New Bookmarks
Year 2009 Quarter 1:  January 31 to March 31 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

For earlier editions of New Bookmarks go to http://www.trinity.edu/rjensen/bookurl.htm 
Tidbits Directory --- http://www.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/.

Choose a Date Below for Additions to the Bookmarks File

March 31

February 28

January 31  

March 31, 2009

Bob Jensen's New Bookmarks on  March 31, 2009
Bob Jensen at Trinity University 

For earlier editions of Fraud Updates go to http://www.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to http://www.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to http://www.trinity.edu/rjensen/bookurl.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 Blogs --- http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm

Many useful accounting sites (scroll down) --- http://www.iasplus.com/links/links.htm

Accounting program news items for colleges are posted at http://www.accountingweb.com/news/college_news.html
Sometimes the news items provide links to teaching resources for accounting educators.
Any college may post a news item.

Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of appendices can be found at
http://www.trinity.edu/rjensen/2008Bailout.htm

Federal Revenue and Spending Book of Charts (Great Charts on Bad Budgeting) ---
http://www.heritage.org/research/features/BudgetChartBook/index.html

Humor Between March 1 and March 31, 2009 --- http://www.trinity.edu/rjensen/book09q1.htm#Humor033109  

Humor Between February 1 and February 28, 2009 --- http://www.trinity.edu/rjensen/book09q1.htm#Humor022809   

Changes in the Wind for the FASB's Accounting Standards Codification Database Project --- http://asc.fasb.org/asccontent&trid=2273304&nav_type=left_nav 

"FASB Advances GAAP Codification Plan," Journal of Accountancy, March 31, 2009 --- http://www.journalofaccountancy.com/Web/20091591.htm

FASB took another step forward in its plan to codify U.S. GAAP with the release Friday of an exposure draft on changes to the GAAP hierarchy.

 

FASB is taking comments on the proposal until May 8. In the draft, the standard setter reiterates the planned July 1 effective date for the FASB Accounting Standards Codification to become the single source of authoritative U.S. accounting and reporting standards, except for SEC rules and interpretive releases.

 

The 20-page proposal would modify FASB Statement no. 162, The Hierarchy of Generally Accepted Accounting Principles. The proposal would establish only two levels of GAAP—authoritative and nonauthoritative.

 

As of July 1, the FASB Accounting Standards Codification (ASC) would supersede all then-existing, non-SEC accounting and reporting standards for nongovernmental entities.  The FASB ASC disassembled and reassembled thousands of nongovernmental accounting pronouncements (including those of FASB, the Emerging Issues Task Force, and the AICPA) to organize them under roughly 90 topics and include all accounting standards issued by a standard setter within levels A–D of the current U.S. GAAP hierarchy. The ASC also includes relevant portions of authoritative content issued by the SEC, as well as selected SEC staff interpretations and administrative guidance issued by the SEC.

 

FASB points out in the exposure draft that it decided to include in the codification the AICPA Technical Inquiry Service (TIS) Section 5100, Revenue Recognition, paragraphs 38–76, which may result in an accounting change for private entities that had not previously applied the guidance. FASB provided specific transition provisions for private entities affected by the change.    

Visit the AICPA Web site’s GAAP Codification page to review resources related to the codification project.

Accounting Standards Codification Site (free but registration required) --- http://asc.fasb.org/asccontent&trid=2273304&nav_type=left_nav

It just gets deeper and deeper for Deloitte

Question
Why would four universities (Carnegie-Mellon, Pittsburgh, Bowling Green, and Ohio Northern) invest hundreds of millions dollars in a fraudulent investment fund and what makes this fraud different from the Madoff and Stanford fund scandals?

One of the reasons is that the fraudulent Westridge Capital Management Fund was audited by the reputable Big Four firm of Deloitte. It seems to be Auditing 101 to verify that securities investments actually exist and have not be siphoned off illegally. Purportedly, Paul R. Greenwood and Stephen Walsh siphoned off hundreds of millions to fund their lavish personal lifestyles

Koch recently told state lawmakers that Iowa officials believed they had "covered the bases" but that "obviously, something went wrong." He and Cochrane, in an interview, said that there was no apparent problem with Westridge that would raise concerns. Numerous government regulatory agencies had audited the company and the venerable Deloitte and Touche firm was Westridge's auditor. The company's investment returns did not raise suspicion because they generally followed market trends: The firm gained and lost money when the rest of the market did.
Stephen C. Fehr, "Iowa, N.D. victims of investment fraud," McClatchy-Tribune News Service, March 16, 2009 ---
http://www.individual.com/story.php?story=97917687

As with the investors who lost $65 billion in the Madoff Fund, word of mouth from respected people and institutions seem to weigh more than factual analysis for countless investors? Rabbi Ragan says a good man runs this fund? If Carnegie-Mellon's investing in it it most be safe? Yeah Right!
Various other investors and investment funds allegedly lost millions in the Greenwood-Walsh Fund Fraud ---
http://www.nytimes.com/2009/02/26/business/26scam.html?scp=1&sq=paul greenwood&st=cse
The Pennsylvania Employees’ Retirement System  was saved in the nick of time from investing nearly a billion dollars in the fund upon discovering that the National Futures Association began an investigation of the Greenwood-Walsh Fund. For other duped investors it was too late.

But in some cases the auditing firm is reputable and has deep pockets.

"A 4th University Is Missing Money in Alleged $554-Million Swindle," by Paul Fain, Chronicle of Higher Education, March 19, 2009 --- Click Here

Ohio Northern University is the fourth higher-education institution to announce that it is seeking to recoup money in an alleged $554-million investment fraud, university officials said today. Ohio Northern’s endowment had $10-million invested with two Wall Street veterans who face criminal charges for allegedly using investors’ money as a “personal piggy bank,” spending at least $160-million on mansions, horses, rare books, and collectible toys.

Also tied up in the apparent swindle is $65-million from the University of Pittsburgh, $49-million from Carnegie Mellon University, and $15-million from Bowling Green State University. Securities lawyers say little value from the original investments will be recovered. Officials from all of the universities say the potential losses will have no immediate impact on their operations.

Most college endowments rely on outside investment consultants to help direct their money. Hartland & Company, a financial firm in Cleveland, steered the now-missing investments by Ohio Northern and Bowling Green to the firm running the allegedly-fraudulent scheme. Pitt and Carnegie Mellon relied on the advice of Wilshire Associates, a major California-based consulting firm.

Paul R. Greenwood and Stephen Walsh, the two Wall Street traders who owned the suspect firm, face charges of securities fraud, wire fraud, and conspiracy. Federal regulators have also sued the men, and are pursuing their assets.

Deloitte is getting deeper and deeper into new lawsuits, one of which is the huge Washington Mutual (WaMu) failed bank lawsuit --- http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors

Bob Jensen's threads on Deloitte are at http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte

Congratulations to Janek Ratnatunga, Norman Gray and Bala K.R. (Kashi) Balachandran

"Researchers Win Award in Management Accounting," Journal of Accountancy, April 2009 --- http://www.journalofaccountancy.com/Issues/2009/Apr/ManagementAccountingAward.htm

Janek Ratnatunga, Norman Gray and Bala K.R. (Kashi) Balachandran are the winners of the first Greatest Potential Impact on Practice Award for research in management accounting, an award given by the American Accounting Association’s Management Accounting Section and sponsored by the AICPA, the Chartered Institute of Management Accountants and the Society of Management Accountants of Canada.

The award, which recognizes academic papers considered to be most likely to have a significant impact on management accounting practice, was presented in January at the AAA MAS Midyear Meeting in Florida.

Their paper, “The Capability Economic Value of Intangible and Tangible Assets (CEVITA): The Valuation and Reporting of Strategic Capabilities,” was originally published in Management Accounting Research, CIMA’s research journal, and introduces a new technique for measuring and reporting the impact of tangible and intangible asset combinations on the value creation potential, or strategic capability of a business.

Ratnatunga is the head of the School of Commerce at the University of South Australia. He has also held academic positions at the University of Melbourne, Monash University and the University of Canberra in Australia and the universities of Washington, Richmond and Rhode Island in the United States. Previously, he practiced as a chartered accountant with KPMG.

Now retired, Gray previously was the head of the Airborne Early Warning and Control Division of the Defence Materiel Organization within the Department of Defence in Australia.

Balachandran is a professor of accounting and operations management at New York University Stern School of Business. He received his bachelor of engineering in mechanical engineering from the University of Madras, India, and attended the University of California, Berkeley, for his master of science in industrial engineering and Ph.D. in operations research.

March 13, 2009 message from Zafar Khan

Why was Sarbanes-Oxley enacted?

Zafar Khan, Ph.D.
Professor
Eastern Michigan University

March 14, 2009 reply from Bob Jensen

Hi Zafar,

Sarbanes (SOX) was enacted to keep investors from abandoning the U.S. stock market after enormous scandals like Enron, WorldCom, and other huge scandals that revealed CPA audits themselves were becoming both substandard and non-profitable --- http://www.trinity.edu/rjensen/FraudEnron.htm

To make money, auditing firms themselves were profiting from irresponsible audit cost cutting and non-audit consulting that compromised their auditing independence. Inside corporations, internal controls for responsible financial reporting had broken down or never existed in the first place.

Sarbanes forced auditors to become more independent and also made it possible to double or triple audit fees, thereby restoring auditing to profitable services rather than services that lost money for auditing firms trying to be responsible auditors.

SOX also created the PCAOB that got serious about reviewing auditor performance (including fining Deloitte a million dollars). Many of the large and smaller CPA firms failed the PCAOB tests early on and soon cleaned up their audit practices with the PCAOB breathing down their backs.

Among other things SOX increased government funding for the SEC and the FASB (which before SOX received no taxpayer funding). This, in turn, made the FASB less dependent upon sales of publications. The FASB then made many publications free electronically, most notably free distribution of standards and interpretations. The IASB, sadly, still depends upon publication revenue such that IFRS are not free unless you play games like download the equivalent Hong Kong accounting standards.

See http://en.wikipedia.org/wiki/Sarbanes_and_Oxley

A variety of complex factors created the conditions and culture in which a series of large corporate frauds occurred between 2000-2002. The spectacular, highly-publicized frauds at Enron (see Enron scandal), WorldCom, and Tyco exposed significant problems with conflicts of interest and incentive compensation practices. The analysis of their complex and contentious root causes contributed to the passage of SOX in 2002. In a 2004 interview, Senator Paul Sarbanes stated:

The Senate Banking Committee undertook a series of hearings on the problems in the markets that had led to a loss of hundreds and hundreds of billions, indeed trillions of dollars in market value. The hearings set out to lay the foundation for legislation. We scheduled 10 hearings over a six-week period, during which we brought in some of the best people in the country to testify...The hearings produced remarkable consensus on the nature of the problems: inadequate oversight of accountants, lack of auditor independence, weak corporate governance procedures, stock analysts' conflict of interests, inadequate disclosure provisions, and grossly inadequate funding of the Securities and Exchange Commission.

• Auditor conflicts of interest: Prior to SOX, auditing firms, the primary financial "watchdogs" for investors, were self-regulated. They also performed significant non-audit or consulting work for the companies they audited. Many of these consulting agreements were far more lucrative than the auditing engagement. This presented at least the appearance of a conflict of interest. For example, challenging the company's accounting approach might damage a client relationship, conceivably placing a significant consulting arrangement at risk, damaging the auditing firm's bottom line.
   
• Boardroom failures: Boards of Directors, specifically Audit Committees, are charged with establishing oversight mechanisms for financial reporting in U.S. corporations on the behalf of investors. These scandals identified Board members who either did not exercise their responsibilities or did not have the expertise to understand the complexities of the businesses. In many cases, Audit Committee members were not truly independent of management.
   
• Securities analysts' conflicts of interest: The roles of securities analysts, who make buy and sell recommendations on company stocks and bonds, and investment bankers, who help provide companies loans or handle mergers and acquisitions, provide opportunities for conflicts. Similar to the auditor conflict, issuing a buy or sell recommendation on a stock while providing lucrative investment banking services creates at least the appearance of a conflict of interest.
   
• Inadequate funding of the SEC: The SEC budget has steadily increased to nearly double the pre-SOX level. In the interview cited above, Sarbanes indicated that enforcement and rule-making are more effective post-SOX.
   
• Banking practices: Lending to a firm sends signals to investors regarding the firm's risk. In the case of Enron, several major banks provided large loans to the company without understanding, or while ignoring, the risks of the company. Investors of these banks and their clients were hurt by such bad loans, resulting in large settlement payments by the banks. Others interpreted the willingness of banks to lend money to the company as an indication of its health and integrity, and were led to invest in Enron as a result. These investors were hurt as well.
   
• Internet bubble: Investors had been stung in 2000 by the sharp declines in technology stocks and to a lesser extent, by declines in the overall market. Certain mutual fund managers were alleged to have advocated the purchasing of particular technology stocks, while quietly selling them. The losses sustained also helped create a general anger among investors.
   
• Executive compensation: Stock option and bonus practices, combined with volatility in stock prices for even small earnings "misses," resulted in pressures to manage earnings. Stock options were not treated as compensation expense by companies, encouraging this form of compensation. With a large stock-based bonus at risk, managers were pressured to meet their targets.

 

Pay Me More and More and More
Sadly, SOX did not attack the root problems that led to the subsequent subprime lending scandals. These root problems included pay-for-performance compensation plans that motivated mortgage brokers, real estate appraisers, banks, and investment banks to screw both shareholders and home owners.

Pass the Trash
Added to this was Congressional pressure on Fannie Mae and Freddie Mack to buy hopeless mortgages that had almost no chance of being repaid. Banks commenced a practice of passing the trash to Freddie, Fannie, and Wall Street investment banks that, in turn, passed the trash to their customers in CDOs that were intended to diversify the bad loan risks (but failed to do so when the real estate bubble burst).

SOX has worked in countless ways, but not all ways
There are countless success stories where SOX led to better internal controls and better auditing with more substantive testing in place of lousy analytical reviews. However, SOX did almost nothing to prevent fraud in the mortgage brokering and banking sectors.

You can read more about subprime sleaze at http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

You can read more about auditing professionalism at http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

Fiduciaries turned into whores
One of the most sad things for me is the way that CPA auditing firms failed to signal the public that banks were filling up on toxic loans. Equally unprofessional were the credit rating agencies like Standard and Poors and Moody’s that in essence became Wall Street’s whores.

Why regulations fail and succeed in the turning of the carousel
The main problem with government regulations on industry is that industry eventually runs the regulators (e.g., the Federal Reserve, SEC, FDA, FAA, FCC, etc.) until some enormous scandals force the regulators to use the powers entrusted to them. Then we get new regulations that industry eventually figures out how to circumvent. Then we wait for more huge scandals. And so the carousel goes round and round.

Socialism bypasses the regulation process by owning and running the industries. Then the abuses really begin
The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.
Winston Churchill

May 14, 2009 reply from Zafar Khan [zkhan@EMICH.EDU]

Hi Bob, one can always depend upon you to set the record straight. Otherwise, some might continue to believe that this (SOX) was another gratuitous government intervention to disrupt the smooth functioning of our self correcting financial markets.

I also read in a recent post that the government should not do anything about executive compensation despite the obscene abuse of power by the executives of public companies who have enriched themselves while running their companies into the ground because the market will in the end sort it out. My humble response to that is dream on.

Zafar Khan, Ph.D.
Professor
Eastern Michigan University

March 15, 2009 reply from Bob Jensen

Hi again Zafar,

After the fall of Andersen you would've thought CPA auditors would've "self corrected" without having SOX since their reputations had hit bottom.

In 2003 a former professor of accounting at the University of Illinois and long-time executive partner with Andersen told accounting professors that the CPA firm executives "still didn't get it." This is probably why we needed SOX and the PCAOB to help them "get it." Art Wyatt’s plenary session speech at the 2003 American Accounting Association annual meetings is at http://aaahq.org/AM2003/WyattSpeech.pdf
Art is also a former AAA President and a member of the Accounting Hall of Fame. His opinions have a lot of clout in both the CPA profession and academe.

From “Topics for Class Debate” at http://www.trinity.edu/rjensen/FraudRotten.htm
This might be a good topic of debate for an ethics and/or fraud course.  The topic is essentially the problem of regulating and/or punishing many for the egregious actions of a few.  The best example is the major accounting firm of Andersen in which 84,000 mostly ethical and highly professional employees lost their jobs when the firm's leadership repeatedly failed to take action to prevent corrupt and/or incompetent audits of a small number audit partners.  Clearly the firm's management failed and deserves to be fired and/or jailed for obstruction of justice and failure to protect the public in general and 83,900 Andersen employees.  A former Andersen executive partner, Art Wyatt, contends that Andersen's leadership did not get the message and that leadership in today's leading CPA firms is still not (just before SOX) getting the message --- http://aaahq.org/AM2003/WyattSpeech.pdf 

Bob Jensen's threads on auditing professionalism are at http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

Bob Jensen's threads on the economic crisis and recovery --- http://www.trinity.edu/rjensen/2008Bailout.htm

Do you know the difference between Market Risk Beta and Downside Risk Beta? --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1360708

New Off Balance Sheet Financing Vehicles

Accounting for the Shadow Economy
Property is much more than a body of norms. It is also a huge information system that processes raw data until it is transformed into facts that can be tested for truth, and thereby destroys the main catalysts of recessions and panics -- ambiguity and opacity.
See below

There are trillions of dollars of off balance sheet obligations that cannot be easily accounted for.
Hernando de Soto
 

A Lesson for Auditors:  Accounting for the shadow economy
"Toxic Assets Were Hidden Assets:  We can't afford to allow shadow economies to grow this big," by Hernando de Soto, The Wall Street Journal, March 25, 2009 --- http://online.wsj.com/article/SB123793811398132049.html?mod=djemEditorialPage

The Obama administration has finally come up with a plan to deal with the real cause of the credit crunch: the infamous "toxic assets" on bank balance sheets that have scared off investors and borrowers, clogging credit markets around the world. But if Treasury Secretary Timothy Geithner hopes to prevent a repeat of this global economic crisis, his rescue plan must recognize that the real problem is not the bad loans, but the debasement of the paper they are printed on.

Today's global crisis -- a loss on paper of more than $50 trillion in stocks, real estate, commodities and operational earnings within 15 months -- cannot be explained only by the default on a meager 7% of subprime mortgages (worth probably no more than $1 trillion) that triggered it. The real villain is the lack of trust in the paper on which they -- and all other assets -- are printed. If we don't restore trust in paper, the next default -- on credit cards or student loans -- will trigger another collapse in paper and bring the world economy to its knees.

If you think about it, everything of value we own travels on property paper. At the beginning of the decade there was about $100 trillion worth of property paper representing tangible goods such as land, buildings, and patents world-wide, and some $170 trillion representing ownership over such semiliquid assets as mortgages, stocks and bonds. Since then, however, aggressive financiers have manufactured what the Bank for International Settlements estimates to be $1 quadrillion worth of new derivatives (mortgage-backed securities, collateralized debt obligations, and credit default swaps) that have flooded the market.

These derivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally accountable for them. Thus, there is widespread fear that potential borrowers and recipients of capital with too many nonperforming derivatives will be unable to repay their loans. As trust in property paper breaks down it sets off a chain reaction, paralyzing credit and investment, which shrinks transactions and leads to a catastrophic drop in employment and in the value of everyone's property.

Ever since humans started trading, lending and investing beyond the confines of the family and the tribe, we have depended on legally authenticated written statements to get the facts about things of value. Over the past 200 years, that legal authority has matured into a global consensus on the procedures, standards and principles required to document facts in a way that everyone can easily understand and trust.

The result is a formidable property system with rules and recording mechanisms that fix on paper the facts that allow us to hold, transfer, transform and use everything we own, from stocks to screenplays. The only paper representing an asset that is not centrally recorded, standardized and easily tracked are derivatives.

Property is much more than a body of norms. It is also a huge information system that processes raw data until it is transformed into facts that can be tested for truth, and thereby destroys the main catalysts of recessions and panics -- ambiguity and opacity. To bring derivatives under the rule of law, governments should ensure that they conform to six longstanding procedures that guarantee the value and legitimacy of any kind of paper purporting to represent an asset:

- All documents and the assets and transactions they represent or are derived from must be recorded in publicly accessible registries. It is only by recording and continually updating such factual knowledge that we can detect the kind of overly creative financial and contractual instruments that plunged us into this recession.

- The law has to take into account the "externalities" or side effects of all financial transactions according to the legal principle of erga omnes ("toward all"), which was originally developed to protect third parties from the negative consequences of secret deals carried out by aristocracies accountable to no one but themselves.

- Every financial deal must be firmly tethered to the real performance of the asset from which it originated. By aligning debts to assets, we can create simple and understandable benchmarks for quickly detecting whether a financial transaction has been created to help production or to bet on the performance of distant "underlying assets."

- Governments should never forget that production always takes priority over finance. As Adam Smith and Karl Marx both recognized, finance supports wealth creation, but in itself creates no value.

- Governments can encourage assets to be leveraged, transformed, combined, recombined and repackaged into any number of tranches, provided the process intends to improve the value of the original asset. This has been the rule for awarding property since the beginning of time.

- Governments can no longer tolerate the use of opaque and confusing language in drafting financial instruments. Clarity and precision are indispensable for the creation of credit and capital through paper. Western politicians must not forget what their greatest thinkers have been saying for centuries: All obligations and commitments that stick are derived from words recorded on paper with great precision.

Above all, governments should stop clinging to the hope that the existing market will eventually sort things out. "Let the market do its work" has come to mean, "let the shadow economy do its work." But modern markets only work if the paper is reliable.

Continued in article

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/Theory01.htm

Off Balance Sheet Vehicles
The Mother of All Ponzi Schemes According to Top Liberal (Progressive) Economists
The Latest Bailout Plan’s a Disaster According to Paul Krugman and James K. Galbraith
And yet American policy-makers appear convinced that more debt can rescue an economy already drowning in it. If we can just keep the leverage party going, all will be well. $787 billion to fund “stimulus,” another $9 trillion committed to guarantee bad debts, 0% interest rates and quantitative easing to drive more lending, new off balance sheet vehicles to hide from the public the toxic assets they’ve absorbed. All of it to be funded with debt, most of it the responsibility of taxpayers. If I may offer just one reason this will all fail: rising interest rates. Interest rates need only revert to their historical median in order to hammer asset values, and balance sheets, into oblivion.
"Added Debt Won't Rescue the Great American Ponzi Scheme," Seeking Alpha, March 23, 2009 ---
http://seekingalpha.com/article/127261-added-debt-won-t-rescue-the-great-american-ponzi-scheme?source=article_sb_picks

Bob Jensen's threads on off-balance sheet financing (OBSF) are at http://www.trinity.edu/rjensen/Theory01.htm#OBSF2

Bob Jensen's threads on the bailout mess --- http://www.trinity.edu/rjensen/2008Bailout.htm

"Fair Disclosure and Investor Asymmetric Awareness in Stock Markets," by Zhen Liu, SSRN, March 12, 2009 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1358637
Link Forwarded by Jim Mahar

The U.S. Security and Exchange Commission implemented Regulation Fair Disclosure in 2000. The regulator aims to reduce information asymmetry among investors, and expects public forums to subsume the forbidden information channel of selective forums. We show that even with cooperative managers and effective technology, current public forums is problematic if participants have asymmetric awareness. Namely, when a participant is aware of more uncertainties than are other participants, with zero incentives to share the insights, he would search information privately rather than raising questions in public forums. This causes inefficient information production compared to "unfair'' selective disclosure. Since asymmetric awareness is assumed away in rational expectations models, these models cannot justify the value of insightful questions. Nevertheless, using a standard quote-driven market model, we can compare the effect of the regulation on the price behavior and investors' welfare when awareness is either symmetric or asymmetric, and derive detailed implications. Empirical predictions are presented and they can match some intriguing empirical findings. Finally, we discuss the regulator's consideration on investor awareness.

