules, but completely inconsistent with the values we foster at the firm,”
said Sebastian Howell, a Goldman Sachs spokesman in London, who said he
couldn’t comment further.
Bankers throughout Wall Street often assist each
other on basic training and compliance tests because these are seen as time
consuming and repetitive, according to separate people with knowledge of the
process. Investment banks have started taking strict measures to prevent
this from happening in recent years amid increasing scrutiny from
regulators.
Continued in article
Jensen Comment
Financial analysts just haven't learned how accountants avoid cheating. In
accountancy, competency in continuing education courses is based on attendance
and not whether attendees stayed awake or concentrated on what was happening in
the courses
Jane Hart's Top 100 Tools for Learning (2015 Edition)
Centre for Learning & Performance Technologies (United Kingdom)
http://c4lpt.co.uk/
For thousands of other tools that did not make the above listing see
Bob Jensen's Threads on Tools and Tricks of the Trade ---
http://faculty.trinity.edu/rjensen/000aaa/thetools.htm
Massive Open Online Course ---
https://en.wikipedia.org/wiki/Massive_open_online_course
By
definition there are no admission standards to take a MOOC and admission is
free, although fees may be charged for recognition (badges, completion
credentials, or college credits) that have added academic standards. In general,
MOOCs are video windows into advanced courses filmed live across the curriculum
at prestigious universities. Although some universities provide MOOCs for
introductory courses (undergraduate or graduate) MOOCs are not well suited to
introductory students who need more hand holding and personalized supervision
that are seldom, if ever, available in a MOOC taken by a "massive" number of
students. At the Wharton Business School at the University of Pennsylvania
introductory courses in the first-year MBA core can be taken for free as MOOCs.
Students who are planning to go into MBA programs around the world often take
these MOOCs in preparation when they will later be taking similar courses in
accounting, finance, management, marketing, etc. for credit.
Whereas the Wharton Business School offers core MBA courses as MOOCs, other
programs have distance education courses that are not
MOOCs because of fees and admission standards. For example, the Harvard
Business School has an extension program for pre-MBA courses that are relatively
expensive and capped regarding course size with competitive admission standards.
Bob Jensen's threads on these and other free-based distance education courses
are at
http://faculty.trinity.edu/rjensen/Crossborder.htm
The cumulative number of MOOCs didn’t break 100 until
the end of 2012. But by the end of 2013 that number had grown to over 800. And
today the number of registered MOOC students added in 2015 is nearly equal to
the last three years combined.
"MOOCs Are Still Rising, at Least in Numbers," by Ellen Wexler,
Chronicle of Higher Education, October 19, 2015 ---
http://chronicle.com/blogs/wiredcampus/moocs-are-still-rising-at-least-in-numbers/57527?cid=wc&utm_source=wc&utm_medium=en&elq=7bf78ed93ead47d3a4da220c40587cbd&elqCampaignId=1647&elqaid=6629&elqat=1&elqTrackId=f325471009eb4e959e66d27de2031216
When one of the first
massive open online courses appeared at Stanford University, 160,000
students enrolled. It was 2011, and fewer than 10 MOOCs existed worldwide.
It has been four years since
then, and according to a new report, the cumulative number of MOOCs has
reached nearly 4,000.
Compiled earlier this month
by Dhawal Shah, founder of the MOOC aggregator Class Central, the report
summarizes data on MOOCs from the past four years. And the data show that
even as the MOOC hype has started to die down, interest hasn’t tapered off.
The cumulative number of
MOOCs didn’t break 100 until the end of 2012. But by the end of 2013 that
number had grown to over 800. And today the number of registered MOOC
students added in 2015 is nearly equal to the last three years combined.
Continued in article
Jensen Comment
Note the graph showing that the cumulative number of MOOCs to date is nearly
4,000 course, most of which are courses from prestigious universities like
MIT, Harvard, Stanford, Penn, Rice, etc. Although MOOCs are free by
definition they cannot usually be taken for transcript credit unless a fee
is paid for competency-based testing. The two largest credit providers are
Coursera and EdX. One of the more noted MOOCs available is from Arizona
State University where the entire first year of courses can be taken for
credit.
Noncredit credentials (badges) for a fee are
also available for most MOOCs that demonstrate completion of a MOOC and
sometimes a level of competency that might be recognized by employers even
though they do not qualify for transcript college credit.
"Who Takes MOOCs?" by Steve Kolowich,
Inside Higher Ed, June 5, 2012 ---
http://www.insidehighered.com/news/2012/06/05/early-demographic-data-hints-what-type-student-takes-mooc
Massive open online courses,
or MOOCs, are popular. This much we know.
But as investors and higher
ed prognosticators squint into their crystal balls for hints of what this
popularity could portend for the rest of higher education, two crucial
questions remains largely unanswered: Who are these students, and what do
they want?
Some early inquiries into
this by two major MOOC providers offer a few hints.
Coursera, a company started
by two Stanford University professors, originated with a course called
Machine Learning, which co-founder Andrew Ng taught last fall to a virtual
classroom of 104,000 students. Coursera surveyed a sample of those students
to find out, among other things, their education and work backgrounds and
why they decided to take the course.
Among 14,045 students in the
Machine Learning course who responded to a demographic survey, half were
professionals who currently held jobs in the tech industry. The largest
chunk, 41 percent, said they were professionals currently working in the
software industry; another 9 percent said they were professionals working in
non-software areas of the computing and information technology industries.
Many were enrolled in some
kind of traditional postsecondary education. Nearly 20 percent were graduate
students, and another 11.6 percent were undergraduates. The remaining
registrants were either unemployed (3.5 percent), employed somewhere other
than the tech industry (2.5 percent), enrolled in a K-12 school (1 percent),
or “other” (11.5 percent).
A subset (11,686
registrants) also answered a question about why they chose to take the
course. The most common response, given by 39 percent of the respondents,
was that they were “just curious about the topic.” Another 30.5 percent said
they wanted to “sharpen the skills” they use in their current job. The
smallest proportion, 18 percent, said they wanted to “position [themselves]
for a better job.”
Udacity, another for-profit
MOOC provider founded by (erstwhile) Stanford professors, has also conducted
some initial probes into the make-up of its early registrants. While the
company did not share any data tables with Inside Higher Ed, chief executive
officer David Stavens said more than 75 percent of the students who took the
company’s first course, Artificial Intelligence, last fall were looking to
“improve their skills relevant for either current or future employment.”
That is a broad category,
encompassing both professionals and students, so it does not lend much
nuance to the questions of who the students are or what they want. And even
the more detailed breakdown of the students who registered for Ng’s Machine
Learning course cannot offer very much upon which to build a sweeping thesis
on how MOOCs might fit into the large and diverse landscape of higher
education.
Coursera has since completed
the first iterations of seven additional courses and opened registration for
32 more beyond that. Many of those courses — which cover poetry, world
music, finance, and behavioral neurology — are likely to attract different
sorts of people, with different goals, than Machine Learning did. “I'm
expecting that the demographics for some of our upcoming classes (Stats One,
Soc 101, Pharmacology, etc.) will be very different,” said Daphne Koller,
one of Coursera’s founders, in an e-mail.
Continued in article
"Coursera Tops 1 Million Students,"
Inside Higher Ed, August 10, 2012 ---
http://www.insidehighered.com/quicktakes/2012/08/10/coursera-tops-1-million-students
Coursera, the company
that provides support and Web hosting for massive open online courses at top
universities, announced Thursday that more than 1 million students have
registered for its courses. The company now serves as a MOOC platform for 16
universities and lists 116 courses, most of which have not started yet. The
students registering for the courses are increasingly from the United
States. Coursera told Inside Higher Ed earlier this summer that about 25
percent of its students hailed from the United States; that figure now
stands at 38.5 percent, or about 385,000 students. Brazil, India and China
follow, with between 40,000 to 60,000 registrants each. U.S. students cannot
easily get formal credit through Coursera or its partners institutions, but
some universities abroad reportedly have awarded credit to students who have
taken the free courses.
Educating the Masses: Coursera doubles the
number of university partners
"MOOC Host Expands," by Steve Kolowich, Inside Higher Ed, September 19,
2012 ---
http://www.insidehighered.com/news/2012/09/19/coursera-doubles-university-partnerships
"The 12 Most Popular Free Online Courses (MOOCs) For
Professionals," by Maggie Zhang, Business Insider, July 8, 2014 ---
http://www.businessinsider.com/free-online-courses-for-professionals-2014-7
12. Johns Hopkins Bloomberg School of
Public Health's "Data
Analysis"
Read more:
http://www.businessinsider.com/free-online-courses-for-professionals-2014-7#ixzz37LiJgQ57
"MOOCs
haven't lived up to the hopes and the hype, Stanford participants say," by
Dan Stober, Stanford Report, October 15, 2015 ---
http://news.stanford.edu/news/2015/october/moocs-no-panacea-101515.html
Thank you Glen Gray for the heads up.
October 17, 2015 reply from Bob Jensen
Hi Glen,
Is the message that learning
from Stanford professors is not worth the price of $0?
Actually I think the message
is that for many folks who try MOOCs the work of learning is too intense and
time consuming given their lack of commitment to keeping up with the class.
Richard Campbell once
revealed to the AECM that when he tried to learn from a MOOC it was like
"trying to drink from a firehose." I dropped out of a C++ programming course
because my heart just was not in keeping up with the class. Ruth Bender
revealed to the AECM that completing a MOOC was one of the hardest things
she ever tried.
In my viewpoint MOOCs are
not good models for introductory students where more hand holding is
generally needed. MOOCs are better suited to highly specialized advanced
courses for learners who are way above average in terms of aptitude and
prior learning.
Bob Jensen's threads on MOOCs are at
http://faculty.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Bob Jensen's Threads on Tools and Tricks of
the Trade ---
http://faculty.trinity.edu/rjensen/000aaa/thetools.htm
This is a bit late, but I belatedly discovered that Dennis Huber is still
attempting to keep his long-time lawsuit against the American Accounting
Association alive. In my opinion he's wasting his own money and the resources of
the AAA ---
http://commons.aaahq.org/posts/7dfc5008a1
Huber v. AAA Update
discussion posted August 13,
2015 by
Wm. Dennis Huber
2 Views
discussion:
Huber v. AAA Update
details:
NOTICE OF MOTION BEFORE
JUDGE KENNETH DIEHL, CHIEF
JUDGE OF THE SEVENTH
JUDICIAL CIRCUIT, TO VACATE
THE JUDGMENT OF JUDGE JOHN
SCHMIDT DISMISSING THIS
CASE, TO REMOVE HIM FROM THE
CASE, AND TO TRANSFER THE
CASE TO A JUDGE WHO HAS NOT
RECEIVED CONTRIBUTIONS TO
HIS OR HER POLITICAL
CAMPAIGN
Filed on August
11, 2015.
See attached motion and
memorandum of law.
American Dream ---
https://en.wikipedia.org/wiki/American_Dream
A Table of the World's Most Valuable
Privately Held Startups Since 2014 ---
http://graphics.wsj.com/billion-dollar-club/
- Uber ($51.0 Billion)
- Xionmi ($46.0 Billion)
- AirBnB ($25.5 Billion)
- Palantir ($20.0 Billion)
- Snapchat ($16.0 Billion)
- Didi Kuaidi ($16.0 Billion)
- Flipkart ($15.0 Billion)
- SpaceX ($12.0 Billion)
- Pinterest ($11.0 Billion
- Dropbox ($10.0 Billion)
- WeWork ($10.0 Billion)
- Many others over $1.0 billion are in the
table (most with unfamiliar names)
Jensen Comment
The American Dream still exists but it's not the dream we envisioned before the
age of technology. Keep in mind the $1.0 billion is a buck greater than
$999,999,999 million. It would be interesting to know how many jobs these
startups have created directly and indirectly by outsourcing and purchasing of
goods and services. Then there are all those higher-order jobs created such as
the number of IRS agents and other government agency employees hired just to
keep track of these new startups in the Billionaires' Club. The higher order
impacts go on and on and on. And let's not forget all those lawyers and
accountants and teachers indirectly affected by these startups and employee
families that send their kids to schools and universities.
Bob Jensen's threads on the American Dream
---
http://www.cs.trinity.edu/~rjensen/temp/SunsetHillHouse/SunsetHillHouse.htm
Lease Accounting Updates and Concerns
October 14, 2015 message from Bill Boscoi
In my opinion if you do sale leasebacks you should be concerned
By Bill Bosco – Leasing 101 checkout the monitordaily website for more
articles by me:
http://www.monitordaily.com/article-categories/lease-accounting/
Also checkout my website for other info:
http://www.leasing-101.com/
As you may know the interaction of the new rules re
sale treatment under Revenue Recognition vs. the proposed new lease
accounting rules will likely mean that sale leasebacks of equipment where
there is a non-bargain purchase option will not be considered sales or
leases. Those “failed” sale leasebacks will be accounted for as debt and the
“sold” asset will be left on the lessees books. Instead the asset should be
an Operating lease asset (at a lower value – merely the PV of the rents) and
the liability (also at a lower value) should be an “other” non-debt
liability. This presentation is what the Leases Project concluded best
represents the economic impact of operating leases for lessees. There are a
few things in the new Revenue Recognition rules that may allow certain
equipment sale lease backs to continue to get sale treatment but the rules
are not clear. One way out is if the lessee is merely an agent in a sale
leaseback that occurs at or near delivery and there is no profit element for
the lessee. Another way out is if the lessee does not control the physical
asset. Another way out is if the lessee only momentarily takes title of the
asset subject to the sale leaseback.
The FASB has issued an exposure draft on the issues
of determining if a party to a transaction (meaning the lessee in a sale
leaseback) is acting as an agent or a principal. The title is “Proposed
Accounting Standards Update, Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations (Reporting Revenue Gross versus
Net)”. It can be downloaded from the FASB website using this link: http://www.fasb.org/cs/ContentServer?pagename=FASB%2FPage%2FSectionPage&cid=1175801893139
You should send them a comment letter to ask them
to clarify the sale leaseback questions via guidance that targets the
leasing issues and specific examples of common sale leaseback transactions.
Your influence counts – use it!
Here is an example of where clarity is needed – if
a lessee orders a corporate jet and makes a progress payment does that
lessee control the physical asset? If yes then a subsequent lease of that
asset occurring before the delivery of the asset would be deemed a sale
leaseback. I think the lessee has a right to the plane and that right is not
a leasable asset. I also think the lessee is acting as an agent of the
lessor – the lessee orders the asset and then seeks a lessor willing to
lease it under competitive terms. The logistics of the process may cause the
form to be a sale leaseback but in substance it is merely a lease.
Here is another example that needs to be clarified–
a lessee and lessor enter into a master lease line of credit. The lessor
agrees to fund certain types of assets under the lease. To reduce costs the
lessee funds the small ticket items and once a quarter the lessor does a
sale leaseback of all the assets funded by the lessee. In my opinion the
lessee is merely an agent as the lessor is committed to fund the assets
under the terms of the master lease. Also the lessee controls the assets
momentarily – but momentarily has to be defined.
My recommendation is that sale leasebacks with
non-bargain purchase options are “special sales”. Those that occur at or
near delivery and where there is no lessee profit element should be
accounted for as Operating Leases – not “failed” sale leasebacks. The sale
lease backs that have a profit element and/or where the lessee is a
principal should still be accounted for as Operating Leases but any profit
should be deferred and amortized over the lease term. The result will be the
balance sheet presentation will best reflect the actual “owned” assets and
the liabilities will be non-debt liabilities – all this in keeping with the
Leases project decisions re Operating leases.
Bill Bosco
Bob Jensen's threads on lease accounting ---
http://faculty.trinity.edu/rjensen/theory02.htm#Leases
"The US Supreme Court could ruin Elon Musk's plan for Tesla,"
by Seth Blumstack, Business Insider, October 15, 2015 ---
http://www.businessinsider.com/the-supreme-court-could-ruin-elon-musks-plan-for-tesla-2015-10
Jensen Comment
This article most likely overstates the importance of power company deals for
lowered usage of electricity under Order 745. Firstly, battery-powered car
owners would probably still find it cheaper to buy electricity than to pay fuel
prices at the pump, especially since fuel prices are expected soon to soar
upwards. Secondly, home owners will soon be generating more of there own power
off the grid. Electric cars are, in my opinion, much more dependent on tax
subsidies on purchase prices and free rides on having to pay nothing for road
and bridge maintenance.
Furthermore, Blumstack overestimates the concerns of Tesla
owners about what they're paying for electricity. Tesla owners are probably in
the top 10% in terms of income given the price of any Tesla vehicle.
Tax Breaks for the 1%: Tesla Model X Buyers Get $35,000 Tax Break
---
http://taxprof.typepad.com/taxprof_blog/2015/10/tesla-model-x-buyers-get-35000-tax-break.html
Jensen Comment
Whew! I was so worried that electric car tax breaks for the wealthy would be
eliminated by President Obama. It was even further of concern that Tesla owners
would have to start contributing a few dollars to pay for road a bridge
maintenance. But Tesla owners continue to get a free ride on top of their
$15.000 tax break on each Tesla purchased. Only the proletariat pay for bridge
and road maintenance (except in Oregon)..
Angus Deaton ---
https://en.wikipedia.org/wiki/Angus_Deaton
Deaton wasn't sure he would be picked for Nobel (in Economics) ---
http://news.yahoo.com/latest-nobel-economics-prize-announced-073958325.html
Development economist Jean Dreze, who has authored
several papers with Nobel laureate Angus Deaton on poverty and nutrition in
India, has praised his contribution to shaping economic policy in India.
"Angus Deaton
is not only a brilliant economist but also a formidable scholar and a great
writer. He has shown how intelligent use of survey data can illuminate
momentous issues of human welfare and contribute to public reasoning," Dreze
said from the Indian state of Jharkhand.
"Deaton's work has important implications not only
for the substance of economic policy in India, but also for the process of
policy-making," he added.
"On the substance, his work calls for significant
rethinking of policy priorities, with much greater attention to the social
sector in particular. On the process, Angus Deaton is very committed to the
idea that public policy should be an outcome of democratic practice, as
opposed, say, to professional expertise or randomized controlled trials.
That, again, has significant implications since the Indian government is
constantly trying to insulate economic policy from public debate."
___
2:40 p.m.
Angus Deaton, who has been awarded the Nobel
economics prize, is not afraid to wade into political controversy in his
adopted home.
Twice a year,
the Scotland-born Deaton who now has dual U.S.-British citizenship, writes a
commentary on American affairs for Britain's Royal Economic Society.
He has challenged Republican attempts to replace
President Barack Obama's health care laws and lamented the inability of the
American political system to do much about the widening income gap between
the rich and everyone else.
___
2:05 p.m.
The secretary of the award committee for the Nobel
economics prize says this year's winner has helped researchers understand
individual consumption choices and how they flow through an economy.
Torsten Persson said Monday that Angus Deaton's
work has had "enormous influence," notably in India where the government has
reshaped its measurement of poverty.
At the same time, Persson said Deaton's work has
had a "huge influence" in the academic community, again by reshaping various
branches of economics — "micro, macro and development economics."
He said "it is
in an important prize in that it highlights applied economics at its very
best."
___
1:35 p.m.
The winner of this year's Nobel economics prize
says he expects extreme poverty in the world to continue decreasing, but
that he isn't "blindly optimistic."
Angus Deaton, the Scotland-born economist who holds
both U.S. and British citizenship, says he is delighted to have been awarded
the prize and was pleased that the committee decided to award work that
concerns the poor people of the world.
Speaking over
the telephone to reporters at the Royal Swedish Academy of Sciences
following the announcement of his award, the Princeton professor noted
"tremendous health problems among adults and children in India, where there
has been a lot of progress."
He notes that
half of the children in India are "still malnourished" and "for many people
in the world, things are very bad indeed."
Continued in article
How to use math to win at Monopoly ---
http://www.businessinsider.com/use-math-win-monopoly-probability-statistics-2015-10
As with any game, including those in a casino, the probabilities are based on
repeated playing of a game. The math may improve your odds of winning a single
play, but the probabilities apply less to a single play than repeated play just
like the odds of a "Head" on only one flip of a fair coin toss.
Of course in repeated plays in a casino you're even less likely to win due to
the cut taken by the house. The only way you could win in a casino is if you
were very, very wealthy and the house did not have limits on the size of the
bets ---
https://en.wikipedia.org/wiki/St._Petersburg_paradox
A Plan to Curb Multinationals’ Tax Avoidance Is "Deeply Flawed"
"New rules, same old paradigm," The Economist, October 8, 2015 ---
http://www.economist.com/news/business/21672207-plan-curb-multinationals-tax-avoidance-opportunity-missed-new-rules-same-old
KPMG Does Some Controversial One-Sided Bragging
"How an Accounting Firm Convinced Its Employees They Could Change the World,"
by Bruce N. Pfau, Harvard Business Review, October 6, 2015 ---
https://hbr.org/2015/10/how-an-accounting-firm-convinced-its-employees-they-could-change-the-world
It’s a fabled story about a janitor’s exchange with
President Kennedy during the early days of NASA: “What do you do?” the
president supposedly asked the man with a broom during a visit to Cape
Canaveral. “Well, Mr. President, I’m helping to put a man on the moon.”
This meeting may not have actually taken place. But
there’s a good reason it’s one of the most commonly-repeated management
anecdotes: it illustrates the idea that a workforce motivated by a strong
sense of higher purpose is essential to engagement. A survey by Calling
Brands found that working for an organization with a clearly defined purpose
is second only to pay and benefits in importance for employees, and ranks
ahead of promotion opportunities, job responsibilities, and work culture.
Two-thirds said a higher purpose would motivate them to go the extra mile in
their jobs. A similar study by Net Impact showed that almost half of today’s
workforce would take a 15% pay cut to work for an organization with an
inspiring purpose.
Convinced that today’s workforce wants more than
what they can see in their paychecks, our firm recently launched an
initiative aimed at inspiring our already high-morale workforce reach new
levels of engagement by reframing and elevating the meaning and purpose of
their work. The results have exceeded our expectations. Our partners and
employees have flooded us with stories, our morale scores have soared, and
turnover has plummeted. Perhaps coincidentally, the firm also enjoyed one of
its best financial years in recent memory—ranking as the fastest growing of
the Big Four public accounting firms.
How We Did It
First, our firm needed to articulate our higher
purpose. Extensive research, including hundreds of interviews, resulted in a
new purpose statement: Inspire Confidence. Empower Change. But we knew we
needed to do more than simply announce our purpose and expect it to take
hold. We needed employees to experience it for themselves.
Continued in article
Jensen Comment
For four years while I was Chair of the Florida State University Accounting
Department my title was KPMG Professor of Accounting. I am really pleased with
the support given to FSU and higher education in general by the KPMG firm. I've
nothing but praise for the support given to me by KPMG.
However, I maintain a Website archive on the good and bad things done by all
the big accounting firms. The title of the KPMG section is The Two Faces of KPMG
---
http://faculty.trinity.edu/rjensen/Fraud001.htm#KPMG
All the big accounting firms do lots of good things and some bad things. The
largest accounting firms generally rank near the top in listings of the most
desirable companies to work for in terms of training and advancement
opportunities.
Best Places to Intern ---
http://www.businessweek.com/managing/content/dec2009/ca2009129_394659.htm?link_position=link1
I'm waiting for Francine to throw cold water on the "ever
before" claim
Especially note the KPMG Experience Abroad module below
"Best Places to Intern: Bloomberg BusinessWeek's 2009 list shows employers are
hiring more interns to fill entry-level positions than
ever before," by Lindsey Gerdes, Business Week, December 10, 2009 ---
http://www.businessweek.com/managing/content/dec2009/ca2009129_394659.htm?link_position=link1
Among the many good things is the serious initiative by the KPMG Foundation
for over nearly three decades to expand the number of minority Ph. D. accounting
professors by funding fellowships and providing other types of assistance while
these students are in doctoral programs.
But there are many, many of KPMG's bad things that I document as well
including the largest fine levied against an accounting firm ($456 million) for
selling phony tax shelters and many other lawsuit settlements and fines by KPMG.
Relative to its size, KPMG may well have the highest rate of litigation among
the Big Four accounting firms.
And Bruce Phau does not mention the pending gender-bias lawsuit by nearly
1,000 current and former female employees.
|
"140 current female KPMG US employees
join lawsuit against firm," by Kevin Reed,
Accountancy Age, January 9, 2015 ---
http://www.accountancyage.com/aa/news/2389474/140-current-female-kpmg-us-employees-join-lawsuit-against-firm
MORE THAN
140 current KPMG US fee-earning female
staff have opted in to a lawsuit against the firm.
Lawyers
contacted 9,000
current and former
fee-earning female staff from KPMG in the US, in
October 2014, to join the
class
action. A former KPMG
manager, Donna Kassman, spent 17 years in the firm's
New York office before resigning, claiming that she
and other women had suffered gender discrimination.
Nearly 900 women
have
currently opted into the case.
Of the 845 that have
been processed by class action representative Kate
Kimpel, of law firm Sanford Heisler, 142 are from
existing staff. The opt-in period runs until 31
January.
Kimpel claimed
that the number of current
employees
that had already
opted in was high. In similar instances, they tend
to wait until the end of the time period before
opting-in, to gauge response from their peers, she
added.