. . .

At first glance, fair disclosure seems the best remedy for the information asymmetry caused by selective disclosure, without sacrificing the availability of high quality information. However, practitioners have argued that the regulation has produced some undesirable side effects:

1. The ambiguous definition of material information makes issuers reluctant to provide "immaterial" information in private .
 

2. Professionals may be unable to obtain information because of ineffective technology utilized in public communications.
 

3. Professionals 'with the most perception, intuition, or experience are not willing to share their insights with other investors under fair disclosure, so that less information can be revealed.

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/Theory01.htm

Auditor "going concern" warnings seen peaking in 2009 --- http://www.trinity.edu/rjensen/GoingConcernIssues.htm
The number of "going concern" warnings by corporate auditors could hit an all-time high this year, as the U.S. recession has put the survival of hundreds of companies in doubt, the chief executive of accounting firm Grant Thornton predicted on Thursday.
Emily Chasan, Reuters, February 26, 2009 --- http://www.reuters.com/article/ousiv/idUSTRE51Q0F620090227

Every year, U.S. auditors are required to say when they have substantial doubt about whether a company can survive for another 12 months. Auditors' so-called "going concern opinions" are included in companies' Form 10-K annual reports filed with U.S. regulators, and sometimes can put companies in violation of their loan covenants.

"I'm sure we will see a very high percentage -- much higher than ever before -- of companies receiving going concern opinions," Ed Nusbaum, chief executive of Grant Thornton, said in an interview.

Auditors must make their decisions over the next few weeks, and Nusbaum, who heads the sixth-largest U.S. accounting firm, measured by revenue, said there is a risk that many will "get it wrong" this year.

"As we've seen over the last three or four months, markets can change so dramatically," Nusbaum said. "There's no doubt that many going concern opinions will be issued for companies that will survive, and likewise there will be companies that don't get going concern opinions that won't survive."

Automaker General Motors Corp (GM.N) said on Thursday it expects to receive a going concern opinion from its auditors this year, but many more companies should also expect to receive such opinions, Nusbaum said.

While he did not have exact numbers, he said auditors have never before considered giving so many going concern opinions.

"So many companies are being dramatically impacted by the recession, whether it's the fair market value of securities, or a slowdown in manufacturing or oil prices," Nusbaum said.

Nusbaum said investors should expect a slew of going concern opinions in automotive, manufacturing, financial services and retail companies.

In fact, the issuance of auditor going concern opinions has climbed sharply since 2001, according to a December study by professors at the University of Arkansas and Texas A&M University.

The study showed that going concern opinions were issued for 52 percent of distressed and subsequently bankrupt companies in 2001, and that the proportion rose to 72 percent after December 2001.

After the collapse of Enron and its auditor Arthur Andersen, the risk that auditors could be sued for failing to issue a going concern opinion is something that auditors keep in mind when making decisions about the issue, Nusbaum said.

"The risk of litigation is significant and in many cases the only option is to issue a going concern opinion ... there is a legal motivation," Nusbaum said.

But ultimately the trouble in the credit markets and uncertainty about how the economy can recover has put both companies and auditors in a tough position this year, Nusbaum said.

Continued in article

Question
How many companies on Moody's new "Bottom Rung" also get going concern exceptions in auditor reports?

For example, GM already has a going concern exception from Deloitte. But will Ford Motor Company on the "Bottom Rung" also get a going concern exception?

"Moody's Aims to Be Ahead on Defaults," by Jeffrey McCracken, The Wall Street Journal, March 10, 2009 --- http://online.wsj.com/article/SB123664643956778537.html?mod=todays_us_money_and_investing

Pilloried for missing credit problems in the nation's mortgage markets, credit-ratings firm Moody's Investors Service is trying to get ahead of corporate bankruptcies. The firm on Tuesday is publishing a list called the Bottom Rung, detailing the companies that Moody's says are most likely to default on their debts.

With 283 companies, the list holds nearly every sector of the economy. The dominant industries on this at-risk list include much of the U.S. auto industry, the casino sector, and many retail chains, newspapers and broadcast-TV and radio-station networks. Energy firms, airlines and restaurant chains appear often.

The Moody's Corp. unit rates debt on about 2073 companies, sizing up each company's ability to pay what it owes. The Bottom Rung, which Moody's began compiling a few months ago and will update monthly, represents roughly the riskiest 20% of all companies it tracks, ranked by those with the lowest credit ratings.

Moody's estimates about 45% of the Bottom Rung companies will default in the next year. Combined these firms have more than $260 billion in bond and bank debt. A default ranges from filing for bankruptcy to a distressed debt-exchange to missing a debt payment.

"Sounds like Moody's may be trying to get out in front on defaults, given they were perhaps a little behind on subprime mortgages and commercial mortgage-backed securities," said David Resnick, managing director at investment banking firm Rothschild Inc. which works on many corporate bankruptcies and restructurings.

Moody's and credit-rating rival Standard & Poor's Corp., were criticized by the Senate in hearings late last year about the effectiveness of the ratings agencies.

Sen. Robert Menendez (D. N.J.), said at the time it seems that the agencies "are playing both coach and referee" in giving advice to issuers of debt.

Yet in trying to predict or warn about coming defaults, Moody's is also pushing into a grey zone, singling out some companies that say they're in decent fiscal health. On Monday, imaging company Eastman Kodak objected to the characterization that it rests on "the bottom rung."

"Any speculation, however informed, suggesting that Kodak is less than financially sound, is irresponsible," wrote Eastman Kodak spokesman David Lanzillo in an email statement. "Kodak is financially solid and we are taking the right actions to ensure that we remain a strong and enduring competitor. We ended 2008 with more than $2.1 billion in cash on our balance sheet, a manageable debt balance, and no significant debt payments likely until late 2010."

The Spanish-language media company Univision Communications Inc. also said its inclusion on the list wasn't warranted.

"Univision has more than ample liquidity to operate the business in the current environment, and has sufficient cash on hand to meet all obligations and debt maturities, including repayment of the asset sale bridge due in March 2009. There are no other debt maturities until the later part of 2011."

Some of the names on the list aren't so surprising, such as General Motors Corp. and Chrysler LLC. But some less-obvious names like information-technology giant Unisys Corp., OSI Restaurant Partners, owner of the Outback Steakhouse restaurant chain and the MGM Mirage casino empire are also included. One name not on the list, but likely to be added when it is first updated next month, is Clear Channel Communications, which Monday was downgraded four notches by Moody's. All these companies declined to comment or did not return a request for comment.

To compile the list, Moody's chose the companies with the lowest credit ratings -- those rated B3 or below -- whose ratings were either negative or under review. That rating is the 16th lowest on Moody's 21-step ratings system.

Applying that methodology retroactively to 2008 would have yielded about 157 companies, Moody's officials said, 60 of which would have eventually defaulted.

"Even though it seems like we've had a lot of defaults already this shows we aren't even close to the peak. There is a lot of bad news to come," said David Keisman, Moody's senior vice president of corporate finance. "Our thought was that in this cycle, with all that's happened, we are going to have a lot of bad news. What we can't have is surprise bad news."

Moody's, S&P and other rating agencies are all forecasting corporate defaults will skyrocket this year to three or four times the default rate of 2008, perhaps eclipsing all-time high default rates of the early 1930s.

The list is rapidly growing. Moody's said 73 new companies were added in January and February. Among the new entries: national retailer Bon-Ton Stores Inc., telecommunications company Global Crossing Inc. and auto-seat maker Lear Corp.

Also dotting the list are multi-billion-dollar private-equity backed leverage buyouts, such as Harrah's Entertainment, Burlington Coat Factory and Univision Communications.

"That's not surprising given a lot of private-equity deals were done in 2006 and 2007 that projected business would keep performing at high levels and then were levered off that," said Mr. Resnick of Rothschild.

Another 24 companies left the list recently, 23 of them because they defaulted or the ratings on them were withdrawn. Many of those companies also filed for bankruptcy, such as Trump Entertainment Resorts and the Tribune Co. newspaper chain. Only the Landry's Restaurant Inc. chain made a move up and off the list.

Mr. Keisman said Moody's analysts are calling the companies on the list to let them know they will be on it.

"It's not an editorial platform. It is very data driven. We are just being pro-active. This is like a slow-motion collapse and this shows so much more in the way of bad news is coming," he said.

Bob Jensen's threads on auditor professionalism are at http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

We need honest accounting more than ever, not fantasy teases for investors

This is a pretty good article on how players (banks), umpires (regulators), and fans (like billionnaires Stever Forbes and Warren Buffet) have inappropriately blamed the scorekeepers (accounts) for the demise of the big banks. In fact the December 30, 2008 research report calls this attribution of blame just plain wrong (and self-serving).

The wonderful December 30, 2008 research report of the SEC shows that fair value accounting is neither the cause nor the cure for the banking crisis. The liquidity problem of the holders of the toxic investments is caused by trillions of dollars invested in underperforming (often zero performing) of bad investments mortgages or mortgaged-backed bonds that have to be written down unless auditors agree to simply lie about values. That is not likely to happen, but client pressures on auditors to value on the high side for many properties will be heavy handed.
The wonderful full SEC report that bankers and regulators do not want to read can be freely downloaded at http://www.sec.gov/news/studies/2008/marktomarket123008.pdf

"We Need Honest Accounting:  Relax regulatory capital rules if need be, but don't let banks hide the truth," by James A. Chanos, The Wall Street Journal, March 24, 2009 --- http://online.wsj.com/article/SB123785319919419659.html?mod=djemEditorialPage

Mark-to-market (MTM) accounting is under fierce attack by bank CEOs and others who are pressing Congress to suspend, if not repeal, the rules they blame for the current financial crisis. Yet their pleas to bubble-wrap financial statements run counter to increased calls for greater financial-market transparency and ongoing efforts to restore investor trust.

We have a sorry history of the banking industry driving statutory and regulatory changes. Now banks want accounting fixes to mask their recklessness. Meanwhile, there has been no acknowledgment of culpability in what top management in these financial institutions did -- despite warnings -- to help bring about the crisis. Theirs is a record of lax risk management, flawed models, reckless lending, and excessively leveraged investment strategies. In the worst instances, they acted with moral indifference, knowing that what they were doing was flawed, but still willing to pocket the fees and accompanying bonuses.

MTM accounting isn't perfect, but it does provide a compass for investors to figure out what an asset would be worth in today's market if it were sold in an orderly fashion to a willing buyer. Before MTM took effect, the Financial Accounting Standards Board (FASB) produced much evidence to show that valuing financial instruments and other difficult-to-price assets by "historical" costs, or "mark to management," was folly.

The rules now under attack are neither as significant nor as inflexible as critics charge. MTM is generally limited to investments held for trading purposes, and to certain derivatives. For many financial institutions, these investments represent a minority of their total investment portfolio. A recent study by Bloomberg columnist David Reilly of the 12 largest banks in the KBW Bank Index shows that only 29% of the $8.46 trillion in assets are at MTM prices. In General Electric's case, the portion is just 2%.

Why is that so? Most bank assets are in loans, which are held at their original cost using amortization rules, minus a reserve that banks must set aside as a safety cushion for potential future losses.

MTM rules also give banks a choice. MTM accounting is not required for securities held to maturity, but you need to demonstrate a "positive intent and ability" that you will do so. Further, an SEC 2008 report found that "over 90% of investments marked-to-market are valued based on observable inputs."

Financial institutions had no problem in using MTM to benefit from the drop in prices of their own notes and bonds, since the rule also applies to liabilities. And when the value of the securitized loans they held was soaring, they eagerly embraced MTM. Once committed to that accounting discipline, though, they were obligated to continue doing so for the duration of their holding of securities they've marked to market. And one wonders if they are as equally willing to forego MTM for valuing the same illiquid securities in client accounts for margin loans as they are for their proprietary trading accounts?

But these facts haven't stopped the charge forward on Capitol Hill. At a recent hearing, bankers said that MTM forced them to price securities well below their real valuation, making it difficult to purge toxic assets from their books at anything but fire-sale prices. They also justified their attack with claims that loans, mortgages and other securities are now safe or close to safe, ignoring mounting evidence that losses are growing across a greater swath of credit. This makes the timing of the anti-MTM lobbying appear even more suspect. And not all financial firms are calling for loosening MTM standards; Goldman Sachs and others who are standing firm on this issue should be applauded.

According to J.P. Morgan, approximately $450 billion of collateralized debt obligations (CDOs) of asset-backed securities were issued from late 2005 to mid-2007. Of that amount, roughly $305 billion is now in a formal state of default and $102 billion of this amount has already been liquidated. The latest monthly mortgage reports from investment banks are equally sobering. It is no surprise, then, that the largest underwriters of mortgages and CDOs have been decimated.

Commercial banking regulations generally do not require banks to sell assets to meet capital requirements just because market values decline. But if "impairment" charges under MTM do push banks below regulatory capital requirements and limit their ability to lend when they can't raise more capital, then the solution is to grant temporary regulatory capital "relief," which is itself an arbitrary number.

There is a connection between efforts over the past 12 years to reduce regulatory oversight, weaken capital requirements, and silence the financial detectives who uncovered such scandals as Lehman and Enron. The assault against MTM is just the latest chapter.

Instead of acknowledging mistakes, we are told this is a "once in 100 years" anomaly with the market not functioning correctly. It isn't lost on investors that the MTM criticisms come, too, as private equity firms must now report the value of their investments. The truth is the market is functioning correctly. It's just that MTM critics don't like the prices that investors are willing to pay.

The FASB and Securities and Exchange Commission (SEC) must stand firm in their respective efforts to ensure that investors get a true sense of the losses facing banks and investment firms. To be sure, we should work to make MTM accounting more precise, following, for example, the counsel of the President's Working Group on Financial Markets and the SEC's December 2008 recommendations for achieving greater clarity in valuation approaches.

Unfortunately, the FASB proposal on March 16 represents capitulation. It calls for "significant judgment" by banks in determining if a market or an asset is "inactive" and if a transaction is "distressed." This would give banks more discretion to throw out "quotes" and use valuation alternatives, including cash-flow estimates, to determine value in illiquid markets. In other words, it allows banks to substitute their own wishful-thinking judgments of value for market prices.

The FASB is also changing the criteria used to determine impairment, giving companies more flexibility to not recognize impairments if they don't have "the intent to sell." Banks will only need to state that they are more likely than not to be able to hold onto an underwater asset until its price "recovers." CFOs will also have a choice to divide impairments into "credit losses" and "other losses," which means fewer of these charges will be counted against income. If approved, companies could start this quarter to report net income that ignores sharp declines in securities they own. The FASB is taking comments until April 1, but its vote is a fait accompli.

Obfuscating sound accounting rules by gutting MTM rules will only further reduce investors' trust in the financial statements of all companies, causing private capital -- desperately needed in securities markets -- to become even scarcer. Worse, obfuscation will further erode confidence in the American economy, with dire consequences for the very financial institutions who are calling for MTM changes. If need be, temporarily relax the arbitrary levels of regulatory capital, rather than compromise the integrity of all financial statements.

Bob Jensen's threads about all this bull crap blaming of the bean counters can be found at
http://www.trinity.edu/rjensen/2008Bailout.htm#FairValueAccounting

Bob Jensen's threads on fair value accounting are at http://www.trinity.edu/rjensen/Theory01.htm#FairValue

FASB Eases Fair-Value Rules Amid Lawmaker Pressure

April 2, 2009 message from Ganesh M. Pandit [profgmp@HOTMAIL.COM]

The FASB has voted to relax the fair value accounting rules.

http://www.bloomberg.com/apps/news?pid=20601087&sid=agfrKseJ94jc&refer=home

Ganesh M Pandit
Adelphi University

 

April 2, 2009 reply from Bob Jensen

Hi Ganesh,

The FASB, now offers an audio file has an audio explanation of why they’re making special fair value accounting allowances for banks. It is linked at the FASB home page.--- http://www.fasb.org/

Be patient. This audio file loads very slowly. 
It may have long pauses while it loads new segments, but these pauses will vary with your bandwidth.

It is not streaming audio and can be easily saved as a file.

 It probably should be shared with all accounting students!

April 2, 2009—
Audio of Today's Press Conference with Robert Herz, Teresa Polley, and Russell Golden on Fair Value and OTTI Actions (Posted: 04/02/09)

 "FASB Eases Fair-Value Rules Amid Lawmaker Pressure (Update3)," by Ian Katz, Bloomberg News, April 2, 2009 ---
http://www.bloomberg.com/apps/news?pid=20601087&sid=agfrKseJ94jc&refer=home 

The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.

The changes to so-called mark-to-market accounting allow companies to use “significant” judgment when gauging the price of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost their first-quarter net income by 20 percent or more. FASB voted 3-2 to approve the rules at a meeting today in Norwalk, Connecticut.

“Congress clearly indicated that some easing was probably appropriate in this instance,” House Democratic Leader Steny Hoyer of Maryland said today in a Bloomberg Television interview.

House Financial Services Committee members pressed FASB Chairman Robert Herz at a March 12 hearing to revise fair-value, which requires banks to mark assets each quarter to reflect market prices, saying the rule unfairly punished financial companies. FASB’s proposals, made four days later, spurred criticism from investor advocates and accounting-industry groups, which say fair-value forces companies to disclose their true financial health.

Financial shares rose after the FASB move. Citigroup rose 4 percent to $2.79 at 11:46 a.m. in New York Stock Exchange composite trading. Bank of America Corp. added 5.5 percent to $7.44. JPMorgan Chase & Co. rose 1 percent to $28.36.

Seeking Suspension

Blackstone Group LP Chairman Stephen Schwarzman, the American Bankers Association and 65 lawmakers in the House of Representatives last September urged that fair-value accounting, mandated by FASB, be suspended. William Isaac, chairman of the Federal Deposit Insurance Corp. from 1981 to 1985, has called fair value “extremely and needlessly destructive” and “a major cause” of the credit crisis. Robert Rubin, the former Citigroup senior counselor and Treasury secretary, said Jan. 27 the rule has done “a great deal of damage.”

“Good decision,” Citigroup Chairman Richard Parsons said of FASB’s move. The market for mortgages and other assets was not working, so something had to change, Parsons said in a New York interview today.

Banks rely on competitors’ asset sales to help determine the fair-market value of similar securities they hold on their own books. FASB’s staff conceded their March 17 proposal led to a “presumption” that all security sales are “distressed” unless evidence proves otherwise. Such an interpretation may have allowed financial companies to ignore transactions in valuing their assets.

‘Orderly’ Transactions

FASB staff said banks should only disregard transactions that aren’t “orderly,” including situations in which the “seller is near bankruptcy” or needed to sell the asset to comply with regulatory requirements. Responding to criticism from investor and accounting groups, the staff said in a report today it was not FASB’s intent “to change the objective of a fair-value measurement.”

Fair-value “provides the kind of transparency essential to restoring public confidence in U.S. markets,” former Securities and Exchange Commission Chairman Arthur Levitt said in an interview yesterday.

Levitt is co-chairman, along with former SEC head William Donaldson, of the Investors’ Working Group, a non-partisan panel formed to recommend improvements to regulation of U.S. financial markets. Other members of the group, which met in New York yesterday, include Brooksley Born, former chairman of the Commodity Futures Trading Commission, and Bill Miller, chief investment officer of Legg Mason Capital Management Inc.

‘Deeply Concerned’

“The group is deeply concerned about the apparent FASB succumbing to political pressures, which prevent U.S. investors from understanding the true obligations of U.S. financial institutions,” Levitt said. Levitt is a senior adviser at buyout firm Carlyle Group and a board member at Bloomberg LP, the parent of Bloomberg News.

Fair-value requires companies to set values on most securities each quarter based on market prices. Wells Fargo and other banks argue the rule doesn’t make sense when trading has dried up because it forces companies to write down assets to fire-sale prices.

By letting banks use internal models instead of market prices and allowing them to take into account the cash flow of securities, FASB’s changes could raise bank industry earnings by 20 percent, according to Robert Willens, a former managing director at Lehman Brothers Holdings Inc. who runs his own tax and accounting advisory firm in New York.

Companies weighed down by mortgage-backed securities, such as New York-based Citigroup, could cut their losses by 50 percent to 70 percent, said Richard Dietrich, an accounting professor at Ohio State University in Columbus.

FASB rejected requests from banks to let them apply the fair-value change to their year-end financial statements for 2008. While the new standard takes effect for earnings reports filed at the end of June, FASB said companies could apply it to their first-quarter financial statements.

 

"FASB's FSP Decisions: Bigger than Basketball?" Seeking Alpha, April 2, 2009 ---
http://seekingalpha.com/article/129189-fasb-s-fsp-decisions-bigger-than-basketball

Finally, the FASB held its long-anticipated meeting on the two FSPs that would have gutted fair value reporting as it exists. There's been more hoopla (and hope-la) about these two amendments than in all of March Madness.

Briefly, here's what transpired, as best as I could tell from the webcast of the meeting:

1. FSP 157-e, the proposal which would have provided a direct route to Level 3 modeling of fair values whenever there was a problem with quoted prices, will be quite different from the original plan. There will be indicators of inactive markets in the final FSP, but they'll only be indicators for a preparer to consider - and more importantly, their presence WILL NOT create a presumption of a distressed price for securities in question. That part of the proposal would have greased the skids for Level 3 modeling. Not now.

There will be added required disclosures, which were not in the exposure draft. One that I caught: quarterly "aging" disclosures of the securities that are in a continuous loss position for more than 12 months and less than 12 months. As discussed in last week's report on the proposals, these now-annual disclosures are useful for assessing riskiness of assets that could become a firm's next other-than-temporary impairment charge.

Bottom line: investors didn't lose here.

2. FSP FAS 115-a, 124-a, and EITF 99-20-b, the proposal that softens the blow of recognizing other-than-temporary impairments, was essentially unchanged from the original proposal. It remains a chancre on the body of accounting literature. The credit portion of an other-than-impairment loss will be recognized in earnings, with all other attributed loss being recorded in "other comprehensive income," to be amortized into earnings over the life of the associated security. That's assuming the other-than-temporary impairment is recognized at all, because the determination will still be largely driven by the intent of the reporting entity and whether it's more likely than not that it will have to sell the security before recovery. This is a huge mulligan for banks with junky securities.

If OTT charges are taken, the full amount of the impairment will be disclosed on the income statement with the amount being shunted into other comprehensive income shown as a reduction of the loss, leaving only the credit portion to be recognized in current period earnings.

Bottom line: Investors lost on this vote, and they will have to pay more attention to OCI in the future, as it becomes a more frequently-used receptacle for unwanted debits. When investors note these "detoured charges" in earnings, they should skip the detour and factor the full charge into their evaluation of earnings. A small victory for investors: the original proposal would have included other-than-temporary impairments on equity securities. The final decision will affect only debt securities.

There was a third, much less-heralded FSP voted upon at the meeting:

3. FSP FAS 107-a and APB 28-a, which will make the now-annual fair value disclosures for all financial instruments required on a quarterly basis. This will be required beginning in the second quarter, with early implementation allowed in the first quarter.

All three FSPs will become effective in the second quarter, with early implementation allowed in the first quarter. Note: any firm electing early adoption of the impairment FSP cannot wait until later to adopt the FSP 157-e fair value amendment. If they change the way they recognize impairments, they also have to change how they consider the calculation of fair values.

Some board members expressed hope that this was the last of the "emergency amendments" to take place at the end of a reporting period. It seems too much to hope for; there could more ahead, depending on how meddlesome the G-20 would like to be. Remember when IFRS in the United States was a hot topic? To a very large degree, that sprouted from a trans-Atlantic summit meeting between the EU and the White House. The same thing could happen again if the G-20 gang decides they know accounting better than the standard-setters.

 

Jensen Comment
It’s another one of those 3-2 FASB votes that gets Tom Selling hot under the collar. Guess which Board members voted yes?

I’m less critical of the so-called “easing of fair value rules” because I always thought it was possible to estimate cash flows and build a model under Level 3 of FAS 157. To me this is all smoke and mirrors that lend added justification for banks to underestimate their bad debt reserves. When the lawsuits roll in there will be more authoritative support for inflating income of banks --- that’s what its all about isn’t it?

Banks need to attract more investors to their manure piles. It’s a whole new springtime for maggots to pursue outrageous leveraging.

The best illustration of the smoke and mirrors part comes from the incomprehensible FASB audio mp3 file on April 2. Try to get your best students to make any sense out of that magic lantern show!

April 2, 2009—
 Audio of Today's Press Conference with Robert Herz, Teresa Polley, and Russell Golden on Fair Value and OTTI Actions (Posted: 04/02/09)

April 3, 2009 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU] 

One of the IASB board members is on my campus today and he fully expects the IASB to follow the FASB's lead, which he strongly disagrees with. For the record, I think the FASB's action was much needed clarification of the intent of SFAS 157 and I applaud its efforts. This was not at all a situation of "bowing to pressure" but rather one of realizing that earlier guidance hadn't been applied in the intended manner. The FASB clearly accelerated its work in response to Congressional concerns but moving too slowly has been a fault of the FASB from the beginning, including the 10 1/2 years I was there.

Bob Jensen

From The Wall Street Journal Accounting Weekly Review on April 1, 2009
This case was published one day prior to the FASB decision to ease the rules on fair value accounting for banks.

Bob Jensen’s threads on accounting valuation are at http://www.trinity.edu/rjensen/Theory01.htm#FairValue

Hi Tom, 

Your latest Onion piece is a good starting point for a “blank paper” beginning for the debate on fair value accounting --- http://accountingonion.typepad.com/theaccountingonion/2009/04/a-new-title.html  

But it overlooks some of the major problems, particularly problems in current (replacement) cost accounting that are summarized at http://www.trinity.edu/rjensen/Theory01.htm#FairValue

One of the main problems with exit value accounting is the huge problem of measuring covariance of exit value of one item with interactive values of other items, particularly covariance with intangible items.

Another huge problem with exit value accounting is that installation costs are often enormous, have future economic benefit, and have zero exit value because they cannot be put back on the market. This includes installation costs and costs of obtaining Government Agency approval of drugs, mining permits, oil drilling permits, etc.

Replacement costs also have huge problems as summarized below.

Market Value Accounting: Entry Value (Current Cost, Replacement Cost) Accounting

Beginning in 1979, FAS 33 required large corporations to provide a supplementary schedule of condensed balance sheets and income statements comparing annual outcomes under three valuation bases --- Unadjusted Historical Cost, Price Level Adjusted (PLA) Historical Cost, and Current Cost Entry Value (adjusted for depreciation and amortization). Companies complained heavily that users did not obtain value that justified the cost of implementing FAS 33. Analysts complained that the FASB allowed such crude estimates that the FAS 33 schedules were virtually useless, especially the Current Cost estimates. The FASB rescinded FAS 33 when it issued FAS 89 in 1986.

Current cost accounting by whatever name (e.g., current or replacement cost) entails the historical cost of balance sheet items with current (replacement) costs. Depreciation rates can be re-set based upon current costs rather than historical costs. 

Beginning in 1979, FAS 33 required large corporations to provide a supplementary schedule of condensed balance sheets and income statements comparing annual outcomes under three valuation bases --- Unadjusted Historical Cost, PLA-Adjusted historical cost, and Current Cost Entry Value (adjusted for depreciation and amortization). Companies are no longer required to generate FAS 33-type comparisons. The primary basis of accounting in the U.S. is unadjusted historical cost with numerous exceptions in particular instances. For example, price-level adjustments may be required for operations in hyperinflation nations. Exit value accounting is required for firms deemed highly likely to become non-going concerns. Exit value accounting is required for personal financial statements (whether an individual or a personal partnership such as two married people). Economic (discounted cash flow) valuations are required for certain types of assets and liabilities such as pension liabilities. Hence in the United States and virtually every other nation, accounting standards do not require or even allow one single basis of accounting. Beginning in January 2005, all nations in the European Union adopted the IASB's international standards that have moved closer and closer each year to the FASB/SEC standards of the United States.

Advantages of Entry Value (Current Cost, Replacement Cost) Accounting

• Conforms to capital maintenance theory that argues in favor of matching current revenues with what the current costs are of generating those revenues. For example, if historical cost depreciation is $100 and current cost depreciation is $120, current cost theory argues that an excess of $20 may be wrongly classified as profit and distributed as a dividend. When it comes time to replace the asset, the firm may have mistakenly eaten its seed corn.
  
   
• If the accurate replacement cost is known and can be matched with current selling prices, the problems of finding indices for price level adjustments are avoided.
  
   
• Avoids to some extent booking the spread between selling price and the wholesale "cost" of an item. Recording a securities “inventory” or any other inventory at exit values rather than entry values tends to book unrealized sales profits before they’re actually earned. There may also be considerably variability in exit values vis-à-vis replacement costs.
   

Although I am not in general a current cost (replacement cost, entry-value) advocate, I think you and Tom are missing the main theory behind the passage of the now defunct FAS 33 that leaned toward replacement cost valuation as opposed to exit valuation.

The best illustration in favor of replacement cost accounting is the infamous Blue Book used by automobile and truck dealers that lists composite wholesale trading for each make and model of vehicle in recent years. The Blue Book illustration is relevant with respect to business equipment currently in use in a company since virtually all that equipment is now in the “used” category, although most of it will not have a complete Blue Book per se.

The theory of Blue Book pricing in accounting is that each used vehicle is unique to a point that exit valuation in particular instances is very difficult since no two used vehicles have the same exit value in a particular instances. But the Blue Book is a market-composite hundreds of dealer transactions of each make and model in recent months and years on the wholesale market.

Hence I don’t have any idea about what my 1999 Jeep Cherokee in particular is worth, and any exit value estimate of my vehicle is pretty much a wild guess relative to what it most likely would cost me to replace it with another 1999 Jeep Cherokee from a random sample selection among 2,000 Jeep dealers across the United States. I merely have to look up the Blue Book price and then estimate what the dealer charges as a mark up if I want to replace my 1999 Jeep Cherokee.

Since Blue Book pricing is based upon actual trades that take place, it’s far more reliable than exit value sticker prices of vehicles in the sales lots.

 Conclusion
It is sometimes the replacement market of actual transactions that makes a Blue Book composite replacement cost more reliable than an exit value estimate of what I will pay for a particular car from a particular dealer at retail. Of course this argument is not as crucial to financial assets and liabilities that are not as unique as a particular used vehicle. Replacement cost valuation for accounting becomes more defensible for non-financial assets.

Disadvantages of Entry Value (Current Cost, Replacement Cost) Accounting

• Discovery of accurate replacement costs is virtually impossible in times of changing technologies and newer production alternatives.  For example, some companies are using data processing hardware and software that no longer can be purchased or would never be purchased even if it was available due to changes in technology. Some companies are using buildings that may not be necessary as production becomes more outsourced and sales move to the Internet. It is possible to replace used assets with used assets rather than new assets. Must current costs rely only upon prices of new assets?
  
   
• Discovering current costs is prohibitively costly if firms have to repeatedly find current replacement prices on thousands or millions of items.
  
   
• Accurate derivation of replacement cost is very difficult for items having high variations in quality. For example, some ten-year old trucks have much higher used prices than other used trucks of the same type and vintage. Comparisons with new trucks is very difficult since new trucks have new features, different expected economic lives, warranties, financing options, and other differences that make comparisons extremely complex and tedious. In many cases, items are bought in basket purchases that cover warranties, insurance, buy-back options, maintenance agreements, etc. Allocating the "cost" to particular components may be quite arbitrary.
   
• Use of "sector" price indices as surrogates compounds the price-index problem of general price-level adjustments. For example, if a "transportation" price index is used to estimate replacement cost, what constitutes a "transportation" price index? Are such indices available and are they meaningful for the purpose at hand? When FAS 33 was rescinded in 1986, one of the major reasons was the cost and confusion of using sector indices as surrogates for actual replacement costs.
  
   
• Current costs tend to give rise to recognition of holding gains and losses not yet realized.
   

Market Value Accounting: Exit Value (Liquidation, Fair Value) Accounting

Whereas entry value is what it will cost to replace an item, exit value is the value of disposing of the item. It can even be negative in some instances where costs of clean up and disposal make to exit price negative. Exit value accounting is required under GAAP for personal financial statements (individuals and married couples) and companies that are deemed likely to become non-going concerns. See "Personal Financial Statements," by Anthony Mancuso, The CPA Journal, September 1992 --- http://www.nysscpa.org/cpajournal/old/13606731.htm 

Some theorists advocate exit value accounting for going concerns as well as non-going concerns. Both nationally (particularly under FAS 115 and FAS 133) and internationally (under IAS 32 and 39 for), exit value accounting is presently required in some instances for financial instrument assets and liabilities. Both the FASB and the IASB have exposure drafts advocating fair value accounting for all financial instruments.

Advantages of Exit Value (Liquidation, Fair Value) Accounting

• In the case of financial assets and liabilities, historical costs may be meaningless relative to current exit values. For example, a forward contract or swap generally has zero historical cost but may be valued at millions at the current time. Failure to require fair value accounting provides all sorts of misleading earnings management opportunities to firms. The above references provide strong arguments in favor of fair value accounting.
•  
• Exit value does not require arbitrary cost allocation decisions such as whether to use FIFO or LIFO or what depreciation rate is best for allocating cost over time.
•  
• In many instances exit value accounting is easier to compute than entry values. For example, it is easier to estimate what an old computer will bring in the used computer market than to estimate what is the cost of "equivalent" computing power is in the new computer market.
•  
•  

Exit value reporting is not deemed desirable or practical for going concern businesses for a number of reasons that I will not go into in great depth here.

Disadvantages of Exit Value (Liquidation, Fair Value) Accounting

·     Operating assets are bought to use rather than sell. For example, as long as no consideration is being given to selling or abandoning a manufacturing plant, recording the fluctuating values of the land and buildings creates a misleading fluctuation in earnings and balance sheet volatility. Who cares if the value of the land went up by $1 million in 1994 and down by $2 million in 1998 if the plant that sits on the land has been in operation for 60 years and no consideration is being given to leaving this plant?

·     Some assets like software, knowledge databases, and Web servers for e-Commerce cost millions of dollars to develop for the benefit of future revenue growth and future expense savings. These assets may have immense value if the entire firm is sold, but they may have no market as unbundled assets. In fact it may be impossible to unbundle such assets from the firm as a whole. Examples include the Enterprise Planning Model SAP system in firms such as Union Carbide. These systems costing millions of dollars have no exit value in the context of exit value accounting even though they are designed to benefit the companies for many years into the future

.

·     Exit value accounting records anticipated profits well in advance of transactions. For example, a large home building company with 200 completed houses in inventory would record the profits of these homes long before the company even had any buyers for those homes. Even though exit value accounting is billed as a conservative approach, there are instances where it is far from conservative

.

·     Value of a subsystem of items differs from the sum of the value of its parts. Investors may be lulled into thinking that the sum of all subsystem net assets valued at liquidation prices is the value of the system of these net assets. Values may differ depending upon how the subsystems are diced and sliced in a sale.

·     Appraisals of exit values are both to expensive to obtain for each accounting report date and are highly subjective and subject to enormous variations of opinion. The U.S. Savings and Loan scandals of the 1980s demonstrated how reliance upon appraisals is an invitation for massive frauds. Experiments by some, mostly real estate companies, to use exit value-based accounting died on the vine, including well-known attempts decades ago by TRC, Rouse, and Days Inn.

·     Exit values are affected by how something is sold. If quick cash is needed, the best price may only be half of what the price can be by waiting for the right time and the right buyer.

·     Financial contracts that for one reason or another are deemed as to be "held-to-maturity" items may cause misleading increases and decreases in reported values that will never be realized.  A good example is the market value of a fixed-rate bond that may go up and down with interest rates but will always pay its face value at maturity no matter what happens to interest rates.

·         Exit value markets are often thin and inefficient markets.

Economic Value (Discounted Cash Flow, Present Value) Accounting

There are over 100 instances where present GAAP requires that historical cost accounting be abandoned in favor of discounted cash flow accounting (e.g., when valuing pension liabilities and computing fair values of derivative financial instruments). These apply in situations where future cash inflows and outflows can be reliably estimated and are attributable to the particular asset or liability being valued on a discounted cash flow basis.

Advantages of Economic Value (Discounted Cash Flow, Present Value) Accounting

• Economic value is based upon management's intended use for the item in question rather than upon some other use such as disposal (Exit Value) or replacement (Entry Value).
• Economic value conforms to the economic theory of the firm.
   
• Real options valuation models in place of present value models under uncertainty --- http://www.trinity.edu/rjensen/realopt.htm 

Disadvantages of Economic Value (Discounted Cash Flow, Present Value) Accounting

• How does one allocate a portion of the cash flows of General Motors to a single welding machine in Tennessee? Or how does one allocate the portion of the sales price of a single car to the robot that welded a single hinge on one of the doors? How does one allocate the price of a bond to the basic obligation, the attached warrants, the call option in the fine print, and other possible embedded derivatives in the contract? The problem lies in the arbitrary nature of deciding what system of assets and liabilities to value as a system rather than individual components. Then what happens when the system is changed in some way? In order to see how complex this can become, note the complicated valuation assumptions in a paper entitled "Implementation of an Option Pricing-Based Bond Valuation Model for Corporate Debt and Its Components," by M.E. Barth, W.R. Landsman, and R.J. Rendleman, Jr., Accounting Horizons, December 2000, pp. 455-480.
• Cash flows are virtually impossible to estimate except when they are contractually specified. How can Amazon.com accurately estimate the millions and millions of dollars it has invested in online software?
• Even when cash flows can be reliably estimated, there are endless disputes regarding the appropriate discount rates.
• Endless disputes arise as to assumptions underlying economic valuations.

Bob Jensen’s threads on accounting valuation are at http://www.trinity.edu/rjensen/Theory01.htm#FairValue

FAS 141(R)-1 --- http://www.fasb.org/pdf/fsp_fas141r-1.pdf
Title: Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies
Date Issued: April 1, 2009
Jensen Comment
This is an illustration of a principles based "standard" that will be very difficult to implement and virtually impossible to consistently apply among different firms.

PwC recommends the following on January 20, 2009 --- Click Here

The proposal offers four advantages for reporting losses on non-trading debt securities: Credit and non-credit losses would be reported separately and prominently in a redesigned income statement. This enhances transparency by providing more information about changes in fair value. Only incurred losses are recorded in net income. This is consistent with accounting for credit losses on loans and eliminates an inconsistency in how incurred losses are reported. Continues to report debt securities at fair value. Reduces effect of temporary market volatility on net income. Swings in earnings will be moderated in both falling and rising markets—essentially buffering the extremes of bull and bear emotion.

 

Question
What is the current huge tax incentive for buying back debt such as non-toxic bonds that have plunged in value?

From The Wall Street Journal Accounting Weekly Review on March 20, 2009

"Debt Buybacks Garner a Tax Incentive," by Michael Aneiro, The Wall Street Journal, March 12, 2009 ---
http://online.wsj.com/article/SB123677884637794739.html?mod=djem_jiewr_AC

With bond prices continuing to fall and companies struggling, more issuers may look to buy back their own debt.

Repurchasing debt can be an especially beneficial use of cash for companies during a downturn, when consumer demand slows and other capital investments are unlikely to offer immediate returns.

A new tax break makes such debt purchases more attractive for companies. Debt forgiven through buybacks is usually taxed as income, but stimulus legislation allows companies that repurchase debt to delay those taxes until 2014, and then to spread the tax out over a five-year period.

Several companies in troubled industries such as housing and casinos lobbied for the tax break, just as some issuers in those industries are starting to avail themselves of the chance to repurchase debt.

This week, home builder Hovnanian Enterprises said it had paid $105 million to repurchase $315 million of its unsecured senior notes, resulting in a $210 million gain in its latest quarter and a corresponding increase in stockholders' equity. The company used proceeds from a $145 million 2008 tax refund to help fund the note repurchase.

Underscoring how quickly debt value has deteriorated, Hovnanian just last May sold $600 million of five-year notes that pay an 11.5% coupon at 99 cents on the dollar. Those notes have since faded to 71 cents on the dollar, according to bond trading platform MarketAxess.

Last week, General Electric unit GE Capital offered to buy back $1.46 billion of its bonds as a way to boost its financial flexibility and possibly make it easier to participate in new government financing programs.

Unlike distressed debt exchanges, where companies invite investors to trade in large blocks of bonds at a steep discount to face value in exchange for new notes, debt buybacks tend to rarely be announced until after they are conducted. Evidence of any significant uptick so far is elusive.

"The buyback issue has kind of been percolating in the background," said Christopher Garman of Garman Research. "The tax issue is helpful on the margins but doesn't carry a lot of broader market impact. Still, you could see more companies starting to look to buy back debt."

But as defaults continue to rise, for some particularly at-risk companies looking to buy back debt while they burn through cash, the tax breaks mightn't come soon enough to matter.

"If they're around to file income taxes again, that's great," said Vicki Bryan, an analyst at bond research firm GimmeCredit. "But between now and then, it's a horse race: How fast can they buy back debt until they come down to a minimum amount of cash?"

Jensen Comment
There seems to be some moral hazard in this particular bailout legislation. Suppose homebuilder Hovnanian Enterprises insiders anticipate declaring Chapter 11 bankruptcy. The company pays $105 million to repurchase $315 million of its unsecured senior notes and garners proceeds from a $145 million 2008 tax refund to help fund the note repurchase. The extra cash from the tax refund is then used to pay $40 million in bonuses to employees before bankruptcy is declared.

Second Life (3-D) Virtual Worlds in Ernst & Young Training Programs

March 12, 2005 message from Steve Hornik

Ernst & Young Uses Avatars to Test the Use of Virtual Worlds as a Way to Enhance Training for New Auditors.

E&Y set up a virtual warehouse where they could train employees on Inventory counting.  The article and the video highlight the benefits of using Second Life for doing such training.  Some of the lessons learned from the article are:

    * Ernst & Young found 3-D learning better prepared new auditors by giving them real-world experience. It compared the results with new auditors who took a traditional instructor-led class.
    * 3-D learning is a cost-effective alternative to on-site training sessions because it can deliver the two goals of the meeting: training the employees and creating camaraderie and collaboration.
    * 3-D learning captures learning digitally, providing a record of what has been informal, on-the-job training. It is a good tool to capture the knowledge of retiring employees.
    * 3-D learning is a good way for adults to learn because they can retain more knowledge.
    * Don't underestimate the time and effort needed to introduce learners to this new platform. Plan to help your learners through the initial set-up and orientation. Once they've been properly introduced, most enjoy the experience.
    * Consult with others working in this space. Old instructional design approaches simply don't work in the virtual world.

The link to full article (make sure to watch the video) is at:
http://www.outsourcing-journal.com/mar2009-acs.html?email011369

_____________________________
Dr. Steven Hornik
University of Central Florida
Dixon School of Accounting
407-823-5739
Second Life: Robins Hermano
http://mydebitcredit.com
yahoo ID: shornik

Bob Jensen's threads Second Life are at http://www.trinity.edu/rjensen/000aaa/thetools.htm#SecondLife

Something Bad About the IASB
There was markedly less harmony between the two panelists when it came to International Financial Reporting Standards. Hewitt said there's no doubt that creating a single worldwide set of accounting rules is the correct thing to do. It reflects the reality that nations depend on one another for imports and exports, and that U.S. companies would have greater access to overseas capital. Turner, though, cuffed the International Accounting Standards Board for bowing to pressure from France president Nicolas Sarkozy and other European Union leaders to relax fair-value accounting rules. Since last October, IASB has come under fire for sidestepping due process to rush out a rule allowing financial institutions to reclassify some loans as a way of avoiding marking those assets to market and avoid losses generated by a drop in asset value. "IASB has not shown that it can develop high-quality standards without political interference," Turner said. "Until it can, IFRS is not ready for prime time."
David McCann, "Former SEC Chief Accountant Blames FASB for Meltdown He credits auditors and financial statement preparers for successfully fighting fraud," CFO.com, March 5, 2009 --- http://www.cfo.com/article.cfm/13234318/c_13234460
Thank you to Glen Gray for this link.

Something Good About the FASB
"IASB has not shown that it can develop high-quality standards without political interference," Turner said. "Until it can, IFRS is not ready for prime time." Turner indicated that even then he would not support IFRS for U.S. companies, rejecting Hewitt's notion that the nature of international business today demands it. In fact, IFRS would make American companies less competitive, he insisted. "If we make our markets look like everyone else's, and they're only as transparent as everyone else's, there's no reason for [investors] to allocate their money to U.S. markets," he said. "But if our markets have, as they always have had, greater transparency, and investors get the information to make better decisions, then there is a reason."
David McCann, "Former SEC Chief Accountant Blames FASB for Meltdown He credits auditors and financial statement preparers for successfully fighting fraud," CFO.com, March 5, 2009 --- http://www.cfo.com/article.cfm/13234318/c_13234460
Bob Jensen's threads on the FASB vs. IASB issue are at http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
Jensen Comment
The implication here has to be that Lynn Turner does not that IASB standards in the U.S. will provide the same level of transparency as FASB standards, at least not until we see some dramatic improvements in IASB standards.

Something Bad About the FASB
Actually, Turner said he gives credit to "practicing accountants" — financial-statement preparers and auditors — for overseeing a dramatic falloff in financial fraud cases compared to the years immediately following the Enron and WorldCom scandals. "There's a change from 10 years ago, and accountants do deserve some credit," he said. "Certainly some of the audit firms get a lot of credit for what they've done in standing behind fair value and trying to get the numbers right." He had no such praise for FASB. Although the board is currently rewriting FAS 140 to eliminate QSPEs, it has "done an absolutely miserable, abysmal job, especially in the balance sheet area."
David McCann, "Former SEC Chief Accountant Blames FASB for Meltdown He credits auditors and financial statement preparers for successfully fighting fraud," CFO.com, March 5, 2009 --- http://www.cfo.com/article.cfm/13234318/c_13234460
Jensen Comment
Whereas the FASB at least tackled the SPE problem and lost, the IASB on the international front has had its head completely in the sand.

Bob Jensen's threads on QSPEs, VIEs, SPEs, etc. --- http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

Questions
Did the FASB's amended fair value guidelines give the players (banks), umpires (regulators), and fans (notably shareholders like Steve Forbes and Warren Buffett seeking a new stock market bubble) the overvalued wine they were seeking? Will the new guidelines mostly increase client pressures on auditors to sign off on fantasy financial statements?