"It's
easier
for previous
employees to opt in, they're less worried about
retaliation. I'm sure the number of current
employees [opted in] will rise dramatically," she
told Accountancy Age.
KPMG has
previously vigorously denied the allegations in the
claim against the firm. "We will not comment on
pending litigation, except to say that KPMG
thoroughly and repeatedly reviewed the allegations
in this case and found them totally unsupported by
the facts," said a statement from a KPMG spokesman.
Continued in article
Bob Jensen's threads on large accounting
firm litigation ---
http://faculty.trinity.edu/rjensen/Fraud001.htm
Bob
Jensen's threads on the history of women in accounting
---
http://faculty.trinity.edu/rjensen/bookbob2.htm#Women |
|
Risk-Based Capital Ratio ---
http://www.investopedia.com/terms/r/risk-based-capital-requirement.asp
"MetLife Declines After Accounting Blunder Tied to Annuities," by
Katherine Chiglinsky, Bloomberg, October 14, 2015 ---
http://www.bloomberg.com/news/articles/2015-10-14/metlife-declines-after-accounting-blunder-tied-to-annuity-claims
RBC ratio was 398%, compared with previously
reported 410%
MetLife Inc., the largest U.S. life insurer,
declined in New York trading after saying that a measure of financial
strength monitored by regulators was lower than previously reported.
MetLife dropped 1.4 percent to $47.20 at 4:04 p.m.,
extending its loss for the year to 13 percent. The combined risk-based
capital ratio as of Dec. 31 was 398 percent, the New York-based company said
in a regulatory filing Tuesday after markets closed. The insurer had
previously said in its annual report that the figure was “in excess of 400
percent” at the end of 2014, and put the figure at 410 percent in a May
conference call.
The insurer said it realized that the ratio needed
to be corrected after a review of projected claims on some variable
annuities with guaranteed lifetime withdrawal benefits. The company said
last month that third-quarter profit will probably be cut by $792 million on
tax costs tied to a U.K. investment subsidiary.
“Between the two seemingly one-off items, we think
the reduction in MET’s excess capital position amounts to about $1.5
billion,” Thomas Gallagher, an analyst at Credit Suisse Group AG, said in a
note to investors Wednesday.
"Investor Seeks to Hold Ernst & Young Liable for Madoff Losses," by
Jacqueline Palank, The Wall Street Journal, October 14, 2015 ---
http://www.wsj.com/articles/investor-seeks-to-hold-ernst-young-liable-for-madoff-losses-1444854695
Ernst & Young failed to serve as a gatekeeper for a
Washington investment firm that sank millions of dollars into Bernard
Madoff’s investment firm and should be held liable for its losses, the
firm’s lawyer told a jury Wednesday.
“I’m going to prove to you that Ernst & Young had a
job. I’m going to prove to you that Ernst & Young didn’t do their job,” said
Steven W. Thomas, a lawyer representing FutureSelect Portfolio Management
Inc.
Court papers show FutureSelect, of Redmond, Wash.,
invested approximately $200 million in feeder funds that pooled investors’
cash and funneled it Mr. Madoff’s way, until his arrest in 2008 exposed a
massive Ponzi scheme in which investors lost some $17 billion.
In 2010, FutureSelect, which lost all of its
investment, filed suit in a court in Washington state against Ernst & Young,
one of the feeder funds’ auditors, alleging negligence and seeking to
recover millions of dollars in losses.
James Bennett, an attorney for Ernst & Young, on
Wednesday told the jury that “Ernst & Young did its job, full stop,”
according to a video feed of the trial’s first day provided by Courtroom
View Network.
Continued in article
Bob Jensen's threads on the Madoff Ponzi Fraud ---
http://faculty.trinity.edu/rjensen/FraudRottenPart2.htm#Ponzi
Just half of college alumni “strongly agree” that their education was
worth what they paid for it
"Not Worth It?" by Jake New, Inside Higher Ed, September 29, 2015
---
https://www.insidehighered.com/news/2015/09/29/half-college-graduates-say-college-not-worth-cost-survey-finds?utm_source=Inside+Higher+Ed&utm_campaign=d5e1f64676-DNU20150929&utm_medium=email&utm_term=0_1fcbc04421-d5e1f64676-197565045
Jensen Comment
This study concludes that alumni who had experiential opportunities such as
internships are more apt to rate their college experience higher. Fortunately
nearly all accounting programs in AACSB-accredited universities now have
internship opportunities due to the extensive participation of large CPA firms
and large companies in accounting internship programs.
Surveys like this can be highly misleading in that there are so many things
other than academics that are usually obtained in college, especially
residential colleges. For example, a student who graduated with little respect
for the faculty may have had great other experiences such as the meeting of his
or her spouse on campus.
Student opinion on academics may be fixated on a single good or bad factor
that outweighs the other combined good and bad experiences. I once gave an F to
a student who I suspect still despises me but is now a business partner with one
of my (now-retired) faculty colleagues who gave him top grades. I wonder which
of the faculty will dominate in that former student's evaluation of his alma
mater?
You Should Have Gone to Rice, Says Feds' Post-College Salary Data ---
http://www.dallasobserver.com/news/you-should-have-gone-to-rice-says-feds-post-college-salary-data-7590111
All
American Accounting Association members may now view the
2015 Annual Meeting videos
http://aaahq.org/Meetings/Annual-Meeting/Meeting-Videos
You must log
in as a member of the American Accounting Association
·
Jacob Soll
(History)
·
Samia Msadek
(Networking)
·
Charles M. C.
Lee (Bridges to the Real World)
·
The Second
City Works (Innovation)
·
Thomas
Davenport (this video on education technology is only available until November
11, 2015)
·
Brian Sommer
(Big Data)
·
Dr. Ann
Cavoukian (Big Data)
·
AAA President
Bruce Behn (Pathways Commission and plans for the AAA during his year as AAA
President)
Does the SEC use XBRL data?
http://blog.calcbench.com/post/130061725263/does-the-sec-use-xbrl-data-you-bet-they-do
Sometimes I'm embarrassed by the links I've overlooked. On October 7,
2015 the Double Entries newsletter of AccountingEducation.com has the
following USA links that I've overlooked until now. Sigh!
USA
·
GASB SURVEY OF FINANCIAL STATEMENT PREPARERS
REGARDING ACTIVITIES RELATED TO PREPARING AND PUBLISHING AN AUDITED ANNUAL
FINANCIAL REPORT
·
AICPA FOUNDATION AWARDS MINORITY DOCTORAL
FELLOWSHIPS TO FOSTER DIVERSITY IN ACADEMICS
·
SEC CHAIR MARY JO WHITE ANNOUNCES NEW RULEMAKING
DATABASE
·
FASB PROPOSES IMPROVEMENTS TO MATERIALITY TO MAKE
FINANCIAL STATEMENT DISCLOSURES MORE EFFECTIVE
·
FOUR UNDERGRADUATE/GRADUATE ACCOUNTING STUDENTS
RECEIVE AICPA/ACCOUNTEMPS SCHOLARSHIP AWARD
·
SUMMARY OF PRIVATE COMPANY COUNCIL MEETING ON
SEPTEMBER 25, 2015
·
STUDY FINDS SEVERANCE PAYOUTS TO CEOS HELP PREVENT
OPPORTUNISTIC MANAGEMENT
·
REQUEST FOR NOMINATIONS FOR FASAC CHAIR CANDIDATES
PCAOB ENTERS INTO COOPERATIVE AGREEMENT WITH AUDIT
OVERSIGHT AUTHORITY IN LUXEMBOURG
'Leaders of the accounting profession discuss its biggest nightmares,"
Accounting Today, September 28, 2015 ---
http://www.accountingtoday.com/news/firm-profession/losing-sleep-75927-1.html
That’s the question facing the accounting
profession, as it advances through a period of unprecedented change: Which
of the many issues that cry out for attention should the profession address
first?
The short answer is: All of them.
In trying to solve this riddle, we reached out to
the leaders in accounting — the regulators, association chiefs, thought
leaders, trailblazing firm owners, software developers, consultants and so
on — and asked them what they thought were the most important issues facing
the field. Their answers covered the wide range that you would expect, but
as we dug through them, three broad categories of concern emerged, each of
which subsumed a number of individual issues. What’s more, all three broad
categories were related in ways that both multiplied their difficulty, and
also pointed toward possible solutions.
Call them the Three Nightmares of the Accounting
Profession, and read on to see what the field’s leaders think can be done to
wake up from them.
THE NIGHTMARE OF IRRELEVANCE
The most-cited concern was the worry that the
profession is dropping behind not just its clients, but the world as a
whole, seeing its core services rendered obsolete by technology, their value
to clients plummeting.
Technology thought leader and educator Doug Sleeter
described it very simply: “The profession is struggling to maintain its
relevance in the eyes of clients. As a whole, the focus is still too much on
compliance services and not enough on going deeper with client engagements.”
ACCA AND IMA EXPLORE FUTURE CHALLENGES FACING THE ACCOUNTING
PROFESSION ---
by Bob Schneider
AccountingEducation.com, September 18, 2015
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=153571
September 4, 2015 Message from Gerald Trites in Canada
Hi Bob,
Is there any material in our website
on the Future of the Profession? In particular I am researching possible
initiatives that could be taken that are new and not presently being
done that will be needed to adapt to our changing world. I have found
numerous articles on the future of the profession but there is not much
real innovation out there.
Jerry
Jensen Comment
There are predictions all over the place, many of which vary with parts of
what we call accountancy. For example, technology will increasingly replace
bookkeepers in capturing transactions, journalizing, posting, closing the
books, and preparing financial statements --- all without human beings.
Technology will also increasingly replace human auditors, although this
happening is further down the road.
But the "future of accounting" can be viewed even without
focusing on human accountants. Even if robots determine what data is
captured and eventually put on financial statements those robots will have
to be guided by accounting policies, standards, and operational rules. Here
futurists are widely divided by traditional and historic differences such as
preferences for historical cost (price-level adjusted), entry values, exit
values, economic values, etc. Robots are no better than humans in measuring
and disclosing intangibles than human accountants. What we really would like
is a robot that can measure "value in use," but that robot if it exists at
all still resides in other galaxies.
In terms of financial accounting standards most of us
thought that it would soon be a done deal to give the IASB a monopoly on
setting the standards and principles that guide operational decisions. But
it looks like, gratefully in my opinion, that the IASB is going to have to
wait decades for monopoly powers.
The future of accounting is conditioned upon the future of
world economics. Most advances in accounting have assumed some form of
capitalism with heavy financial and managerial accounting advances for
business enterprises. The state of accountancy for socialism and
governmental accounting in general is still in the dark ages. We only have
to compare Soviet accounting advances in the 20th Century with accounting
advances in the West to appreciate that as imperfect as accounting is in the
West it is well ahead of Soviet accounting that amounted to writing of
fiction.
You might take a look at the following article in
Forbes.
The Future Of The Accounting Industry In 2015 ---
http://www.forbes.com/sites/russalanprince/2015/01/21/the-future-of-the-accounting-industry-in-2015/
I would download this immediately before Forbes takes it off the Web
Software was a frequently cited villain in the
case. “Technology is moving so fast that all the bean-counting that has been
the heart and soul of the industry is disappearing fast,” warned 2020 Group
chairman Chris Frederiksen, describing how staples of accounting like
recording purchases, writing checks, invoicing and others have disappeared
in the face of automation. “Some firms have moved swiftly to give clients
what they want: accurate, timely information and meaningful advice.”
Continued in article
PwC: Re-Branding the Accounting Profession ---
http://www.pwc.ch/en/video.html?objects.mid=362&navigationid=3856
Wealth is transferred from shareholders to
executives, helping to explain why
executive rewards have far outpaced economic growth or shareholder returns.
"The share buyback mirage," The Economist, October 6, 2015 ---
http://www.economist.com/blogs/buttonwood/2015/10/robbing-peter-pay-ceo
. . .
But hold on a minute. We need to return to why
dividends haven't grown as fast as GDP. A related issue is why emerging
market investors haven't enjoyed the same kind of returns from equities as
the GDP growth records of such countries might have suggested. One reason is
that, as economies grow, the amount of equities in issuance is not static;
new companies float and existing companies issue new shares and these absorb
the benefits of GDP growth. In a
2003 paper, William Bernstein and Robert Arnott
described this as the "2% dilution" effect, explaining why stock prices and
dividends grew 2% a year slower than GDP.
So if you are going to add buybacks to the dividend
yield, you must also allow for the new shares that companies issue. Research
Affiliates has just tried to
do that work for the US market. Working out the
level of buybacks is a relatively easy task; last year, it was around $696
billion (a remarkable 4% of GDP). In contrast, companies don't make it easy
to find out how many shares they issued. Here is what Research Affliates
did.
We compare the market capitalization of a
company at the end of the year to its market capitalization at the
beginning of the year, adjusted for the change in the company’s stock
price. If the market capitalization is up 10% and stock price is
unchanged, there must have been 10% new share issuance. This analysis
allows us to determine the amount of a company’s stock buybacks or
issuance. We then follow a thorough process of fundamental research into
each company’s corporate actions as described in its press releases and
by the financial media to determine the source of and reason for the new
issuance unexplained by the cash flow statement.
Once you make that kind of calculation, you find
that companies issued around $1.2 trillion of new stock, far more than the
buyback total. Instead of adding buybacks to the dividend yield, maybe
shareholders should be subtracting that number. Some of the stock may
reflect share issuance for takeovers of other quoted companies (which is not
dilutive). Nevertheless, Research Affiliates reckons that the net dilution
was around $454 billion, or 1.8%; pretty close to the 2% mentioned in the
Bernstein/Arnott paper.
Why are all these shares being issued? The answer
is simple; to meet share option programmes, designed to reward executives.
It is robbing Peter to pay the CEO. As Research Affiliates remarks
When management redeems stock
options, new shares are issued to them, diluting other shareholders. A
buyback is then announced that roughly matches the size of the option
redemption. This facilitates management’s resale of the new stock they
were issued in the option redemption. Buyback? Not really! Management
compensation? Yes.
Because the stock options a company
issues its management dilute the value of its stockholders’ shares,
companies often repurchase their stock to offset this dilutive effect.
The net impact is a transfer to management of more of a company’s cash
flow than is reported as compensation on the income statement.
Wealth is transferred from shareholders
to executives, helping to explain why
executive rewards have far outpaced economic growth or shareholder returns.
And Research Affiliates makes another point; companies
often accompany buy-backs with debt issuance. In 2014, US companies issued a
net $693 billion of debt; almost the same as the gross buyback total.
Investors are ending up owning a smaller portion of a more highly-indebted
company; more of the cashflows generated by such groups will be absorbed by
banks and bondholders. sometimes equity investors must feel like rubes at a
carnival sideshow; which paper cup is the ball really under?.
Law are often considers closer to their practicing profession than schools
of accounting
But this closeness may not be as close as we sometimes assume (although probably
much closer than is the case in accountancy which is drifting further apart with
each new accounting Ph.D. that is more econometrician and mathematician than
accountant)
Tacha: Why I Support California's Proposed 15 Credit Skills Requirement ---
http://taxprof.typepad.com/taxprof_blog/2015/10/tacha-why-i-support-californias-proposed-15-credit-skills-requirement.html#more
"Almost half of American households don't pay
federal income tax," by Martin Matishak, The Fiscal Times via
Business Insider, October 9, 2015 ---
http://www.businessinsider.com/almost-half-of-american-households-dont-pay-federal-income-tax-2015-10
Mitt Romney, the 2012
Republican presidential nominee, did irreparable damage to his campaign when
he asserted that the 47 percent of Americans dependent on government who
don’t pay federal income taxes would back President Obama “no matter what.”
A few years later, that
estimate needs to be revised.
On Tuesday, The Tax Policy
Center, a joint effort by the Urban Institute and the Brookings Institution,
said the number of households that don’t pay federal income taxes fell to
45.3 percent. But that figure is still roughly 5 percentage points higher
than the center’s 2013 estimate of 40.4 percent.
The uptick doesn’t mean more
folks have moved off the tax rolls. Rather, the surge from 2013 is largely
thanks to better data tracking tools, according to the Center's Roberton
Williams. “Those additional non-payers were there all the time -- we just
failed to count them,” he said in a blog post.
That said, the Center still
projects that the percentage of non-payers will fall over time, just more
gradually than previously thought.
“We now estimate that 40
percent of tax units won’t pay tax in 2025, higher than our previous
projection of about one-third,” Williams said.
While the Center, the
Treasury Department and the Joint Committee on Taxation all try their best
to give a proper estimate of the amount of non-payers, their figures
shouldn’t be accepted as gospel truth, in part because some people don’t
file returns or may have had taxes withheld during the calendar year.
Williams stressed that
just because people don’t pay federal income taxes doesn’t mean they don’t
contribute in some way. In fact, a majority of them work and therefore are
on the hook for payroll taxes. They also pay local sales tax and state taxes.
Jensen Comment The drop in the percentage of households not paying any income
tax is due mostly to the drop in unemployment rates rather than tightening of
tax laws. The biggest single item taking away tax obligations is the earned
income tax credit for lower income families. Since it is a payout credit many of
these taxpayers take home cash like in a negative income tax system advocated by
conservative economist Milton Freedman years ago.
Since many states peg their state income tax obligation to the federal income
tax paid, the taxpayers are usually off the hook as well for state income taxes.
Of course there can be some exceptions.
"Microsoft's earnings would have looked awful
under the old reporting scheme," by Julie Bort, Business Insider, October
2015 ---
http://www.businessinsider.com/microsofts-quarter-looks-worse-this-way-2015-10
Microsoft
rolled out
a new way to report earnings
with its first
quarter, 2016 earnings on Thursday.
This new
reporting structure consolidated
Microsoft's businesses into three
new units.
The
previous structure had two major
units (commercial and consumer) and
broke out a few different businesses
in each of those.
As you can
see, under the old scheme, all
business units shrunk except two:
Continued
in article
Jensen Comment
Accounting standard setters such as the FASB and IASB have no operational
concept of earnings and put earnings standard setting on permanent low priority
as focus shifted to fair value accounting on the balance sheet.
Net earnings and EBITDA cannot be defined since
the FASB and IASB elected to give the balance sheet priority over the income
statement in financial reporting ---
"The Asset-Liability Approach: Primacy does not mean Priority,"
by Robert Bloomfield, FASRI Financial Accounting Standards Research
Initiative, October 6, 2009 ---
http://www.fasri.net/index.php/2009/10/the-asset-liability-approach-primacy-does-not-mean-priority/
"Whither the Concept of Income?" by Shizuki Saito University of Tokyo
and Yoshitaka Fukui Aoyama Gakuin University, SSRN, May 17, 2015 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2607234
Abstract:
Since the 1970s, the decision-usefulness has taken center stage and our
attention has been concentrated on valuation of assets and liabilities
instead of income measurement. The concept of income, once considered the
gravitational center of accounting has lost its primacy and become a
byproduct of the balance sheet derived from the measurement of assets and
liabilities.
However, we have not been equipped with robust
conceptual foundation supporting theoretically reasoned accounting
measurement. It is not only theoretically but also practically important to
renew our seemingly waned interest in the concept of income because ongoing
reforms of accounting standards cannot be successfully implemented without a
sound understanding of the concept of income.
Be that as it may, net earnings and EBITDA are all-important because
investors change their portfolios based on net earnings and its derivatives more
than anything in the balance sheet.
"Accounting Alchemy," by Robert E. Verrecchia, Accounting Horizons,
September 2013, pp. 603-618.
Verrecchia alleges that it's not that managers have a functional fixation for
earnings metrics as it is that they believe that other managers and investors
are so fixated with earnings that it because of monumental importance not
because it is inherently a great metric but because they believe deeply that the
market itself makes this index of vital importance.
. . .
In summary, my thesis is that managers project that
others are fixated on earnings—independent of any evidence in support
of, or contrary to, this phenomenon. This leads to managers resisting the
inclusion in earnings items that fail to enhance performance, such as the
amortization of Goodwill, or measures that make future performance more
volatile, such as those based on fair value. In the absence of acknowledging
PEF and attempting to grapple with it, I continue to see confrontations over
accounting regulation along the lines of recent debates about fair value
accounting, in addition to further impediments along the path to greater
transparency in financial statements.
It's a bit like requiring calculus for
undergraduate accounting courses. Calculus probably is not essential in any
undergraduate accounting course in the curriculum, but faculty are fixated that
the best accounting majors are the ones do well in calculus. Similarly,
investors change their portfolios based on earnings, eps, EBITDA, and P/E ratios
when in fact those metrics are not defined and may have a lot of misleading
noise and secret manipulation
October 25, reply to Jagdish by Bob Jensen
Hi Jagdish,
The sum of a company’s segment earnings
need not equal corporate net income
You might note Study Three beginning on Page 109 of a Kansas dissertation
at
https://kuscholarworks.ku.edu/bitstream/handle/1808/9995/Wang_ku_0099D_10491_DATA_1.pdf?sequence=1
STUFFING THE SEGMENT SAUSAGE: CAUSES AND
CONSEQUENCES OF INCOMPLETE ALLOCATION OF CORPORATE INCOME TO SEGMENT
UNDER FAS 131
ABSTRACT
Under a controversial provision of FAS 131, the
sum of a company’s segment earnings need not equal corporate net income,
nor is it required to equal any corporate earnings sub-total, such as
operating income (however defined). We refer to the difference between
summed segment earnings and corporate-level income, when it exists, as
the ‘Gap’. Using a sample of 12,064 company-year observations provided
by 3,357 multiple segment companies during the FAS 131 era of 1998-2006,
this study examines the determinants of Gaps, and investigates whether
summed segment earnings are more persistent and informative than
corporate earnings when Gaps exist. The results suggest that Gaps shield
segment-level managers from risk (by excluding transitory income items
from segment earnings), and from income items arising from decisions not
made at the segment level. We also find evidence that companies facing
high proprietary costs and agency costs tend to disclose more and larger
Gaps. Specifically, we find that industry concentration and free cash
flow have positive associations with the existence and the magnitudes of
Gaps. With regard to the consequences of Gaps, our results show that
summed segment income is more persistent, in terms of its association
with future summed segment earnings, compared to the association of GAAP
corporate earnings with future corporate earnings. Summed segment income
also is more informative in terms of its association with concurrent
stock returns than are corporate earnings. These results primarily are
due to the existence of Gaps.
Bob Jensen
Bob Jensen's threads on the differences between IASB versus FASB standards
---
http://faculty.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
Bob Jensen's threads on accounting theory ---
http://faculty.trinity.edu/rjensen/Theory01.htm
From the CFO Journal's Morning Ledger on
October 23, 2015
SEC doubles number of financial reporting and audit cases
http://blogs.wsj.com/cfo/2015/10/22/sec-doubles-number-of-financial-reporting-and-audit-cases-in-two-years/?mod=djemCFO_h
The U.S. Securities and Exchange Commission nearly
doubled its enforcement actions related to financial reporting and audit
fraud over the past two years, the agency’s top cop said
Thursday.
Emily Chasan reports the agency filed 134 cases in the financial reporting
and audit area in its 2015 fiscal year, ended Sept. 30. That is up from 98
in fiscal 2014, and 68 in fiscal 2013.
SEC filed more than 800 enforcement actions in fiscal 2015 ---
http://www.journalofaccountancy.com/news/2015/oct/2015-sec-enforcement-201513237.html
Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
American International Group ---
https://en.wikipedia.org/wiki/American_International_Group
From the CFO Journal's Morning Ledger on
October 23, 2015
FDIC sets new swaps rules in bid to prevent AIG-type meltdown
http://www.wsj.com/articles/u-s-banking-regulators-poised-to-cut-banks-costs-in-swaps-margin-rules-1445522400?mod=djemCFO_h&alg=y
Federal banking regulators adopted a new rule forcing
banks to collect more collateral for certain swaps trades but with a change
that will cut the industry’s costs. But two other regulators, the Commodity
Futures Trading Commission and the Securities Exchange Commission, haven’t
yet said how they will write their own versions of the rules, decisions that
could still have a big impact on such bank transactions.
Iowa Sen. Charles Grassley suggested that AIG
executives should accept responsibility for the collapse of the insurance giant
by resigning or killing themselves. The Republican lawmaker's harsh comments
came during an interview Monday with Cedar Rapids, Iowa, radio station WMT . . .
Sen. Charles Grassley wants AIG executives to apologize for the collapse of the
insurance giant — but said Tuesday that "obviously" he didn't really mean that
they should kill themselves. The Iowa Republican raised eyebrows with his
comments Monday that the executives — under fire for passing out big bonuses
even as they were taking a taxpayer bailout — perhaps should "resign or go
commit suicide." But he backtracked Tuesday morning in a conference call with
reporters. He said he would like executives of failed businesses to make a more
formal public apology, as business leaders have done in Japan.
Noel Duara, "Grassley: AIG execs
should repent, not kill selves," Yahoo News, March 17, 2009 ---
http://news.yahoo.com/s/ap/20090317/ap_on_re_us/grassley_aig
"The Bailout of AIG: Mission Accomplished?" by Francine McKenna,
re:TheAuditors, September 17, 2012 ---
http://retheauditors.com/2012/09/17/the-bailout-of-aig-mission-accomplished/
On Friday September 14, the US government announced
the completion of the sale of AIG stock taxpayers bought during the
financial crisis bailout of the insurer. The government took in $20.7
billion for the sale and is no longer the majority owner of the company. At
the peak of the crisis, taxpayers owned almost 80% of AIG.