Although the new FASB Guidelines for estimating fair value under FAS 157 and FAS 115 in "broken markets" expands client/auditor discretion for some types of assets having long-term value such as real estate, it's asking a lot to have auditors agree once again to rosy valuation of sorry-looking toxic investments such as the value of a mortgage that's about to wither on the vine. You can't squeeze sweet grape juice from shriveled homeowners, let alone fine wine. It may, however, be that higher value on foreclosed properties in bank inventories will lead to some partying over banks' financial statements.

The wonderful December 30, 2008 research report of the SEC shows that fair value accounting is neither the cause nor the cure for the banking crisis. The liquidity problem of the holders of the toxic investments is caused by trillions of dollars invested in underperforming (often zero performing) of bad investments mortgages or mortgaged-backed bonds that have to be written down unless auditors agree to simply lie about values. That is not likely to happen, but client pressures on auditors to value on the high side for many properties will be heavy handed.
The wonderful full SEC report that bankers and regulators do not want to read can be freely downloaded at http://www.sec.gov/news/studies/2008/marktomarket123008.pdf

The FASB probably did its best to maintain integrity in the face of massive political pressures. I hope the IASB is able to resist the same pressures in the international arena. To me the new FASB Guidelines are mostly old wine in new bottles since FAS 157 previously gave considerable discretion in valuing items in broken markets.

"Expedited fair value guidance may ease pressure on banks," AccountingWeb, March 17, 2009 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=107232

Following a hearing at a House Financial Services subcommittee last week, the Financial Accounting Standards Board (FASB) agreed to expedite release of their proposed guidance for the application of FAS 157 "Fair Value Measurement." The proposed guidance was published for public comment on March 17th and will be voted on by the Board on April 2. If approved, the FASB recommends that the guidance be effective for interim and annual periods ending after March 15, 2009. According to CFO.com, FASB chairman, Robert H. Herz, chairman of the Financial Accounting Standards Board (FASB), told legislators, "We can have the guidance in three weeks, but whether that will fix everything is another [issue]."

SB's proposal give more detailed guidance for valuing assets that would be classified as Level 3 under FAS 157, where values are assigned in the absence of an active market or where a sale has occurred in distressed circumstances when prices are temporarily weighed down. The new guidance allows companies to use their own models and estimates and exercise "significant judgment" to determine whether a market exists or whether the input is from a distressed sale. Under FAS 157, financial instruments' fair values cannot be based on distressed sales.

FASB had planned to issue the proposed guidance by the end of the second quarter. A study on mark-to-market accounting standards conducted by the Securities and Exchange Commission (SEC), which was mandated by the Emergency Economic Stabilization Act of 2008, concluded that more application guidance to determine fair values was needed in current market conditions. On February 18, Herz announced that FASB agreed with the SEC study and would develop additional guidance.

Thomas Linsmeier, FASB board member, said that they hoped that the new guidance could lead to more accurate and possibly higher values, CFO.com reports. "What we are voting on will hopefully elevate fair values to a more reasonable price so investors are more comfortable investing in the banking system," he said.

Edward Yingling, president of the American Bankers Association, said in a statement he welcomed the proposal but expressed caution about the ways it might be used by auditors, MarketWatch says. "While we welcome today's news, it will be important to look at the details of the written proposal to see how fully it improves the guidance. It will also be imperative to examine the practical effect the proposal will have based on the various ways it is interpreted."

The FASB proposal recommends that companies take two steps to determine whether there an active market exists and whether a recent sale is distressed before applying their own models and judgment:

Step 1: Determine whether there are factors present that indicate that the market for the asset is not active at the measurement date. Factors include:

• Few recent transactions (based on volume and level of activity in the market). Thus, there is not sufficient frequency and volume to provide pricing information on an ongoing basis.
   
• Price quotations are not based on current information.
   
• Price quotations vary substantially either over time or among market makers (for example, some brokered markets).
   
• Indices that previously were highly correlated with the fair values of the asset are demonstrably uncorrelated with recent fair values.
   
• Abnormal (or significant increases in) liquidity risk premiums or implied yields for quoted prices when compared to reasonable estimates of credit and other nonperformance risk for the asset class.
   
• Significant widening of the bid-ask spread.
   
• Little information is released publicly (for example, a principal-to-principal market).

If after evaluating all the factors the sum of the evidence indicates that the market is not active, the reporting entity shall apply step 2.

Step 2: Evaluate the quoted price (that is, a recent transaction or broker price quotation) to determine whether the quoted price is not associated with a distressed transaction. The reporting entity shall presume that the quoted price is associated with a distressed transaction unless the reporting entity has evidence that indicates that both of the following factors are present for a given quoted price:

• There was a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities (for example, there was not a regulatory requirement to sell).
   
• There were multiple bidders for the asset.

The proposed guidance also provides examples of measurement approaches in the event that the observable input is from a distressed sale.

At Monday's meeting, Herz deflated any beliefs that FASB's new guidance will be a panacea for the many ills of the U.S. economy. "There's not much accounting can do other than help people get the facts and use their best judgment," he said.

The International Accounting Standards Board, which sets accounting rules followed by more than 100 countries, plans to publish a draft rule to replace and simplify fair-value accounting rules. Critics say the rules have exacerbated the credit crunch by forcing write-downs. "We plan to replace it, the whole thing. We want to stop patching up the standard and we want to write a new one. We are aware that the current model is too complex. We need to simplify.... We will move to exposure draft hopefully within the next six months," said Philippe Danjou, a member of the IASB board.

Professor Schiller at Yale asserts housing prices are still overvalued and need to come down to reality
The median value of a U.S. home in 2000 was $119,600. It peaked at $221,900 in 2006. Historically, home prices have risen annually in line with CPI. If they had followed the long-term trend, they would have increased by 17% to $140,000. Instead, they skyrocketed by 86% due to Alan Greenspan’s irrational lowering of interest rates to 1%, the criminal pushing of loans by lowlife mortgage brokers, the greed and hubris of investment bankers and the foolishness and stupidity of home buyers. It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20% overvalued. Long-term averages are created by periods of overvaluation followed by periods of undervaluation. Prices need to fall 20% and could fall 30%.....
Watch the video on Yahoo Finance --- Click Here
See the chart at http://www.businessinsider.com/the-housing-chart-thats-worth-1000-words-2009-2
Also see Jim Mahar's blog at http://financeprofessorblog.blogspot.com/2009/02/shiller-house-prices-still-way-too-high.html
Jensen Comment
In the worldwide move toward fair value accounting that replaces cost allocation accounting, the above analysis by Professor Schiller is sobering. It suggests how much policy and widespread fraud can generate misleading "fair values" in deep markets with many buyers and sellers, although the housing market is a bit more like the used car market than the stock market. Each house and each used car are unique, non-fungible items that are many times more difficult to update with fair value accounting relative to fungible market securities and new car markets.

Bob Jensen's threads on fair value accounting are at http://www.trinity.edu/rjensen/Theory01.htm#FairValue

Don't Blame Fair Value Accounting Standards (Except in Terms of Executive Bonus Payments) --- http://www.trinity.edu/rjensen/2008Bailout.htm#FairValueAccounting

"IASB Enhances Financial Instruments Disclosures," SmartPros, March 5, 2009 --- http://accounting.smartpros.com/x65784.xml

The International Accounting Standards Board (IASB) today issued amendments that improve the disclosure requirements about fair value measurements and reinforce existing principles for disclosures about the liquidity risk associated with financial instruments.

The amendments form part of the IASB’s focused response to the financial crisis and addresses the G20 conclusions aimed at improved transparency and enhanced accounting guidance. The improvements also reflect discussions by the IASB’s Expert Advisory Panel on measuring and disclosing fair values of financial instruments when markets are no longer active.

Responding to the calls of policymakers, many investor groups and other interested parties, the IASB is bringing the disclosure requirements of International Financial Reporting Standards (IFRSs) more closely into line with US standards. The amendments to IFRS 7 Financial Instruments: Disclosures introduce a three-level hierarchy for fair value measurement disclosures and require entities to provide additional disclosures about the relative reliability of fair value measurements. These disclosures will help to improve comparability between entities about the effects of fair value measurements. In addition, the amendments clarify and enhance the existing requirements for the disclosure of liquidity risk. This is aimed at ensuring that the information disclosed enables users of an entity’s financial statements to evaluate the nature and extent of liquidity risk arising from financial instruments and how the entity manages that risk.

The amendments to IFRS 7 apply for annual periods beginning on or after 1 January 2009. However, an entity will not be required to provide comparative disclosures in the first year of application.

Introducing the amendments, Sir David Tweedie, Chairman of the IASB, said: The financial crisis has shown that a clear understanding of how entities determine the fair value of financial instruments, particularly when only limited information is available, is crucial to maintaining confidence in the financial markets. The additional disclosure requirements and the three-level hierarchy will help to increase the clarity of the information. The amendments will also enhance the disclosures about the liquidity risks associated with financial instruments. The proposals build on the advice we have received from the IASB’s Expert Advisory Panel. For more information about measures undertaken by the IASB in response to the financial crisis, visit www.iasb.org

 

Bull Crap About Fair Value Accounting

Congress is also be readying legislation to suspend doctors' cancer diagnoses for the next two years to "help" with the health care crisis.
Ed Scribner (paraphrased)

Here are three bull crap teaching cases on this matter. At least two prominent billionaires (Warren Buffet and Steve Forbes) are totally ignoring the wonderful December 30, 2008 SEC research report that concludes that suspension of fair value accounting for banks will hurt rather than help solve the banking crisis. But nobody seems to be listening to anything from the SEC these days. The outstanding SEC research report is at http://www.sec.gov/news/studies/2008/marktomarket123008.pdf
Especially note the review of 22 bank failures beginning around Page 100.

It appears that Warren Buffett and Steve Forbes are still holding billions of shares of equity stock that tanked. They will stoop to almost any bull crap accounting rules that will help lure investors back into the stock market. For example, Warren Buffet lost $25 billion in share value. He wants you and millions of others to help create a new stock market bubble. Coloring book fantasy accounting might help them regain their lost billions.

Bull Crap Teaching Case 3
From The Wall Street Journal Accounting Weekly Review on March 13, 2009

Bull Crap Teaching Case 2
Forbes serves up barf --- No it's worse than barf!
It's clear that Forbes never read the excellent December 2008 SEC research report on this topic.
"Obama Repeats Bush's Worst Market Mistakes:  Bad accounting rules are the cause of the banking crisis," by Steve Forbes, The Wall Street Journal, March 6, 2009 --- http://online.wsj.com/article/SB123630304198047321.html?mod=djemEditorialPage

What is most astounding about President Barack Obama's radical economic recovery program isn't its breadth, but its continuation of the most destructive policies of the Bush administration. These Bush policies were in themselves repudiations of Franklin Delano Roosevelt, Mr. Obama's hero.

The most disastrous Bush policy that Mr. Obama is perpetuating is mark-to-market or "fair value" accounting for banks, insurance companies and other financial institutions. The idea seems harmless: Financial institutions should adjust their balance sheets and their capital accounts when the market value of the financial assets they hold goes up or down.

That works when you have very liquid securities, such as Treasurys, or the common stock of IBM or GE. But when the credit crisis hit in 2007, there was no market for subprime securities and other suspect assets. Yet regulators and auditors kept pressing banks and other financial firms to knock down the book value of this paper, even in cases where these obligations were being fully serviced in the payment of principal and interest. Thus, under mark-to-market, even non-suspect assets are being artificially knocked down in value for regulatory capital (the amount of capital required by regulators for industries like banks and life insurance).

Banks and life insurance companies that have positive cash flows now find themselves in a death spiral. Of the more than $700 billion that financial institutions have written off, almost all of it has been book write-downs, not actual cash losses. When banks or insurers write down the value of their assets they have to get new capital. And the need for new capital is a signal to ratings agencies that these outfits might deserve a credit-rating reduction.

So although banks have twice the amount of cash on hand that they did a year ago, they lend only under duress, or apply onerous conditions that would warm Tony Soprano's heart. This is because they know that every time they make a loan or an investment there is a risk of a book write-down, even if the loan is unimpaired.

If this rigid mark-to-market accounting had been in effect during the banking trouble in the early 1990s, almost every major commercial bank in the U.S. would have collapsed because of shaky Latin American and commercial real estate loans. We would have had a second Great Depression.

But put aside for a moment the absurdity of trying to price assets in a disrupted or non-existent market, of not distinguishing between distress prices and "normal" prices. Regulatory capital by its definition should take the long view when it comes to valuation; day-to-day fluctuations shouldn't matter. Assets should be kept on the books at the price they were obtained, as long as the assets haven't actually been impaired.

Continued in article

Jensen Comment
By now investors know which large banks are stuck with trillions of dollars in non-performing loans. Wrapping them gold ribbons by reporting them way above market value is hardly going to induce investors to go out an buy enormous amounts of common shares of CitiBank, Bank of America, Wells Fargo, and JP Morgan. This artificial gilding of capital ratios does nothing to solve the problem of detoxifying the poison of non-performing loans and poisonous collateralized bonds.

This type of naive and dangerous reasoning was started on September 19, 2008 by former FDIC director Bill Isaac --- http://www.trinity.edu/rjensen/2008Bailout.htm#FairValueAccounting

It's certain that FAS 157 needs some amending for broken markets, but what Isaac and Forbes are proposing serve as no basis for improvements on FAS 157. After Isaac proposed elimination of fair value accounting for troubled banks, Congress ordered, in no uncertain terms, the SEC to do a research study on what was causing so many bank failures like the huge failures of WaMu and Indy Mac. Although the SEC has been disgraced for a lot of reasons as of late, the particular study that emerged in a very short period of time (December 2008) is an excellent study of why banks were failing.

In particular, beginning on Page 100 of the study the SEC reports on why 22 large-size, medium-size, and small-size banks failed. It turns out that most assets and liabilities of banks are not marked to market in the first place. Secondly, fair value adjustments downward has not been the problem of recent bank failures. The problem is non-performing loans, dangerous management of financial risk, fraud in property valuations (which was especially bad at WaMu), and performance-based reward systems that induced bank employees to screw their companies and their shareholders.

If you want to blame accountants, blame the auditors for not raising going concern questions about the failed banks --- http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Blame them for badly understating bad debt reserves.
But don't blame them or the FASB/IASB standard setters for fair value accounting.
And this is from an old accounting professor who favors fair value accounting for financial and derivative financial instruments but fights against fair value accountign for non-financial investments --- http://www.trinity.edu/rjensen/theory01.htm#FairValue

I'll bet you 99-1 odds that Steve Forbes never read this excellent SEC study:
"Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on Mark-To-Market Accounting"
The full report can be freely downloaded at http://www.sec.gov/news/studies/2008/marktomarket123008.pdf. (pdf)

March 6, 2009 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

Bob,

Congress is holding a hearing on market value accounting next week - http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr031209.shtml 
I understand that one Congressman is readying legislation to suspend market value accounting for two years in order to "help" with the economic crisis.

On a somewhat related point, see the recent speech by the Comptroller of the Currency who would like to use the allowance for loan losses of banks to squirrel away amounts in good times that can then be drawn on in bad times like these - http://www.occ.treas.gov/ftp/release/2009-16a.pdf 

Along with GM's going concern qualification, accounting is truly front page news again - after fading into the background a little a couple of years after SOX. We are indeed living in interesting times although with the value of my portfolio being what it is "living" may be putting too positive a spin on it!

Denny

March 6, 2009 reply from Ed Scribner [escribne@NMSU.EDU]

Denny,

That same Congressman may also be readying legislation to suspend doctors' cancer diagnoses for the next two years to "help" with the health care crisis.

 Ed

March 6, 2009 reply from Richard C. Sansing [Richard.C.Sansing@TUCK.DARTMOUTH.EDU]

Thanks for a Friday afternoon chuckle. I see many potential applications of the same idea. Can we help address global warming by suspending the use of thermometers?

Richard Sansing

 

Bull Crap Teaching Case 1
From The Wall Street Journal Accounting Weekly Review on

Bank Capital Gets Stress Test
by Deborah Solomon and Jon Hilsenrath
Feb 26, 2009
Click here to view the full article on WSJ.com
http://online.wsj.com/article/SB123557705225772665.html?mod=djem_jiewr_AC

TOPICS: Bad Debts, Banking, Financial Analysis, Financial Statement Analysis

SUMMARY: The Obama administration is proposing new bank capital requirement tests that will be designed to assess whether "...banks can survive even if the unemployment rate rises above 10% and home prices fall by another 25%....worse than most economists and the Federal Reserve currently expect." If banks fail to demonstrate sufficient capital to weather those circumstances, they may either raise additional funds privately or accept further investment from the U.S. government. "The government's investment would come in the form of convertible preferred shares, which institutions could choose to convert into common equity at any time....Officials said they expect banks would convert the shares to common equity as needed to help protect against losses."

CLASSROOM APPLICATION: Questions help students to understand the meaning of capital beyond the balance sheet definition of assets - liabilities = equity and to understand the relationship between economic forecasting and bank capital requirements. The article also discusses the use of preferred shares versus common stock and the use of convertible preferred shares.

QUESTIONS: 
1. (Introductory) Define bank capital in terms of the balance sheet equation.

2. (Advanced) What tests are used to assess a bank's health based on the level of its capital or equity? (Hint: for background information and an international perspective, you may investigate the Basel and Basel II Accords of the Basel Committee on Banking Supervision of the Group of Ten nations. See the related articles.)

3. (Introductory) How can economic and financial advisors relate the potential unemployment rate and mortgage default rate in the U.S. economy to banks' capital needs?

4. (Advanced) If financial institutions fail capital requirement tests based on new thresholds as outlined by the Obama administration, the U.S. government may invest in "...convertible preferred shares, which institutions could choose to convert into common equity at any time." Define and describe the differences between preferred and common shares. Also define convertibility features.

5. (Introductory) Why might financial institutions not want to issue common shares of stock but be allowed to do so by converting preferred shares whenever they so choose?

6. (Introductory) What is the difference between financial institutions issuing stock to the U.S. government in the ways described in this article and nationalizing our financial institutions?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES: 
Rules on Capital Roil U.S. Bankers
by Damian Paletta
Nov 01, 2006
Page: C3

http://online.wsj.com/article/SB116234873761209749.html
by Damian Paletta and Alistair MacDonald
Mar 04, 2008
Page: 03/04

"Bank Capital Gets Stress Test," by Deborah Solomon and Jon Hilsenrath, The Wall Street Journal, Feb 26, 2009
http://online.wsj.com/article/SB123557705225772665.html?mod=djem_jiewr_AC

The Obama administration, in unveiling details of its financial-rescue plan, laid out a dark economic scenario it expects banks to be able to withstand, the starting point for what could become a significant new infusion of government cash into the banking system.

To ensure banks can survive even if the unemployment rate rises above 10% and home prices fall by another 25%, the administration will require some institutions to either raise private money or accept a bigger investment from the U.S. government. U.S. officials don't expect the economy to deteriorate that sharply, but they want to be sure banks are prepared nonetheless.

The first step in the latest effort to shore up the banking sector will be a series of "stress tests" to assess whether the largest U.S. banks can survive a protracted slump. The tests aren't expected to be finished until April. Banks will then have up to six months to address any shortfall.

Unlike the Bush administration's effort to pump $250 billion into banks, the Obama team didn't commit a set amount of money to the effort and President Barack Obama said Tuesday it is likely that banks will need additional funds beyond the $700 billion rescue package approved by Congress last fall.

The government's investment would come in the form of convertible preferred shares, which institutions could choose to convert into common equity at any time. Regulators and investors have become more concerned about the amount of common stock banks hold, since that is a bank's first line of defense against losses.

To ensure their balance sheets are strong, the biggest banks will be required to undergo a tough assessment, including whether they have the right type of capital. Officials said they expect banks would convert the shares to common equity as needed to help protect against losses.

A bank's capital is its cushion against losses, a buffer that ensures its depositors and other lenders will get paid even if the bank runs into trouble.

Economists said most of the nation's largest banks will likely have to raise capital under the economic assumptions that regulators plan to use. The stress test assumes an unemployment rate averaging 8.9% in 2009 and 10.3% in 2010. Because that is an average for a whole year, the test envisions the jobless rate reaching higher than those levels on a monthly basis during these stretches. It was 7.6% in January

Under some circumstances, the government might end up owning majority stakes in banks.

"I think you'll find most firms need more capital and that Bank of America and Citigroup are going to need a boatful of new capital," said Douglas Elliott, a fellow at the Brookings Institution.

Discuss Would nationalizing banks improve or worsen the crisis? Share your thoughts at Journal Community.Banks that get a government investment will have to comply with strict executive-compensation restrictions, including curtailed bonuses for top executives and earners. The securities will pay a 9% dividend -- higher than the 5% banks are required to pay under the Bush-era program -- and banks would be restricted in paying dividends and from buying back their own stock. The securities would automatically convert to common stock after seven years.

Banks that have already sold preferred shares to the government as part of the $250 billion program would also be able to swap the preferred shares for convertible securities that can convert to common shares.

Administration officials said the effort is an attempt to avoid nationalizing banks and to make sure institutions can lend money. While officials said most banks are considered well capitalized, uncertainty about economic conditions is hindering their ability to lend money or attract private capital.

Treasury Secretary Timothy Geithner sought to knock down speculation that the government may nationalize banks, saying such a move is "the wrong strategy for the country and I don't think it's the necessary strategy." Mr. Geithner, speaking on The NewsHour with Jim Lehrer, said there may be situations where the government provides "exceptional support" but that the best outcome is if the banks "are managed and remain in private hands."

U.S. officials will demand that financial institutions test the resilience of their portfolios and capital against a grim, though not catastrophic, economic landscape. The test assumes a 3.3% contraction in gross domestic product in 2009, which would be the worst performance since 1946. And it assumes home-price declines of another 22% in 2009 and 7% in 2010.

That would be worse than most economists and the Federal Reserve currently expect. Private economists on average forecast a 2% contraction in economic output this year and a 2% rebound next year, with the jobless rate remaining below 10%.

Some private forecasters said they can imagine worse.

"I don't have any problem believing the unemployment rate is going to move to 12% or that vicinity," said Laurence Meyer, vice chairman of Macroeconomic Advisers LLC, a forecasting firm whose models are widely used in Washington and New York.

Mr. Meyer said regulators had to strike a delicate balance in designing their test. If they painted a truly grim scenario -- the economy contracted by 9% in 1930, 6% in 1931 and 13% in 1932 -- it could force banks to raise more capital than they are capable of raising, driving them further into the government's arms.

"You don't want to know the answer to some of the questions you might ask," Mr. Meyer said.

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory01.htm

Bob Jensen's threads on the bailout mess --- http://www.trinity.edu/rjensen/2008Bailout.htm

A Small But Important Step in Breaking the Accountics Stranglehold on Accountancy Doctoral Programs

"A Profession's Response to a Looming Storage (sic, I think they meant shortage): Closing the Gap in the Supply of Accounting Faculty," by Michael Ruff, Jay C. Thibodeau, and Jean C. Bedard, Journal of Accountancy, March 2009 --- http://www.journalofaccountancy.com/Issues/2009/Mar/AccountingFaculty.htm 

EXECUTIVE SUMMARY
A looming shortage exists in the academic world of accounting as many accounting professors retire and new instructors are needed. The AICPA, along with other groups and professional services firms, offers assistance to accountants interested in future careers in academia.

The Accounting Doctoral Scholars Program (ADS), administered by the AICPA Foundation, was recently established by 67 of the largest accounting firms, along with the support of state societies. Designed to encourage audit and tax professionals to pursue a career as a professor, the ADS Program intends to award 30 four-year scholarships during each of the next four years.

Other financial assistance is available to Ph.D. students in accounting to supplement stipends provided by universities. While these stipends are low relative to accounting salaries, universities generally waive tuition for doctoral study, since most students serve as graduate assistants. Accounting faculty earn competitive salaries, providing a reasonable payback period of the investment for the CPA. More opportunities are also expected to open up for professionally qualified instructors. Professionally qualified instructors are not Ph.D.s but have extensive professional accounting experience. An AICPA/ American Accounting Association program offers assistance in making such a career change.

March 10, 2009 reply from Roger Debreceny [roger@DEBRECENY.COM]

The website for the ADS program is http://www.adsphd.org/ . The list of participating institutions is at http://www.adsphd.org/participatingschools.asp
 Doyle Williams is chairing this effort. He has been strong in holding the line, saying, for example, that if a student starts in auditing and tax and then decides to switch to financial accounting, they must give up their scholarship. Of course, the reality is that capital markets research can be applied to many decision frames and the centrifugal forces are so strong that we will see:

1) Students using capital markets approaches to study auditing (think audit fees) or tax
2) Switching to largely financial accounting, capital markets research after graduation

Having said that, I think this will apply to only a minority (albeit a significant minority) of students. It was a great experience to interact with other faculty and potential students in December last year. I think we can see this effort as an important first step in righting the listing ship of accounting academia.

Roger

Bob Jensen's threads on the doctoral program mess are at http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

From The Wall Street Journal Accounting Week in Review on April 3, 2009

Bob Jensen's taxation helpers are at http://www.trinity.edu/rjensen/Bookbob1.htm

Questions
What do airline fares and Congressional budgets have in common?

Answer
There are a lot of surprises that are revealed only after you're struck with the deceptions (especially about baggage fees in both instances).
What you end up with is not necessarily what you'd planned on getting.

In 2009 the airline seat demand is expected to drop off a cliff for a variety of reasons, not the least of which is the economy.
Beware of increasingly deceptive ticket deals.

Travel companies say that by the end of this year, consumers will be able to comparison shop for airfares that for the first time will include the fees airlines have been tacking on to advertised fares only after you hit the "buy" button. Already TripAdvisor.com and FlyingFees.com offer elementary tools for calculating fees, and advanced technology that can fold fees into fare quotes at travel agencies, online vendors and airline Web sites is likely to hit the market later this year.
"Airfare Quotes That Lay Bare Hidden Fees:  Sites Build Tools to Compare the Actual Costs of Flights; When Baggage Tips the Scale," by Scott Macartney, The Wall Street Journal, March 10, 2009 --- http://online.wsj.com/article/SB123664662318478683.html?mod=todays_us_personal_journal

Shop for airline tickets online or through a travel agent and the price quotes you get don't tell the whole story these days. But that's about to change.

Travel companies say that by the end of this year, consumers will be able to comparison shop for airfares that for the first time will include the fees airlines have been tacking on to advertised fares only after you hit the "buy" button. Already TripAdvisor.com and FlyingFees.com offer elementary tools for calculating fees, and advanced technology that can fold fees into fare quotes at travel agencies, online vendors and airline Web sites is likely to hit the market later this year.

"This has tremendous potential to turn air-travel shopping on its end," said Kyle Moore, vice president of product marketing for Sabre Travel Network.

A $200 ticket on one airline may look like a good deal, but could ultimately be more expensive than a $250 ticket on another carrier if that first airline charges fees for checking baggage, transporting pets or unaccompanied minors. Even perks like seats with extra legroom, priority security-line privileges or one-day passes to an airport lounge can significantly boost the price of a ticket.

Airlines have found customers willing to pay more at the airport when fees are separate from fares. Folding fees into fares could limit airlines' ability to dig deeper into traveler wallets.

Sabre Holdings Corp. and Amadeus IT Group SA, two leading airline booking companies, say they'll have tools out to travel agents, Web sites and airlines beginning later this year that will add fees consumers plan to use into ticket prices, showing bottom-line prices much as car-rental companies were pressured into showing the total price of a rental with all fees, taxes and surcharges included.

Rough early attempts to fold fees into prices give travelers a better idea of the fees they may incur, but still leave a lot of the math to travelers. TripAdvisor, a company owned by Expedia Inc. that built a following collecting travelers' hotel and destination reviews, added airline ticket search capabilities to its site on Feb. 27 and unveiled a "fee estimator" that can re-rank prices based on how many bags you plan to check. The fee estimator, developed in-house by TripAdvisor, can also calculate expected fees for each flight for meals, drinks, snacks and 

"Customers are looking for clarity in pricing," says Bryan Saltzburg, general manager of new initiatives for TripAdvisor.

Without fees, a $193 round-trip fare between New York and Fort Lauderdale for travel later this month on US Airways Group Inc. looks cheaper than a $197 fare at JetBlue Airways Corp., for example. But if you're checking two bags, you'll pay $80 in fees on US Airways and only $40 on JetBlue.

The fee estimator takes into account whether you have elite status at an airline that may exempt you from some fees. But there are lots of limitations. TripAdvisor's estimator only works for domestic flights and does not price out the costs of overweight or oversized luggage, priority seating, pets, unaccompanied minors or other charges. TripAdvisor says it concentrated on the most frequently incurred fees; more fees may be coming.

Continued in article

Bob Jensen's threads on consumer fraud and reporting are at http://www.trinity.edu/rjensen/FraudReporting.htm

Jensen Comment
Add-on fee collecting greatly complicates product costing since most of these fees are in essence for separate products and services. But the products are in no way independent since the all depend on the purchase of the main ticket. Also these products share many common fixed costs such as the cost of baggage handling. The airline needs a baggage system to serve both the "free baggage" that is part of the ticket price and the "fee baggage" that is charged baggage not covered in the price of a ticket. Cost accounting and pricing decisions are very complicated and offer an opportunity for new case studies in cost and managerial courses. Add this to the problem of frequent flier liabilities and you may write up a case that nobody can solve. Those incomprehensible telephone bills demonstrated that consumers really hate complicated billings with lots of hidden surprises in the fine print.

Question
Why doesn't anybody ask the obvious question that, since the Federal government now owns 80% of AIG, the taxation of AIG is in a sense an intra-company transfer payment?

Setting AIG in the IRS's sights is not quite the same as aiming at General Electric's tax shelters.

I don't think Watts and Zimmerman ever envisioned such government ownership complications of positive accounting theory. Shooting at AIG with the right hand is a little like shooting off 80% of the left hand.

From The Wall Street Journal Accounting Weekly Review on March 27, 2009

"AIG's Bonus Unit Now in IRS's Sights," by Jesse Drucker, The Wall Street Journal, ---
http://online.wsj.com/article/SB123785925883921027.html?mod=djem_jiewr_AC

Some of the same banks that got government-funded payouts to settle contracts with American International Group Inc. also turned to the insurer for help cutting their income taxes in the U.S. and Europe, according to court records and people familiar with the business.

The Internal Revenue Service is challenging some of the tax deals structured by AIG Financial Products Corp., the same unit of the New York company that has caused political ire over $165 million in employee bonuses.

The company paid $61 million last year in disputed taxes stemming from the deals but sued the U.S. government last month in federal court in New York, seeking a refund, according to filings in the case.

Banks that worked with AIG on tax deals include Crédit Agricole SA of France, Bank of Ireland and Bank of America Corp., according to AIG's lawsuit. The banks declined to comment.

In general, AIG's tax deals permitted U.S. companies and foreign banks to effectively claim credit in their home country for a single tax payment, partly through the use of an offshore AIG subsidiary. In its lawsuit against the government, the insurer said it was told by the IRS that AIG hadn't shown that the transactions "had sufficient economic substance and business purpose" to justify tax benefits. The IRS declined to comment.

The tax-structuring operation started by AIG in the 1990s was even bigger than AIG's credit-default-swaps business, according to a person familiar with the matter.

An AIG spokesman declined to discuss the tax-cutting transactions in detail but asserted that the tax benefits were proper and justified. AIG wants to "ensure that it is not required to pay more than its fair share of taxes," a company spokeswoman said.

More AIG Workers to Return $50 Million of BonusesWealth: Bus Tours of the Rich and InfamousSoros: Credit Default Swaps Need Stricter RegulationDefenders of these arrangements say that taking advantage of differences between tax laws in the U.S. and overseas is simply smart business, arguing that the deals weren't explicitly prohibited by IRS regulations at the time.

New versions of these foreign-tax-credit deals effectively stopped in 2007 after the IRS proposed regulations to end them. The agency has formed a special team of agents and attorneys to examine such transactions. AIG wound down its tax unit last year following the proposed regulations.

Cross-border tax transactions are drawing increased scrutiny from U.S. and European tax officials, who are seeking to limit deals that help firms to play one nation's tax laws against another. This month, U.K. tax authorities said they were reviewing documents that show how Barclays PLC structured offshore deals for clients.

Last week, IRS Commissioner Douglas Shulman told the Senate Finance Committee that the agency is "aggressively pursuing" so-called "foreign tax-credit generators." Those are the sort of deals that the IRS is challenging at AIG, court records in two cases show.

Mr. Shulman didn't identify specific companies, though such a transaction "really perverts the foreign tax credit," he said.

The foreign-tax-credit transactions took numerous forms. In one version, an offshore AIG subsidiary would borrow money from an overseas bank and also earn investment income overseas. The AIG unit would pay foreign taxes on that investment income and earn a foreign tax credit in the U.S., according to court records involving companies using these deals that have been challenged by the IRS and people who have worked on such deals.

Another AIG unit would then pay interest to the foreign bank, deducting those payments from its U.S. taxes. Meanwhile, the foreign bank was exempt from tax on that interest because overseas tax authorities treated the bank as simultaneously owning the AIG subsidiary. That effectively gave the foreign bank credit for taxes paid by the AIG subsidiary.

Because the foreign bank got a tax exemption overseas, it could charge lower interest costs on the cash loaned to AIG, according to people familiar with the transactions.

AIG helped set up a complex transaction for France's Crédit Agricole in the late 1990s that generated roughly $17.8 million in tax savings for AIG and unspecified tax savings for Crédit Agricole, according to court filings by AIG in its suit against the IRS. The bank declined to comment.

Last year, Crédit Agricole's Calyon investment-banking unit got $3.3 billion in payouts as part of the U.S. government's rescue of AIG.

"If people are going to get taxpayer money, then there definitely should be a measure of corporate social responsibility, to put it bluntly," said Reuven S. Avi-Yonah, a former corporate tax attorney who is director of the international tax program at the University of Michigan's law school.

Continued in article

"Former BDO Seidman vice chair pleads guilty to tax fraud," AccountingWeb, March 20, 2009 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=107235 

Adrian Dicker, a United Kingdom chartered accountant and former vice chairman and board member at a major international accounting firm, has pleaded guilty to conspiring with certain tax shelter promoters to defraud the United States in connection with tax shelter transactions involving clients of the accounting firm and the law firm Jenkens & Gilchrist (J&G), the Justice Department and Internal Revenue Service (IRS) announced. In the hearing before U.S. Magistrate Judge Theodore H. Katz in the Southern District of New York, Dicker, who is a resident of Princeton Junction, NJ, also pleaded guilty to tax evasion in connection with a multi-million dollar tax shelter that Dicker helped sell to a client of the accounting firm.

According to the information and the guilty plea, between 1995 and 2000, Dicker was a partner in the New York office of the accounting firm which he identified during his guilty plea as BDO Seidman. From early 1999 through October 2000, Dicker was on the firm's Board of Directors, and through October 2003 he served as a retired partner director. From 1998 until 2000, Dicker was one of the leaders of the firm's "Tax Solutions Group" (TSG), a group led by the firm's chief executive officer, Dicker, and another New York-based tax partner. The activities of the TSG were devoted to designing, marketing, and implementing high-fee tax strategies for wealthy clients, including tax shelter transactions.

According to the information and the guilty plea, Dicker and the other two TSG managers used a bonus structure that handsomely rewarded the accounting firm personnel involved in the design, marketing, and implementation of the TSG's transactions, including: the individual who referred the client to TSG personnel; the TSG member who pitched and closed the sale; other TSG members; and TSG management. From July 1999, Dicker, the CEO, and the other TSG manager earned and shared equally 30 percent of the net profits of the TSG. Dicker earned approximately $6.7 million in net TSG profits, as well as salary and bonuses between 1998 and 2000. In addition, the CEO of the firm doled out additional bonuses from the profits earned as a result of the sale of the tax shelter products. Moreover, the firm made the sale of the tax shelter products a focal point of its aggressive "value added" product promotion activities, using a "Tax $ells" logo and other marketing hype to induce employees to generate additional tax shelter sales.

According to the information and the guilty plea, while serving as a manager of the TSG, Dicker, along with other TSG partners, engaged in the design, marketing, and implementation of two different tax shelter transactions with the Chicago office of the law firm of Jenkens & Gilchrist, as well as an international bank with its U.S. headquarters in New York. As a member of TSG and the accounting firm's tax opinion committee - which reviewed the tax opinions issued in connection with tax shelter transactions sold by the accounting firm and J&G - Dicker knew that the tax shelter transactions he helped vet and sell would be respected and allowed by the IRS only if the client had a substantial non-tax business purpose for entering the transaction, and the client had a reasonable possibility of making a profit through the transaction. Dicker and his co-conspirators knew and understood that the clients entering into the tax shelter transactions being marketed and sold with J&G had neither a substantial non-tax business purpose nor a reasonable possibility of earning a profit, given the large amount of fees being charged by the accounting firm and J&G to enter the transaction. Those fees were set by the co-conspirators as a percentage of the tax loss being sought by the tax shelter clients. Dicker also knew that the clients who purchased the tax shelter had no non-tax business reasons for entering into the transactions and their pre-planned steps.

According to the information and the guilty plea, in order to make it appear that the tax shelter clients of Dicker, other TSG members, and J&G had the requisite business purpose and possibility of profit, Dicker and his co-conspirators reviewed and approved the use of a legal opinion letter issued by J&G that contained false and fraudulent representations purportedly made by the clients about their motivations for entering into the transactions. In addition, Dicker and his co-conspirators created and used, or approved of the creation and use of, other documents in the transactions that were false, fraudulent, and misleading in order to paint a picture for the IRS that was patently untrue - that is, that the clients had a legitimate non-tax business purpose for entering the transaction and executing the preplanned steps of the transaction. Dicker also admitted during his plea that TSG members created and placed into client files certain paperwork that falsely conveyed fabricated business purposes and rationales for clients entering into the shelters. The false paperwork was created to mislead and defraud the IRS.

Continued in article

Bob Jensen's threads on accounting firms are at http://www.trinity.edu/rjensen/Fraud001.htm

IFRSs from a financial analyst's viewpoint
The cover story of the Winter 2009 issue of The Investment Professional presents a range of viewpoints – primarily those of professional investors and analysts – on the benefits and shortcomings of requiring IFRSs for all US SEC registrants. The Investment Professional is the quarterly journal of The New York Society of Security Analysts, Inc (NYSSA). The article, The Hard Sell – SEC in a Quandary over Its Push for IFRS (PDF 551k), is copyright 2009 by NYSSA and is posted on IAS Plus with their kind permission. Here is a brief excerpt:
Deloitte's IAS Plus, March 9, 2009 --- http://www.iasplus.com/index.htm

Bob Jensen's threads on the controversial abandonment of U.S. GAAP in favor of international GAAP --- http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

The Politics of IFRS versus U.S. GAAP

March 8, 2009 message from David Albrecht [albrecht@PROFALBRECHT.COM]

Last night, I blogged two essays ( http://profalbrecht.wordpress.com) dealing with the push for global financial markets and the free flow of the capital across national borders.  The push for GFS (a global financial system) started in the early 1960s and has gained widespread acceptance.

It is the push for GFS that has resulted in:
        (1) the rise of IFRS, adopted by over 100 countries.  The pressure from Europe for the U.S. to adopt IFRS is immense.  A recent Accountancy Age editorial asserted that if the U.S. does not immediately accept and implement IFRS, then GFS will be derailed and there is no hope of the world emerging from its current economic downturn.

        (2) push for the U.S. to accept foreign auditor opinions in financial statements of companies that are listed in the U.S.  The Sarbanes Oxley Act of 2002 explicitly requires the PCAOB to inspect such audit firms.  Christopher Cox, who chaired the SEC until one month ago, overlooked these provisions and publicly stated that the SEC would accept foreign government inspection and certification of these auditors.  In her confirmation hearings, members of the Senate Banking Committee expressed frustration with Cox's stand on this issue and asked Schapiro what she would do.  She replied that she would enforce the law and saw no need for a change in the law.  Foreign Minister Charley McCreevey stated that enforcement of this provision of SOX will have a significant negative impact on the implentation of GFS.

        (3) a push for coordinated regulation of primary and secondary securities markets in the U.S. and Europe.  Just prior to his stepping down, Christopher Cox seemed to back off from this (Denny Beresford alerted us to Cox's speech on this).

Anyway, it has just been reported ( http://www.guardian.co.uk/business/2009/mar/08/regulators-securities-and-exchange-commission ) that:
         "Britain and America are heading for an embarrassing showdown at next month's G20 financial summit in London as Mary Schapiro, the recently appointed head of the Securities and Exchange Commission, has signaled she will abandon efforts to seek a convergence of financial regulation between the US and Europe. "

There is a tremendous amount of tension that is affecting international relations between the U.S. and the E.U., all centered around Global Financial Markets and its goal of free flow of capital and various issues related to implementation, such as IFRS, auditor regulation and even securities regulation by individual governments.  We can see that various European governments are lobbying Mary Schapiro not to appoint Charlie Niemeier as Chief Accountant of the SEC (and when has appointment of chief accountant ever mattered so much to Europe?)

It is my opinion that the issues of the debate over GAAP v. IFRS can best be understood after a thorough study of the history and issues related to GFS and the free flow of capital.

I wish my doctoral studies in the late 80s had included at least some exposure to the push for GFS, which apparently had gained a goodly measure of orthodoxy by that time.

A book that is a key part of my education about GFS is Capital Rules, by Rawi Abdelal.  Rawi Abdelal is the Joseph C. Wilson Professor of Business Administration at Harvard Business School.  It is, as they say, a real page turner.  I wish I read it two years ago when it was published.

David Albrecht

Bob Jensen's threads on IFRS versus U.S. GAAP are at http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

Capital Requirement in Bank Regulation --- http://en.wikipedia.org/wiki/Capital_ratio

The capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital. The categorization of assets and capital is highly standardized so that it can be risk weighted[clarification needed]. Internationally, the Basel Committee on Banking Supervision housed at the Bank for International Settlements influence each country's banking capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Accord. This framework is now being replaced by a new and significantly more complex capital adequacy framework commonly known as Basel II. While Basel II significantly alters the calculation of the risk weights, it leaves alone the calculation of the capital. The capital ratio is the percentage of a bank's capital to its risk-weighted assets. Weights are defined by risk-sensitivity ratios whose calculation is dictated under the relevant Accord.

Each national regulator normally has a very slightly different way of calculating bank capital, designed to meet the common requirements within their individual national legal framework.

Most developed countries and Basel I and II, stipulate lending limits as a multiple of a banks capital eroded by the yearly inflation rate.

The 5 C's of Credit, Character, Cash Flow, Collateral, Conditions and Capital, have been replaced by one single criterion. While the international standards of bank capital were laid down in the 1988 Basel I accord, Basel II makes significant alterations to the interpretation, if not the calculation, of the capital requirement.

Examples of national regulators implementing Basel II include the FSA in the UK, BAFIN in Germany, and OSFI in Canada.

An example of a national regulator implementing Basel I, but not Basel II, is in the United States.[verification needed] Depository institutions are subject to risk-based capital guidelines issued by the Board of Governors of the Federal Reserve System (FRB). These guidelines are used to evaluate capital adequacy based primarily on the perceived credit risk associated with balance sheet assets, as well as certain off-balance sheet exposures such as unfunded loan commitments, letters of credit, and derivatives and foreign exchange contracts. The risk-based capital guidelines are supplemented by a leverage ratio requirement. To be adequately capitalized under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 capital ratio of at least 4%, a combined Tier 1 and Tier 2 capital ratio of at least 8%, and a leverage ratio of at least 4%, and not be subject to a directive, order, or written agreement to meet and maintain specific capital levels. To be well-capitalized under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 capital ratio of at least 6%, a combined Tier 1 and Tier 2 capital ratio of at least 10%, and a leverage ratio of at least 5%, and not be subject to a directive, order, or written agreement to meet and maintain specific capital levels. These capital ratios are reported quarterly on the Call Report or Thrift Financial Report.

Different International Implementations

Regulators in each country have some discretion on how they implement capital requirements in their jurisdiction.

For example, it has been reported that Australia's Commonwealth Bank is measured as having 7.6% Tier 1 capital under the rules of the Australian Prudential Regulation Authority, but this would be measured as 10.1% if the bank was under the jurisdiction of the UK's Financial Services Authority. This demonstrates that international differences in implementation of the rule can vary considerably in their level of strictness.

Common capital ratios

• Tier 1 capital ratio = Tier 1 capital / Risk-adjusted assets >=6%
• Total capital (Tier 1 and Tier 2) ratio = Total capital (Tier 1 and Tier 2) / Risk-adjusted assets >=10%
• Leverage ratio = Tier 1 capital / Average total consolidated assets >=5%
• Common stockholders’ equity ratio = Common stockholders’ equity / Balance sheet assets

Listed below are the capital ratios in Citigroup at the end of 2003

Ratios

At year-end	2003
Tier 1 capital	8.91%
Total capital (Tier 1 and Tier 2)	12.00%
Leverage (1)	5.56%
Common stockholders’ equity	7.67%

(1) Tier 1 capital divided by adjusted average assets.

Components of Capital Under Regulatory Guidelines

In millions of dollars at year-end	2003
Tier 1 capital
Common stockholders’ equity	$ 96,889
Qualifying perpetual preferred stock	1,125
Qualifying mandatorily redeemable securities of subsidiary trusts	6,257
Minority interest	1,158
Less: Net unrealized gains on securities available-for-sale (1)	(2,908)
Accumulated net gains on cash flow hedges, net of tax (751) (1,242)	(751)
Intangible assets: (2)
Goodwill	(27,581)
Other disallowed intangible assets	(6,725)
50% investment in certain subsidiaries (3)	(45)
Other	(548)
Total Tier 1 capital	66,871
Tier 2 capital
Allowance for credit losses (4)	9,545
Qualifying debt (5)	13,573
Unrealized marketable equity securities gains (1)	399
Less: 50% investment in certain subsidiaries (3)	(45)
Total Tier 2 capital	23,472
Total capital (Tier 1 and Tier 2)	$ 90,343
Risk-adjusted assets (6)	$750,293

 

"How Stressed is Your Bank?" by Stephen Gandel, Time Magazine, March 2, 2009 --- http://www.time.com/time/business/article/0,8599,1880499-1,00.html

Citigroup
.038 = Assets/Equity = $150,000,000,000/$2,000,000,000,000
Loan losses: Even after making a government deal, the bank is still on the hook for the first $40 billion in loan losses in the pool it has insured. Citi also has $277 billion in other, nonhousing consumer loans, such as credit cards and student debt. Roubini estimates that about 17% of consumer loans will go unpaid nationwide. That translates into a $47 billion river of red ink. Add in everything else (commercial real estate, corporate loans), and Citigroup will have to swallow $106 billion in loan losses by the end of 2010.