Andrew Ross Sorkin, New York Times reporter, CNBC
host, and author of “Too Big To Fail” used his
DealBook column to ask
former Special Inspector General of TARP Neil Barofsky if he was
satisfied, finally. Sorkin says the US Treasury made a profit on the AIG
transaction.
As we approach the four-year anniversary of the
collapse of Lehman Brothers and the rescue of A.I.G. next week, sadly,
much of the public — and people like Mr. Barofsky, as well-intentioned
as he is — are still criticizing and debating the merits of the bailout.
It’s almost become a cottage industry.
In his book, Mr. Barofsky wrote, “Treasury’s
desperate attempt to bail out Wall Street was setting the country up for
potentially catastrophic losses.”
As distasteful as the rescue effort was, it
should be clear by now that without it, we faced an economic Armageddon.
And the results thus far of bailing out the big banks, and A.I.G.,
indicate a profit.
Treasury never uses the term “profit” to describe
what taxpayers would receive. The
GAO did in a report in May
when it estimated the proceeds that could be realized at various sale
prices.
I wrote in American Banker about Sorkin’s claim
that the bank bailouts prevented “financial system Armageddon” and his
debate with Barofsky. I think “profit” is not only the wrong term but an
answer to the wrong question.
It can never be proven that the crisis bailouts
saved us from financial Armageddon. That’s the logical fallacy of
asserting a claim with no way to disprove the opposite, so saying we
made a profit on the deal is the next best thing. The New
York Times’ Andrew Ross Sorkin claims,
if you combine Treasury actions and “positive returns” on Federal
Reserve activities, the Treasury is now “on a path to actually turn a
profit.” That’s where the debate starts.
Former Special Inspector General for the
Troubled Asset Relief Program Neil Barofsky says, “Not
so fast.” I
agree. If your intention is to try to prove
or disprove the government PR claims that the taxpayer has made an
accounting profit on any of the bailouts, or
even broken even, you must remember this: That’s not why the government
supposedly did what they did. And on the two counts of failing to
unfreeze credit and failing to help homeowners – how the bailouts were
justified to Congress – the government is guilty.
Treasury never uses the term “profit,” even in
press releases. The term it does use, “positive return,” is a
non-Generally Accepted Accounting Principles metric. Treasury has sunk
to the level of a social commerce IPO like Groupon, whose infamous Consolidated
Segment Operating Income (CSOI) – which was slammed
by the Securities and Exchange Commission –
glossed over losses to convince investors there was a gain instead.
“Yves Smith” at Naked Capitalism also points out
that AIG enjoyed a tax benefit that negates Treasury”s claim. Who reported
that deal? Andrew Ross Sorkin in February.
In a February article, “Bending
the Tax Code, and Lifting A.I.G.’s Profit,”
Sorkin described how AIG was allowed to retain $26.2 billion of net
operating losses that should have been wiped out as a part of the rescue
of the company as well as an additional $9 billion of “unrealized loss
on investments.” That increased AIG’s fourth quarter and hence fiscal
year earnings by a remarkable $17.7 billion, which dwarfs the mere $1.6
billion its operations produced that quarter. And the article includes
this juicy bit:
Analysts at Bank of
America and JPMorgan Chase last year estimated that the tax benefits
from the losses propped up A.I.G. stock by $5 to $6 a share. Its shares
closed at $28.66 on Monday, just shy of the $29 mark that the government
says
it needs to sell
its shares to break even.
General Motors, another bailout “success story” –
because saving GM supposedly averted jobs and economic disaster in Detroit –
also benefited from the IRS rule change regarding retention of net operating
loss carry forwards and “fresh start” accounting. I wrote about that in
Forbes in November of 2010.
Reporting profits means new GM doesn’t lose the
valuable deferred tax assets they carried over from old GM, thanks to a
last minute fix from the US Treasury in
September. The accountants can pull dollars from a cookie jar valuation
allowance to prop up earnings when needed.
The IPO would probably have never passed even a
minimal “smell test” by the SEC’s Division of Corporate Finance if
”fresh start accounting” hadn’t put millions
in goodwill on their balance sheet. That gave
GM a positive balance in shareholder’s equity. In a perverse example of
accounting chicanery, the better GM does the less valuable that asset
is.
Read the rest of my column about the AIG share sale
at
American Banker.
Bob Jensen's threads on the 2008 Bailout (the greatest
fraud in the history of the USA) ---
http://faculty.trinity.edu/rjensen/2008Bailout.htm
Cadillac Insurance Tax ---
https://en.wikipedia.org/wiki/Cadillac_insurance_plan
From the CFO Journal's Morning Ledger on
October 20, 2015
The spa-like day-long health checkups that many executives enjoyed in years
past are going the way of the corporate country-club membership,
CFO Journal’s Emily Chasan reports.
Faced with the “Cadillac tax” on
health benefits that exceed certain thresholds, as well as pressure to limit
the inequalities in employee benefit packages, companies are eliminating or
paring down platinum-level health benefits.
Only 6% of
chief executives at the 500 largest U.S. companies had supplemental
health-insurance benefits last year, compared with 14% in 2008, according to
a study by consulting firm Towers Watson. Those benefits typically reimburse
executives $10,000 to $50,000 for out-of-pocket costs and copays.
In
addition to the Cadillac tax, companies are still waiting for the Internal
Revenue Service to write ACA-required regulations on discrimination in
health-care benefits. Those rules charge hefty penalties if companies
discriminate in the health care they offer to highly compensated employees
versus the rest of their workers.
Jensen Comment
I wonder if taxpayers are paying the Cadillac Tax for the luxury health
insurance of members of the House and Senate. If so it's a waste of money
keeping those incompetents alive.
Clawback ---
https://en.wikipedia.org/wiki/Clawback
Watch Those Accounting Errors --- They'll Cost You
From the CFO Journal's Morning Ledger on October 12, 2015
Nearly 90% of the largest U.S. firms have a policy in
place mandating that some compensation be clawed back from top executives in
certain situations, according to a recent study. That is up from barely a
third eight years ago. But the policies of individual businesses may no
longer matter once the Securities and Exchange Commission issues new rules
requiring companies to punish accounting mistakes by clawing back pay from a
range of top executives,
CFO Journal’s Maxwell Murphy reports.
Failure to do so could cost a company its stock
listing.
Many companies object to the proposed rules, which are awaiting the SEC’s
final approval after a public-comment period ended last month. Corporate
critics say the rules could wallop executives who had no knowledge of errors
in the books or any role in overseeing them. Some critics also say companies
could dodge the new rules simply by altering their pay packages.
“It is overbroad in its reach,” said Timothy Donnelly, chief administrative
officer and general counsel of American Vanguard Corp. Boards want to
avoid a situation in which, for example, a chief technology officer would be
punished “if the [chief financial officer] decided to cook up some
ridiculous scheme,” or vice versa, he
Jensen Comment
It might be interesting to have accounting students investigate how much it
costs local hospitals to provide charity services?
Hint
Such studies ideally show both the gross cost and the net cost after various
subsidies. For example, when I lived 24 years as a homeowner in San Antonio, the
Bexar County Hospital provided the most charity services. However, over $1,000
each year was designated each year as going for charity services at the Bexar
County Hospital. Virtually all hospitals that have emergency rooms provide some
charity servicves. However, when there are two or more hospitals in a given
county it's increasingly common for a hospital to drop its ER services. For
example, the New England Baptist Hospital in the vicinity of the Harvard Medical
School specializes in orthopedic surgeries and at one time had ER services. By
the time my wife started having spine surgeries at this hospital, there were no
more ER services available from this hospital. It would be interesting to see a
case study on the decision by the hospital to drop its ER services.
"How Much Charity Care Do Hospitals Really Provide?" by A. Barton
Hinkle, Reason Magazine, October 12, 2015 ---
https://reason.com/archives/2015/10/12/how-much-charity-care-do-hospitals-reall
Jensen Comment
This article illustrates somewhat how difficult it is to estimate the cost of a
hospital's charity services. An enormous problem is that there are so many
joint, common, and fixed costs (and semi-fixed costs) of hospital services. By
the way, a joint cost is not the same as a common cost. The article does not
delve into these costs that are near and dear to accounting researchers and
savvy economists.
There is a huge problem at get go in defining a "charity service." For
example, various studies of hospital costs and Medicaid reimbursements contend
that Medicaid only pays have the cost of delivering hospital services. But
there's a huge problem of defining the "cost" of Medicaid services. Something
similar happens to a lesser extent with Medicare and Obamacare patients.
Bob
Jensen's universal health care messaging ---
http://faculty.trinity.edu/rjensen/Health.htm
From the CFO Journal's Morning Ledger on October 12, 2015
Truck drivers riding high
http://www.wsj.com/articles/drivers-reap-benefits-of-trucking-boom-1444728780?mod=djemCFO_h
After years of spending long hours behind the wheel
without seeing their paychecks grow, U.S. truck drivers now have employers
fighting for their services. Many freight haulers have in the past year
pushed through their biggest raises in decades.
From the CFO Journal's Morning Ledger on October 12, 2015
More retailers offering free shipping on online orders
http://www.wsj.com/articles/more-retailers-offering-free-shipping-on-online-orders-1444402553?mod=djemCFO_h
Retailers are making free returns available
to more online customers, delighting consumers but raising costs for the
companies. About 49% of retailers now offer free return shipping, according
to a new study released this month by the National Retail Federation,
underscoring how companies that had long been resistant to footing the bill
for returns are being forced to do so by their customers.
Jensen Comment
Erika now buys a lot of stuff from various online retailers with the intent of
returning most if it with free shipping. For example it's hard to fit her narrow
feet. So she orders three sizes shoes online, chooses the pair that is most
comfortable, and returns the other boxes with free shipping. Up here in the
boondocks she rarely finds comfortable shoes in stores. It's amazing how sizes
of shoes and clothes in general vary even though they are labeled as being a
given size.
In large measure free return shipping by online vendors is driven by Amazon's
long-time policy of free shipping for returns coupled with easiness in
transacting those returns. All you have to do is to point to a recent order that
was received and click on the option to return the item. It's then easy to print
a return label that has a free return postage declaration. Most times we simply
drop the package off down the hill to our village post office that now accepts
USPO packages, UPS packages, and FedEx packages all at the same counter. We
don't even have to wait in line with free shipping labels --- not that there's
ever much of a line at our small village post office.
Also many retailers are offering original shipping deals to compete with
Amazon Prime ---
https://en.wikipedia.org/wiki/Amazon.com#Amazon_Prime
Some like LL Bean now offer free shipping most of the time such that it pays to
wait for when there are such free shipping deals. Of course you don't have to
wait for such times using Amazon Prime, although there are quite a few items at
Amazon that do not qualify for "free shipping" under Amazon Prime. For example,
yesterday I ordered a new book published a few years ago that carried a notice
reading "no longer available for Amazon Prime." In other words the Amazon Prime
free shipping deal tends to expire on older books and is almost never available
on used books. I have to chuckle when a used book has a $0 price with only a
small shipping charge rather than a large shipping and handling charge. It
hardly seems worth the effort for a vendor to sell a used book for $0.00 or
$0.01 and $2 for shipping.
One thing I've noticed about Amazon is that increasingly simultaneous orders
are shipped in the same box.
I recently ordered a new pair of red flannel long johns underwear and artificial
flowers on the same day. The artificial flowers arrived two days later but the
long johns did not show up for over a week. So I checked the status of the long
johns order (which is easy to do online with Amazon) and learned that the item
was received me on the same day I received the artificial flowers. So I went out
to my studio, dug down deep in the artificial flower box, and discovered the
pair of new long johns. Sadly the long johns were way too big so I shipped them
back and ordered a smaller size to wear under my snow suit when I move my
driveway snow at below-zero temperatures in a howling north wind.
By the way it has not snowed yet at our cottage this autumn, but I can see
new snow on the high mountain tops ---
http://faculty.trinity.edu/rjensen/tidbits/Foliage/Set18/FoliageSet09.htm
From the CFO Journal's Morning Ledger on October 9, 2015
Audit fees jump faster at riskier companies
http://blogs.wsj.com/cfo/2015/10/08/audit-fees-jump-faster-at-riskier-companies/?mod=djemCFO_h
How much a company pays its auditor depends on
how well it safeguards against fraud and reporting errors, Emily Chasan
reports. Firms with ineffective controls over financial reports tend to pay
more than those who do a better job, according to a new report by the
Financial Executives Research Foundation.
From the CFO Journal's Morning Ledger on October 8, 2015
Blackstone in $39 million SEC settlement
http://www.wsj.com/articles/blackstone-settles-with-sec-over-certain-fee-practices-1444238653?mod=djemCFO_h
Blackstone Group LP
has agreed to pay about $39 million to settle charges with the Securities
and Exchange Commission over some of the buyout fund manager’s fee
practices. The SEC said firm failed to sufficiently disclose to its fund
investors details about big one-time fees Blackstone collected from
companies it sold or took public, as well as discounts the firm received on
some legal fees that weren’t passed on to the fund investors.
From the CFO Journal's Morning Ledger on October 8, 2015
It
is no secret that banks have been forking over penalties to settle
allegations of misconduct over recent years. But a new inquiry aims to
determine whether banks are actually improving their behavior as a result,
the WSJ reports.
Sherrod Brown of Ohio, the top Democrat on
the Senate Banking Committee, asked banks to provide details of settlements
and judgments from the past 10 years involving 15 federal agencies. The
inquiry could add fuel to growing criticism by lawmakers and others that
such settlements have failed to deter repeated bank misbehavior.
His
letter dated Sept. 30 asks
for the impact of the settlements, including sanctions paid, personnel or
board changes or other compliance fixes that followed, whether any
individuals were punished, and whether the bank had sought any waivers from
any disqualifications that followed such settlements. The questions touch on
issues that recent settlements have raised, including whether certain
penalties were largely offset by corresponding tax benefits, or whether the
SEC has too readily provided waivers to the disqualifications that banks
face when hit with criminal penalties.
From the CFO Journal's Morning Ledger on October 7, 2015
PepsiCo latest company to write-off Venezuela
http://blogs.wsj.com/cfo/2015/10/06/pepsico-latest-company-to-write-off-venezuela/?mod=djemCFO_h
PepsiCo Inc.
on Tuesday
became the latest company to substantially write off its investments in
Venezuela, to limit the drag on earnings from the country’s inflation and
volatile currency, Emily Chasan reports. The food and beverage maker
reported a $1.4 billion charge to write-off its Venezuela business at the
end of the third quarter and said it would deconsolidate its Venezuela
operations.
Ex-Im Bank ---
https://en.wikipedia.org/wiki/Export-Import_Bank_of_the_United_States
From the CFO Journal's Morning Ledger on October 6, 2015
When the U.S. failed to reauthorize its Export-Import
Bank in June, it made itself an outlier among developed nations, most of
which have their own similar banks to guarantee financing for purchases of
goods from their countries. And that effective shutdown of the U.S. Ex-Im
Bank is making for a double-whammy against U.S. firms already struggling to
sell their products abroad amid a global economic slowdown,
CFO Journal’s Kimberly S. Johnson reports.
A strong U.S. dollar makes matters worse.
Boeing Co.,
a strong proponent and major beneficiary of the bank, expects it to reopen.
Last week, the U.S. Ex-Im Bank’s Republican supporters moved to bring the
bill reauthorizing the bank to a vote. But an extended shutdown would prompt
Boeing to consider moving work offshore to compete for contracts that
require Ex-Im backing, Chairman Jim McNerney said last month.
General Electric Co. is
already making it easier for its customers to use export-import funding from
other countries, such as Canada, France and Hungary. But small U.S.
companies, which can’t relocate or move jobs overseas, are feeling the brunt
of the bank’s closure. “We might be losing projects we’re not aware of,”
said W.S. Darley & Co. Chief Operating Officer Peter Darley. “If a
buyer knows that Americans don’t have an open Ex-Im, they might not even
knock on the door, or invite us to the bid table.”
"GE to Shift Jobs to Canada in Ex-Im Bank Protest: Company plans to
close Wisconsin manufacturing plant and move 350 jobs," The Wall Street
Journal, September 28, 2015 ---
http://www.wsj.com/articles/ge-to-shift-jobs-to-canada-in-ex-im-bank-protest-1443449286?mod=djemCFO_h
General Electric Co. said Monday that it would
cease manufacturing gas engines in Waukesha, Wis., and move 350 jobs to a
new factory in Canada to use that country’s export financing regime to
pursue new business.
The announcement is the latest from GE after
Congress failed in July to reauthorize the Export-Import Bank, the export
financing entity in the U.S.
GE says that financing from an export credit agency
such as Ex-Im is required for some $11 billion of projects for which it is
preparing bids, including power turbines, generation equipment and aircraft
engines.
Continued in article
From the CFO Journal's Morning Ledger on October 6, 2015
Corporate boardrooms are still largely men’s clubs
http://www.wsj.com/articles/the-big-number-1444091024?mod=djemCFO_h
Women fill slightly more than a fifth of the 1,210
board seats at 100 of the largest U.S. public companies in 2015, says a new
study by New York-based law firm Shearman & Sterling LLP. The proportion was
up only slightly from 2013, when the firm began tracking the data, Vipal
Monga reports.
Bob Jensen's threads on the history of professional women ---
http://faculty.trinity.edu/rjensen/Bookbob2.htm#Women
EY: FASB simplifies measurement-period adjustments in business
combinations ---
http://www.ey.com/Publication/vwLUAssetsAL/TothePoint_BB3052_MeasurementPeriod_28September2015/$FILE/TothePoint_BB3052_MeasurementPeriod_28September2015.pdf
What you need to know
• The FASB issued new guidance that eliminates
the requirement that an acquirer in a business combination account for
measurement-period adjustments retrospectively.
• Instead, an acquirer will recognize a measurement-period adjustment
during the period in which it determines the amount of the adjustment.
• The guidance is effective for public business entities for fiscal
years beginning after 15 December 2015, and interim periods within those
fiscal years. For all other entities, it is effective for fiscal years
beginning after 15 December 2016, and interim periods within fiscal
years beginning after 15 December 2017. Early adoption is permitted.
Continued in article
PwC: Derivative instruments and hedging activities - 2013 second
edition (updated July 2015) ---
http://www.pwc.com/us/en/cfodirect/publications/accounting-guides/guide-to-accounting-for-derivative-instruments-and-hedging-activities-2013-edition.html
PwC: FASB proposes further amendments to the new revenue standard
---
http://www.pwc.com/us/en/cfodirect/publications/in-brief/fasb-practical-expedients-amendments-to-new-revenue-standard.html
PwC: Video Update on IFRS 15: Revenue recognition ---
http://www.pwc.com/us/en/cfodirect/multimedia/videos/update-ifrs-15-revenue-recognition.html
PwC: Can Audit Quality be Measured?
http://www.pwc.com/us/en/cfodirect/publications/point-of-view/pcaob-audit-quality-indicators.html
PwC: Consolidation and equity method of accounting ---
http://www.pwc.com/us/en/cfodirect/publications/accounting-guides/consolidation-framework-equity-method-accounting-vie-guide.html
LIBOR ---
https://en.wikipedia.org/wiki/Libor
LIBOR Scandal Update: Brokers called 'Big Nose' and 'Lord Libor' are
being accused of rigging rates ---
http://www.businessinsider.com/libor-fixing-court-case-james-gilmour-terry-farr-colin-goodman-darrell-read-danny-wilkinson-and-noel-cryan-2015-10
Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
Harvard Business School: A Refresher on the Current Ratio ---
https://hbr.org/2015/09/a-refresher-on-current-ratio
Jensen Comment
Of course the challenge to be uncovered by critical thinking is how to deal with
variations in inventory measurement such as LIFO versus FIFO that matters more
when those LIFO layers get really, really old.
A challenge to students could be to debate (critical thinking) the LIFO
layering problem in relation to the current ratio.
September 29, 2015 reply from Sharon Gavin
Yes, we often have to teach the students how to
convert the LIFO balance sheet to FIFO before financial analysis. (You do
that by adding the LIFO Reserve to the LIFO inventory, adding the (Income
Tax rate times the LIFO Reserve) to Deferred Income Tax Liability and adding
the difference between those two to Retained Earnings.)
The new wrinkle this year shows up in firms using
the FASB standard 2014-08 in the Codification that deals with Discontinued
Operations. Companies will now report SEPARATELY assets and liabilities
related to the discontinued operations. To analyze liquidity, we recommended
that students do the Current Ratio with the Discontinued Operations Current
Assets and Discontinued Operations Current Liabilities taken out.
If you are looking for a company that students
recognize to demonstrate this, look up the most recent 10-K report for
Target, specifically its balance sheet which reports Discontinued Operations
Current Assets, Discontinued Operations Current Liabilities, Discontinued
Operations Noncurrent Assets, and Discontinued Operations Noncurrent
Liabilities. (Target decided to discontinue its Canada operations.) You can
show that Target's "revised" current ratio indicates slightly less liquidity
than initially thought.
(You can also have students calculate the Debt
Ratio with discontinued operations assets (both current and noncurrent) and
discontinued operations liabilities (both current and noncurrent) removed.
For Target, it will show that the perceived riskiness of the firm from use
of financial leverage is slightly higher than initially thought.
Have to think a little more before deciding how to
teach students to do common-size balance sheets for these types of companies
. . . Would analysts net all of these discontinued operations balance sheet
items into one "Investment in Discontinued Operations" asset account to get
the best feel for the company operations that will continue into the future?
What do others think?
Dr. Sharon K. Garvin
Professor
Business and Economics Department
School of Business and Technology
Gardner Hall 111A
Wayne State College
1111 Main Street
Wayne, NE 68787
"Bill Gates sues oil giant Petrobras and PwC over corruption scandal,"
The Telegraph, September 25, 2015 ---
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11892400/Bill-Gates-sues-oil-giant-Petrobras-and-PwC-over-corruption-scandal.html
The charity foundation of multi-billionaire
Microsoft founder Bill Gates has sued Petrobras and accounting giant PwC's
Brazil arm over investment losses due to corruption at the Brazilian oil
giant.
The Bill & Melinda Gates Foundation Foundation,
together with WGI Emerging Markets Fund, alleged in the suit that Petrobras
repeatedly misrepresented its operations and financial situation in raising
billions of dollars from investors.
It also alleges that PwC's Brazil affiliate,
PricewaterhouseCoopers Auditores Independentes, played a key role by
attesting to Petrobras financial statements and ignoring red flags. The suit
seeks unspecified damages.
"The depth and breadth of the fraud within
Petrobras is astounding. By Petrobras's own admission, the kickback scheme
infected over $80bn of its contracts, representing one-third of its total
assets," the suit alleged.
"Equally breathtaking is that the fraud went on for
years under PwC's watch, who repeatedly endorsed the integrity of Petrobras'
internal controls and financial reports. This is a case of institutional
corruption, criminal conspiracy and a massive fraud on the investing
public."
Prosecutors in Brazil say Petrobras executives
colluded with construction companies to massively overbill the state oil
giant. The extra money went to kickbacks and political payoffs company
executives, politicians and political parties that include the ruling
Workers' Party.
Portfolio managers for Gates and WGI probed
Petrobras executives on questionable financial data, but were misled in a
"series of materially false and misleading written and oral statements
and/or omissions by Petrobras and/or PwC," according to the complaint.
The Gates litigation follows a class-action suit in
New York by a group of investors against Petrobras. Petrobras has argued
that the scandal was the result of contractors, corrupt politicians and a
few employees and should not impugn the company as a whole.
Continued in article
Bob Jensen's threads about PwC scandals ---
http://faculty.trinity.edu/rjensen/Fraud001.htm
"PCAOB urges focus on Risk Assessment Standards," by Ken Tysiac,
Journal of Accountancy, October 15, 2015 ---
http://www.journalofaccountancy.com/news/2015/oct/pcaob-urges-action-risk-assessment-201513203.html
The Risk Assessment Standards—Auditing Standards
(AS) No. 8 through No. 15—were adopted in 2010. The standards address the
auditor’s assessment of and response to risk of material misstatements and
the auditor’s evaluation of the results of procedures performed in the
audit. The standards include:
AS No. 8, Audit Risk.
AS No. 9, Audit Planning.
AS No. 10, Supervision of the Audit Engagement.
AS No. 11, Consideration of Materiality in
Planning and Performing an Audit.
AS No. 12, Identifying and Assessing Risks of
Material Misstatement.
AS No. 13, The Auditor’s Responses to the Risks
of Material Misstatement.
AS No. 14, Evaluating Audit Results. AS No. 15,
Audit Evidence.
In a report released Thursday, the PCAOB expressed
concern over the number and significance of deficiencies in compliance with
these standards found in inspections from 2012 through 2014.
The PCAOB encouraged audit firms to review the
report and consider the compliance of their practices related to the Risk
Assessment Standards. According to the report, examples of remedial actions
by firms in this area have included:
Enhancing audit methodologies and processes.
Developing technical guidance targeted to
specific issues.
Developing and requiring training targeted to
specific issues.
Developing new audit tools.
Requiring additional audit procedures to
provide reasonable assurance of compliance with PCAOB standards.
In addition, the report said some firms have
developed automated audit tools, templates, or additional guidance to help
their auditors understand the flow of business transactions and to identify
the risks of material misstatement and related business controls that may
mitigate those risks. -
See more at:
http://www.journalofaccountancy.com/news/2015/oct/pcaob-urges-action-risk-assessment-201513203.html#sthash.zhqBCUf6.dpuf
Bob Jensen's threads on professionalism in auditing ---
http://faculty.trinity.edu/rjensen/Fraud001c.htm
Illustration of the Use of Materiality Guidelines to Commit Accounting
Fraud
Swisher Hygiene ---
http://www.charlotteobserver.com/news/business/article40301211.html
As long as the changes aren’t material, I wouldn’t
need to disclose.
"Former Swisher CFO, accountant charged in fraud case," The Charlotte
Observer, October 19, 2015 ---
http://www.charlotteobserver.com/news/business/article40301211.html
. . .
Kipp, the former CFO, was fired
in 2012 as part of the probe, Swisher said. According to the federal
indictment, Kipp, Viard, Pierrard and other employees who haven’t been
charged used a variety of tricks to juice the company’s earnings in order to
hit predetermined target numbers.
For example, the company
allegedly used “cookie jar” accounting, inflating reserves of other
companies it acquired and then drawing those reserves down to inflate
earnings. Prosecutors say the company also took expenses that should have
been booked on the profit-and-loss sheet and moved them to Swisher’s balance
sheet, fraudulently reducing its reported expenses.
According to prosecutors, Kipp
emailed Viard on Oct. 15, 2011, and said “I need to get about $300k in
expense reductions.”
Viard responded with ideas of
accounting items they could adjust, prosecutors said, and wrote back that “As
long as the changes aren’t material, I wouldn’t need to disclose.”
They reduced an accounting charge by $500,000, prosecutors charge, inflating
earnings by the same amount.
Later that same day, Kipp
emailed Viard again, prosecutors said, to tell her they would be able to
make their earnings target.
“Here is the sum of my handy
work for the day. I think if we can make all these stick, we can make it to
the forecast of $3.5 million,” prosecutors say Kipp wrote.
Read more here:
http://www.charlotteobserver.com/news/business/article40301211.html#storylink=cpy
In 2015 after a critical audit Swisher fired the audit firm of BDO ---
http://www.sec.gov/Archives/edgar/data/1504747/000135448815001539/swsh_10k.htm
In 2014 BDO reported concerns that Swisher had going concern issues.
Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
From the CPA Newsletter on October 20, 2015
SEC investor panel members object to FASB materiality proposal
http://www.marketwatch.com/story/investor-advocates-protest-to-sec-proposals-limiting-disclosure-2015-10-19
Members of
a Securities and Exchange Commission Investor Advisory Committee meeting
pushed back against a Financial Accounting Standards Board proposal on
materiality that will affect financial disclosures, saying that the measure
redefines materiality as a legal concept requiring court interpretation. Jim
Schnurr, head of the SEC's Office of the Chief Accountant, cited a
2008 SEC study that supports FASB's measure, but critics said the study
was flawed.
MarketWatch (10/19)
From the CFO Journal's Morning Ledger on October 1, 2015
CEOs ask Congress to return “materiality” to securities laws
http://blogs.wsj.com/cfo/2015/09/30/business-roundtable-asks-congress-to-put-materiality-back-into-securities-laws/?mod=djemCFO_h
Legislators should allow regulators to refocus their
efforts on material issues in financial statements, instead of aiming to
solve social problems through such documents, according to a new report by
The Business Roundtable. Emily Chasan reports that the group, which
represents CEOs, takes issue with new rules mandated by Dodd-Frank that
demand disclosures on conflict minerals and payments to foreign governments
without regard to materiality.
Jensen Comment
Materiality might be less relevant here than in financial reporting. For
example, inadvertently capitalizing $1 million of transactions that should have
been expensed for a company having $60 billion in net earnings is not material
in terms of earnings reporting. Nor is a foreign bribe that impacts the bottom
line by $1 million material in terms of earnings. However, the same bribe in a
small company having less than $2 million in earnings is material in terms of
earnings. The issue in these two cases, however, is the
issue of being inadvertent versus deliberate.
Should deliberate violations of regulations be treated differently in large
versus small companies? Perhaps we should add criteria regarding deliberate
intent to materiality considerations.
FASB writes two new exposure drafts on
materiality concept ---
http://www.journalofaccountancy.com/news/2015/sep/fasb-proposal-what-materiality-means-201513079.html
Deloitte: FASB Modifies View on Immaterial Disclosure Omissions
---
http://deloitte.wsj.com/cfo/
The FASB has issued a proposed standard indicating
that the omission of disclosures about immaterial information in the notes
is not an accounting error. Additionally, the board noted that materiality
is a legal concept that shall be applied to assess quantitative and
qualitative disclosures individually and in the aggregate in the context of
the financial statements taken as a whole. Currently, failure to provide
required disclosures on the basis of materiality concerns is considered an
accounting error.
October 1, 2015 reply from Dennis Beresford
Bob,
The 18 page white paper on this topic
published by the Business Roundtable can be accessed at:
http://businessroundtable.org/sites/default/files/reports/Materiality White
Paper FINAL 09-29-15.pdf
Denny
October 1, 2015 reply from Bob Jensen
Thank you Denny,
That is a value-added link. But I think it still is somewhat vague. Consider
the following quotation:
Court then articulated the standard for materiality that
is still widely used today:
“An omitted fact is material if there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how to
vote… . It does not require proof of a substantial likelihood that
disclosure of the omitted fact would have caused the reasonable investor
to change his vote. What the standard does contemplate is a showing of a
substantial likelihood that, under all the circumstances, the omitted
fact would have assumed actual significance in the deliberations of the
reasonable shareholder. Put another way , there must be a substantial
likelihood that the disclosure of the
omitted fact would have been viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information available.
”
Jensen Comment
There are really two types of omitted facts that arise in this situation and
in nearly every situation where a parent learns about something bad done by
a teenage child. Firstly, there's the fact that concerning the deed and how
bad the deed is from a materiality standpoint no matter who did the deed.
For example, if $5 in merchandise is shoplifted the materiality can be
judged on the value of the amount stolen.
Then there's the fact that your child felt an need or an urge to shoplift at
all, thereby violating your trust in the child.
Thus we have two possibly omitted facts that were learned. One is that
$5-value fact. The other is that it was your child.
Some investors may not be concerned about small-valued improprieties per se.
But they may be concerned that management would commit the impropriety
irrespective of the value involved.
My
point is that some investors may overlook improprieties that are not
material in value. Other investors, perhaps more religious investors, may
find it hard to forgive no matter what the materiality of the sin involved.
Thus my point is that materiality alone does not determine how an investor
will react.
We
encounter similar situations with faculty or student cheating all the time.
On the Trinity University campus officials are finding that a scheduled
lecture for the largest auditorium by Jane Goodall is the becoming one of
the most wildly popular lectures ever scheduled on campus (and a wealthy
school like Trinity pays hundreds of thousands of dollars to a number of
outside speakers every year). But a few in the audience will find it hard to
forget than Jane once confessed to plagiarizing from Wikipedia.
To most
this one-time cheating is immaterial.
To a few, however, the mere fact that she confessed to ever plagiarizing
says something "material" about her character.
What is a "reasonable investor" versus an "unreasonable investor" with
respect to materiality?
Thanks,
Bob
Additional Reply to Tom Selling
|
I viewed your new Onion postings: |
Jensen Comment
This is a very nice posting that you entitled
Camfferman and Zeff on the IASB. I've not yet delved
into these additions to our historical literature
and thus do not feel qualified to add to your
comments.
I do not agree with you that the FASB "the
FASB has never needed the concept of materiality to
promulgate its standards." The FASB makes
statements that provisions of a standard generally
do not apply if they do not meet the FASB concept on
"immaterial items." For example, Paragraph 56 of the
original SFAS 133 in part reads as follows:
. . .
The provisions of
this Statement (SFAS 133) need
not be applied to immaterial items.
This Statement was adopted by the unanimous
vote of the seven
members of the Financial Accounting Standards
Board:
Thus the FASB needs a concept or standard for
preparers and auditors to rely upon for determining
when items in financial statements are "immaterial,"
but beyond that the issue of materiality is based
upon judgment regarding materiality. To my knowledge
there are no white lines to apply in this regard in
either the FASB or IASB standards.
Materiality is more of an issue in auditing
standards. Financial statement auditors historically
emphasize over and over that they are not
responsible for fraud detect6ion unless that fraud
materially affects the financial statements. There
are numerous instances of audit failures in this
regard where fraud materially affected the financial
statements ranging all the way from
McKesson & Robbins
Allied Crude Vegetable Oil Refining
ZZZZ Best
Crazy Eddie
Phar-Mor
Foundation for New Era Philanthropy
Waste Management
Enron
Worldcom
Sunbeam
Toshiba
ETC ---
http://faculty.trinity.edu/rjensen/Fraud001.htm
The Koss Case is Becoming a
Classic Example
The problem these days is that users of financial
statements and the courts are thinking that
financial statement auditors should do more in the
area of detection of management fraudsters even when
their frauds are in the gray zone of lesser impact
on the financial statements.
"Koss
Sues Grant Thornton, Blames Firm’s
Assignment of Newbie Auditors," by
Caleb Newquist , Going Concern,
June 25, 2010 ---
http://goingconcern.com/2010/06/koss-sues-grant-thornton-blames-firms-assignment-of-newbie-auditors/
Koss hired one of the best
accounting firms in the world, Grant
Thornton, and should have been able
to rely on Thornton’s audits to
uncover wrongdoing, Avenatti said.
The suit against the auditing firm
says auditors assigned to Koss were
not properly trained.
The lawsuit lists hundreds of checks
that Sachdeva ordered drawn on
company accounts to pay for her
personal expenses. She disguised the
recipients — upscale retailers such
as Neiman Marcus, Saks Fifth Avenue
and Marshall Fields — by using just
the initials. But the suit says
Grant Thornton could have
ascertained the true identity of the
recipients by inspecting the reverse
side of the checks, which showed the
full name.
Continued in article
July 3,
2013 ---
http://www.theflyonthewall.com/permalinks/entry.php/KOSSid1854256/KOSS-Koss-Corp-receives-M-in-settlement-with-former-auditor
Koss Corp. receives $8.5M in
settlement with former auditor Koss
Corporation announced it has settled
the claims between Koss and its
former auditor, Grant Thornton, in
the lawsuit pending in the Circuit
Court of Cook County, Illinois. As
part of the settlement, the parties
provided mutual releases that
resolved all claims involved in the
litigation between Koss and its
directors against Grant Thornton.
Pursuant to the settlement, Koss
received gross proceeds of $8.5M on
July 3.
Jensen
Comment
Grant Thornton failed to detect former
Koss Corp. executive's $34 million
embezzlement. Normally external auditors
rested easy when such frauds did not
materially affect the financial
statements or they had strong cases that
they were deceived by the client in a
way that they were not responsible to
detect such fraud in a financial
statement audit.
Both the
SEC and the PCAOB are beginning to make
waves about having audit firms more
responsible for detecting major frauds
like the SAC fraud. If one of the Big
Four had been the auditor of the Madoff
Fund I think the audit firm probably
would not have gotten off with zero
liability for negligence. Times are
changing since Andy Fastow pilfered
around $60 million from his employer
(Enron).
"Defending
Koss And Their Auditors: Just Loopy
Distorted Feedback," by Francine
McKenna, re: TheAuditors, January
16, 2010 ---
http://retheauditors.com/2010/01/16/defending-koss-and-their-auditors-just-loopy-distorted-feedback/
My objective
in writing this story was to handily
contradict Grant Thornton’s self-serving
defense to
the Koss fraud.
The defense
supported
by some commentators:
Audits are not designed to
uncover fraud and Koss did not pay
for a separate opinion on internal
controls because they are exempt
from that Sarbanes-Oxley
requirement.
But punching
holes in that Swiss-cheese defense
is like shooting fish in a barrel.
Leading that horse to water is like
feeding him candy taken from a baby.
The reasons why someone other than
American Express should have caught
this sooner are as numerous as the
acorns you can
steal from a blind pig…
Ok, you get the gist.
Listing
standards for the NYSE require an
internal audit function. NASDAQ,
where Koss was listed, does not.
Back in 2003, the
Institute of Internal Auditors (IIA)
made recommendations
post-
Sarbanes-Oxley that were adopted for
the most part by NYSE, but not
completely by NASDAQ. And both the
NYSE and NASD left a few key
recommendations hanging.
In addition,
the IIA has never mandated, under
its own standards for the internal
audit profession, a
direct reporting
of the
internal audit function to the
independent Audit Committee. The
SEC
did not adopt this requirement in
their final rules, either.
However, Generally Accepted Auditing
Standards (GAAS), the standards an
external auditor such as Grant
Thornton operates under when
preparing an opinion on a company’s
financial statements – whether a
public company or not, listed on
NYSE or NASDAQ, whether exempt or
not from Sarbanes-Oxley – do require
the assessment of the internal audit
function when planning an audit.
Grant Thornton
was required to adjust their
substantive testing given the number
of
risk factors
presented by Koss, based on
SAS 109 (AU 314),
Understanding the Entity and Its Environment
and Assessing the Risks of Material
Misstatement. If they had
understood the entity and assessed
the risk of material misstatement
fully, they would have been all over
those transactions like _______.
(Fill in the blank)
If they had
performed a proper
SAS 99 review (AU 316),
Consideration of Fraud in a
Financial Statement Audit, it
would have hit’em smack in the face
like a _______ . (Fill in the
blank.) Management oversight of the
financial reporting process is
severely limited by Mr. Koss Jr.’s
lack of interest, aptitude, and
appreciation for accounting and
finance. Koss Jr., the CEO and son
of the founder,
held the titles of COO and CFO, also.
Ms. Sachdeva,
the Vice President of Finance and
Corporate Secretary who is accused
of the fraud, has been in the
same job since
1992
and during one ten year period
worked remotely from Houston!
When they
finished their review according to
SAS 65 (AU 322),
The
Auditor’s Consideration of the
Internal Audit Function in an Audit
of Financial Statements, it
should have dawned on them: There is
no internal audit function and the
flunky-filled Audit Committee is a
sham. I can see it now. The Grant
Thornton Milwaukee OMP smacks head
with open palm in a “I could have
had a V-8,” moment but more like,
“Holy cheesehead, we’re indigestible
gristle-laden, greasy bratwurst
here! We’ll never be able issue an
opinion on these financial
statements unless we take these
journal entries apart, one-by-one,
and re-verify every stinkin’ last
number.”
But I dug in and did some additional
research – at first I was just
working the “no internal auditors”
line – and I found a few more
interesting things. And now I have
no sympathy for Koss management and,
therefore, its largest shareholder,
the Koss family. Granted there is
plenty of basis, in my opinion, for
any and all enforcement actions
against Grant Thornton and its audit
partners. And depending on how far
back the acts of deliciously
deceptive defalcation go,
PricewaterhouseCoopers may also be
dragged through the mud.
Yes.
I can not make
this stuff up and have it come out
more music to my ears.
PricewaterhouseCoopers was Koss’s
auditor prior to Grant Thornton. In
March of 2004,
the
Milwaukee Business Journal
reported, “Koss
Corp.
has fired the
certified public accounting firm of
PricewaterhouseCoopers L.L.P. as its
independent auditors March 15 and
retained Grant Thornton L.L.P. in
its place.”
The article was short with the
standard disclaimer of no disputes
about accounting policies and
practices. But it pointedly pointed
out that PwC’s fees for the audit
had increased by almost 50% from
2001 to 2003, to $90,000 and the
selection of the new auditor was
made after a competitive bidding
process.
PwC had been Koss’s auditor since
1992!
The focus on
audit fees by Koss’s CEO should have
been no surprise to PwC.
Post-Sarbanes-Oxley, Michael J. Koss
the son of the founder, was quoted
extensively as part of the very
vocal cadre of CEOs who complained
vociferously about paying their
auditors one more red cent. Koss Jr.
minced no words regarding PwC in the
Wall Street Journal in August 2002,
a month after the law was passed:
“…Sure, analysts had
predicted a modest fee increase
from the smaller pool of
accounting firms left after
Arthur Andersen LLP’s collapse
following its June conviction on
a criminal-obstruction charge.
But a range of other factors are
helping to drive auditing fees
higher — to as much as 25% —
with smaller companies bearing
the brunt of the rise.
“The auditors are
making money hand over fist,”
says Koss Corp. Chief Executive
Officer Michael Koss. “It’s
going to cost shareholders in
the long run.”
He should know. Auditing
fees are up nearly 10% in the
past two years at his
Milwaukee-based maker of
headphones. The increase has
come primarily from auditors
spending more time combing over
financial statements as part of
compliance with new disclosure
requirements by the Securities
and Exchange Commission. Koss’s
accounting firm,
PricewaterhouseCoopers LLP, now
shows up at corporate offices
for “mini audits” every quarter,
rather than just once at
year-end.”
A year later,
still irate, Mr. Koss Jr. was quoted
in
USA Today:
“Jeffrey Sonnenfeld,
associate dean of the Yale
School of Management, said he
recently spoke to six CEO
conferences over 10 days. When
he asked for a show of hands,
80% said they thought the law
was bad for the U.S. economy.
When pressed individually,
CEOs don’t object to the law or
its intentions, such as forcing
executives to refund ill-gotten
gains. But confusion over what
the law requires has left
companies vulnerable to experts
and consultants, who “frighten
boards and managers” into
spending unnecessarily,
Sonnenfeld says.
Michael Koss, CEO of
stereo headphones maker Koss,
says it’s all but impossible to
know what the law requires, so
it has become a black hole where
frightened companies throw
endless amounts of money.
Companies are spending way
too much to comply, but
the cost is due to
“bad advice,
not a bad law,” Sonnenfeld
says.”
It’s
interesting that Koss Jr. has
such minimal appreciation for the
work of the external auditor or an
internal audit function. By virtue,
I suppose, of his esteemed status as
CEO, COO and CFO of Koss and
notwithstanding an undergraduate
degree in anthropology,
according to
Business Week,
Mr. Koss Jr.
has twice served other Boards as
their “financial expert” and
Chairman of their Audit Committees.
At
Genius
Products,
founded by the Baby Genius DVDs
creator, Mr. Koss served in this
capacity from 2004 to 2005. Mr. Koss
Jr. has also been a Director,
Chairman of Audit Committee, Member
of Compensation Committee and Member
of Nominating & Corporate Governance
Committee at
Strattec Security Corp.
since 1995.
If I were the
SEC, I might take a look at those
two companies…Because
I warned you
about the CEOs
and CFOs who are pushing back on
Sarbanes-Oxley and every other
regulation intended to shine a light
on them as public company
executives.
No good will come of this.
I don’t want
you to shed crocodile tears or pity
poor PwC for their long-term, close
relationship with
another blockbuster Indian
fraudster.
Nor should you pat them on the back
for not being the auditor now. PwC
never really left Koss after they
were “fired” as auditor in 2004.
They continued until today to be the
trusted “Tax and All Other” advisor,
making good money
filing Koss’s now totally bogus tax
returns.
Continued in article
Bob Jensen's threads on fees and
fraud detection performance of other
large auditing firms
http://faculty.trinity.edu/rjensen/fraud001.htm
Jensen Comment
You may want to compare Francine's above
discussion of audit fees with the
following analytical research study:
In most instances the defense of
underlying assumptions is based upon
assumptions passed down from
previous analytical studies rather
than empirical or even case study
evidence. An example is the
following conclusion:
We find
that audit quality and audit
fees both increase with the
auditor’s expected litigation
losses from audit failures.
However, when considering the
auditor’s acceptance decision,
we show that it is important to
carefully identify the component
of the litigation environment
that is being investigated. We
decompose the liability
environment into three
components: (1) the strictness
of the legal regime, defined as
the probability that the auditor
is sued and found liable in case
of an audit failure, (2)
potential damage payments from
the auditor to investors and (3)
other litigation costs incurred
by the auditor, labeled
litigation frictions, such as
attorneys’ fees or loss of
reputation. We show that,
in equilibrium,
an increase in the potential
damage payment actually leads to
a reduction in the client
rejection rate. This effect
arises because the resulting
higher audit quality increases
the value of the entrepreneur’s
investment opportunity, which
makes it optimal for the
entrepreneur to increase the
audit fee by an amount that is
larger than the increase in the
auditor’s expected damage
payment. However, for this
result to hold, it is crucial
that damage payments be fully
recovered by the investors. We
show that an increase in
litigation frictions leads to
the opposite result—client
rejection rates increase.
Finally, since a shift in the
strength of the legal regime
affects both the expected damage
payments to investors as well as
litigation frictions, the
relationship between the legal
regime and rejection rates is
nonmonotonic. Specifically, we
show that the relationship is
U-shaped, which implies that for
both weak and strong legal
liability regimes, rejection
rates are higher than those
characterizing more moderate
legal liability regimes.
Volker Laux and D. Paul Newman,
"Auditor Liability and Client
Acceptance Decisions," The
Accounting Review, Vol. 85,
No. 1, 2010 pp. 261–285
http://faculty.trinity.edu/rjensen/TheoryTAR.htm#Analytics
|
Added Jensen Comment
I'm inclined to agree with you, Tom, on the
following:
Why wouldn’t the FASB
simply remind these respondents that there is
nothing in current GAAP, the PCAOB’s auditing
standards or the securities laws, that bars an
issuer from omitting immaterial disclosures.
Perhaps the FASB is bothered by the need for more
disclosures in the gray zone of immaterial fraud
that is nevertheless management fraud.
As to reconciliations and roll forwards what I
would really like to see are new rules from somebody
requiring roll forwards on the change in retained
earnings that provides details regarding components
of net earnings for the year.
Thanks,
Bob
|
October 12, 2015 reply from Tom Selling
Bob, my point is that even though there are
some words in CON 8, they do not constitute a genuine definition of
materiality. Since financial reporting and standard setting has
functioned without one, evidently one is not needed.
I should have
been more clear on this in my post, and may follow up later: What is
driving the FASB’s proposal is the requirement in the PCAOB’s AS14
for auditors to accumulate errors , unless clearly trivial (an
amount well below immaterial) and evaluate the accumulated errors
(whether an B/S or P&L amount, or a disclosure) and to share the
schedule of unadjusted differences with management and the audit
committee. The FASB proposal would take the audit committee out of
the equation in evaluating aggregated immaterial disclosures if they
are specifically designated as
not accounting errors because they are
immaterial. For
the life of me, I have no idea why the FASB is sticking its nose in
this. Surely, GAAP is clearly that If an
item is not material, then a company can do what it wants. But, if
a fix is needed (which I question), it is a matter for the PCAOB to
discuss.
Jagdish, you stated:
“all promulgated accounting standards are
fair except that one can violate one standard if in following
another standard such violation does not make financial
standards misleading”
This presumes that all accounting standards
are “fair” as written. Did you intend to imply that if something is
GAAP, it is by definition “fair”? Prior to the Codification, that
was indeed the definition of “fair” in the AICPA’s auditing
standards.
As one example of many, but one that I think
is close to the problem of materiality being solely a legal
standard, the SEC used to have the position that revenue could not
be recognized on the sale of goods until legal title has
transferred. Since some non-US jurisdictions kept legal title with
the seller until payment occurred, this was seen to be unfair, and
the SEC modified its position. So, what was “fair” yesterday became
foul the next day.
If “fair” is defined as following the rules,
and materiality is specified as a legal concept, then the standard
auditor report should read “…complies with applicable laws” instead
of “is fairly presented.”
Best,
Tom
"Evidence on Contagion in Earnings Management," by Simi Kedia, Kevin
Koh, and Shivaram Rajgopal, Columbia Business School, Forthcoming ---
http://www8.gsb.columbia.edu/researcharchive/articles/12936
Abstract
We examine contagion in earnings management using
2,376 restatements announced during the years 1997-2008. Controlling for
industry and firm characteristics, firms are more likely to begin managing
earnings after the public announcement of a restatement by another firm in
their industry or neighborhood. Such contagion is absent when the restating
firm is disciplined by the SEC or class action lawsuits, suggesting
deterrent effects of enforcement activity. Contagion among peers is observed
(i) in the same account as the one restated by the target firm; or (ii) when
larger target firms restate or the restatement is prominently disclosed; or
(iii) when the target firm's restatement is less severe. Contagion stops
during the years 2003-2005, possibly due to the enforcement associated with
the Sarbanes-Oxley (SOX) Act but reappears during 2006-2008, perhaps because
the sting associated with SOX has worn off. In sum, peers' actions appear to
affect a firm's earnings management decisions.
Citation
Kedia, Simi, Kevin Koh, and Shivaram Rajgopal. "Evidence on Contagion in
Earnings Management." The Accounting Review (forthcoming).
"Earnings Misstatements Come in Bunches, Study Says," by Gretchen
Morgenson, The New York Times, October 23, 2015 --- |
http://www.nytimes.com/2015/10/25/business/earnings-misstatements-come-in-bunches-study-says.html?emc=edit_tnt_20151023&nlid=27162368&tntemail0=y&_r=0
Thank you Tom Selling for the heads up.
. . .
For the three years after Sarbanes-Oxley went into effect, contagion in
earnings misstatements disappeared, the academics found. But memories are
short. The study provided evidence that the copycat behavior resumed in 2005
and continued through 2008, when the research concluded.