Capital cushion: Thanks to the Troubled Asset Relief Program (TARP), Citigroup now has $151 billion in equity, up from $113 billion a year ago. Alas, it will have a $76 billion hit from bad loans. Along with a projected bottom-line loss of $3.5 billion, that drops the bank's capital to $70.5 billion.

Prognosis: On the way to the ICU. Citigroup has a projected leverage ratio of just 3.8% — far lower than what it would need to be considered well capitalized. How much would the U.S. have to give the bank to nurse it back to good health? About $22 billion.

 

JPMorgan Chase
.078 = Assets/Equity = $166,000,000,000/$2,100,000,000,000
Loan losses: JPMorgan largely avoided the troubled subprime-lending game. Not so Washington Mutual, which JPMorgan acquired in 2008 in an FDIC-brokered deal. With housing prices still falling, many of those WaMu loans are going unpaid. JPMorgan has $105 billion in credit card loans, which could cost the company some $18 billion. And there is an additional $262 billion in corporate and commercial loans, which, according to Roubini, could tally $26 billion more in red ink. All told, it's a $97 billion loss for JPMorgan.

Capital cushion: JPMorgan has $23 billion in its rainy-day fund for such losses. Not enough. Shareholders' equity will drop to $121 billion, from the current $167 billion.

Prognosis: Looking good. JPMorgan is in better shape than other big banks are. Its post-test leverage ratio drops to 6.4%, from nearly 8% — still a picture of financial health. 

 

Bank of America
.046 = Assets/Equity =$176,000,000,000/ $2,000,000,000,000
Loan losses: BofA's buyout of mortgage broker Countrywide means the bank has $400 billion in home loans outstanding — more than its competitors. Worse, Countrywide, by nearly all accounts, had shockingly low lending standards. Chalk up a higher-than-average $40 billion in losses there. On top of that, BofA has made $87 billion in loans to commercial real estate developers. Roubini predicts 17% of those loans will go bad as developers hit the skids. For BofA, that's $15 billion more in losses. Toss in $55 billion in commercial- and consumer-loan losses, and you get $121 billion in lending deficits by the end of 2010.

Capital cushion: BofA has put away $23 billion to cover future losses, and it has more equity — $177 billion — than JPMorgan or Citigroup. But that might not be enough to preserve it without government help.

Prognosis: Prepare the transfusion. BofA is still on the monitor, but it's not far from being healthy again. It has a stressed leverage ratio of 4.6%. Just $7.3 billion in new capital would put BofA back on its feet. And with Uncle Sam finalizing its deal to guarantee $118 billion of BofA debt, the bank may already be on the mend. (See the top 10 financial-crisis buzzwords.)

 

Wells Fargo
.076 = Assets/Equity = $99,000,000,000/$1,300,000,000,000/
Loan losses: When Wells Fargo acquired Wachovia late last year, it more than doubled its loan book. In good times, that would be a major coup. These days, it's major trouble. Home buyers owe the bank $360 billion, up from about $150 billion just three months ago. Next, Wells has $154 billion in commercial real estate loans, as well as $200 billion in other types of commercial debt. Apply Roubini's overall 13% loss projection, and the conclusion is that Wells may be sitting on a $117 billion loss.

Capital cushion: The good news for Wells is that it has been aggressive in identifying problem loans — $37 billion from Wachovia alone. Wells officials argue that will lead to lower losses than its competitors'. But if not, the bank could be in trouble.

Even after the $25 billion Wells got from the government last year, it has just under $100 billion in equity, trailing other major banks by more than 50%.

Prognosis: Defibrillator. Stat! Wells Fargo is generally considered one of the banks that are least likely to fail. But our stress test says otherwise. Even with its $58 billion loan-loss buffer, Wells is still in the hole for $59 billion, or 60% of its capital. With $40 billion remaining and an expected $5 billion in income, the bank could sink to a less-than-rosy leverage ratio of 3.7%.

Bob Jensen's threads on the bailout mess are at http://www.trinity.edu/rjensen/2008Bailout.htm

Question
Should companies be allowed to outsource internal auditing to their external auditors?
An Enron Message

Shari Thompson in the early 1990s was an African American internal auditor in Enron trying her best to be a good auditor.

She gave me permission to forward two of her messages that I received out of the blue from her. For those of you that still hold deep abiding sympathies for Andersen's top management, I suggest that you read both of these messages, especially Message 2.

Message 1 appears below. Note that this message contains a lot more messaging than just her message to me. That messaging is very critical of some BYU professors and arguments that internal auditing might be outsourced to external auditors.

My main Enron and WorldCom fraud document (especially note Enron's Timeline) ---
http://www.trinity.edu/rjensen/FraudEnron.htm
This Timeline will soon be updated for Shari's assertion that Enron outsourced internal auditing to Andersen in 1994.

My Enron Quiz will soon be updated for Shari's messages --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm  

Bob Jensen's threads on professionalism and auditor independence are at (scroll down) ---  http://www.trinity.edu/rjensen/Fraud001.htm

Message 1 from Shari Thompson to Bob Jensen

-----Original Message-----
From: Thompson, Shari [mailto:shari.thompson@pvpl.com] 
Sent: Friday, February 27, 2009 2:33 PM
To: 'dboje@nmsu.edu' ; rjensen@trinity.edu
Subject: Please update your Enron blog (from former Enron Internal Auditor)

Why is it that everyone who chronologizes Enron's fall misses a hugely significant, contributing factor to Enron's demise?  That is, that Enron's entire internal audit department was systematically eliminated by Andersen, when the internal audit function was outsourced to Andersen.  This outsourcing was instrumental in allowing Lay/Skilling/Fastow to commit accounting fraud undetected for a long period of time.

 The outsourcing of Enron's internal audit function is one of the most festering flaws in the debacle, yet no one has sufficiently reported it.  As a former Enron senior internal auditor, I have brought this flaw to the attention of reporters and bloggers over the years since 2001.  To no avail, however.  Some of them respond "interesting, I never knew that."  But that's it.  No one follows up and reports on the incestuous relationship Enron had with Andersen as the "internal" audit department.

Now we have three professors concluding that companies should outsource internal audit to external auditors.  Please be cognizant enough to add the rest of the story, so that the Finance world can clearly connect the dots between outsourcing internal audit and accounting fraud.  http://www.cfo.com/article.cfm/13111528

Shari Thompson CIA
Direct 402.829.5248 Mobile 402.740.4012

 _____________________________________________

From: Thompson, Shari

Sent: Friday, February 27, 2009 1:28 PM
To: 'richard.chambers@theiia.org' ; 'edward.nusbaum@gt.com '; 'douglas_prawitt@byu.edu '; 'nsharp@mays.tamu.edu '; 'davidwood@byu.edu'
Subject: Thank you to IIA President Richard Chambers

 Good afternoon Mr. Chambers,

I just read an article about professors at Brigham Young and Texas A&M claiming that companies gain from having external auditors perform their internal audits.  I was a senior internal auditor for Enron and subsidiaries (before outsourcing to Andersen) for 24 years (1981 to 2004).  I can attest that having companies use their external auditor as internal auditor is a toxic and deceptive practice.

Thank you so much for voicing your disagreement with this conclusion.  Please keep up the fight to not have this practice become acceptable again.

____________________________________________________________

 Mr. Nusbaum:

You've changed your tune much from your 2006 letter to the SEC when you advocated " Equally without question is that these early experiences with implementation have been costly, but we cannot and should not go back."  http://www.sec.gov/news/press/4-511/enusbaum051006.pdf

____________________________________________________________

 Messieurs Prawitt, Wood, and Sharp:

I am shocked and appalled at your "findings."  Has someone at KPMG, PWC, E&Y or D&T paid you enormous sums of money in return for your publishing such a ludicrous recommendation to outsource internal audit to external auditors?  How could you even preliminarily come to such an incestuous conclusion?

I invite you to talk to me about real world consequences of the unintelligence of outsourcing internal audit to externals.  Blending the two functions is purely a management's self-serving act.  The very phrase "outsourcing internal audit" is an oxymoron, and the terms "outsource" and "internal audit" should be forever mutually exclusive.

I'm 50 years old, an expert internal auditor that worked for Enron and its subsidiaries for 24 of my 28 years in the auditing industry.  And yet I-as well as hundreds of my former Enron colleagues, and untold others around the world-have no 401k nor ESOP savings to show for all my years of hard work.  Why?  Because of the very thing you recommend-outsourcing internal audit.

 When I was a college student years ago, I enjoyed engaging in theoretical debates with my professors.  However, they were wise enough to caveat their opinions with warnings that they'd never worked-or hadn't worked for some time-in corporate America.  Unfortunately, you lack the sageness to recognize the limitations of your insulated confines of collegiate life.

 You state: "Our results indicate that, prior to SOX, outsourcing the work of the IAF to the external auditor is associated with lower accounting risk as compared to keeping the IAF in-house or outsourcing the work of the IAF to a third party other than the external auditor."

*       Must I remind you that the lack of accounting controls is precisely what tanked Enron?

*       Must I remind you of why were there were no controls?  Because Lay, Fastow and Skilling hired Andersen to perform both internal and external audits.  Lay, Fastow, and Skilling knew that Andersen's heads would willingly participate in accounting fraud cover-up as long as Enron paid them well.  And they also knew that any Andersen soul brave enough to dissent would be summarily removed from the Enron account, or from Andersen altogether.

*       Do you know that a few months before the outsourcing to Andersen, one of my former internal audit colleagues discovered irregularities in Enron's accounting transactions related to a bank in New York?  A few months later, after the internal auditors discussed the matter with Lay, Lay outsourced the entire audit function.  This outsourcing came after several yearly sales pitches by Andersen, where Andersen requested the internal auditing job.  It's clear that Lay felt the internal auditors were getting too close to uncovering fraud.  So he outsourced the function to a bunch of yes-men.

 I can only conclude that you obviously have been recently cut in on Lay's, Skilling's or Fastow's Enron bounty.

 

Shari Thompson CIA
Direct 402.829.5248
Mobile 402.740.4012

Message 2 from Shari Thompson to Bob Jensen

Hi Bob,

Thanks for your reply. I should mention that I really like your website, and have referred to it many times over the years. It was very helpful when studying for the CIA exam—some of the exam study guides don’t do near a good job as your site in explaining accounting theory, especially the complexities introduced changed since I was in college…

But, to your question, the internal auditors came from a number of the (back then anyway) big 8, and also many of us were from industry. Like for instance, I’ve never worked for a public accounting firm. (Could have something to do with when I graduated in 1980 many of publics wouldn’t hear of hiring a female, let alone a African American female. But that’s another story.) So anyway, the internal audit department in Enron Houston was initially formed in 1986 as a combining of all the audit departments of Enron subsidiaries around the nation. So we came from all over. I came in from Omaha, others from Enron subsidiaries on the East Coast, Texas and Oklahoma. The goal after the “merger” of HNG & InterNorth was to centralize the audit function. So, there weren’t an inordinate amount of internal auditors from Andersen as from any other public accounting firm. I’ve not read Eichenwald’s book. I’ll check it out.

Actually the department was eliminated as far as being an effective, functional department. That is, it was eliminated by Enron’s replacing us “real” internal auditors with fake Andersen “internal” auditors. So technically the department still existed in name only, but was functionally ineffective since it was outsourced to Andersen. This outsourcing happened in 1994. I had, at that time, worked for an Enron subsidiary in Omaha for about a year, so I wasn’t at risk of losing my job. Everyone else in the Houston office, however, was told by Andersen that they had 12 months to get their CPA’s or they were out. Many of them that had CPA’s quit anyway, because they didn’t like the environment of the Andersen-run department. We didn’t know what was going on, we just knew something wasn’t right, and didn’t like it. So most of the real auditors quit, or were run out by Andersen leaning on them to get their CPA. The CPA requirement was just a ploy to get the real auditors out as fast as possible.

An interesting development: While writing this email, one of the author’s (Doug Prawitt) of the article that prompted my email called. He explained to me that the CFO.com reporter omitted key pieces of his interview. Namely, that he did not recommend outsourcing to externals, and that this finding is one of thousands of points of information in their study. I apologized for the email-trigger finger, but he said he enjoyed the opportunity to meet me. And hopes to talk to me again about my experience at Enron, which I welcome. I am definitely enjoying the opportunity to communicate with you as well.

Regards,
Shari

Note from Bob Jensen

My main Enron and WorldCom fraud document (especially note Enron's Timeline) ---
http://www.trinity.edu/rjensen/FraudEnron.htm
This Timeline will soon be updated for Shari's assertion that Enron outsourced internal auditing to Andersen in 1994.

My Enron Quiz will soon be updated for Shari's messages --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm  

Bob Jensen's threads on professionalism and auditor independence are at (scroll down) ---  http://www.trinity.edu/rjensen/Fraud001.htm

Fair Value Estimate Subjectivity in Price Swaps
At least in theory, yield curves should be constructed with yields that rely on common conventions. Put another way, the yield curve built, assuming standard settlement assumptions, would be different from the yield curve built with fixed rate quotes that reflect, say, monthly settlements or quarterly settlements. While intuition might lead us to expect these differences to be inconsequential, in fact, these differences have started to become more substantial . . . The real lesson here is that we need to understand the limitations of fair value estimates. They are just that — estimates. And it may be worth pointing out that value may just be in the eye of the beholder. Different analysts will likely employ somewhat different methodologies. We should appreciate that different valuation estimates do not necessarily mean that one result is wrong and the other is right. They are just different.
Ira Kawaller, "Pricing Swaps: Once Upon a Time…," Bank Asset/Liability Management, March 2009 --- http://www.kawaller.com/pdf/BALM_Pricing_Swaps_Mar_09.pdf

Bob Jensen's threads on interest rate swap valuation are at http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm

Bob Jensen's threads on fair value accounting are at http://www.trinity.edu/rjensen/theory01.htm#FairValue

"New York CPAs Slam IFRS Roadmap:  The international standards are of dubious quality, the SEC is vague on how it will judge them, and the benefits of adoption are contradictory, the accountants charge," by David McCann, CFO.com, March 6, 2009 ---
http://www.cfo.com/article.cfm/13254066/c_13252677?f=home_todayinfinance
Pat Walters forwarded the above link.

A prominent accountants group filed a comment letter with the Securities and Exchange Commission yesterday displaying deep skepticism about the workability of the current roadmap for requiring U.S. public companies to use International Financial Reporting Standards.

The New York State Society of Certified Public Accountants registered a broad range of concerns, addressing the quality of the international standards; conversion costs; an alleged contradiction between the two main benefits of adopting IFRS put forth by the SEC; eligibility criteria for early adopters; and a forthcoming version of the standards for use by private companies.

The roadmap calls for the SEC to vote in 2011 whether to move forward with mandatory adoption, which under the existing plan would be phased in from 2012 to 2014. It also allows a limited number of large U.S. companies to adopt the international standards as early as this year.

The quality issue is foremost to the New York accountants. "The SEC Roadmap does not present, in sufficient detail, the methodology and criteria expected to be applied ... in assessing the adequacy of IFRS," they wrote in their comment letter.

Apples and Oranges?

In their letter, the New York accountants seemed to question whether the SEC is doing enough to make sure financial reports that use IFRS will be comparable with one another.

Any assessment of the international standards, the NYSSCPA wrote, should consider whether they are consistent with the Financial Accounting Standards Board's Concepts Statements. They singled out Statement No. 1, which says that financial reports should provide information investors and creditors can use to make informed decisions, and Statement No. 2, which says comparability and consistency are important characteristics of financial statements.

The New York accountants also questioned whether the decision-making process of the International Accounting Standards Board, which promulgates IFRS, "is conducive to setting future high-quality standards."

They criticized the IASB for its move last fall to let companies retroactively reclassify assets so they could "cherry pick" ones with significant losses and remove them from net-income calculations. In doing so, the international board gave in to pressure from the European Commission, the accountants suggested, saying they are concerned about "the influence of various national regulators, users, and others who promote the interests of their specific constituencies, as opposed to the needs of the worldwide community."

Further, the NYSSCPA said the supposed main benefits of adopting IFRS — comparability with non-U.S. reporting entities and allowing management greater judgment in preparing financial information — may both be desirable but appear inherently contradictory.

"The comparability of financial statements prepared in conformity with IFRS may be overstated," the comment letter said. "IFRS does not seem to be consistently applied from country to country, as the number of allowable options is conducive for the regulatory agencies in each country to interpret IFRS pursuant to their respective needs and business environments."

Comparability is further reduced, the letter added, by the tendency of preparers and auditors, "because of their habits of mind," to apply IFRS in a manner that is as similar to their current or former national accounting standards as possible. "When using principles-based standards, reasonable people arrive at materially different results after applying their judgments to a given set of facts and cirucmstances," the New York accountants wrote.

When and Who?

The letter also questioned the prudence of the conversion to IFRS when the depth and duration of the financial crisis are hard to predict. "It would be reasonable to conclude that the monetary and human capital costs of the transition could be burdensome to entities with limited resources and prohibitive for some smaller entities, even over a period of many years."

An alternative, the NYSSCPA suggested, would be for FASB and IASB to vigorously pursue efforts to converge the American and international standards, which it said would produce the best-quality global standards and help minimize conversion costs for U.S. companies when IFRS adoption does finally become mandatory.

At the same time, though, the society said it fully supports allowing early adoption of IFRS, and in fact the eligibility criteria should be expanded.

The roadmap suggests that the proposal to limit early use of IFRS to the 20 largest companies in so-called "IFRS industries" is grounded in an assumption that larger companies will be more likely to have sufficient expertise and resources to carry out the adoption.

"We disagree," the accounting society members wrote. "In fact, IFRS adoption experience in Europe has shown that smaller entities may need less time to complete the IFRS transition, while large companies with numerous subsidiaries in different countries may take as long as five years."

U.S. companies that are among the 20 largest worldwide in "IFRS industries" — ones like oil and gas and some retail sectors in which IFRS is the most-often-used financial reporting system — are eligible to adopt the international standards as early as this year. The SEC has estimated there are at least 110 such companies.

Continued in article

AICPA Supports SEC Proposed Roadmap for Transitioning to IFRS for Public Companies --- Click Here
However, no mention is made of any survey of the membership on this issue.
 

Bob Jensen's threads on standard setting controversies are at http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

New Teaching Cases in Corporate Responsibility and Compensation

Topic: Corporate Responsibility
	The markets are down and the economy is in a recession. The causes are complex and varied, but many people are focusing the blame on a breakdown in corporate responsibility. How much corporate directors and executives are to blame remains debatable, but most would agree that the investing public has lost confidence in the corporate governance and ethics of boards and executives. The following articles present some of the reactions and consequences resulting from the leadership lapses reported recently. Current and future business professionals need to be aware of the consequences that will impact all businesses and industries, regardless of whether those businesses have acted improperly. Additionally, all in the business world must deal with negative perceptions the investing public now has of boards and corporate activity. On a positive note, with the widespread lack of confidence in the markets, fiscally and ethically-responsible companies can use that reputation to develop a distinct advantage in the marketplace. This month's articles highlight some of the recent ethical and leadership lapses, as well as the public outcry and emerging rules and regulations resulting from those decisions. Regardless of your position or industry, there are important lessons to be learned and shared so that you and your organizations are not punished, but instead thrive.
	FOCUS ARTICLE>>  Legislation, Shareholder Rights Policy Makers Work to Give Shareholders More Boardroom Clout by: Kara Scannell Date: Mar 26, 2009  SUMMARY: Policy makers are advancing plans to give shareholders more power in boardrooms at a time when decisions about executive pay have ignited a public furor. DISCUSSION:  What measures are policy makers considering that would provide shareholders with additional rights in corporate governance? What authority and interests do each of these policy-making groups have in the governance arena? Why are corporations regulated by many different bodies? What are proxies and why are they a point of contention between corporations and shareholders? What are the pros and cons of shareholder access to proxies? Why are shareholder rights so important? Up to this point, what parties have had most of the control over a corporation? What are some reasons that these types of rules were not enacted sooner? What could be some unintended negative consequences of these new laws and rules? What are the costs involved? Would small and medium-sized businesses impacted by these rules? How does this information impact your attitudes and concerns regarding your current and future investment decisions? What are some of the cumulative effects of those concerns when held by millions of shareholders?
	FOCUS ARTICLE>>  Government Oversight The U.S.'s Fly on the Wall at AIG by: Peter Lattman Date: Mar 27, 2009  SUMMARY: Government-appointed lawyer James Cole has been on site and inside AIG board-committee meetings for the past four years, but his reports to regulators aren't public. DISCUSSION:  What is a deferred-prosecution agreement? Why would companies agree to this? What are the costs involved versus the corresponding benefits? Why would the government agree to one of these agreements? Why do these agreements seem to be more common today than they have been in the past? What AIG activities led to its deferred-prosecution agreement? What have been the duties of the government-appointed attorney? How were day-to-day operations affected by the agreement? Have these activities corrected the problems that triggered the government actions at AIG? Were they meant to prevent further problems as well? Are deferred-prosecution agreements effective tools for punishing and preventing negative corporate activity? Should similar plans be implemented for currently troubled companies? Please give reasons for your answers.
	FOCUS ARTICLE>>  Corporate Governance, Director Responsibility Corporate Directors' Group Gives Repair Plan to Boards by: Joann S. Lublin The Wall Street Journal Date: Mar 24, 2009  SUMMARY: A directors' trade group in a new report urges boards to do a better job of governing corporate America. DISCUSSION:  What is the NACD and what is its purpose? What is the reasoning for its new report and why was the report issued? What specific suggestions does it contain? What is your opinion of the ideas presented in the report? Do you think that these ideas will restore investor confidence? Why or why not? What is the purpose of a corporate board of directors? What are its duties and responsibilities? Why is the board so important? Why do business professionals serve on boards? Have any of these ideas been implemented at one of your past or current employers? What other ideas could be implemented to increase corporate governance at your current employer or other companies?
	FOCUS ARTICLE>>  Executive Compensation, Nonprofits Pay at Nonprofits Gets a Closer Look by: Mike Spector and Shelly Banjo The Wall Street Journal Date: Mar 27, 2009  SUMMARY: Furor over big AIG bonuses and other Wall Street firms is prompting nonprofits to brace for more scrutiny of their executive pay practices. DISCUSSION:  What nonprofit industries and organizations are being impacted by the increase in scrutiny? What are some of the positive outcomes that could result from this closer examination of nonprofits? What would be some negative outcomes from these current pressures? Corporations are facing increased scrutiny as a result of the market meltdown. Why are nonprofits also feeling pressure from additional scrutiny for compensation and other expenses? How are nonprofits different from profit-seeking entities? Should they be held to the same standards? Why or why not? How might this additional scrutiny impact nonprofits? How might your career, business, or industry be affected by increased scrutiny of nonprofits? How will you be affected personally, either through services you receive or donations that you make?
	FOCUS ARTICLE>>  Risk Management, Market Regulation Geithner Calls for Tougher Standards on Risk by: Damian Paletta, Maya Jackson Randall, and Michael Crittenden The Wall Street Journal Date: Mar 26, 2009  SUMMARY: Geithner will call for changes in how the government oversees risk-taking in financial markets, pushing for tougher rules on how big companies manage their finances. DISCUSSION:  What changes is Geithner proposing? What ideals would this new regulation support? Do you think that the newly proposed rules would achieve these goals? Are there other ways to achieve those same goals? Why is Geithner calling for changes in the regulation of risk management? What will be the costs to industry for this new government oversight? Who will pay these costs, both directly and ultimately? How will these rules change your current or future industry and career? How could these rules impact you as an investor?