Class-action lawsuits and news reports critical of manipulative conduct
reduce the likelihood that other companies will mimic the behavior, the
study found. By contrast, restatements disclosed in a news release that
receives little attention tend to encourage others to follow suit.
“One of the biggest problems in this research is that we can’t observe
people who get away with this” and never disclose misconduct, Mr. Rajgopal
said. “If Firm A is subject to an S.E.C. action or class action or if the
press shows them in a bad light, this behavior goes down. You see less of
this contagion if one of these things happens.”
The academics say their study is unusual in its documentation of the
deterrent effects of policing by the S.E.C. and class-action lawsuits.
Mr. Rajgopal said that he and his colleagues believed that their research
could help the S.E.C.
“By definition, deterrence is far more important than enforcement,” he said
in the interview. “The S.E.C. has limited policing dollars: It can go after
60 or 90 criminals, but the more important issue is to stop the thousands of
others.”
The same goes for the Justice Department, whose
pursuit of
criminal wrongdoers in the mortgage crisis was so undistinguished.
On Thursday, the
S.E.C. said it
brought a record 507 independent actions for violations of the federal
securities laws in fiscal 2015, which ended in September. Of those, 134 were
in the financial reporting and audit area, up from 96 such actions brought
in 2014.
That is all to the good. But what this study hammers home is this:
Accountability counts. Whether it comes from a regulator, a shareholder
lawsuit or a journalistic enterprise, our capital markets and our investors
need more of it, not less.
Jensen Comment
The study covered restatements from 1997-2008. This leaves some unanswered
questions that will perhaps be revealed, at least in part, when the study is
published. Many firms, especially in the technology sector, were focusing on
revenues rather than earnings since revenues were growing but earnings were
still being reported at net losses. Exhibit A is Amazon. Many of the tech firms
were using gimmicks to push up revenues. Such gimmicks included the following as
reported at
http://faculty.trinity.edu/rjensen/ecommerce/eitf01.htm
Revenue Issue: Gross
versus Net
Issue 01:
Should a company that acts as a distributor or reseller of products or
services record revenues as gross or net?
Issue 02:
Should a company that swaps website advertising with another company record
advertising revenue and expense?
Issue 03: Should discounts
or rebates offered to purchasers of personal computers in combination with
Internet service contracts be treated as a reduction of revenues or as a
marketing expense?
Issue 04: Should shipping
and handling fees collected from customers be included in revenues or netted
against shipping expense?
Definition of and Accounting for Software
Issue 07:
Should the accounting for products distributed via the Internet, such as
music, follow pronouncements regarding software development or those of the
music industry?
Issue 08:
Should the costs of website development be expensed similar to software
developed for internal use in accordance with SOP 98-1?
Reconfiguring the Scope of Software
Revenue Recognition Guidance
Revenue
Recognition
Issue 9:
How should an Internet auction site account for up-front and back-end fees?
Issue 10:
How should arrangements that include the right to use software stored on
another company’s hardware be accounted for?
Issue 11:
How should revenues associated with providing access to, or maintenance of,
a website, or publishing information on a website, be accounted for?
Issue 12:
How should advertising
revenue contingent upon “hits,” “viewings,” or “click-throughs” be accounted
for?
Issue 13:
How should “point” and other loyalty programs be accounted for?
Others reported at
http://faculty.trinity.edu/rjensen/ecommerce/eitf01.htm
My point here is that the so-called "contagion effect" in the Simi Kedia,
Kevin Koh, and Shivaram Rajgopal study could have be due
not so much to intentional follow-the-herd to cheat as it was to
follow competitor gimmicks to report higher revenues. For example,
consider Issue 2 above. Swapping advertising to boost revenues (and expenses)
was a new gimmick for inflating revenues where there was no flow of cash between
the firms that were simply swapping advertising space at Websites.
The firms that followed the herd in this regard did not really think they
were cheating. Rather they thought that if they did not use revenue accounting
similar to their competitors they were hurting themselves in the capital
markets.
The credit for doing away will many of these gimmicks is not so much a
Sarbanes-Oxley Act cause as it is the EITF actions taken by the FASB to do away
with many of these dubious revenue reporting gimmicks. Each of the issues listed
above was resolved by the Emerging Issues (EITF) Task Forces.
My first question to be asked when the Simi Kedia, Kevin Koh, and Shivaram
Rajgopal study is published is whether they have given too much credit to
enforcement of the Sarbanes-Oxley Act and not enough credit to the FASB
evolution of new standards and EITF rulings that dictate what auditors will
accept in the way of new creativity ploys taken by firms to boost revenues and
earnings.
From the CFO Journal's Morning Ledger on October 1, 2015
Vegas fights to buy its own electricity
http://www.wsj.com/articles/vegas-casinos-fight-to-buy-their-own-electricity-1443999633?mod=djemCFO_h
Three big casino companies that run glittering resorts
on the Las Vegas Strip are trying to break free from Nevada’s electric-power
monopoly, NV Energy. Hoteliers including Wynn
Resorts Ltd., MGM Resorts International and Las
Vegas Sands Corp. say they could cut millions of dollars from their
electric bills if they could buy power directly from solar farms or
power-plant owners.
Jensen Comment
This may be a question of who pays the fixed cost of electric power monopolies
that have heavy fixed costs due to power line investments and investments in
maintaining power generating capacity for peak demand. Big power users like
casino-hotels want marginal cost-based pricing
where they pay little toward the high fixed costs of power monopolies. Nearly
all states where solar power is becoming plentiful have similar problems of
maintaining power generating capacity for nights and cloudy days. Some like
California and Vermont are cutting back on in-state power generating capacity
and relying more on the out-of-state grid capacity. California now draws over
half its power from out-of-state, and Vermont like much of New England in
general plans to rely more and more on Quebec Hydro to feed the grid.
In doing so, however states give up pricing regulation power and become more
dependent upon power sources over which they have little control.
The politics of power will soon become down and dirty as more and more heavy
power users obtain technology (with somewhat heavy investment) to generate all
of their power needs on and off peak. This will leave power monopolies (public
or private) inside a state with a higher proportion of small users (think family
homes and small businesses). Many of those smaller users will generate some of
their own power like my friend down the road who has a single solar panel to
heat a water tank. However, he still relies on the power company for other power
needs such as running appliances in his home, including his hot water tank at
night and own cloudy days.
Eventually the big power users like casino-hotels will not be sharing power
generating capacity costs and even power line costs with the small users who
still rely on the power company monopolies. As a result the power company
monopolies will either have to charge a lot more to the small users or make
those small users vulnerable to out-of-state pricing whims of the grid. Once
Quebec Hydro has more and more pricing power for our grid the deals may get
worse and worse for our New England states.
http://en.wikipedia.org/wiki/Quebec_%E2%80%93_New_England_Transmission
Capacity Accounting ---
http://maaw.info/CapacityRelatedMain.htm
Electric Power Company Dilemma: Those Pesky Capacity Costs
"Frank Wolak: How to Keep Green Policies from Crashing the Electricity Grid
As California embarks on “cap and trade,” Stanford researchers employ advanced
trading games to head off nasty surprises," by Edmund Andrews, Stanford
University Graduate School of Business, May 13, 2015 ---
Click Here
http://www.gsb.stanford.edu/insights/frank-wolak-how-keep-green-policies-crashing-electricity-grid?utm_source=Stanford+Business&utm_campaign=7df5032836-Stanford-Business-Issue-63-5-31-2015&utm_medium=email&utm_term=0_0b5214e34b-7df5032836-70265733&ct=t%28Stanford-Business-Issue-63-5-31-2015%29
. . .
The games also highlight what is perhaps the
biggest long-term conundrum tied to regulatory mandates for solar and wind
power: a pricing dynamic that sends spot-market electricity prices crashing
to almost zero at times when sunlight and wind are abundant, which can make
it hard for other electricity providers that are essential during periods of
peak demand to recover their fixed costs.
Price crashes have already become a serious issue
in Germany, where government-supported mechanisms have propelled renewables
to the point that, during a few hours of the year, renewables are the
nation’s largest source of electricity. Germany has actually experienced
negative spot prices on days in the summer when solar output is high and
electricity demand is relatively low. Negative prices also occur in US
electricity markets with substantial renewable energy shares, such as
California and Texas.
Continued in article
Question
In the realm electric power, what is a "levelized cost?"Hint
The Economist: Wind
and solar power are even more expensive than is commonly thought ---
http://www.businessinsider.com/free-exchange-sun-wind-and-drain-2014-7#ixzz38bOmPFSx
. . .
But whereas the cost of a solar panel is easy to
calculate, the cost of electricity is harder to assess. It depends not only
on the fuel used, but also on the cost of capital (power plants take years
to build and last for decades), how much of the time a plant operates, and
whether it generates power at times of peak demand.
To take account
of all this, economists use "levelised costs"--the net present value of all
costs (capital and operating) of a generating unit over its life cycle,
divided by the number of megawatt-hours of electricity it is expected to
supply.
The trouble, as Paul Joskow of the Massachusetts
Institute of Technology has pointed out, is that levelised costs do not take
account of the costs of intermittency. Wind power is not generated on a calm
day, nor solar power at night, so conventional power plants must be kept on
standby--but are not included in the levelised cost of renewables.
Electricity demand also varies during the day in
ways that the supply from wind and solar generation may not match, so even
if renewable forms of energy have the same levelised cost as conventional
ones, the value of the power they produce may be lower. In short, levelised
costs are poor at comparing different forms of power generation.
To get around that problem Charles Frank of the
Brookings Institution, a think-tank, uses a cost-benefit analysis to rank
various forms of energy. The costs include those of building and running
power plants, and those associated with particular technologies, such as
balancing the electricity system when wind or solar plants go offline or
disposing of spent nuclear-fuel rods.
The benefits of renewable energy include the value
of the fuel that would have been used if coal- or gas-fired plants had
produced the same amount of electricity and the amount of carbon-dioxide
emissions that they avoid.
Mr Frank took four sorts of zero-carbon energy
(solar, wind, hydroelectric and nuclear), plus a low-carbon sort (an
especially efficient type of gas-burning plant), and compared them with
various sorts of conventional power. Obviously, low- and no-carbon power
plants do not avoid emissions when they are not working, though they do
incur some costs.
So nuclear-power plants, which run at about 90% of
capacity, avoid almost four times as much CO{-2} per unit of capacity as do
wind turbines, which run at about 25%; they avoid six times as much as solar
arrays do. If you assume a carbon price of $50 a tonne--way over most actual
prices--nuclear energy avoids over $400,000-worth of carbon emissions per
megawatt (MW) of capacity, compared with only $69,500 for solar and $107,000
for wind.
Nuclear power plants, however, are vastly
expensive. A new plant at Hinkley Point, in south-west England, for example,
is likely to cost at least $27 billion. They are also uninsurable
commercially. Yet the fact that they run around the clock makes them only
75% more expensive to build and run per MW of capacity than a solar-power
plant, Mr Frank reckons.
To determine the overall cost or benefit, though,
the cost of the fossil-fuel plants that have to be kept hanging around for
the times when solar and wind plants stand idle must also be factored in. Mr
Frank calls these "avoided capacity costs"--costs that would not have been
incurred had the green-energy plants not been built.
Thus a 1MW wind farm running at about 25% of
capacity can replace only about 0.23MW of a coal plant running at 90% of
capacity. Solar farms run at only about 15% of capacity, so they can replace
even less. Seven solar plants or four wind farms would thus be needed to
produce the same amount of electricity over time as a similar-sized
coal-fired plant. And all that extra solar and wind capacity is expensive.
A levelised playing field
If all the costs and benefits are totted up using
Mr Frank's calculation, solar power is by far the most expensive way of
reducing carbon emissions. It costs $189,000 to replace 1MW per year of
power from coal. Wind is the next most expensive. Hydropower provides a
modest net benefit.
But the most cost-effective zero-emission
technology is nuclear power. The pattern is similar if 1MW of gas-fired
capacity is displaced instead of coal. And all this assumes a carbon price
of $50 a tonne. Using actual carbon prices (below $10 in Europe) makes solar
and wind look even worse. The carbon price would have to rise to $185 a
tonne before solar power shows a net benefit.
There are, of course, all sorts of reasons to
choose one form of energy over another, including emissions of pollutants
other than CO{-2} and fear of nuclear accidents. Mr Frank does not look at
these. Still, his findings have profound policy implications. At the moment,
most rich countries and China subsidise solar and wind power to help stem
climate change.
Yet this is the most expensive way of reducing
greenhouse-gas emissions. Meanwhile Germany and Japan, among others, are
mothballing nuclear plants, which (in terms of carbon abatement) are
cheaper. The implication of Mr Frank's research is clear: governments should
target emissions reductions from any source rather than focus on boosting
certain kinds of renewable energy.
Bob Jensen's threads on cost and managerial accounting ---
http://faculty.trinity.edu/rjensen/Theory02.htm#ManagementAccounting
Is this Canadian repatriation decision somewhat or all due to deliberate
earnings management?
From the CFO Journal's Morning Ledger on October 1, 2015
Gas, currency sap Costco’s top line; taxes help
http://blogs.wsj.com/cfo/2015/09/30/gas-currency-sap-costcos-top-line-taxes-help/?mod=djemCFO_h
Warehouse retailer Costco Wholesale Corp.
would have reported strong sales growth if not for cheap gas and a strong
dollar, but a tax windfall helped it report solid earnings growth, Maxwell
Murphy reports. Costco reported a lower tax rate, thanks to a tax benefit it
received bringing home $560 million from Canada. Repatriating the funds gave
the company a 4 cent per-share boost to earnings during the fiscal fourth
quarter ended in August.
Bob Jensen's threads on earnings management ---
http://faculty.trinity.edu/rjensen/theory02.htm#Manipulation
From the CFO Journal's Morning Ledger on October 1, 2015
Target’s online price-match policy to include Amazon, Wal-Mart
http://www.wsj.com/articles/target-expands-online-price-match-policy-to-include-amazon-wal-mart-1443636271?mod=djemCFO_h
Target Corp.
said
Wednesday
its website will start matching prices from the websites of rivals like
Amazon.com Inc. and Wal-Mart Stores Inc.
These days, retailers are constantly monitoring rival websites for price
changes and will follow price drops to stay competitive. Prices are harder
to change quickly in stores, however, so they can be higher for an item that
has dropped even on the retailer’s own website.
Jensen Comment
Price matching alone would not make me shift from Amazon to Target. Even price
cutting would probably not do it for me unless there were some deep cuts on
items I buy regularly. One of the factors is the somewhat free/fixed price of
shipping on Amazon for many of the items I purchase regularly. Price matching or
even cutting probably would not excite me much unless there was "free shipping"
comparable to Amazon Prime membership. Probably Amazon is the reason so many
other online vendors now offer something like Amazon Prime.
But the real reason I prefer Amazon to virtually all the other online vendors
is the number of products (millions) conveniently available along with so many
options such as color, size, style, etc. available on Amazon. There are, in my
opinion, great economies of scale in online vendors couple with a great
free-return policy that's really easy to use. Amazon is truly amazing for a
daily online shopper like me.
Download our FREE Special Report: POTENTIAL PITFALLS OF SSARS 21 ---
DOWNLOAD NOW
https://tax.thomsonreuters.com/CompilationReviewStandards/?utm_source=AcctWeb&utm_medium=email&utm_campaign=PSDQ.SR&utm_content=PSDQ.SR.AW&cm_mmc=PSDQ.SR-_-email-_-15-07-15-_-PSDQ.SR.AW
Last fall, the Accounting and Review Services
Committee issued SSARS 21, Statements on Standards for Accounting and Review
Services: Clarification and Recodification. SSARS 21 is the most significant
change to the Statements on Standards for Accounting and Review Services (SSARS)
since their inception in 1978. Practitioner awareness of the new standard
has increased significantly since last year. However, many practitioners are
still not aware of the significant changes that SSARS 21 makes to
compilation and review engagements or the specific requirements necessary to
provide the financial statement preparation service.
This special report focuses on some of the more
significant changes to the SSARS to help CPAs avoid potential pitfalls and
noncompliance with the new standard.
How to Mislead With Statistics
"The ‘Wage Gap’ Myth That Won’t Die: You have to ignore many variables
to think women are paid less than men. California is happy to try," by Sarah
Ketterer, The Wall Street Journal, September 30, 2015 ---
http://www.wsj.com/articles/the-wage-gap-myth-that-wont-die-1443654408?mod=djemMER
When it comes to
economically foolish laws, California is second to none. A good example is
the California Fair Pay Act, which Gov. Jerry Brown is expected to sign in
coming days.
This bill, which the
California senate unanimously passed in August, is a state version of the
Paycheck Fairness Act that the U.S. Congress rejected in 2014. Like its
national counterpart, it is an aggressive attempt to eradicate a wage gap
between men and women that is allegedly due to discrimination in the
workplace. But this wage gap is illusory, and the legislation will have
unintended consequences, including for women.
The Fair Pay Act will
prohibit employers from paying men and women different wages for
“substantially similar work.” At first glance, this prohibition might appear
reasonable: Government data for 2014 show that women in California earn, on
average, 84 cents for every dollar earned by men. (Nationally, women earn
about 79 cents for every dollar earned by men.)
But a closer look reveals a
different picture. The Bureau of Labor Statistics (BLS) notes that its
analysis of wages by gender does “not control for many factors that can be
significant in explaining earnings differences.”
What factors? Start with
hours worked. Full-time employment is technically defined as more than 35
hours. This raises an obvious problem: A simple side-by-side comparison of
all men and all women includes people who work 35 hours a week, and others
who work 45. Men are significantly more likely than women to work longer
hours, according to the BLS. And if we compare only people who work 40 hours
a week, BLS data show that women then earn on average 90 cents for every
dollar earned by men.
Career choice is another
factor. Research in 2013 by Anthony Carnevale, a Georgetown University
economist, shows that women flock to college majors that lead to
lower-paying careers. Of the 10 lowest-paying majors—such as “drama and
theater arts” and “counseling psychology”—only one, “theology and religious
vocations,” is majority male.
Conversely, of the 10
highest-paying majors—including “mathematics and computer science” and
“petroleum engineering”—only one, “pharmacy sciences and administration,” is
majority female. Eight of the remaining nine are more than 70% male.
Other factors that account
for earnings differences include marriage and children, both of which cause
many women to leave the workforce for years. June O’Neill, former director
of the Congressional Budget Office, concluded in a 2005 study that “there is
no gender gap in wages among men and women with similar family roles.” Time
magazine reported in 2010 that in 98% of America’s largest 150 cities,
including my hometown of Los Angeles, single women under 30 actually earned,
on average, 8% more than their male counterparts.
Ms. O’Neill and her
husband concluded in their
2012 book, “The
Declining Importance of Race and Gender in the
Labor Market,” that once all these factors are
taken into account, very little of the pay
differential between men and women is due to
actual discrimination, which is “unlikely to
account for a differential of more than 5
percent but may not be present at all.”
What California’s Fair Pay Act will do,
however, is make the state, already notorious
for regulation and red tape, a more difficult
place to do business. Companies must now ensure
that every penny of wage differential between
the men and women they employ is attributable to
bona-fide differences in education, training,
experience, quantity or quality of work, and so
on. Referring to the countless factors at play,
Harvard economist Claudia Goldin has said “it’s not checkable.” Yet even attempting to do so will only
add to companies’ already substantial
regulatory-compliance budgets.
Some of these factors—quality of work, for
instance—are inevitably subjective, yet trial
lawyers will swoop in to turn every conceivable
pay difference into a lawsuit. Employers who
cannot “prove” objectively that one employee’s
work was better than another’s may face costly
penalties. Many will surely pay to settle these
lawsuits instead of taking them to court.
Continued in article
Jensen Comment
It will be interesting to see how this law plays out in tenure decisions at the
most prestigious universities in California. For example, my 2012/2013 version
of the Hasselback Directory shows that 27% are women in Stanford's accounting
program. The proportions appear to be no better or even worse in the other
highly prestigious accounting programs in California universities.
It will take years to track the
impact of the Fair Pay Act in California's universities, but evidence may mount
up more quickly in the outcomes of lawsuits in universities. This probably
sounds sexist, but the tenured women I've worked with as a colleague in four
universities across 40 years of my full-time faculty career tended to work as
hard or harder than the men in the classroom but not as hard at research and
publishing in accounting research journals. Of course times have changed in
recent years. and we see a rise in the proportions of women authors in our top
accounting research journals.
The tenured women in very
prestigious accounting programs tend to rival the men in research and
publication even if they are more of a minority in those prestigious programs. I
think that greater focus on teaching by tenured women comes in colleges and
universities that are not in the Top 25 universities in the the US News
rankings.
My point is that
the Fair Pay Act in California may impact how prestigious universities grant
tenure and performance pay based upon tradeoffs between research versus
teaching. In prestigious universities outstanding research performance is now
a necessary condition for tenure. Litigation following the Fair Pay Act may
make outstanding research less necessary for outstanding women teachers.
Will I be in
trouble for thinking like this? Almost certainly!
Bob Jensen's threads on the
history of women in the accounting profession are at
http://faculty.trinity.edu/rjensen/bookbob2.htm#Women
Is the European Union falling
apart?
Europe's highest court just rejected the 'safe harbor' agreement used by
American tech companies ---
http://www.businessinsider.com/european-court-of-justice-safe-harbor-ruling-2015-10
EU Strikes Back Over Snowden
Leaks, But the Elimination of the Safe Harbor Agreement Makes it Difficult for
USA Companies to Do Business in Europe ---
http://readwrite.com/2015/10/07/europe-eu-privacy-nsa-court
Jensen Comment
This is an illustration of how Snowden's good intentions paved the road to Hell.
Teaching Case
From The Wall Street Journal Weekly Accounting Review on September 26,
2015
Coca-Cola Owes $3.3 Billion in Taxes Over Foreign Transfer Licensing
by:
Mike Esterl and Chelsey Dulaney
Sep 19, 2015
Click here to view the full article
on WSJ.com
TOPICS: Corporate
Taxation, Financial Reporting, Foreign Transfer Pricing
SUMMARY: Coca-Cola
Co. said the Internal Revenue Service had notified it of a potential $3.3
billion federal income-tax liability, becoming the latest U.S. multinational
challenged over so-called foreign transfer pricing. Coke said the dispute
relates to how it reports income from foreign licensing of manufacturing,
distribution, sale, marketing and promotion of products in overseas markets.
Coke said it followed the methodology for the licenses outlined in a 1996
agreement with the IRS.
CLASSROOM
APPLICATION: This
is an excellent article for corporate taxation and for financial accounting.
QUESTIONS:
1. (Introductory) What are the facts of the dispute between Coca-Cola
and the IRS? What does the IRS allege?
2. (Introductory) What is Coke's response to the IRS's notification?
What does the company offer for support of its position? What methodology
did the company use? Why?
3. (Advanced) What is foreign transfer pricing? How does it affect a
company's financial statements?
4. (Advanced) Why are disputes like this likely to occur with U.S.
corporations? What factors make it appealing for companies to structure
their deals as they often do?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Coca-Cola Owes $3.3 Billion in Taxes Over Foreign Transfer
Licensing," by Mike Esterl and Chelsey Dulaney, The Wall Street Journal,
September 19, 2015 ---
http://www.wsj.com/articles/coca-cola-could-face-3-3-billion-tax-liability-over-foreign-license-accounting-1442591946?mod=djem_jiewr_AC_domainid
Coca-Cola Co. on Friday said the Internal Revenue
Service had notified it of a potential $3.3 billion federal income-tax
liability, becoming the latest U.S. multinational challenged over so-called
foreign transfer pricing.
The Atlanta beverage giant also disclosed the IRS
has recommended the matter be designated for litigation after a government
audit determined the company’s reported income from 2007 to 2009 should have
been higher.
“The company firmly believes that the assessments
are without merit and plans to pursue all administrative and judicial
remedies necessary to resolve this matter,” Coke said in a regulatory
filing, adding it plans to file a petition in U.S. Tax Court challenging the
notice.
Coke said the dispute relates to how it reports
income from foreign licensing of manufacturing, distribution, sale,
marketing and promotion of products in overseas markets. Coke said it
followed the methodology for the licenses outlined in a 1996 agreement with
the IRS. The company’s compliance with the agreement was confirmed by five
audits covering the subsequent years through 2006, with the most recent
audit ending in 2009, Coke added.
An IRS spokesman declined to comment, citing a
federal law prohibiting the IRS from discussing specific taxpayers.
Such disputes, in which the IRS accuses U.S.
multinationals of transferring profits to countries with lower tax rates,
have become increasingly common in recent years. The IRS is believed to have
filed hundreds of such cases totaling tens of billions of dollars,
particularly in the technology and pharmaceutical industries.
“It’s almost more common than not to have a
transfer pricing dispute with the U.S.,” said Robert Willens, an independent
tax consultant in New York.
The IRS dispute with Coke primarily revolves around
how the company accounts for profit from its sales of concentrate used to
make soda. Coke has several concentrate plants around the world and makes
money from selling the concentrate to bottlers in local markets.
Coke says it derived 57% of its $46 billion in
revenue last year from outside the U.S., but it books a higher percentage of
its operating income overseas. As a result, it reported an effective tax
rate of 23.6% in 2014, below the statutory U.S. tax rate of 35%.
Mr. Willens, the tax consultant, said such transfer
pricing disputes typically are resolved out of court, typically for a
fraction of the amount that the IRS is seeking.
In its filing, Coke said its 1996 agreement with
the IRS protects the company from penalties if the methodology is followed.
The company didn’t give details about the methodology.
The company said it doesn’t believe the dispute
will have a material impact on its results and noted it regularly assesses
its tax reserves for such situations.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on September 26,
2015
MetLife to Take $792 Million Third-Quarter Charge Tied to Tax Issues
by:
Leslie Scism
Sep 17, 2015
Click here to view the full article on WSJ.com
TOPICS: Corporate
Taxation, Financial Accounting, Foreign Tax Credit
SUMMARY: Life
insurer MetLife Inc. said it would take a $792 million charge against
third-quarter earnings to reflect that it may owe more federal taxes for
past years, prompted by an adverse court ruling earlier this month involving
other companies in a similar tax dispute. The nation's biggest life insurer
said it stands by its tax treatment, but said the charge "is the result of
the company's consideration of recent decisions of the U.S. Court of Appeals
for the Second Circuit upholding the disallowance [by the Internal Revenue
Service] of foreign tax credits" claimed by other companies.
CLASSROOM
APPLICATION: This
is an excellent example of the foreign tax credit, and how tax law impacts
financial accounting results.
QUESTIONS:
1. (Introductory) What is the foreign tax credit? How is it
calculated? Why does U.S. tax law provide for it?
2. (Introductory) What is the basis of MetLife's dispute with the
IRS? What was the conclusion of that dispute?
3. (Advanced) Why did MetLife take action at this point? What did the
company do?
4. (Advanced) How does tax law affect a company's financial
reporting? How did this issue affect the MetLife's financial statements? How
could that affect the company's stock price?
Reviewed By: Linda Christiansen, Indiana University Southeast
"MetLife to Take $792 Million Third-Quarter Charge Tied to Tax Issues," by
Leslie Scism, The Wall Street Journal, September 17, 2015 ---
http://www.wsj.com/articles/metlife-to-take-792-million-third-quarter-charge-tied-to-tax-issues-1442434246?mod=djem_jiewr_AC_domainid
Life insurer MetLife Inc. said it would take a $792
million charge against third-quarter earnings to reflect that it may owe
more federal taxes for past years, prompted by an adverse court ruling
earlier this month involving other companies in a similar tax dispute.
The nation’s biggest life insurer said it stands by
its tax treatment, but said the charge “is the result of the company’s
consideration of recent decisions of the U.S. Court of Appeals for the
Second Circuit upholding the disallowance [by the Internal Revenue Service]
of foreign tax credits” claimed by other companies. MetLife’s action relates
to tax years 2000 to 2009 and involves the tax treatment of a wholly-owned
U.K. investment subsidiary of MetLife.
“There has been no change in the company’s position
on the disallowance of its foreign tax credits” by the IRS, the company said
Wednesday. “MetLife continues to contest the disallowance of these foreign
tax credits by the IRS as management believes the facts strongly support the
company’s position.”
MetLife said the noncash, after-tax charge to
operating earnings and net income would be 70 cents a share. The company
also said it does not expect any additional charges related to this matter.
In the third quarter of 2014, MetLife reported net
income of $2.1 billion, or $1.81 per share.
“This is not a trivial charge,” David Havens, a
credit analyst with Imperial Capital LLC, said of MetLife’s announcement,
though he added “this should be manageable.”
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on September 26,
2015
Treasury to Delay Enforcing Part of Tax Law That Curbs Offshore Tax Evasion
by:
John D. McKinnon
Sep 19, 2015
Click here to view the full article on WSJ.com
TOPICS: FATCA,
Taxation
SUMMARY: The
Treasury Department said it would delay enforcement of one key part of a
2010 law that is aimed at curbing offshore tax evasion, in a regulatory
victory for banks. The law, the Foreign Account Tax Compliance Act, or FATCA,
requires foreign banks to start handing over information about U.S.-owned
accounts to the Internal Revenue Service. It also would force banks and
other financial institutions around the world to withhold a share of many
types of payments to other banks that aren't complying with the law. In
effect, the withholding amounts to a kind of U.S. tax penalty on
noncompliant financial institutions.
CLASSROOM
APPLICATION: This
is an update to (and a rare article about) the Foreign Account Tax
Compliance Act.
QUESTIONS:
1. (Introductory) What is FATCA? To whom to does it apply? About whom
does it collect information?
2. (Advanced) What is the purpose of FATCA? Are there other ways for
the IRS to collect the same information?
3. (Advanced) What actions does FATCA require? Why is this
information important to the IRS?
4. (Advanced) What did the Treasury Department announce regarding
FATCA? Why did it do this? Was this a good decision?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Treasury to Delay Enforcing Part of Tax Law That Curbs Offshore Tax
Evasion," by John D. McKinnon, The Wall Street Journal, September 19,
2015 ---
http://www.wsj.com/articles/treasury-to-delay-enforcing-part-of-tax-law-that-curbs-offshore-tax-evasion-1442609347?mod=djem_jiewr_AC_domainid
The Treasury Department said Friday it would delay
enforcement of one key part of a 2010 law that is aimed at curbing offshore
tax evasion, in a regulatory victory for banks.
The law, the Foreign Account Tax Compliance Act, or
FATCA, requires foreign banks to start handing over information about
U.S.-owned accounts to the Internal Revenue Service.
It also would force banks and other financial
institutions around the world to withhold a share of many types of payments
to other banks that aren’t complying with the law. In effect, the
withholding amounts to a kind of U.S. tax penalty on noncompliant financial
institutions.
The latest move by Treasury will push back the
start of withholding for many types of transactions—such as stock
trades—from 2017 until 2019. Withholding for some other types of payments
has already begun. The change will give banks more time to come into
compliance with FATCA, and governments and the financial industry more time
to work out some of the difficult details involved in withholding on
more-complex financial transactions.
The withholding provision is “the really big stick”
in FATCA, said Michael Plowgian, a former Treasury official who is now at
KPMG LLP. “The problem with it is that it’s really complicated…So Treasury
and IRS have essentially punted” and created more time to solve some of the
sticky technical issues, he added.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on September 26,
2015
GE Offers to Exchange $30 Billion of Debt for New Notes
by:
Ted Mann
Sep 22, 2015
Click here to view the full article on WSJ.com
TOPICS: Liabilities,
Promissory Notes
SUMMARY: General
Electric Co. offered to exchange up to $30 billion of outstanding debt for
new notes with shorter maturities, as the company restructures and shrinks
its large financial services arm. As a result of the exchange, some of its
existing debt at GE Capital will be replaced by notes that mature more
quickly, and which can be paid off as the company sells off divisions of its
lending businesses.
CLASSROOM
APPLICATION: This
is a good article to use in financial accounting classes when covering
liabilities and debt structure.
QUESTIONS:
1. (Introductory) What are GE's plans regarding some of its debt? How
is the company implementing those plans? Why is the company doing this?
2. (Advanced) What is a note? Why types of notes does GE currently
have? What is it offering? Why does the company want less of one type of
debt and more of another? What strategy is the company employing?
3. (Advanced) How would these transactions be entered into GE's
accounting records?
4. (Advanced) Once these transactions are completed, what will be the
difference in GE's financial statements? How will the results of various
types of financial statement analysis be different because of these
transactions?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
GE to Cash Out of Banking Business
by Ted Mann and Victoria McGrane
Apr 11, 2015
Online Exclusive
"GE Offers to Exchange $30 Billion of Debt for New Notes," by Ted Mann,
The Wall Street Journal, September 22, 2015 ---
http://www.wsj.com/articles/ge-offers-to-exchange-30-billion-of-debt-for-new-notes-1442872167?mod=djem_jiewr_AC_domainid
General Electric Co. on Monday offered to exchange
up to $30 billion of outstanding debt for new notes with shorter maturities,
as the company restructures and shrinks its large financial services arm.
Under the private debt exchange offer, holders of
more than 100 different tranches of debt from GE Capital will be eligible to
exchange their notes. Some $100.4 billion of existing notes qualify for the
exchange which is capped at $30 billion.
The debt exchange, which expires on Oct. 19, is
intended to more quickly lower the overall indebtedness of GE Capital as its
parent seeks to shrink the operation by selling off most of its assets. As a
result of the exchange, some of its existing debt at GE Capital will be
replaced by notes that mature more quickly, and which can be paid off as the
company sells off divisions of its lending businesses.
The move is part of GE’s larger plan to
aggressively reduce the size of its GE Capital unit to get it out from under
tough banking regulations by the Federal Reserve. In April GE announced
plans to sell-off virtually much of the more than $500 billion in assets
held by GE Capital, as the company sought to focus more on its industrial
operations.
GE Capital for years had been a prolific seller of
investment grade bonds and commercial paper in the U.S. It plans to reduce
its outstanding commercial-paper debt to about $5 billion by year end, down
from $25 billion at the end of last year and from $72 billion at the end of
2008.
GE is providing an irrevocable and unconditional
guarantee to the new notes which will be issued by its new Irish subsidiary,
GE Capital International Funding Co. Standard & Poor’s and Moody’s Investor
Services assigned the new issuing unit ratings of double-A-plus and A1
respectively.
GE is keeping the aspects of its finance business
that complement its industrial products like jet engines and power turbines.
It will also retain the units that own and finance aircraft and jet engines,
as well as those investing in energy projects and financing healthcare
equipment purchases.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on September 26,
2015
Denbury Resources Suspends Dividend
by:
Lisa Beilfuss
Sep 22, 2015
Click here to view the full article on WSJ.com
TOPICS: Dividends,
Financial Accounting
SUMMARY: Driller
Denbury Resources said that it would suspend its cash dividend effective in
the fourth quarter of 2015, the latest company to do so as the industry
grapples with the low price of oil. Suspending the dividend will free up
about $22 million of cash each quarter. The newly available cash will be
directed toward debt reduction, increases in capital spending or repurchases
of shares.
CLASSROOM
APPLICATION: This
is a good article to use for coverage of dividends.
QUESTIONS:
1. (Introductory) What are dividends? Are they an expense of doing
business?
2. (Introductory) What is the accounting treatment of dividends? How
are they entered into the accounting system? On what statement do they
appear? Is the account permanent or temporary? Why?
3. (Advanced) Why do companies have dividends? What purpose do they
serve?
4. (Advanced) Denbury announced that it would suspend its dividends.
What does that mean? Why is the company doing that? How will that action
help the company? How could it hurt
Reviewed By: Linda Christiansen, Indiana University
Southeast
"Denbury Resources Suspends Dividend," by Lisa Beilfuss, The Wall Street
Journal, September 22, 2015 ---
http://www.wsj.com/articles/denbury-resources-suspends-dividend-1442835773?mod=djem_jiewr_AC_domainid
Driller Denbury Resources said Monday that it would
suspend its cash dividend effective in the fourth quarter, the latest
company to do so as the industry grapples with the low price of oil.
While oil commodity hedges and reductions in
capital spending “have buffered us to a large degree from this oil price
downturn,” Chief Executive Phil Rykhoek said the benefit from those hedges
will begin to diminish in the fourth quarter.
Denbury said it will pay its previously-announced
third-quarter dividend on Sept. 29.
Suspending the dividend will free up about $22
million of cash each quarter, the company said. The newly available cash
will be directed toward debt reduction, increases in capital spending or
repurchases of shares.
The company said Monday that its board approved a
reinstatement of the company’s share-buyback program, which had been
suspended in November 2014. Under the program, about $222 million is
authorized for repurchases with no expiration date and no requirement that
any buybacks are completed.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 2,
2015
What
Audit Committees Want from CFOs
by:
Deloitte CFO Journal Editor
Sep 28, 2015
Click here to view the full article on WSJ.com
TOPICS: Audit
Committee, Auditing, Financial Accounting
SUMMARY: Audit
committees play a critical corporate governance and oversight role, and
their members can bring a wealth of experience helpful to CFOs.
Understanding what audit committees want from their CFOs, such as visibility
into key finance staff, can create a context for both parties to effectively
work together. The article covers a list, including: no surprises; strong
partnering with the CEO and other leaders; confidence in finance
organization talent, command of key accounting, finance, and business
issues; insightful forecasting and earning guidance; effective risk
management; and clear and concise stakeholder communications.
CLASSROOM
APPLICATION: This
is an excellent article for auditing class, as well as for any accounting
class as it discusses real-world workplace issues.
QUESTIONS:
1. (Introductory) What is an audit committee? What are its
responsibilities?
2. (Advanced) What is a CFO? What are the responsibilities of the
person in that position? How is a CFO involved with the company's audit
committee?
3. (Advanced) How did the writers assemble the list included in the
article? Is the list credible? Why or why not?
4. (Advanced) Review the list and select two items that interest you
most. Why did you choose those two? Why are those desires important? Why are
those items not necessarily a given between audit committees and CFOs? What
can the parties do to improve in those areas?
Reviewed By: Linda Christiansen, Indiana University Southeast
"What Audit Committees Want from CFOs," by Deloitte CFO Journal Editor,
The Wall Street Journal, September 28, 2015 ---
http://deloitte.wsj.com/cfo/2015/09/28/what-audit-committees-want-from-cfos/?mod=djem_jiewr_AC_domainid
Audit committees play a critical corporate governance and oversight role,
and their members can bring a wealth of experience helpful to CFOs.
Understanding what audit committees want from their CFOs, such as visibility
into key finance staff, can create a context for both parties to effectively
work together.
Since 2010, Deloitte’s CFO Program has delivered more than 700 CFO
Transition Lab sessions—one-day workshops that help finance chiefs onboard
into their new role. In preparation for these sessions, hundreds of audit
committee chairs and members across 20 countries have been interviewed. The
following excerpt from CFO Insights synthesizes key lessons learned from
those interviews in terms of what audit committees generally want from their
CFOs.
1. “No Surprises”
One of the most common phrases we hear from audit
chairs is, “I want no surprises.” While surprises are generally inevitable
in the course of business, audit chairs and committees want the CFO to
manage the avoidable issues and inform them in a timely way when the
unexpected occurs.
To set the context for direct, timely
communications and joint problem-solving, CFOs should consider building
working and personal relationships early in their dealings with the audit
committee. They especially have to establish regular communications and
interactions with the audit chair. These interactions should occur outside
of preparing for audit committee meetings and may mean scheduling dinners or
breakfasts four or more times a year with the chair or other key committee
members. While board members and finance chiefs are busy, audit committee
chairs often tell us that they are available to the CFO as a sounding board
and that the CFO should feel comfortable reaching out beyond formal
committee meetings. Establishing a good relationship with audit chairs early
on can enhance mutual confidence in tackling difficult issues when they
arise.
2. Strong Partnering with the CEO and Other Leaders
Audit committees and the overall board want to see
a CFO who effectively partners with the CEO and other key business leaders.
The partnership with the CEO is the most important of these relationships.
Although some CEOs and boards prefer their CFO to focus on the traditional
roles of operator and steward, many look for support from the finance chief
as a strategist and catalyst (see the “The Four Faces of the CFO”). As a
strategist, a CFO can align financial strategy to business strategy for
growth, but may also choose to shape growth through finance (for example,
finding innovative ways to finance M&A or other investment activity or
pricing strategies to grow revenues). Similarly, CFOs can drive change in
organizations through levers, such as efficiency initiatives and new ways of
measuring and rewarding performance. Effective partnering and influence
skills with the CEO and other C-suite leaders are critical imperatives for
CFOs. In fact, audit chairs and board members often observe CFO-CEO and
CFO-peer relationships to gauge how well the leadership team works together
to achieve company goals.
3. Confidence in Finance Organization Talent
As the workhorse for creating accurate and timely
financial reports, the broader finance organization is of interest to audit
committees. They want to know that the organization is stable and supports
and complements the skills of the CFO. In addition, they want assurances
that key-person risks are being managed and that the organization is
developing finance talent, including potential successors to the finance
chief.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 2,
2015
FASB
Proposes Changes to 'Materiality'
by:
Emily Chasen
Sep 24, 2015
Click here to view the full article on WSJ.com
TOPICS: FASB,
Financial Accounting, Materiality
SUMMARY: The
Financial Accounting Standards Board receives complaints from companies,
investors and auditors stating that the materiality definition is sometimes
confusing, or in conflict with the Supreme Court's standard. Allegations
that companies failed to disclose material information are frequently at the
center of securities fraud cases and class actions. Under the FASB's current
rules, information is considered material if omitting or misstating it could
influence investment decisions. The U.S. Supreme Court defined materiality
in a 1976 court decision as information that would present "a substantial
likelihood that the disclosure of the omitted fact would have been viewed by
the reasonable investor as having significantly altered the 'total mix' of
information made available."
CLASSROOM
APPLICATION: This
is a good update on materiality for a financial accounting class.
QUESTIONS:
1. (Introductory) What is materiality for financial accounting
purposes? What is the legal definition, as established by the U.S. Supreme
Court? How do these differ?
2. (Introductory) What is FASB? What is its purpose? What are its
areas of authority?
3. (Advanced) What is FASB considering regarding materiality? Why
might it change? What issue would the change resolve?
4. (Advanced) The article states that FASB is seeking comments from
the public. Why does FASB do that? Who is likely to respond?
Reviewed By: Linda Christiansen, Indiana University Southeast
"FASB Proposes Changes to 'Materiality'," by Emily Chasen, The Wall Street
Journal, September 25, 2015 ---
http://blogs.wsj.com/cfo/2015/09/24/fasb-proposes-changes-to-materiality/?mod=djem_jiewr_AC_domainid
The definition of what information companies have a duty to share with
investors could be changing.
U.S. accounting rule makers are considering throwing out their concept of
“materiality”, or the information companies deem important enough for
investors to know about, according to a proposal released Thursday. The
proposed to align their rule with the definition set by the U.S. Supreme
Court.
The Financial Accounting Standards Board receives complaints from
companies, investors and auditors stating that the materiality definition is
sometimes confusing, or in conflict with the Supreme Court’s standard.
Allegations that companies failed to disclose material information, are
frequently at the center of securities fraud cases and class actions.
Under the FASB’s current rules, information is considered material if
omitting or misstating it could influence investment decisions.
Continued in article
From the CFO Journal's Morning Ledger on October 1, 2015
CEOs ask Congress to return “materiality” to securities laws
http://blogs.wsj.com/cfo/2015/09/30/business-roundtable-asks-congress-to-put-materiality-back-into-securities-laws/?mod=djemCFO_h
Legislators should allow regulators to refocus their
efforts on material issues in financial statements, instead of aiming to
solve social problems through such documents, according to a new report by
The Business Roundtable. Emily Chasan reports that the group, which
represents CEOs, takes issue with new rules mandated by Dodd-Frank that
demand disclosures on conflict minerals and payments to foreign governments
without regard to materiality.
Jensen Comment
Materiality might be less relevant here than in financial reporting. For
example, inadvertently capitalizing $1 million of transactions that should have
been expensed for a company having $60 billion in net earnings is not material
in terms of earnings reporting. Nor is a foreign bribe that impacts the bottom
line by $1 million material in terms of earnings. However, the same bribe in a
small company having less than $2 million in earnings is material in terms of
earnings. The issue in these two cases, however, is the
issue of being inadvertent versus deliberate.
Should deliberate violations of regulations be treated differently in large
versus small companies? Perhaps we should add criteria regarding deliberate
intent to materiality considerations.
FASB writes two new exposure drafts on
materiality concept ---
http://www.journalofaccountancy.com/news/2015/sep/fasb-proposal-what-materiality-means-201513079.html
October 1, 2015 reply from Dennis Beresford
Bob,
The 18 page white paper on this topic
published by the Business Roundtable can be accessed at:
http://businessroundtable.org/sites/default/files/reports/Materiality White
Paper FINAL 09-29-15.pdf
Denny
October 1, 2015 reply from Bob Jensen
Thank you Denny,
That is a value-added link. But I think it still is somewhat vague. Consider
the following quotation:
Court then articulated the standard for materiality that
is still widely used today:
“An omitted fact is material if there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how to
vote… . It does not require proof of a substantial likelihood that
disclosure of the omitted fact would have caused the reasonable investor
to change his vote. What the standard does contemplate is a showing of a
substantial likelihood that, under all the circumstances, the omitted
fact would have assumed actual significance in the deliberations of the
reasonable shareholder. Put another way , there must be a substantial
likelihood that the disclosure of the
omitted fact would have been viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information available.
”
Jensen Comment
There are really two types of omitted facts that arise in this situation and
in nearly every situation where a parent learns about something bad done by
a teenage child. Firstly, there's the fact that concerning the deed and how
bad the deed is from a materiality standpoint no matter who did the deed.
For example, if $5 in merchandise is shoplifted the materiality can be
judged on the value of the amount stolen.
Then there's the fact that your child felt an need or an urge to shoplift at
all, thereby violating your trust in the child.
Thus we have two possibly omitted facts that were learned. One is that
$5-value fact. The other is that it was your child.
Some investors may not be concerned about small-valued improprieties per se.
But they may be concerned that management would commit the impropriety
irrespective of the value involved.
My
point is that some investors may overlook improprieties that are not
material in value. Other investors, perhaps more religious investors, may
find it hard to forgive no matter what the materiality of the sin involved.
Thus my point is that materiality alone does not determine how an investor
will react.
We
encounter similar situations with faculty or student cheating all the time.
On the Trinity University campus officials are finding that a scheduled
lecture for the largest auditorium by Jane Goodall is the becoming one of
the most wildly popular lectures ever scheduled on campus (and a wealthy
school like Trinity pays hundreds of thousands of dollars to a number of
outside speakers every year). But a few in the audience will find it hard to
forget than Jane once confessed to plagiarizing from Wikipedia.
To most
this one-time cheating is immaterial.
To a few, however, the mere fact that she confessed to ever plagiarizing
says something "material" about her character.
What is a "reasonable investor" versus an "unreasonable investor" with
respect to materiality?
Thanks,
Bob
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 2,
2015
Crunchtime for Global Tax-Avoidance Push
by:
Paul Hannon
Sep 28, 2015
Click here to view the full article on WSJ.com
TOPICS: Corporate
Taxation, International Business, International Taxation
SUMMARY: Nearly
50 governments are set to agree to a new set of rules to clamp down on tax
avoidance among multinational corporations. Their chance of success,
however, is unclear. If the rules work as planned, they will help ensure big
companies pay tax on profits where they are earned, boosting revenues for
governments, particularly in larger countries. Advocates say the stricter
rules will make for fairer competition between small and large companies,
since the latter gain an advantage by being better able to avoid tax. Far
less certain is how widely the new rules will be applied, and whether they
will boost government revenues after all. Also unclear is whether the U.S.
will overcome opposition in Congress, where critics question the Treasury
Department's right to implement international rules not reflected in U.S.
legislation.
CLASSROOM
APPLICATION: This
is a good corporate tax article, as it features the bigger picture of
taxation around the world than individual inversions have illustrated. With
increased globalization, tax planning opportunities abound for corporations,
while governments face more challenges in collecting tax revenues.
QUESTIONS:
1. (Introductory) Why are governments from around the world meeting?
What are their concerns?
2. (Advanced) Where do most governments want international companies
to pay taxes? Why?
3. (Advanced) What strategic planning opportunities do international
corporations have regarding taxation? What clearly-legal actions can they
take? What tax-saving plans could be questionable? Why?
4. (Advanced) How would these governments want to change the way
corporations are taxed? How could they go about making those changes? What
challenges do they face?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Crunchtime for Global Tax-Avoidance Push," by Paul Hannon, The Wall
Street Journal, September 28, 2015 ---
http://www.wsj.com/articles/crunchtime-for-global-tax-avoidance-push-1443376341?mod=djem_jiewr_AC_domainid
Nearly 50 governments are set to agree this fall to
a new set of rules to clamp down on tax avoidance among multinational
corporations. Their chance of success, however, is unclear.
If the rules work as planned, they will help ensure
big companies pay tax on profits where they are earned, boosting revenues
for governments, particularly in larger countries. Advocates say the
stricter rules will make for fairer competition between small and large
companies, since the latter gain an advantage by being better able to avoid
tax.
Far less certain is how widely the new rules will
be applied, and whether they will boost government revenues after all. Also
unclear is whether the U.S. will overcome opposition in Congress, where
critics question the Treasury Department’s right to implement international
rules not reflected in U.S. legislation.
The international effort was launched in 2012 as
governments struggled to contain a surge in deficit-spending that followed
the financial crisis and the global recession.
Amid burgeoning deficits, a string of revelations
about large-scale tax avoidance by a raft of big companies emerged, and
officials turned attention to the web of thousands of tax treaties dating
back to the 1920s.
These treaties were initially intended to prevent
the double taxation of company profits. But over time they became a
playground for companies engaged in what tax people like to call Base
Erosion and Profit Shifting, or BEPS, a term of art for moving profits to
the jurisdictions with the lowest taxes.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 2,
2015
Bed
Bath Should Plump Up Its Margins
by:
Miriam Gottfried
Sep 24, 2015
Click here to view the full article on WSJ.com
TOPICS: Sales
Mix, Financial Accounting, Financial Reporting, Financial Statement
Analysis, Gross Margin, Managerial Accounting, Segment Analysis
SUMMARY: Shares
in Bed Bath & Beyond have fallen by roughly 20% since the beginning of 2015.