"Executives Took, but the Directors Gave," by Heather Landy, The New York Times, April 4, 2009 ---
http://nytimes.com/2009/04/05/business/05board.html?8dpc 

Little of the ire against outsize C.E.O. paychecks has been aimed at the people who signed off on them: corporate directors.

Instead, the anger has been concentrated on the executives themselves, particularly those running companies at the heart of the financial crisis. And boards — thrust into the limelight only rarely, as when the directors of the New York Stock Exchange were in a legal battle over the pay collected by Richard A. Grasso — have managed to stay in the background.

The exchange’s board “really took a lot of heat for that controversy,” says Sarah Anderson, an analyst on executive pay at the Institute for Policy Studies in Washington. “But so far, with this crisis, I don’t feel like boards have been getting as much attention as they should be.”

Last spring, the House Committee on Oversight and Government Reform examined pay practices at Countrywide Financial, Merrill Lynch and Citigroup, but those issues eventually took a back seat to broader concerns about the viability of the country’s financial system. As investors frustrated by the continuing crisis start seeking ways to avoid the next one, advocates of change in corporate governance expect boards to come under renewed scrutiny that could yield big changes.

Emboldened shareholder activists are pressing more companies to hold annual nonbinding votes on executive pay packages. They’re also pursuing, and appear increasingly likely to win, rules to make it easier for investors to nominate or replace board members.

And as more people start connecting the dots between pay incentives that boards laid out for executives and the risk-taking at the heart of the financial crisis, some lawmakers have been eager to step in, and many directors themselves are re-examining their approach to compensation.

“When you look at cases where compensation of senior management was out of line, or where people arguably were overpaid, it’s definitely the fault of the compensation committee of the board,” says Thomas Cooley, dean of the Stern School of Business at New York University and a director of Thornburg Mortgage. “Congress has gotten into the business of dictating executive pay now, and they shouldn’t be in that business. What they should be doing is turning the light on the committees.”

Activist shareholders have been criticizing executive pay practices for well over a decade, accusing directors of being too cozy with C.E.O.’s, too eager to lavish pay on them and too ambiguous about the formulas they use for setting compensation.

Improved standards for determining director independence and disclosing the procedures of board compensation committees were supposed to help solve those problems. And activist shareholders played a major role in spreading the notion of pay-for-performance, by which executives would be compensated based on their ability to meet board-devised financial targets.

But amid all the changes, a crucial piece of the equation — the unintended risks that could arise from these pay-for-performance incentives — went unnoticed, said James P. Hawley, co-director of the Elfenworks Center for the Study of Fiduciary Capitalism at St. Mary’s College of California.

“The problem isn’t just when people in a particular firm are getting rewarded in ways that take away from the shareholder. That’s been well recognized,” Mr. Hawley says. “What’s not been recognized is that the misalignment of incentives has resulted in firm, sector and systemic risks. None of the corporate governance activists ever made the connection.”

It took the disastrous results of 2008 to expose such links, and to make compensation a central issue for politicians and corporate America.

TWO factors contributed to the pay scales that now have C.E.O.’s earning more than 300 times the pay of the average American worker.

First was the advent of giant stock option grants, a form of compensation made all the more attractive by a 1993 change to the tax law that maintained corporate tax deductions for executive pay over $1 million, but only if the pay was tied to performance.

Second was the widespread practice of linking pay to the levels at companies of similar size or scope. Every time a board tries to keep an executive happy by offering above-average pay, the net effect is to raise the average that everyone else will use as a baseline.

In the absence of fraud or self-dealing, it’s hard for shareholders to make a legal argument that boards have failed at their job. State law in Delaware, where most big public entities are incorporated, simply requires companies to have boards that direct or manage their affairs, and it affords broad legal protection to board members so long as they act in good faith and in a manner “believed to be in or not opposed to the best interests of the corporation.”

That was the basis for the recent ruling of a Delaware judge who threw out most of the claims in a shareholder lawsuit seeking to hold Citigroup directors and officers liable for big losses tied to subprime mortgages. But the judge did allow the plaintiffs to pursue one of their claims, which alleged corporate waste stemming from a multimillion-dollar parting pay package that Citigroup’s board awarded Charles O. Prince III, the former C.E.O., in 2007.

Continued in article

Bob Jensen's threads on corporate governance are at http://www.trinity.edu/rjensen/Fraud001.htm#Governance

Outrageous Executive and Director Compensation Schemes That Reward Failure and Fraud ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

Corporate Governance is in a Crisis --- http://www.trinity.edu/rjensen/Fraud001.htm#Governance

Rotten to the Core --- http://www.trinity.edu/rjensen/FraudRotten.htm

The AICPA's Economic Crisis Resource Center --- http://economy.aicpa.org/

Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of appendices can be found at
http://www.trinity.edu/rjensen/2008Bailout.htm

2009 AICPA Video on Career Opportunities for CPAs --- http://link.brightcove.com/services/player/bcpid1716442239

Accounting firms dominate BusinessWeek's second annual ranking of the "Best Places to Launch a Career."
From SmartPros, September 14, 2007 --- http://accounting.smartpros.com/x59101.xml

Deloitte & Touche is No. 1, followed by PricewaterhouseCoopers and Ernst & Young. The last of the Big Four, KPMG, moved up four spots to No. 11.

Accountants used to be spoofed as bean counters -- dutiful, middle-aged, gray-suited men with considerable analytical expertise but little charisma. This year accountants became sexy, BusinessWeek said in a statement.

Why did the accounting firms do so well? Enormous demand. Across industries, there is a mad scramble to recruit the best and brightest of a new generation, the much-maligned, heavily scrutinized Gen Y. Nowhere is the pressure more intense than in the Big Four. The Sarbanes-Oxley Act has so greatly increased the need for their services that the firms are facing an epic talent shortage.

BusinessWeek's "Best Places to Launch a Career" ranking is based on three extensive surveys: of career services directors at U.S. colleges, the employers they identify as the best for new graduates, and college students themselves.

Some great information about the organization of major accounting firms, their finances (including average partner comp) and litigation --- http://thecaq.org/publicpolicy/treasurydata.htm

Bob Jensen's threads on careers are at http://www.trinity.edu/rjensen/Bookbob1.htm#careers

"Task Force Identifies 21 Practical Pointers for Public Company Auditors," SmartPros, February 16, 2009 --- http://accounting.smartpros.com/x65443.xml

Here are two professors who really works to reduce dropout rates.
Actually they really work period!

February 27, 2009 message from Mark Meuwissen [MarkM@ALEXTECH.EDU]

In response to my previous post, two of you asked how I accomplished good student retention this year.

Now you put me on the spot. It was more of an observation from a contrarian than a claim to have the secret, but here are some thoughts.

First, we are a small outstate tech school that doesn't always recruit the cream of the crop. Our AAS 2 year accounting degree typically start 30 students a year, and graduate less than 20. We also have 4 to 6 AS transfer degree students.

There have been years when we lost 1/3 of the students in the first year. Sometimes it is because they just aren't ready or willing to get ready for college. Other times it is because life problems drove them to pursue a college degree and those life problems didn't go away. One year, I remember 2 of my 29 new students were diagnosed with an incurable cancer and then later that year a spring start died unexpectedly in her apartment. I suspect suicide, but never found out. So, we haven't always had good luck with retention.

Here are few things my co-instructor, Carole, and I do different from past years:

- We incorporate more team projects and working together in class. We have daily exercises completed in pairs. We do a lot of active learning techniques. This includes an occasional table test where the whole table shares their answers and tries to outdo the other table. The concept is to quickly build a support network with the other students. We also find that working together gives better retention.

- Both Carole and I take two days each semester to advise meet with each student two on one. It takes two full days but sometimes it provides that first opportunity to meet with a troubled student. I find it very effective to ask them what they will do if they don't finish school. Most are adamant that they won't live at home, but when I ask them how they will pay for their own car and their own rent, they get very nervous. For most however, we really pump them up and make them feel good about their school.

- We are able to find some funding for second year students to tutor the first year students. This helps maybe 1 or 2 per year.

- We aggressively pursue attendance contracts and often send students to academic affairs for a good chewing out. When I started school here, I thought this was ridiculous. I graduated from a private college where attendance was completely your option. I thought the students would be grown up enough to come to class, but they weren't. I have been converted into taking attendance and acting like it is still high school. Unfortunately, this seems to be important and we have saved at least one student each year by getting them on an attendance contract.

- We changed the sequence of courses around so that any student in our program has to take Payroll in the Fall. Some come in with Principles already from another school or from high school, so we use to have students neither Carole or I had in class their first semester. Now, we always make sure that a new student has either Carole or I at least once in their first semester so we get to know them and they get to know us. This was huge!

- In principle 1, I started doing a life plan project where each student has to lay out their life listing every major event that affects who they are. I am the only one that sees it other than the student. I very clearly tell them that every event has to be on their project no matter how painful. If their brother committed suicide, it has to be on there. If they got into drugs, it has to be on there. I explain that completion of this project will give them a much better idea where they are and how they got there. Without this idea, they can't do a good job making a plan for their future. I then make them do 5, 10 and 15 year plans. One other requirement is they have to use pictures, real, hand drawn or something similar found on the internet. It has to be visual. They usually do this either in PowerPoint or on an oversized sheet of paper. Some use a scrap book approach. One other part of this project that adds to the effect is that I tell them my life story, which has some not so great events. I have made several cry in class at how pitiful I was before turning my life around. This project has been very effective at building relationships and opening the students to change. It has also opened my eyes to the number of these students who have been raped, or have tried to commit suicide. It opened my eyes and my heart.

- Both Carole and I give many, many chances for make-up, rework, independent studies, maybe even special treatment. We probably violate almost every rule out there on assessment and fairness. Our thought is that we need to get the weaker students through as many semesters as we can even if they have no hope of graduating. Each semester completed improves the student. You can see them grow. Some have taken 4 years to graduate from a 2 year program, but we think these are our biggest success. It is really only until the final semester that we buckle down and hold them accountable. In the end, we know that our reputation is stamped on their head when they leave, so we make the final semester pretty dang hard. But by making the others much easier, we get more of them to the final semester.

I wish I could tell you it was about using some special educational methodology like "self-directed hybrid course work" but it isn't. In just my 4th year here, I have already taught 14 different courses. I rarely have the same course twice in a semester. For example, this semester I have 5 preps and will spend 24 contact hours each week in class or in lab. That doesn't count the time I spend administrating a VITA tax service here at the college. I don't think the quality of our delivery is that great, which is why I read this list serve so attentively. I want to improve delivery methods.

I believe the key is the relationship we develop with our students. I don't have any other answer.

Mark Meuwissen

Professor Schiller at Yale assets housing prices are still overvalued and need to come down to reality
The median value of a U.S. home in 2000 was $119,600. It peaked at $221,900 in 2006. Historically, home prices have risen annually in line with CPI. If they had followed the long-term trend, they would have increased by 17% to $140,000. Instead, they skyrocketed by 86% due to Alan Greenspan’s irrational lowering of interest rates to 1%, the criminal pushing of loans by lowlife mortgage brokers, the greed and hubris of investment bankers and the foolishness and stupidity of home buyers. It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20% overvalued. Long-term averages are created by periods of overvaluation followed by periods of undervaluation. Prices need to fall 20% and could fall 30%.....
Watch the video on Yahoo Finance --- Click Here
See the chart at http://www.businessinsider.com/the-housing-chart-thats-worth-1000-words-2009-2
Also see Jim Mahar's blog at http://financeprofessorblog.blogspot.com/2009/02/shiller-house-prices-still-way-too-high.html
Jensen Comment
In the worldwide move toward fair value accounting that replaces cost allocation accounting, the above analysis by Professor Schiller is sobering. It suggests how much policy and widespread fraud can generate misleading "fair values" in deep markets with many buyers and sellers, although the housing market is a bit more like the used car market than the stock market. Each house and each used car are unique, non-fungible items that are many times more difficult to update with fair value accounting relative to fungible market securities and new car markets.

Note how Days Inns presented both traditional and real estate exit value balance sheets when anticipating an IPO --- http://www.trinity.edu/rjensen/theory01.htm#FairValue 

"SEC ISSUES DETAILED STUDY ON MARK-TO-MARKET ACCOUNTING," by Gia Chevis, Accounting Education.com, February 19, 2009 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=148980
The report was issued on December 31, 2008

At the direction of the U.S. Congress, the SEC prepared and released on 30 December 2008 a study on mark-to-market accounting and its role in the recent financial crises. Though it concluded that mark-to-market accounting was not responsible for the crisis, it did make eight recommendations.

The 259-page document, a result of the Emergency Economic Stabilization Act of 2008, details an in-depth study of six issues identified by the Act: effects of fair value accounting standards on financial institutions' balance sheets; impact of fair value accounting on bank failures in 2008; impact of fair value accounting on the quality of financial information available to investors; process used by the FASB in developing accounting standards; alternatives to fair value accounting standards; and advisability and feasibility of modifications to fair value accounting standards. Its eight recommendations are:

1) SFAS No. 157 should be improved, but not suspended.

2) Existing fair value and mark-to-market requirements should not be suspended.

3) While the Staff does not recommend a suspension of existing fair value standards, additional measures should be taken to improve the application and practice related to existing fair value requirements (particularly as they relate to both Level 2 and Level 3 estimates).

4) The accounting for financial asset impairments should be readdressed.

5) Implement further guidance to foster the use of sound judgment.

6) Accounting standards should continue to be established to meet the needs of investors.

7) Additional formal measures to address the operation of existing accounting standards in practice should be established.

8) Address the need to simplify the accounting for investments in financial assets.

On February 18, the FASB announced the addition of two short-timetable projects to its agenda concerning fair value measurement and disclosure. The first project aims to improve application guidance for measurement of fair value, with issuance projected for the second quarter. The second will address issues related to input sensitivity analysis and changes in levels; the FASB anticipates completing that project in time for calendar-year-end filing deadlines. Both projects were undertaken in response to the SEC's recent study on mark-to-market accounting and input from the FASB's Valuation Resource Group.

The full report can be freely downloaded at http://www.sec.gov/news/studies/2008/marktomarket123008.pdf. (pdf)
 

SFAS No. 157’s fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). With respect to IFRS, the report states the following on Page 33:

Currently, under IFRS, “guidance on measuring fair value is dispersed throughout [IFRS] and is not always consistent.”52 However, as discussed in Section VII.B, the IASB is developing an exposure draft on fair value measurement guidance.

IFRS generally defines fair value as “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction” (with some slight variations in wording in different standards).53 While this definition is generallyconsistent with SFAS No. 157, it is not fully converged in the following respects:

• The definition in SFAS No. 157 is explicitly an exit price, whereas the definition in IFRS is neither explicitly an exit price nor an entry price.

• SFAS No. 157 explicitly refers to market participants, which is defined by the standard, whereas IFRS simply refers to knowledgeable, willing parties in an arm’s length transaction.

• For liabilities, the definition of fair value in SFAS No. 157 rests on the notion that the liability is transferred (the liability to the counterparty continues), whereas the definition in IFRS refers to the amount at which a liability could be settled.

 

Banking industry pressures to abandon fair value accounting are summarized at
http://www.trinity.edu/rjensen/2008Bailout.htm#FairValueAccounting

Bob Jensen's threads on fair value accounting are at http://www.trinity.edu/rjensen/theory01.htm#FairValue

IASB = International Accounting Standards Board
"IASB's Responses to the Global Financial Crisis," IAS Plus, February 25, 2009 --- http://www.iasplus.com/index.htm

The SAC discussed the current global financial crisis and the IASB's responses to it. The IASB Chairman and the IASB's Director of Capital Markets outlined the activities of the IASB and the staff since the Financial Stability Forum's action plan was issued in April 2008. Among others, the following matters were raised or discussed:

• Regulatory responses tended to mingle (unhelpfully) issues related to financial stability (prudential regulation) and 'dynamic provisioning'. These were separate issues that needed to be addressed separately and not necessarily by accounting standard-setters.
• The recent activities of the US Financial Accounting Standards Board with respect to proposed FAS 133 Implementation Issue C22, Exception Related to Embedded Credit Derivatives, were acknowledged as still under deliberation by the FASB. The IASB staff and SAC members noted that, if issued in the same form as it was exposed, C22 would narrow but not eliminate an IFRS/US GAAP difference. In particular, the March 2009 joint meeting of the IASB and FASB would examine issues related to impairment.
• The FASB/ IASB Financial Crisis Advisory Group was of the view that 'financial stability' was the responsibility of regulators, while the interests of investors (who do not have the statutory access to information usually available to regulators) are best served by transparent financial reporting that reflected the economics of the entity.
• SAC members supported this conclusion, but noted that transparent financial reporting was necessary for regulators to achieve financial stability. While SAC members noted that accounting has an important role to play in market regulation, it should not be driven by the prudential needs of regulators. As one SAC member put it: 'Financial stability is important, but not at the price of playing with the numbers'.
• It was suggested that the IASB had been 'slow out of the blocks' at the beginning of the crisis, with poor communications. Communications had improved but needed to acknowledge that, while accounting did not cause the crisis, it was inextricably involved with it.
• While the use of fair value still has lots of support in principle, there needs to be greater discipline in how it is applied in practice. One SAC member, representing a financial regulator, said that it would be helpful, for example, if all banks applied the same measurement principles to the same instruments.
• While focusing on fair value for all financial instruments as a long term goal, the IASB (and the FASB) might be more successful if they adopted an 'evolutionary' rather than 'revolutionary' approach and allow the financial markets to regain credibility before adopting radical changes to the accounting for financial instruments.
• The Experts Advisory Panel's guidance on applying fair value in illiquid and inactive markets was seen as very useful guidance and was commended.
• Sharing the results of a study of the use of the Reclassification Amendment to IAS 39 approved in October 2008, the SAC was told that about €7.5 billion worth of assets had been reclassified, resulting in about €5.5 billion positive effect on profit and loss. The reclassifications had been done primarily for regulatory capital reasons. The survey had demonstrated a fundamental conflict between investor and supervisory interests.

The IASB Chairman suggested that the IASB had three real alternative approaches to accounting for financial instruments generally:

• (A) Fair value for all financial instruments
• (B) All financial instruments that are 'traded' to be measured at fair value; all others would be measured at amoritsed cost. ('Traded' was not defined but, in context, appeared to mean fair value reliably measurable based on price quotations or transactions in an active market.)
• (C) All financial instruments with contractual terms and conditions that permit the determination of a basis of amortisation would be measured at amortised cost; all others would be measured at fair value.

(It was assumed that certain financial instruments, such as all derivative financial instruments, would be measured at fair value.)

Bob Jensen's threads on the global financial crisis are at http://www.trinity.edu/rjensen/2008Bailout.htm

Leading Academic Research Centers of Business

There are various competing rankings of business schools most of which are published by media giants like US News, Business Week, and The Wall Street Journal. These vary by criteria used and by who does the rankings. For example, the WSJ rankings are done by recruiters of graduates and hence are heavily influenced by quality of students admitted as well as quality of student eventually graduated by the business schools. The US News rankings are done by business school deans who are influenced by various criteria, not the least of which is the halo reputation of the entire university in which a business school is embedded, which in my viewpoint gives the Ivy League along with Stanford and some leading universities a bias toward the reputation of the entire university vis-a-vis its business school if it has a business school. The rankings themselves can vary somewhat significantly between US News, Business Week, and The Wall Street Journal. You can read more about these popular and highly controversial rankings at http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

In comparison there are also rankings of business schools according to research journal publications of faculty. One such ranking can be found in the University of Texas at Dallas (UTD) database at http://somweb.utdallas.edu/top100Ranking/
It would seem that since UTD does not come out particularly well in the US News, Business Week, and The Wall Street Journal that this UTD ranking database is an attempt to inform prospective students and faculty that UTD is one of the leading research centers in management. Indeed, using the criteria chosen by UTD for this database, UTD shows up at Rank 18 among the leading business schools Rank 18 (worldwide) among the world's leading schools of business.

The criteria used for these rankings include publications of faculty in 20 leading accounting, finance, marketing, management, and management science research journals. The journals chosen are indeed leading research journals in those disciplines, but since there are so many different disciplines there are many research journals that are excluded. In accounting, the only chosen journals are TAR, JAR, and JAE.

The criteria include an adjustment for joint authorship such that if there are four authors on a paper, a given author only gets 0.25 credit rather than the 1.00 credit given to solo authors.

Advantages of the UTD Database

• Although the criteria are subjectively selected, the application of these criteria is not subjective. Unlike the US News, Business Week, and The Wall Street Journal rankings, people are not subjectively applying the criteria.
   

• This database allows interaction to such a level as to selectively choose journals and universities and individual authors.
   

• Users can drill down to see the actual journal titles and author listings going into any university's ranking.
   

• The rankings have a surprise factor in that the top 25 business programs in this database differ substantially from the rankings in all the popular media rankings of business schools.

Disadvantages of the UTD Database

• The database has a self-selected total population of only 20 research journals in business and leaves out some high quality academic research journals such as Contemporary Accounting Research, Accounting Organizations and Society, Abacus, The British Accounting Review, and hundreds of others across all business disciplines that were left out of the database.
   

• The database provides worldwide rankings with limited or no non-US journals in most disciplines. For example, the only three accounting research journals included in the database are all in published in the United States. Having worldwide rankings with only U.S. journals is a severe limitation.
   

• The database is skewed heavily toward quantitative research methods and leaves out research journals that feature other methodologies such as the philosophical and archival methods of AOS and the case methods of the Harvard Business Review.
   

• Related to the above methodology bias is the neglect of emerging research areas. For example an emerging research area in the past two decades as been accounting information systems. The leading AIS research centers do have much of any chance to help lift their university in this UTD database. Similarly, and emerging research area is in forensic accounting. The TAR, JAR, and JAE fail to publish any of the leading AIS and forensic accounting research over the period covered in the database (beginning in 1990).
   

• The database counts a university's ghosts in the context of giving credit to a university for a former faculty member who was at that university at the time of the publication but departed years ago.
   

• The database can give an undeserved high or low ranking to a given discipline by "halo association." For example, a business school may have professors in finance, marketing, and management who are prolific publishers relative to the accounting faculty. This can lead readers to think the business school is great in all disciplines when in fact it is rated high only because of halo aggregation rather than by individual disciplines. For example, the University of Maryland is in the top ten worldwide research centers in this database. However, in the UTD database's three accounting journals only 16 of its faculty are co-authors between 1990 and 2008 in the database. In comparison, SUNY Buffalo has 17 hits in these top accounting journals and comes up at Rank 97 worldwide. Apparently the non-accounting disciplines are driving the high ranking of Maryland relative to Buffalo. This "halo phenomenon"  is even more marked in the worldwide rankings. Accounting is a difficult discipline for many research centers since there is a marked shortage of accounting researchers relative to researchers in the other disciplines of business --- http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

I do not want to imply that the UTD database should not be studied and evaluated. Like any database or other ranking reference, it has its advantages and disadvantages. Readers who view these rankings superficially are apt to be misled without fully understanding the limitations caused by both the criteria used and the possible subjectivity of the persons doing the ranking. As pointed out earlier, the only subjectivity in the UTD database is the choice of the 20 academic research journals used as inputs to the UTD ranking outcomes. This eliminates some, but certainly not all, the subjectivity found in many other ranking systems.