Gross margins at Bed Bath have been under pressure from increased coupon use
aimed at keeping prices competitive as well as ramped-up investment in
efforts to sell across the Internet, mobile devices and in stores.
Meanwhile, the retailer has experienced a continuing shift toward
less-profitable goods such as small kitchen appliances and away from
traditionally higher-margin ones such as sheets and towels where competition
is steeper.
CLASSROOM
APPLICATION: This
article show how performance of business segments (sales mix) affects gross
margins, stock prices, and other financial indicators.
QUESTIONS:
1. (Introductory) What is gross margin? How is it calculated? What
information does gross margin provide to users of the financial statements?
2. (Advanced) How have Bed Bath & Beyond's financial results changed
this year? How has gross margin been changing? Why? What other factors have
been affected?
3. (Advanced) Which Bed Bath & Beyond business segments did the
article mention? Which of these segments are increasing? Which are
decreasing? How is that affecting the profitability of the company?
4. (Advanced) How have Bed Bath & Beyond's financial results affected
its stock price? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Bed Bath & Beyond Issues Muted Guidance as Earnings
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Jun 24, 2015
Online Exclusive
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Dec 28, 2014
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Bed Bath & Beyond Still Looks Cozy
by Spencer Jakab
Jan 07, 2015
Online Exclusive
"Bed Bath Should Plump Up Its Margins," by Miriam Gottfried, The Wall
Street Journal, September 24, 2015 ---
http://www.wsj.com/articles/bed-bath-should-plump-up-its-margins-1443030123?mod=djem_jiewr_AC_domainid
Investors in Bed Bath & Beyond Inc. have gotten the
20%-off coupon they didn’t ask for.
Shares in the home-furnishings retailer have fallen
by roughly that much since the beginning of 2015. Gross margins at Bed Bath
have been under pressure from increased coupon use aimed at keeping prices
competitive as well as ramped-up investment in efforts to sell across the
Internet, mobile devices and in stores.
Meanwhile, the retailer has experienced a
continuing shift toward less-profitable goods such as small kitchen
appliances and away from traditionally higher-margin ones such as sheets and
towels where competition is steeper, according to Morgan Stanley.
Bed Bath’s gross margin was 38.9% in the fiscal
year ended in February, down from a peak of 41.9% in 2004. The sales-mix
shift should eventually moderate. But the company is still in the early
innings of its so-called omnichannel strategy, with planned investments in
areas such as analyzing purchasing data, a new point-of-sale system and
improvements to its website and mobile app.
. These initiatives eventually should help it
compete with the likes of Amazon.com Inc. But they will continue to weigh on
margins Thursday, when Bed Bath reports fiscal second-quarter earnings.
Analysts polled by FactSet expect earnings of $1.21 a share, with same-store
sales growth of 2.2%.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 2,
2015
Microsoft Changes How It Reports Its Financial Results
by:
Tess Stynes
Sep 29, 2015
Click here to view the full article on WSJ.com
TOPICS: Financial
Accounting, Financial Reporting
SUMMARY: Microsoft
Corp. said it would begin reporting its financial results based on three
operating divisions, as the software maker aims to emphasize its mobile and
cloud businesses. The new format will break out results from its commercial
cloud businesses, an area where Microsoft and other tech firms have turned
their focus amid waning PC demand. The change also will unite results from
its Office and Office 365 for commercial and consumer customers. Previously,
the company's cloud businesses were included in Microsoft's commercial
segment, which also included Office and Windows business software as well as
server products and services.
CLASSROOM
APPLICATION: This
article offers an opportunity to discuss how a company's financial results
are reported, and whether changes add value for the users of the financial
statements.
QUESTIONS:
1. (Introductory) What changes is Microsoft making in its financial
reporting? How has the company been reporting this information? What is the
new format?
2. (Advanced) Why is Microsoft making this change? How could it add
value for the users of the financial statements? How could it affect
financial statement analysis of the company's reports?
3. (Advanced) Could this move help the company in any way other than
with financial reporting? Does it impact operations?
4. (Advanced) Are there any reasons the company should not make such
a change? Are there any potential problems when making a change like this?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Microsoft Changes How It Reports Its Financial Results," by Tess Stynes,
The Wall Street Journal, September 29, 2015 ---
http://www.wsj.com/articles/microsoft-changes-how-it-reports-its-financial-results-1443473944?mod=djem_jiewr_AC_domainid
Microsoft Corp. said it would begin reporting its
financial results based on three operating divisions, as the software maker
aims to emphasize its mobile and cloud businesses.
The changes begin with the results for the current
quarter—the first of Microsoft’s new fiscal year—which the Redmond,
Wash.-based company plans to report Oct. 22.
The new format will break out results from its
commercial cloud businesses, an area where Microsoft and other tech firms
have turned their focus amid waning PC demand. The change also will unite
results from its Office and Office 365 for commercial and consumer
customers.
In a news release Monday, Microsoft said the new
operating segments include “Productivity and Business Processes,” which will
include Office products as well as Dynamics and Dynamics CRM Online.
An “Intelligent Cloud” segment will include public,
private and hybrid server products and services, such as Windows Server,
Azure and Enterprise Services.
The third operating segment, called “More Personal
Computing,” will include results from licensing of the Windows operating
system, devices such as mobile phones and Surface tablets, game products
including Xbox consoles, and its Bing search business.
Previously, the company’s cloud businesses were
included in Microsoft’s commercial segment, which also included Office and
Windows business software as well as server products and services.
Microsoft’s former devices and consumer segment included Office consumer
subscribers, Surface tablets and Xbox game consoles and related software.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 9,
2015
Glencore Seeks Way to Sell Some Assets
by:
Scott Patterson and Alex MacDonald
Oct 01, 2015
Click here to view the full article on WSJ.com
TOPICS: Asset
Sales, Debt, Financial Accounting
SUMMARY: Glencore,
whose stock in recent weeks has been ravaged, announced a plan to reduce its
$30 billion net debt by $10 billion by the end of next year. It has achieved
about $5 billion through slashing its dividend and issuing new shares and
hopes to achieve another $5 billion in asset sales and cost cuts. Instead of
selling mines, Glencore is in talks to do up to $1.5 billion in streaming
deals, in which it gets cash upfront in exchange for royalties on gold and
silver it sells in the future.
CLASSROOM
APPLICATION: This
article is appropriate for financial accounting classes to show how deals
like this are booked and the impact on financial statement analysis results.
QUESTIONS:
1. (Introductory) What are Glencore's reasons for selling its assets?
What challenges is the company facing?
2. (Advanced) What assets is Glencore considering selling? How would
the company book each of those transactions? How would those sales affect
the company's financial statements?
3. (Advanced) Why is the company interested in reducing its debt? How
will the assets sales and debt reduction affect financial statement analysis
results? How could those actions affect how the company operates?
4. (Advanced) How would the accounting treatment of a sale of a mine
differ from the streaming deals Glencore is considering? Should that
influence the company's decision?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Glencore Seeks Way to Sell Some Assets," by Scott Patterson and Alex
MacDonald, The Wall Street Journal, October 1, 2015 ---
http://www.wsj.com/articles/glencore-shares-rise-again-as-company-moves-to-reassure-investors-1443600980?mod=djem_jiewr_AC_domainid
LONDON—Mining and trading giant Glencore PLC,
racing to reduce its debt, is grappling with how to unload assets at a time
when commodity deals are drying up and is considering selling its
agriculture infrastructure to sovereign-wealth funds and royalty deals on
its gold assets.
Glencore, whose stock in recent weeks has been
ravaged, announced a plan in September to reduce its $30 billion net debt by
$10 billion by the end of next year. It has achieved about $5 billion
through slashing its dividend and issuing new shares and hopes to achieve
another $5 billion in asset sales and cost cuts.
When Glencore announced its debt-reduction plan in
September, Chief Financial Officer Steve Kalmin said $2 billion of asset
sales should be completed by the end of 2016. It is a challenging task when
mining deals were down 43% in the first half of this year from the
year-earlier period, according to Ernst & Young.
One option that has emerged is selling a stake in
its agricultural business, though that would be painful. The agricultural
arm’s earnings before interest and taxes last year was $856 million for
Glencore, almost a third of its marketing division’s profit, according to
the company’s annual report. Glencore would be unloading part of a business
it had recently built up with the $6.1 billion acquisition in 2012 of
Canada-based Viterra.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 9,
2015
OECD
Rewrites Corporate Tax Rule Book
by:
Paul Hannon and Sam Schechner
Oct 06, 2015
Click here to view the full article on WSJ.com
TOPICS: Corporate
Taxes, International Business
SUMMARY: A
major overhaul of the international rules governing the taxation of company
profits moved a step closer to completion, with the publication of a package
of new standards that are set to be adopted by leaders of the Group of 20
largest economies. The Organization for Economic Cooperation and
Development, which was charged with rewriting the rule book, said the
package will help governments around the world claw back between $100
billion and $240 billion in lost revenue each year. But some critics -
including some executives in the technology industry - argue the new rules
rely too much on interpretation by national tax authorities, opening up the
possibility that a number of governments will attempt to tax the same
profit. They also say the process for resolving disputes is inadequate, and
could lead to lengthy periods of uncertainty over tax bills for companies
operating in more than one country.
CLASSROOM
APPLICATION: This
is an excellent update for a corporate tax class when covering international
taxation.
QUESTIONS:
1. (Introductory) What is the OECD? What is its involvement in
corporate taxation?
2. (Advanced) What issues and challenges do multinational companies
face regarding international taxation? What new rules are being formulated?
3. (Advanced) What concerns do critics have regarding the new plan?
Are these concerns legitimate?
4. (Advanced) What challenges do countries have in taxing foreign
companies? How could these issues be minimized or resolved?
5. (Advanced) Are these new rules likely to be enacted? Why or why
not?
6. (Advanced) How are companies preparing for the new rules? How
successful do these seem to be? How will the companies be affected?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
OECD Calls for Corporate-Tax Overhaul
by Paul Hannon
Feb 12, 2013
Online Exclusive
G-20 Plans to Overhaul International Corporate Tax
System Still on Track
by Paul Hannon
Sep 16, 2014
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Crunchtime for Global Tax-Avoidance Push
by Paul Hannon
Sep 27, 2015
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OECD Prepares to Close Tax Loophole
by Paul Hannon
Feb 16, 2015
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Global Tech Firms Brace for Tax Rules
by Sam Schechner
Oct 05, 2015
Online Exclusive
"OECD Rewrites Corporate Tax Rule Book," by Paul Hannon and Sam Schechner,
The Wall Street Journal, October 6, 2015 ---
http://www.wsj.com/articles/oecd-rewrites-corporate-tax-rule-book-1444046845?mod=djem_jiewr_AC_domainid
A major overhaul of the international rules
governing the taxation of company profits moved a step closer to completion
Monday, with the publication of a package of new standards that are set to
be adopted by leaders of the Group of 20 largest economies.
The Organization for Economic Cooperation and
Development, which was charged with rewriting the rule book, said the
package will help governments around the world claw back between $100
billion and $240 billion in lost revenue each year.
But some critics—including some executives in the
technology industry —argue the new rules rely too much on interpretation by
national tax authorities, opening up the possibility that a number of
governments will attempt to tax the same profit.
They also say the process for resolving disputes is
inadequate, and could lead to lengthy periods of uncertainty over tax bills
for companies operating in more than one country.
Other critics say the new rules don’t go far enough
in attempting to clamp down on tax avoidance, and should have aimed to tax a
multinational company as a single entity with revenue subsequently split
among governments, rather than as a series of units based in different
countries.
What isn’t in dispute is that the new rules
represent the most wide-ranging overhaul of tax rules in many decades, with
implications for the tax revenue of individual governments and the tax bills
of individual companies that are difficult to predict in advance.
The OECD, which is acting on behalf of the G-20 and
its own 34 member countries, is confident the new rules will close off many
avenues for what is known as “profit shifting,” or the ways in which
companies adopt legal structures and practices designed to record their
profits in the lowest tax jurisdictions, regardless of where those profits
are generated.
“This is one of the big deliverables of the G-20 to
the world,” OECD Secretary General Ángel Gurria said in an interview with
The Wall Street Journal. “It is a huge, huge response to a big, big
problem.”
The new rules will be approved by finance ministers
meeting in Lima, Peru on Oct. 9 to 11, and then by G-20 leaders when they
meet in Antalya, Turkey, on Nov. 15 and 16. Some rules will begin take
effect immediately.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 9,
2015
Why
It's a Prime Time for a Roth IRA
by:
Laura Saunders
Oct 03, 2015
Click here to view the full article on WSJ.com
TOPICS: Roth
Conversion, Roth IRAs, Tax Planning
SUMMARY: With
some stock indexes well below their highs this year despite a recent rally,
Roth individual retirement accounts are gaining appeal. A down market
presents tax-savings opportunities for both owners of Roth IRAs and savers
who would like to be. That's because the main drawback of a Roth IRA is
often the big tax hit affluent savers take when they put money into one, so
depressed asset values minimize this downside. And some Roth IRA owners who
transferred assets into their accounts last year when values were higher
still have a chance at a do-over.
CLASSROOM
APPLICATION: This
is an excellent tax planning article regarding Roth IRAs.
QUESTIONS:
1. (Introductory) What is a Roth IRA? How do they differ from
traditional IRAs? Are the differences minor or significant?
2. (Advanced) At what time does the article say is a good time to
take advantage of Roth IRAs?
3. (Advanced) What are the advantages of Roth accounts? What are the
advantages of traditional accounts? What are the disadvantages of each?
4. (Advanced) What is a Roth conversion? For whom does a conversion
present challenges? Why? What planning options do these taxpayers have?
5. (Advanced) What is a recharacterization? Why would a taxpayer do
this? What advantages would it provide?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Why It's a Prime Time for a Roth IRA," Laura Saunders, The Wall Street
Journal, October 3, 2015 ---
http://www.wsj.com/articles/why-its-a-prime-time-for-a-roth-ira-1443778202?mod=djem_jiewr_AC_domainid
With some stock indexes well below their highs this
year despite a recent rally, Roth individual retirement accounts are gaining
appeal.
A down market presents tax-savings opportunities
for both owners of Roth IRAs and savers who would like to be. That’s because
the main drawback of a Roth IRA is often the big tax hit affluent savers
take when they put money into one, so depressed asset values minimize this
downside. And some Roth IRA owners who transferred assets into their
accounts last year when values were higher still have a chance at a do-over.
The deadline to undo such transfers made in 2014 is Oct. 15.
Roth IRAs are considered the gold standard of
tax-sheltered retirement plans, with good reason: Both asset growth and
withdrawals can be tax-free, and Roth owners don’t have to take required
withdrawals during their lifetime. By contrast, owners of traditional IRAs
must make withdrawals after age 70˝ that deplete the account, and the
payouts are taxable at ordinary income rates.
The hitch is that Roth IRA contributions are in
after-tax dollars, while contributions to traditional IRAs are often pretax.
This hasn’t kept younger savers and others from using them. According to
data from Vanguard Group, nearly two-thirds of IRA contributions since 2007
have been to Roth accounts.
But taxes do pose a problem for older, affluent
savers who want to transfer assets to Roth accounts from traditional
IRAs—some of which are very large because they contain rollovers from an
employer’s retirement plan. The law allows such transfers, which are known
as conversions, but they trigger a tax bill that can push people into higher
brackets.
Strategies for
Roth conversions.
For these would-be Roth owners, one
option is to convert to a Roth IRA in “nibbles”
and at opportune times, says Natalie Choate, a
lawyer who specializes in estate planning for
retirement benefits at Nutter, McClennen & Fish
in Boston. This means transferring just enough
avoid to a higher bracket, and trying to do
conversions in years when income is lower—such
as when someone is between jobs, or after
retirement but before turning 70˝.
A market decline also
brings opportunities, assuming stocks rise
again, because value can be transferred at a
lower tax cost into a Roth account. Ms. Choate
says she is compiling a list of losers in her
traditional IRA to transfer to her Roth IRA.
This strategy served
her well during a 2010 market drop, as she did a
Roth conversion of 10 battered blue-chip stocks
in her traditional IRA. Five years later, says
Ms. Choate, the stocks and their dividends have
gained 82%—“and it’s all inside my tax-free Roth
IRA.”
The Dow Jones
Industrial Average is down 10.05% from its peak
this year, and the Dow Jones U.S. Total Stock
Market Index is down 9.01%.
Undoing a Roth
conversion. People who did Roth IRA
conversions either last year or this year should
also do a check, says Ed Slott, an IRA
specialist who is a certified public accountant
in Rockville Centre, N.Y. If the account value
has dropped, the owner may be able to reverse
the transfer and avoid paying tax on value that
has vanished. This is called “recharacterization.”
A spokesman for Vanguard said such reversals
were recently up 26% compared with the same time
last year.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 9,
2015
PricewaterhouseCoopers Posts 4.1% Rise in Global Revenue
by:
Michael Rapoport
Oct 06, 2015
Click here to view the full article on WSJ.com
TOPICS: Auditing,
Big Four
SUMMARY: PricewaterhouseCoopers
had global revenue of $35.4 billion in its last fiscal year, up 4.1% from
the previous year at each year's average foreign-exchange rates, the Big
Four accounting firm. In those terms, the firm's revenue growth for the
fiscal year ended June 30 was below last
year's 5.8% growth. However, when exchange rates are held constant - the way
PwC prefers to measure its growth - the firm's global revenue was up 9.9%,
an improvement over the previous year's 6.1% growth. PwC and the other major
accounting firms are international networks of private partnerships, and
they disclose only their annual revenues, not their earnings. The firm's
revenue growth was led by its consulting business, which outpaced the growth
of its more-mature core audit business, as has been the case at all of the
Big Four firms over the past several years. PwC's consulting revenue grew
12.3% in average-exchange-rate terms. Audit revenue rose 0.3% at average
exchange rates.
CLASSROOM
APPLICATION: This
article features financial results of one of the Big Four accounting firms
and offers a glimpse into the business of those firms.
QUESTIONS:
1. (Introductory) What are the Big Four accounting firms? What do
they do? Why are they called big?
2. (Advanced) What are the various service areas of work accounting
firms do? What is the largest area? Why? How are things changing?
3. (Advanced) What are the details regarding PwC's domestic and
international business? Where are the areas of growth for the firm and
others in the industry?
4. (Advanced) The article mentions exchange rates. What are they? How
did exchange rates impact the firm's financial results? How does the firm
prefer to measure growth? Why?
5. (Advanced) How do PwC's results compare with results of the other
Big Four firms?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Ernst & Young's Global Revenue Increases in Fiscal
Year
by Michael Rapoport
Sep 14, 2015
Online Exclusive
"PricewaterhouseCoopers Posts 4.1% Rise in Global Revenue by: Michael
Rapoport, The Wall Street Journal, October 6, 2015 ---
http://www.wsj.com/articles/pricewaterhousecoopers-posts-4-1-rise-in-global-revenue-1444086218?mod=djem_jiewr_AC_domainid
PricewaterhouseCoopers had global revenue of $35.4
billion in its last fiscal year, up 4.1% from the previous year at each
year’s average foreign-exchange rates, the Big Four accounting firm
announced on Monday.
In those terms, the firm’s revenue growth for the
fiscal year ended June 30 was below last year’s 5.8% growth. However, when
exchange rates are held constant—the way PwC prefers to measure its
growth—the firm’s global revenue was up 9.9%, an improvement over the
previous year’s 6.1% growth.
PwC had a “very, very strong performance” in a
“pretty challenging economic environment that continues to have a lot of
instabilities,” said Dennis Nally, PwC’s global chairman, in an interview
with The Wall Street Journal.
PwC and the other major accounting firms are
international networks of private partnerships, and they disclose only their
annual revenues, not their earnings.
The firm’s revenue growth was led by its consulting
business, which outpaced the growth of its more-mature core audit business,
as has been the case at all of the Big Four firms over the past several
years. PwC’s consulting revenue grew 12.3% in average-exchange-rate terms
and 18% in constant-exchange-rate terms. Audit revenue rose 0.3% at average
exchange rates and 6.2% at constant exchange rates.
Consulting revenues were boosted by Strategy&,
which is the former management-consulting firm Booz & Co. that PwC acquired
in 2014. The latest year was the first full fiscal year to reflect the
deal’s impact. It’s hard to quantify Strategy&’s impact on revenues, Mr.
Nally said, but “it’s clearly having a positive effect.” The acquisition
“added significant new competencies that are making a difference for our
clients.”
Continued in article
Bob Jensen's threads on PwC ---
http://faculty.trinity.edu/rjensen/Fraud001.htm
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 9,
2015
For
Prescription Drug Makers, Price Increases Drive Revenue
by:
Joseph Walker
Oct 06, 2015
Click here to view the full article on WSJ.com
TOPICS: Managerial
Accounting, Pricing, Variable Costs, Cost Behavior, Cost-Volume-Profit
Analysis, Fixed Costs
SUMMARY: Demand
for a drug called Avonex has declined every year for the past 10. Not a
problem for its manufacturer. U.S. revenue from the drug has more than
doubled in that time, to $2 billion last year. The key: repeated price
increases. It is an example of drug companies' unusual ability to boost
prices beyond the inflation rate to drive their revenue, even when demand
for the drugs doesn't cooperate.
CLASSROOM
APPLICATION: This
article can be used in managerial accounting classes for CVP analysis and
cost behavior.
QUESTIONS:
1. (Introductory) What demand issues has the manufacturer of Avonex
been facing? How has the company reacted in an attempt to maintain
profitability?
2. (Advanced) What is the supply-demand-price dynamic in economics?
How does Biogen's pricing strategy seem to contradict this economic law?
3. (Advanced) How could the manufacturers in the article use
cost-volume-profit analysis to improve profitability? In what ways might
they have used the analysis tool to make decisions in the past?
4. (Advanced) If Biogen raises prices in the face of decreased
demand, how are the company's fixed costs impacted? What is the affect on
variable costs? How do those factors ultimately affect net income?
Reviewed By: Linda Christiansen, Indiana University Southeast
"For Prescription Drug Makers, Price Increases Drive Revenue," by Joseph
Walker, The Wall Street Journal, October 6, 2015 ---
http://www.wsj.com/articles/for-prescription-drug-makers-price-increases-drive-revenue-1444096750?mod=djem_jiewr_AC_domainid
Demand for a drug called Avonex has declined every
year for the past 10.
Not a problem for its manufacturer. U.S. revenue
from the drug has more than doubled in that time, to $2 billion last year.
The key: repeated price increases. The multiple
sclerosis drug’s maker, Biogen Inc., raised its price an average of 16% a
year throughout the decade—21 times in all.
It is an example of drug companies’ unusual ability
to boost prices beyond the inflation rate to drive their revenue, even when
demand for the drugs doesn’t cooperate.
A result of this pricing power is that across 30
top-selling drugs sold by pharmacies, U.S. revenue growth has far outpaced
demand in the past five years, according to a Wall Street Journal analysis
of corporate filings and industry data. Revenue growth averaged 61%, three
times the increase in prescriptions.
Attention has focused lately on new drugs with
eye-popping prices and on a few whose price a new owner abruptly raised
several-fold. But what many drug companies rely on for sales growth is a
pattern of steady increases, year in and year out, on older medicines.
Wholesale-price increases for the 30 drugs analyzed by the Journal averaged
76% over the five-year stretch from 2010 through 2014. That was more than
eight times general inflation.
For 20 leading global drug companies last year, 80%
of growth in net profits stemmed from price increases in the U.S., according
to a May report by Credit Suisse.
Pricing power helps some in the pharmaceutical
industry to compensate for sluggish demand, new competition or weak product
pipelines. “Pricing has covered up a multitude of other disappointments over
the past 15 years” in the sector, said Geoffrey Porges, a biotech analyst at
AllianceBernstein LP.
This is no cause for cheer, of course, to certain
other market participants, notably the many large companies that pick up the
tab for their employees’ prescriptions. Drug pricing has helped drive up
spending on benefits at Lowe’s Cos., said Bob Ihrie, a senior vice president
at the home-improvement retailer.
“It’s one thing when you read about a new drug in
the newspaper, and all the costs of launching it. But when it’s drugs that
have been on the market and you see these price increases, you go, ‘Why
would this be?’ ” Mr. Ihrie said. “I feel like we’re really being taken
advantage of.”
Pharmaceutical companies defend their pricing as
helping to finance development of innovative medicines, an expensive and
risky enterprise they say wouldn’t attract investment without the potential
for large returns when a new drug succeeds.
Continued in article
Bob
Jensen's universal health care messaging ---
http://faculty.trinity.edu/rjensen/Health.htm
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 16,
2015
SEC
Readies Clawback Rules for Punishing Bad Accounting
by:
Maxwell Murphy
Oct 13, 2015
Click here to view the full article on WSJ.com
TOPICS: Accounting
Errors, Clawback, Compensation, Dodd-Frank, Restatements, SEC
SUMMARY: When
errors are found in a company's books, the responsibility often falls on the
finance chief and chief executive who signed off on the numbers. And it is
up to the board of directors to decide whether they should be penalized by
returning some of their compensation. The Securities and Exchange Commission
is about to issue new rules that would take away a board's discretion in
such cases, and would require companies to punish accounting missteps by
clawing back pay from a wider range of top executives. Failure to do so
could cost a company its stock listing. The Dodd-Frank Act of 2010 required
the SEC to write the rules, in hopes that putting executive pay at risk
would discourage fraud and undue risk-taking. The rules apply only to pay
that is tied to a company's financial performance, a type that is
increasingly common. Corporate critics say the rules could wallop executives
who had no knowledge of errors in the books or any role in overseeing them.
CLASSROOM
APPLICATION: These
SEC rules resulting from Dodd-Frank are appropriate for financial accounting
classes when covering accounting errors.
QUESTIONS:
1. (Introductory) What is Dodd-Frank? What does it regulate?
2. (Introductory) What is the SEC? What is its area of authority? How
is it involved with Dodd-Frank?
3. (Advanced) What are the details of these new rules? Why were they
drafted? What is a clawback? What is being 'clawed back' by these rules?
From whom does the clawback come? What are the penalties for noncompliance?
4. (Advanced) What is the reasoning for these rules? Should all of
the parties who could be affected be included in the rules? Why or why not?
5. (Advanced) Are these rules fair? Why or why not? If not, how could
they be changed to be fair?
6. (Advanced) How could companies avoid the penalties associated with
these rules?
7. (Advanced) What do critics of the new rules say? Are their
arguments convincing?
Reviewed By: Linda Christiansen, Indiana University Southeast
"SEC Readies Clawback Rules for Punishing Bad Accounting," by Maxwell Murphy,
The Wall Street Journal, October 12, 2015 ---
http://www.wsj.com/articles/sec-readies-clawback-rules-for-punishing-bad-accounting-1444694080?mod=djem_jiewr_AC_domainid
When errors are found in a company’s books, the
responsibility often falls on the finance chief and chief executive who
signed off on the numbers. And it is up to the board of directors to decide
whether they should be penalized by returning some of their compensation.
The Securities and Exchange Commission is about to
issue new rules that would take away a board’s discretion in such cases, and
would require companies to punish accounting missteps by clawing back pay
from a wider range of top executives. Failure to do so could cost a company
its stock listing.
Many companies object to the proposed rules, which
are awaiting the SEC’s final approval after a public-comment period ended
last month. Corporate critics say the rules could wallop executives who had
no knowledge of errors in the books or any role in overseeing them.
“It is overbroad in its reach,” said Timothy
Donnelly, chief administrative officer and general counsel of American
Vanguard Corp. Boards want to avoid a situation in which, for example, a
chief technology officer would be punished “if the [chief financial officer]
decided to cook up some ridiculous scheme,” or vice versa, he said.
American Vanguard, a California chemical maker, has
a clawback policy in place, as do nearly 90% of the nation’s 100 largest
public companies, says a recent study by law firm Shearman & Sterling LLP.
Eight years ago, barely a third of them had such a policy.
Oil companies Exxon Mobil Corp. and Chevron Corp.
and package-delivery giant FedEx Corp. , said in their comment letters that
the proposed rules were too rigid and usurped too much of a board’s
authority. They called for changes they said would make the impact less
onerous.
The Dodd-Frank Act of 2010 required the SEC to
write the rules, in hopes that putting executive pay at risk would
discourage fraud and undue risk taking. The rules apply only to pay that is
tied to a company’s financial performance, a type that is increasingly
common.
A recent study by Cornell University and
compensation consulting firm Pearl Meyer & Partners LLC suggests more than
half of public companies tie some portion of executive pay to total
shareholder return—or stock appreciation plus dividend payments—up from 17%
about a decade ago.
That is partly because some proxy advisers, such as
Institutional Shareholder Services, use that benchmark to shape
recommendations to investors about whether they should approve corporate-pay
packages.
Many aspects of the proposed rule aren’t clear.
“There are too many variables in the market” to say what portion of
performance-based pay would be at risk under the clawback rules, said
compensation lawyer Jim Barrall of Latham & Watkins LLP.
Some critics also say companies could dodge the new
rules simply by altering their pay packages. “It could have the unintended
consequence” of dialing back the clock to a time when companies didn’t
disclose the rationale for bonuses, said John Roe, executive director of
ISS’s Corporate Solutions division, which advises companies on governance
policies.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 16,
2015
Tips for Tax-Savvy Homeowners
by:
Anya Martin
Oct 08, 2015
Click here to view the full article on WSJ.com
TOPICS: Home-Office
Deduction, Individual Taxation, Mortgage Interest Deduction
SUMMARY: With
nearly three months left in the year, homeowners still have time to make
tweaks that can lessen what they owe next April. The tax-planning ideas
include home-office deduction, mortgage interest deduction, and short-term
rentals.
CLASSROOM
APPLICATION: This
article is appropriate for individual taxation.
QUESTIONS:
1. (Introductory) What tax deductions are available to homeowners?
What are the limits to deductibility of these expenses?
2. (Advanced) What is the home-office deduction? What is allowed? How
is the deduction limited?
3. (Advanced) How does a free-standing home office affect a taxpayer
taking the home-office deduction?
4. (Advanced) What is the mortgage interest deduction? How can
marital status affect that deduction?
5. (Advanced) What are the rules regarding rental income from
short-term rentals of a home? What is taxable and what is deductible?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Airbnb Income May Be Tax-Free:But There's a Catch
by Laura Saunders
Apr 03, 2015
Online Exclusive
Tips for Homeowners to Ease the Tax Bite
by Anya Martin
Mar 04, 2015
Online Exclusive
Another Reason Not to Get Married
by Laura Saunders
Aug 21, 2015
Online Exclusive
IRS Simplifies Home-Office Deduction
by Tom Herman
Feb 16, 2015
Online Exclusive
"Tips for Tax-Savvy Homeowners," by Anya Martin, The Wall Street Journal,
October 8, 2015 ---
http://www.wsj.com/articles/tips-for-tax-savvy-homeowners-1444226991?mod=djem_jiewr_AC_domainid
Autumn chores: raking leaves, weatherproofing,
storing the patio furniture and preparing for
next year’s tax returns.
With nearly three months left in the year,
jumbo-mortgage borrowers still have time to make
tweaks that can lessen what they owe in April.
Here are
some tips from tax experts—but
be sure to consult a tax professional for
specifics on your return.
First, the tax rules
are tricky for home sellers who have
claimed a home-office deduction.
On the tax return for the year of sale of a
primary residence, the seller can exclude as
much as $250,000 in capital gains for a single
person or $500,000 for a couple. But sellers who
claimed a home-office deduction for depreciation
have to pay capital gains taxes on the amount
deducted, says Janet C. Hagy, president of
accounting firm Hagy & Associates in Austin,
Texas. This “recaptured depreciation” is taxed
at a 25% rate (unless the seller’s income-tax
bracket is lower than 25%).
The location of the home office also matters when
it comes time to sell, says Ms. Hagy. If the home office is a separate,
free-standing structure, such as a guesthouse, homeowners must allocate the
profit between the personal living and office portions of the home and pay
taxes on the profits allocated to the office. “I see clients turn the pool
house or a detached garage into a home office, but the rules can be
surprising,” she adds.
Two possible strategies for future home-sellers: At
least two years before a sale, relocate the office back into the home or
knock down a wall to physically attach the structure to the existing home.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 16,
2015
Audit Fees Jump Faster at Riskier Companies
by:
Emily Chasan
Oct 08, 2015
Click here to view the full article on WSJ.com
TOPICS: Audit
Fees, Auditing, Internal Controls, Sarbanes-Oxley Act
SUMMARY: Firms
with ineffective controls over financial reports tend to pay more than those
who do a better job. Companies registered with the SEC paid a median audit
fee of $402,812 last year. But for about 21% of companies that reported
ineffective controls over financial reporting, the median increase in audit
fees was three percentage points higher than the median increase for all
companies.
CLASSROOM
APPLICATION: This
is interesting real-world information for an auditing class.
QUESTIONS:
1. (Introductory) What are internal controls? What are some examples
of internal control activities?
2. (Advanced) Why are internal controls important? How could the
quality of internal controls affect a company's audit?
3. (Advanced) How are audit fees affected by a company's internal
controls? Why is there a connection between controls and fees?
4. (Advanced) What are recent trends in audit fees and internal
controls? Please list some reasons for this. From a cost/benefit
perspective, are controls a good use of corporate funds?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Audit Fees Jump Faster at Riskier Companies," by Emily Chasan, The
Wall Street Journal, October 8, 2015 ---
http://blogs.wsj.com/cfo/2015/10/08/audit-fees-jump-faster-at-riskier-companies/?mod=djem_jiewr_AC_domainid
How much a company pays its auditor depends on how
well it safeguards against fraud and reporting errors.
Firms with ineffective controls over financial
reports tend to pay more than those who do a better job, according to a new
report by the Financial Executives Research Foundation.
Companies registered with the SEC paid a median
audit fee of $402,812 last year. But for about 21% of companies that
reported ineffective controls over financial reporting, the median increase
in audit fees was three percentage points higher than the median increase
for all companies.
The group reviewed audit fees at 7,000 companies.
Last year’s median fee is up 3.4% from 2013.
Companies are required to test the effectiveness of
their internal controls for financial reporting and have auditors review
their results under the Sarbanes-Oxley Act of 2002. The testing is aimed at
preventing fraud or material errors in financial reports.
Almost 60% of the companies polled said the cost of
internal control audits rose over the past three years, but about 45% said
they saw improvements to their controls and were satisfied with the
additional expense.
In a survey of 200 financial executives, the
majority of public companies said there was an increase in the volume of
audit work in 2014, compared with 2013.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 16,
2015
The
Number to Watch This Earnings Season
by:
Saumya Vaishampayan and Corrie Driebusch
Oct 12, 2015
Click here to view the full article on WSJ.com
TOPICS: Financial
Accounting, Profit Margin, Profitability
SUMMARY: Many
investors are putting an increased focus on profit margins as a sign of
companies' ability to propel earnings higher. Profit margins, or earnings as
a share of revenue, reached a record 10.5% for the S&P 500 in the second
quarter of 2015. Margins have expanded since the financial crisis as
companies cut costs, held off on updating infrastructure and borrowed at
historically low rates. The upshot was several quarters of higher profits
even as sales stagnated.
CLASSROOM
APPLICATION: This
article on recent trends in profitability and components of profitability is
appropriate for use in financial accounting classes.
QUESTIONS:
1. (Introductory) What is profit margin? How is it calculated?
2. (Advanced) How important is profit margin when analyzing the
financial condition of a company? What does it show? What are some important
factors of a business that are not revealed in profit margin?
3. (Advanced) What have been the trends for profit margins in the S&P
500? What are the reasons for those trends? What have many companies been
doing with components of profit margins in recent years? Why have they made
those decisions?
4. (Advanced) What concerns do investors have regarding profit
margins? What changes in the economy or in businesses could impact the
trends and profitability levels?
Reviewed By: Linda Christiansen, Indiana University Southeast
"The Number to Watch This Earnings Season," by Saumya Vaishampayan and Corrie
Driebusch, The Wall Street Journal, October 12, 2015 ---
http://www.wsj.com/articles/profit-margins-take-spotlight-in-u-s-earnings-season-1444580752?mod=djem_jiewr_AC_domainid
As third-quarter U.S. corporate results roll out
this week, many investors are putting an increased focus on profit margins
as a sign of companies’ ability to propel earnings higher.
Profit margins, or earnings as a share of revenue,
reached a record 10.5% for the S&P 500 in the second quarter. Margins have
expanded since the financial crisis as companies cut costs, held off on
updating infrastructure and borrowed at historically low rates. The upshot
was several quarters of higher profits even as sales stagnated.
Many investors now say companies don’t have much
excess left to wring out to boost profits.
The issue has attracted increased attention as
investors fret about factors that could boost costs for companies. These
include pressure to pay workers more as the labor market improves and higher
borrowing costs as the Federal Reserve gets closer to raising interest
rates.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on October 16,
2015
The
Big Number: 49% Share of Auditor Errors
by:
Emily Chasan
Oct 13, 2015
Click here to view the full article on WSJ.com
TOPICS: Auditing,
Mergers and Acquisitions
SUMMARY: Corporate
auditors struggled to keep up with an uptick in mergers and acquisitions
following the financial crisis. A spike in deal activity this year could
make the problem worse. 49% of valuation-related deficiencies cited by the
Public Company Accounting Oversight Board last year from 2013 audits by the
nine largest audit firms were linked to mergers and acquisitions. Auditors
are cited for deficiencies when they fail to follow proper procedures, but
that doesn't necessarily mean a company's financial statements are
incorrect.
CLASSROOM
APPLICATION: This
article provides good information for auditing classes and financial
accounting classes dealing with mergers and acquisitions.
QUESTIONS:
1. (Introductory) What are M&A deals? Who is involved and what is at
stake?
2. (Advanced) What are deficiencies? How do deficiencies affect the
financial statements?
3. (Advanced) How are auditors involved with M&A deals? What are the
statistics regarding audit errors? Are audits an important part of those
deals? Why or why not?
4. (Advanced) What is the PCAOB? How is it involved with auditing
and/or M&As?
Reviewed By: Linda Christiansen, Indiana University Southeast
"The Big Number: 49% Share of Auditor Errors, by Emily Chasan, The Wall
Street Journal, October 13, 2015 ---
http://www.wsj.com/articles/the-big-number-1444692338?mod=djem_jiewr_AC_domainid
49%
Share of auditor errors linked to the value of M&A
deals
Corporate auditors struggled to keep up with an
uptick in mergers and acquisitions following the financial crisis. A spike
in deal activity this year could make the problem worse.
The percentage of auditor errors linked to M&A
deals jumped over the past two years of inspections by the government’s
auditing watchdog, according to a study by valuation advisory firm Acuitas
Inc.
Auditors are cited for deficiencies when they fail
to follow proper procedures, but that doesn’t necessarily mean a company’s
financial statements are incorrect.
Acuitas said 49% of valuation-related deficiencies
cited by the Public Company Accounting Oversight Board last year from 2013
audits by the nine largest audit firms were linked to mergers and
acquisitions.
For 2012, that figure was 45%. But between 2008 and
2011, the M&A-related deficiencies averaged just 9%.
Errors ranged from failing to properly test data on
cash-flow projections, improperly testing management’s techniques for
valuing assets, and sometimes failing to detect intangible assets that
needed to be assigned a value.
Continued in article
Humor for October 1-31, 2015
Economics Humor ---
http://alternativeinvestmentcoach.com/economics-resources/jokes/
The funniest Amazon product reviews you’ve ever
seen (like many Amazon product reviews, some may be fake) ---
https://www.yahoo.com/tech/s/funniest-amazon-product-reviews-ve-ever-seen-160558073.html
Famous last words of 18 famous people ---
http://www.businessinsider.com/list-compilation-famous-last-words-2015-10
Forwarded by Paula
When Insults Had
Class...
These glorious
insults are from an era before the English language got boiled down to 4-letter
words.
"I am enclosing two tickets to the first night of my new play; bring a friend,
if you have one."
-George Bernard Shaw to Winston Churchill
"Cannot possibly attend first night, will attend second... if there is one."
-Winston Churchill, in response
A member of Parliament to Disraeli: "Sir, you will either die on the gallows
or of some unspeakable disease."
"That depends, Sir," said Disraeli, "whether I embrace your policies
or your mistress."
"He is a self-made man and worships his creator."
-John Bright
"I've just learned about his illness. Let's hope it's nothing trivial."
-Irvin S. Cobb
"He had delusions of adequacy."
-Walter Kerr
"He has all the virtues I dislike and none of the vices I admire."
- Winston Churchill
"I have never killed a man, but I have read many obituaries with great
pleasure."
-Clarence Darrow
"He has never been known to use a word that might send a reader to the
dictionary."
-William Faulkner (about Ernest Hemingway)
"Thank you for sending me a copy of your book; I'll waste no time reading
it."
-Moses Hadas
"I didn't attend the funeral, but I sent a nice letter saying I approved of
it."
-Mark Twain
"He has no enemies, but is intensely disliked by his friends."
-Oscar Wilde
"I feel so miserable without you; it's almost like having you here."
-Stephen Bishop
"He is not only dull himself; he is the cause of dullness in others."
-Samuel Johnson
"He is simply a shiver looking for a spine to run up."
- Paul Keating
"In order to avoid being called a flirt, she always yielded easily."
-Charles, Count Talleyrand
"He loves nature in spite of what it did to him."
-Forrest Tucker
"Why do you sit there looking like an envelope without any address on it?"
-Mark Twain
"His mother should have thrown him away and kept the stork."
-Mae West
"Some cause happiness wherever they go; others, whenever they go."
-Oscar Wilde
"He uses statistics as a drunken man uses lamp-posts... for support rather
than illumination."
-Andrew Lang (1844-1912)
"He has Van Gogh's ear for music."
-Billy Wilder
"I've had a perfectly wonderful evening. But I'm afraid this wasn't it."
-Groucho Marx
Forwarded by Paula
A gorgeous young redhead goes into the doctor's
office and said that her body hurt wherever she touched it. "Impossible!" says
the doctor. "Show me."
The redhead took her finger, pushed on her left
wrist and screamed, then she pushed her elbow and screamed in even more. She
pushed her knee and screamed; likewise she pushed her ankle and screamed.
Everywhere she touched made her scream.
The doctor said, "You're not really a redhead,
are you?
"Well, no" she said, "I'm actually a blonde."
"I thought so," the doctor said. "Your finger is
broken"
Forwarded by Paula
It got crowded in heaven, so, for one day it was
decided only to accept people who had really had a bad day on the day they died.
St. Peter was standing at the pearly gates and said to the first man, "Tell me
about the day you died."
The man said, "Oh, it was awful. I was sure my
wife was having an affair, so I came home early to catch her with him. I
searched all over the apartment but couldn't find him anywhere. So I went out
onto the balcony, we live on the 25th floor, and found this man hanging over the
edge by his fingertips. I went inside, got a hammer, and started hitting his
hands. He fell, but landed in some bushes. So, I got the refrigerator and pushed
it over the balcony and it crushed him. The strain of the act gave me a heart
attack, and I died."
St. Peter couldn't deny that this was a pretty
bad day, and since it was a crime of passion, he let the man in.
He then asked the next man in line about the day
he died. "Well, sir, it was awful," said the second man. "I was doing aerobics
on the balcony of my 26th floor apartment when I twisted my ankle and slipped
over the edge. I managed to grab the balcony of the apartment below, but some
maniac came out and started pounding on my fingers with a hammer. Luckily I
landed in some bushes. But, then the guy dropped a refrigerator on me!"
St. Peter chuckled, let him into heaven and
decided he could really start to enjoy this job.
"Tell me about the day you died?", he said to
the third man in line.
"OK, picture this, I'm naked, hiding inside a
refrigerator...."
Humor September 1-30, 2015
---
http://faculty.trinity.edu/rjensen/book15q4.htm#Humor093015
Humor August 1-31, 2015
---
http://faculty.trinity.edu/rjensen/book15q3.htm#Humor083115
Humor July 1-31, 2015
---
http://faculty.trinity.edu/rjensen/book15q3.htm#Humor073115
Humor June 1-30, 2015
---
http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015
Humor May 1-31, 2015
---
http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015
Humor April 1-30, 2015
---
http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015
Humor March 1-31, 2015
---
http://faculty.trinity.edu/rjensen/book15q1.htm#Humor033115
Humor February 1-28, 2015
---
http://faculty.trinity.edu/rjensen/book15q1.htm#Humor022815
Humor January 1-31, 2015
---
http://faculty.trinity.edu/rjensen/book15q1.htm#Humor013115
Humor December 1-31, 2014
---
http://faculty.trinity.edu/rjensen/book14q4.htm#Humor123114
Humor November 1-30, 2014
---
http://faculty.trinity.edu/rjensen/book14q4.htm#Humor113014
Humor October 1-31, 2014
---
http://faculty.trinity.edu/rjensen/book14q4.htm#Humor103114
Humor September 1-30, 2014
---
http://faculty.trinity.edu/rjensen/book14q3.htm#Humor093014
Humor August 1-31, 2014
---
http://faculty.trinity.edu/rjensen/book14q3.htm#Humor083114
Humor July 1-31, 2014---
http://faculty.trinity.edu/rjensen/book14q3.htm#Humor073114
And that's
the way it was on October 31, 2015 with a little help from my friends.
Bob
Jensen's gateway to millions of other blogs and social/professional networks ---
http://faculty.trinity.edu/rjensen/ListservRoles.htm
Bob
Jensen's Threads ---
http://faculty.trinity.edu/rjensen/threads.htm
Bob
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http://faculty.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called
New
Bookmarks ---
http://faculty.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called
Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past
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http://faculty.trinity.edu/rjensen/resume.htm#Presentations
Free
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http://faculty.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://faculty.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Bob
Jensen's Resume ---
http://faculty.trinity.edu/rjensen/Resume.htm
Bob
Jensen's Homepage ---
http://faculty.trinity.edu/rjensen/
Accounting
Historians Journal ---
http://www.libraries.olemiss.edu/uml/aicpa-library and
http://clio.lib.olemiss.edu/cdm/landingpage/collection/aah
Accounting Historians Journal
Archives---
http://www.olemiss.edu/depts/general_library/dac/files/ahj.html
Accounting History Photographs ---
http://www.olemiss.edu/depts/general_library/dac/files/photos.html
|
For an elaboration on the reasons you should join a ListServ (usually
for free) go to http://faculty.trinity.edu/rjensen/ListServRoles.htm |
|
AECM (Accounting Educators)
http://listserv.aaahq.org/cgi-bin/wa.exe?HOME
The AECM is an email Listserv list which
started out as an accounting education technology Listserv. It has
mushroomed into the largest global Listserv of accounting education
topics of all types, including accounting theory, learning, assessment,
cheating, and education topics in general. At the same time it provides
a forum for discussions of all hardware and software which can be useful
in any way for accounting education at the college/university level.
Hardware includes all platforms and peripherals. Software includes
spreadsheets, practice sets, multimedia authoring and presentation
packages, data base programs, tax packages, World Wide Web applications,
etc
Roles of a ListServ --- http://faculty.trinity.edu/rjensen/ListServRoles.htm
|
|
CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down)
CPAS-L provides a forum for discussions of
all aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just monitoring
the list. You qualify for a free subscription if you are either a CPA or
a professional accountant in public accounting, private industry,
government or education. Others will be denied access. |
|
Yahoo (Practitioners)
http://groups.yahoo.com/group/xyztalk
This forum is for CPAs to discuss the
activities of the AICPA. This can be anything from the CPA2BIZ portal
to the XYZ initiative or anything else that relates to the AICPA. |
|
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as accounting
software, consulting, financial planning, fixed assets, payroll, human
resources, profit on the Internet, and taxation. |
|
Business Valuation Group
BusValGroup-subscribe@topica.com
This discussion group is headed by Randy Schostag
[RSchostag@BUSVALGROUP.COM] |
Concerns That Academic Accounting Research is Out of Touch With Reality
|
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the twin
dangers of fossilization and scholasticism (of three types: tedium,
high tech, and radical chic)
From
http://faculty.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of the
shift from Gemeinschaft to
Gesellschaft. Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue
to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
What went wrong in accounting/accountics research?
How did academic accounting research become a pseudo science?
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong
Avoiding applied research for practitioners and failure to attract
practitioner interest in academic research journals ---
"Why business ignores the business schools," by Michael
Skapinker
Some ideas for applied research ---
http://faculty.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession
Clinging to Myths in Academe and Failure to Replicate and
Authenticate Research Findings
http://faculty.trinity.edu/rjensen/theory01.htm#Myths
Poorly designed and executed experiments that are rarely, I mean
very, very rarely, authenticated
http://faculty.trinity.edu/rjensen/theory01.htm#PoorDesigns
Discouragement of case method research by leading journals (TAR,
JAR, JAE, etc.) by turning back most submitted cases ---
http://faculty.trinity.edu/rjensen/000aaa/thetools.htm#Cases
Economic Theory Errors
Where analytical mathematics in accountics research made a huge
mistake relying on flawed economic theory and interval/ratio scaling
http://faculty.trinity.edu/rjensen/theory01.htm#EconomicTheoryErrors
Accentuate the Obvious and Avoid the Tough Problems (like fraud) for
Which Data and Models are Lacking
http://faculty.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Financial Theory Errors
Where capital market research in accounting made a huge mistake by
relying on CAPM
http://faculty.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Philosophy of Science is a Dying Discipline
Most scientific papers are probably wrong
http://faculty.trinity.edu/rjensen/theory01.htm#PhilosophyScienceDying
|
September
17, 2015 message from Sudipta Basu
Dear Bob:
Don't know if you have come across this paper by
Gow, Larcker and Reiss, but given your interest in methodological issues,
you will probably find this interesting.
http://research.chicagobooth.edu/~/media/90CF65A6E20D44C6A70C579937A9778C.pdf
Best wishes,
Sudipta
Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites
---
http://faculty.trinity.edu/rjensen/AccountingNews.htm
Accounting
Professors Who Blog ---
http://faculty.trinity.edu/rjensen/ListservRoles.htm
Cool
Search Engines That Are Not Google ---
http://www.wired.com/epicenter/2009/06/coolsearchengines
Free
(updated) Basic Accounting Textbook --- search for Hoyle at
http://faculty.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
CPA
Examination ---
http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle ---
http://cpareviewforfree.com/
Bob Jensen's Pictures and Stories
http://faculty.trinity.edu/rjensen/Pictures.htm
Bob
Jensen's Homepage ---
http://faculty.trinity.edu/rjensen/