The obvious risk in using any ranking system is the risk that it will become a huge factor in the choice of a program by a doctoral student or a faculty prospect. For example, an accounting PhD prospect might be terribly impressed that Duke University is the Rank 1 management research center in North America and the Rank 2 business program in the entire world. Duke certainly has a great business school, but its UTD high ranking for research should not, in my viewpoint, become the major criterion for choosing Duke for doctoral studies relative to such programs as Cornell (Rank 33), University of Virginia (Rank 98), Notre Dame (Rank 49), and the University of Southern California (Rank 13) in terms of worldwide rankings.

Similarly I doubt that most accounting faculty in Texas would rate the University of Texas at Dallas (Rank 18 worldwide) higher than the Texas A&M (Rank 37 worldwide) accounting researchers. But this is the outcome in the UTD multi-discipline ranking outcomes.

The rankings of business research centers in the UTD database is most certainly at odds with the rankings of accounting research programs in the Coyne, Summers, Williams, and Wood ranking of accounting research programs under varying criteria. This controversial paper can be downloaded for free from SSRN and is worth your time to read. Note especially that the study is not limited to accounting research centers in the United States. Names like Melbourne, Manchester, and Waterloo appear in the rankings ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1337755

Leading Academic Research Centers of Accountancy

Four accounting researchers (Professors Coyne, Summers, Williams, and Wood) at Brigham Young University have written a paper that ranks accounting research programs in the academy according to varying criteria. This controversial paper can be downloaded for free from SSRN and is worth your time to read. Note especially that the study is not limited to accounting research centers in the United States. Names like Melbourne, Manchester, and Waterloo appear in the rankings ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1337755

To its credit, this study’s findings are based on current affiliations of leading researchers and attempts not to give ranking credits for an institution’s ghosts. This may, in part, explain some of the unexpected rankings of some institutions. I think in some cases a doctoral student might be a little misled by the outcomes. In other instances, however, there is richness in these outcomes that can lead a doctoral program applicant to ask the right questions. For example, why is Bentley College so highly ranked in AIS? There is a reason! Why does Florida International rank so very high in international accounting research?

The study possibly should’ve noted which accounting research centers have no doctoral programs. For example, BYU and Rice and Dartmouth have no doctoral programs in accountancy. A doctoral program listing is available in the Hasselback Directory, although Hasselback has some errors such as the failure to list Yale’s doctoral program and the listing of Penn State as not having graduated any doctoral students since 1998 (actually Penn State has graduated more than five a year in recent years).

There are other noteworthy innovations in this (Professors Coyne, Summers, Williams, and Wood) study. However, I think the analysis falls short of what is possible from this and related data. The analysis is weak on history and possible explanations of trends. A table of trends in doctoral student graduation numbers would help along with a table of faculty size of leading accounting programs. The analysis also does not discuss how poorly academic accounting research is perceived in academe relative to finance, marketing, and management research --- http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

My first reaction is that size matters in these rankings, especially in terms of the number of accounting researchers in a given area. This is probably why the University of Chicago and Yale come out so poorly in this study relative to the huge accounting programs of Texas, Texas A&M, OSU, Michigan State, Illinois, and USC. The University of Rochester does not even get mentioned. This may also be due, at least in part, by not counting ghosts who left for greener pastures.  And what happened to that former research powerhouse on the eastern side of the Bay Bridge leading out of San Francisco?

Carnegie-Mellon, Michigan, UC Berkeley, Rochester, and Chicago were at certain points in history the leading centers of accounting research. They do not do well in this later study. Times are changing. Even mighty Stanford slipped down a lot of notches in some categories.

The non-mention of the University of Rochester and Lancaster (England) might be due to small numbers of accounting researchers, albeit influential researchers. The relatively poor showings larger research centers at MIT and NYU are more surprising. Harvard is also less than stellar in these outcomes to say the least.

Some of the larger doctoral programs in accountancy get a zero in this study. Examples include the non-mention of Kent State University and the University of Nebraska.

An unexpected outcome is that the huge accounting research center at the University of Florida does not rank highly in comparison to lesser-known Florida International University, the University of Southern Florida, and Florida State University just to name a few of its closest rivals. The same can be said for the huge research center at the University of Georgia vis-à-vis its geographical rivals Georgia State, Georgia Tech, and Emory. The same can also be said for the University of Arizona (except for its Number 2 ranking in tax research).

I think the general conclusion is that the centers for academic research in accounting have shifted in recent years. In many respects this reflects how graduates of former leading research centers commenced to populate the larger accounting programs that, until then, were not especially known for accounting research. Examples include Arizona State University, the University of Washington, BYU, and Texas A&M. The University of Iowa dropped in terms of its ranking in financial accounting research but graduated some leading researchers that now are at other universities. Similarly, Michigan State University graduated some of the leading AIS researchers in the U.S. but only ranks Number 12 in the listing of AIS research centers. Some of Bill McCarthy’s gifted alumni are at higher-ranked AIS research centers.

The study also indicates how some of the historically leading accounting research centers such as the University of Illinois and the University of Texas did not change with the times in emerging areas of research. For example, except for Missouri the top ten AIS research centers were not particularly noted as accounting research centers in the past before AIS emerged as a research discipline in accounting.

One criticism I have of this study is the bibliography. It’s missing most of the previous studies related to historical trends in accounting research people and universities. Many of the missing references, for example, are cited and quoted in the following paper:
“Evolution of Research Contributions by The Accounting Review (TAR): 1926-2005,” by Jean L. Heck and Robert E. Jensen, Accounting Historians Journal, Volume 34, No. 2, December 2007

Former studies along these lines enable readers to reflect on trends in academic accounting research centers.

One limitation of the study is the failure to note how common it is for accounting researchers to be more productive in the early years before becoming full professors. Jensen and Heck note the fall off of leading-researcher publications after their assistant professorships. Hence there may be an assistant-professor bias in some of the rankings in this new Coyne, Summers, Williams, and Wood study. A few institutions that have some of the leading doctoral program advisors may not rank high because those leading advisors just do not publish much as senior professors. Also it may be common of some of these institutions to have a leading researcher and publisher who just does not have many colleagues that help to raise the ranking in the CSWW study. I can name a few such universities but will not do so since this is anecdotal on my part.

Remember that there are Accounting Hall of Fame doctoral studies advisors not noted for any publication records. Tom Burns at Ohio State and Carl Nelson at Minnesota produced some of the best accounting researchers in history, but I don’t think Tom and Carl were ever noted for their bibliographic listings of research publications. My point here is that faculty advisors recommend doctoral programs to prospective doctoral students for reasons other than the publication records of faculty in doctoral programs.

Hence when an aspiring accounting professor is trying to decide on where to get a doctoral degree, I would sometimes advise looking more closely for the particular woman or man at an institution relative to an institutional ranking. Some people go to Florida just to study under Joel Demski. Others go to Duke just because of Katherine Schipper or Southern California because of Zoe-Vonna Palmrose. Ken Peasnell attracts doctoral students to Lancaster across the pond. Others want UCONN now that Amy Dunbar heads up the doctoral program or Stanford because of the IASB’s Mary Barth. Some people choose Yale just to be near Shyam Sunder. Some people go to Chicago just to learn from Ray Ball for reasons other than his knowledge of fine wines.

Also see --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

Bob Jensen's critique of accountancy doctoral programs can be found at http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

I received the following message from a staff member of the FASB. I altered it slightly to keep it anonymous.

Hi Bob,

As you know, after 16 years in the corporate world, I spent over (XX) years teaching as a non-tenure track, non PhD in accounting. Several times during my stay in academia, i investigated PhD programs in accounting. Each time i found the mathematical requirements to be distasteful. Precious few programs actually included courses in accounting or current FASB/IASB practice issues and those who did still did so sparingly. I could not see myself, at advanced age and experience, subjecting myself to several year of extremely low pay and distasteful (to me) study. What joy is there in producing "research" that includes heavy statistical analysis that nobody outside a very small circle of researchers looking for citations will ever read? There certainly would have been no time or encouragement to pursue relevant topics like XBRL.

While I at the FASB, I see first hand the low esteem members of academia held inside FASB. Not once did I hear a staff member indicate that they would be calling a professor to ask an opinion on an accounting issue. I'm sure some did, but they were quiet about it. I also did not see any academic journals in the bookcases of FASB staff members. The library held copies of the top level journals but it was as rare occasion indeed when the library sent a notice to staff alerting them to a new accounting journal article. In contrast, Accounting Today, CFO magazine, Wall Street Journal, The Times, New York Times and the news services that produced digests of current accounting issues were in daily their reads.

XXXXX

Questions
Why might you want to teach a modified IRR?

Is the reinvestment-at-the-same-rate assumption true?
It may not be, when interim cash inflows occur far in the future, or if there is limited available capital to fund competing projects.

Is timing important?
Yes, it is vital. A change in the expected receipt of future cash inflows by as little as 30 days has a significant impact on the computed IRR.

"Spreadsheets at Work: Rating Your Own IRR Some tips for doing these key calculations; and introducing "modified" internal rate of return," by Richard Block and Jan Bell, CFO.com, February 20, 2009 --- http://www.cfo.com/article.cfm/13052407/c_2984312?f=FinanceProfessor/SBU
Link forwarded by Jim Mahar.

It is budgeting season again. Financial analysts are completing their analyses of the R&D or capital spending projects being proposed. And financial executives are either anxiously awaiting those analyses, or already getting started on their reviews. No doubt the analyses include investment costs, anticipated future savings, discounted cash flows, computed internal rates of return, and a ranking of which projects make the "cut," and which do not.

Almost certainly, a spreadsheet was used for each project — to compute the discounted cash flows, the internal rates of return, and the presentation of the overall rankings.

You will take comfort, of course, because these analyses, and your decision on which projects to accept or fund, were based on a sound financial principle: namely, the better the internal rate of return, the better the project.

But is that comfort warranted? Or might you be vulnerable to the weaknesses long pointed out — if too often ignored — by researchers who have warned that IRR calculations often contain built-in reinvestment assumptions that improperly improve the appearance of bad projects, or make the good ones look too good .

IRR, of course, is the actual compounded annual rate of return from an investment, often used as a key metric in evaluating capital projects to determine whether an investment should be made. IRR also is used in conjunction with the Net Present Value (NPV) function, determining the current value of the sum of a future series of negative and positive cash flows; namely investments and savings. The prescribed discount factor to be used in computing NPV is the company's weighted average cost of capital, or WACC. The internal rate of return is the annual rate of return, also known as the discount factor, which makes the NPV zero.

The rub in justifying long-term project funding decisions by using IRR is two-fold. First, IRR assumes that interim cash inflows, or savings, will be "reinvested," and will produce a return — the reinvestment rate — equal to the "finance rate" used to fund the cash outflows (the investment.) Second, the anticipated investment cash outflows required for the project, and for the anticipated cash inflows from savings once the project is complete, are so far in the future that their timing is difficult to determine with reasonable accuracy.

Is the reinvestment-at-the-same-rate assumption true? It may not be, when interim cash inflows occur far in the future, or if there is limited available capital to fund competing projects. Is timing important? Yes, it is vital. A change in the expected receipt of future cash inflows by as little as 30 days has a significant impact on the computed IRR.

But by knowing and using the subtleties of the various IRR functions available in an electronic spreadsheet, we can safeguard ourselves against miscalculations based on faulty assumptions, and minimize the range of error by early detection of faulty assumptions.

In this article, part one of a two-part series, we will study the reinvestment issue. The second article will address how to reduce inaccuracies — minimizing the range of error — based on timing concerns.

Continued in article

Finance Test Questions --- http://financetestquestions.wikispaces.com/

Bob Jensen's threads on rate of return theory --- http://www.trinity.edu/rjensen/roi.htm

The American Accounting Association holds the active copyright to one of the most classic books in accounting history:
W.A. Paton and A.C. Littleton's 1940 monograph, An Introduction to Corporate Accounting Standards
I don’t think the AAA has ever paid royalties to authors based upon book sales. Both Paton and Littleton are long dead.

I noticed that there is one used copy of this very short book available from Amazon at $416.39 ---
http://www.amazon.com/Introduction-Corporate-Accounting-Standards/dp/0865390002

This makes me think that the American Accounting Association should digitize this classic history book and sell it as an electronic download at a much more reasonable price. Since most college libraries have one copy at best it would be very difficult to make this book available to all students in an accounting course. Also at used book prices like that it seems to be a theft hazard for libraries.

If they can borrow a copy, students can scan this book for free or photocopy two small pages per sheet for less than $8 since there are only 156 pages to this book, including the bibliography. But I'm not sure this is legal even though the AAA has a copyright policy that some of its publications (e.g., journals) can be distributed free for educational purposes to students in a course. Certainly it is not legal at this point in time to digitize a copy and distribute to the public in general without written permission from the AAA.

If I didn't prize my old copy so much I would sell it for $400 on Amazon and top off my heating oil tank. Fortunately we're having a heat wave at the moment with temperatures less than 30 degrees below freezing. Earlier in the week it roared up to above freezing for a couple of days --- hated it!

"The SEC Rules Historical Cost Accounting: 1934 to the 1970s," by Stephen A. Zeff, SSRN, January 2007 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=956163

Abstract:
From its founding in 1934 until the early 1970s, the SEC and especially its Chief Accountant disapproved of most upward revaluations in property, plant and equipment as well as depreciation charges based on such revaluations. This article is a historical study of the evolution of the SEC's policy on such upward revaluations. It includes episodes when the private-sector body that established accounting principles sought to gain a degree of acceptance for them and was usually rebuffed. In the decade of the 1970s, the SEC altered its policy. Throughout the article, the author endeavors to explain the factors that influenced the positions taken by the parties.

Question
How close to the edge would an accounting firm be if it performed this consulting service for an audit client?
I did not investigate whether E&Y refuses to perform such services for audit clients.

Ernst & Young, a major accountancy firm, markets its services with the statement that (see page 81 of this report) "successfully managing business and tax issues related to transfer pricing involves much more than documentation compliance. Transfer pricing affects almost every aspect of an MNE and can significantly impact its worldwide tax burden. Our ... professionals help MNEs address this burden ... with leading solutions. Our multidisciplinary team helps MNEs develop transfer pricing strategies, tax effective solutions, and controversy management approaches that best fit their objectives."
Prem Sikka, "Shifting profits across borders'Transfer pricing' is the biggest tax avoidance scheme of all. The government must insist on companies being more transparent," The Guardian, February 12, 2009 --- http://www.guardian.co.uk/commentisfree/2009/feb/11/taxavoidance-tax

Bob Jensen's threads on auditor professionalism and independence --- http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

Bob Jensen's threads on Ernst & Young --- http://www.trinity.edu/rjensen/Fraud001.htm#Ernst

Question
Who needs the accounting lesson here?
All the accounting professors, like me, I know are just shaking their heads or are bent over in laughter at the Accounting 101 stupidity here.
To my knowledge there's no "Accumulated Retained Earnings Cash/Investment Account" on the asset side of these troubled banks that is reserved for dividends. Seems like some banks are robbing Peter (oops I meant to say TARP) to pay Paul a bit like Madoff paid his wife 15 million dollars just before he opened the door to guys holding out handcuffs. Without TARP funds some banks couldn't meet the payroll let alone pay dividends and hefty executive bonuses. The Madoff Fund is not the only Ponzi game on Wall Street.

And just having an accumulated balance in the Retained Earnings account from prior years of happiness still leaves common shareholders at the bottom of the priority list in terms of claims on bank assets. Current creditors and preferred shareholders have higher order claims that must be paid before shareholders get a penny if the bank indeed fails. Of course the bankruptcy lawyers have first dibs on any assets of a failed bank before the creditors even get paid. If the FDIC pays off depositors, it too is a priority claimant.

"Accounting for (Congressional Jerry Bower) Dummies,"  by Jerry Bowyer, Townhall, February 14, 2009 --- http://townhall.com/columnists/JerryBowyer/2009/02/14/accounting_for_congressional_dummies 

Kudlow was right, and Sherman needs a little accounting refresher. Dividends are paid out of retained earnings, which is the accumulated net income of the business. They are not paid out of direct investment accounts such as preferred stock. The TARP money was in the form purchase of preferred stock, which is a completely separate account than retained earnings.

It’s actually even a little bit worse for his case: companies pay dividends out of the retained earnings account, which means even companies that don’t have any net earnings can pay dividends without touching TARP money, because retained earnings are the accumulated wealth of prior years of net income. If I lose money this year, but made money last year, and I pay a dividend this year, the money is not coming from preferred stock accounts, or common stock accounts, it’s coming from the net income of prior profitable years. Bank of America, for example, is sitting on over $70 billion in retained earnings, all available to distribute to the shareholders to whom it rightly belongs.

Continued in article

Jensen Comment
In truth the really ignorant people here, other than Jerry Bower, are members of Congress who did not place restrictions on how TARP money could be spent. I guess we can blame that one on their lousy teachers --- Barney Frank, Nancy Pelosi, Harry Reid, Hank Paulsen and Ben Bernanke

I suggest that they learn by playing The Bailout Game (its fun and educational) --- http://www.trinity.edu/rjensen/2008Bailout.htm#Revolution

Bob Jensen's threads on the bailout mess --- http://www.trinity.edu/rjensen/2008Bailout.htm

Essay

• Introductory Quotations
• The Bailout's Hidden, Albeit Noble, Agenda (for added details see Appendix Y)
• A Step Back in History
• Barney's Rubble
• 2009 Update on the Socialist Revolution Without Increased Taxes, Debt, or Civil War
• Why Wasn't Your Diversified Investment Portfolio Safe?

 

NASBA Wants SEC to Withdraw IFRS Roadmap
NASBA said in a comment letter to the SEC that it believes that moving to convergence with IFRS, rather than simply adopting the international standards, is the right path for the SEC to follow. NASBA wrote a letter to the SEC asking it to withdraw the proposed roadmap and instead support the joint efforts of the Financial Accounting Standards Board and the IASB to converge standards by 2011.
Michael Cohn, "NASBA Wants SEC to Withdraw IFRS Roadmap," WebCPA, February 20, 2009 --- http://www.webcpa.com/article.cfm?articleid=30786

The Securities and Exchange Commission of Pakistan (SECP) has granted a 'relaxation' of the requirements of IAS 39

IAS Plus, February 15, 2009 --- http://www.iasplus.com/index.htm

The Securities and Exchange Commission of Pakistan (SECP) has granted a 'relaxation' of the requirements of IAS 39 by allowing impairment losses on available-for-sale (AFS) equity securities to be charged against equity, rather than against profit or loss as IAS 39 requires. Click for SECP Announcement (PDF 79k). The 'relaxation' is valid till 31 December 2009. The 'relaxation' was granted in response to requests from various financial institutions in Pakistan, including mutual funds, insurance companies, leasing companies, banks, and the corporate sector in general. The SECP said it granted the relaxation because recognising impairment losses on AFS equity securities through profit or loss 'will not reflect the correct financial performance of the corporate entities'. Nonetheless, the SECP's announcement said that 'those companies who are willing to follow the full requirements of IAS 39 are encouraged to do so'. The current and former presidents of the Institute of Chartered Accountants of Pakistan (ICAP) expressed support for the 'relaxation'. Asad Ali Shah, current ICAP President, said that 'such deviations from IFRSs have been witnessed in extraordinary situations in the world'. The Competition Commission of Pakistan, however, expressed concern that failure to recognise losses could be viewed as deceptive marketing of securities.

Bob Jensen's theads on IAS 39 are at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

My Latest Fish Catch

"The Two Languages of Academic Freedom," by Stanley Fish, The New York Times, February 8, 2009 ---
http://fish.blogs.nytimes.com/2009/02/08/the-two-languages-of-academic-freedom/ 

Last week we came to the section on academic freedom in my course on the law of higher education and I posed this hypothetical to the students: Suppose you were a member of a law firm or a mid-level executive in a corporation and you skipped meetings or came late, blew off assignments or altered them according to your whims, abused your colleagues and were habitually rude to clients. What would happen to you?

The chorus of answers cascaded immediately: “I’d be fired.” Now, I continued, imagine the same scenario and the same set of behaviors, but this time you’re a tenured professor in a North American university. What then?

I answered this one myself: “You’d be celebrated as a brave nonconformist, a tilter against orthodoxies, a pedagogical visionary and an exemplar of academic freedom.”

My assessment of the way in which some academics contrive to turn serial irresponsibility into a form of heroism under the banner of academic freedom has now been at once confirmed and challenged by events at the University of Ottawa, where the administration announced on Feb. 6 that it has “recommended to the Board of Governors the dismissal with cause of Professor Denis Rancourt from his faculty position.” Earlier, Rancourt, a tenured professor of physics, had been suspended from teaching and banned from campus. When he defied the ban he was taken away in handcuffs and charged with trespassing.

What had Rancourt done to merit such treatment? According to the Globe and Mail, Rancourt’s sin was to have informed his students on the first day of class that “he had already decided their marks : Everybody was getting an A+.”

But that, as the saying goes, is only the tip of the iceberg. Underneath it is the mass of reasons Rancourt gives for his grading policy and for many of the other actions that have infuriated his dean, distressed his colleagues (a third of whom signed a petition against him) and delighted his partisans.

Rancourt is a self-described anarchist and an advocate of “critical pedagogy,” a style of teaching derived from the assumption (these are Rancourt’s words) “that our societal structures . . . represent the most formidable instrument of oppression and exploitation ever to occupy the planet” (Activist Teacher.blogspot.com, April 13, 2007).

Among those structures is the university in which Rancourt works and by which he is paid. But the fact of his position and compensation does not insulate the institution from his strictures and assaults; for, he insists, “schools and universities supply the obedient workers and managers and professionals that adopt and apply [the] system’s doctrine — knowingly or unknowingly.”

It is this belief that higher education as we know it is simply a delivery system for a regime of oppressors and exploiters that underlies Rancourt’s refusal to grade his students. Grading, he says, “is a tool of coercion in order to make obedient people” (rabble.ca., Jan. 12, 2009).

It turns out that another tool of coercion is the requirement that professors actually teach the course described in the college catalogue, the course students think they are signing up for. Rancourt battles against this form of coercion by employing a strategy he calls “squatting” – “where one openly takes an existing course and does with it something different.” That is, you take a currently unoccupied structure, move in and make it the home for whatever activities you wish to engage in. “Academic squatting is needed,” he says, “because universities are dictatorships . . . run by self-appointed executives who serve capital interests.”

Rancourt first practiced squatting when he decided that he “had to do something more than give a ‘better’ physics course.” Accordingly, he took the Physics and Environment course that had been assigned to him and transformed it into a course on political activism, not a course about political activism, but a course in which political activism is urged — “an activism course about confronting authority and hierarchical structures directly or through defiant or non-subordinate assertion in order to democratize power in the workplace, at school, and in society.”

Clearly squatting itself is just such a “defiant or non-subordinate assertion.” Rancourt does not merely preach his philosophy. He practices it.

This sounds vaguely admirable until you remember what Rancourt is, in effect, saying to those who employ him: I refuse to do what I have contracted to do, but I will do everything in my power to subvert the enterprise you administer. Besides, you’re just dictators, and it is my obligation to undermine you even as I demand that you pay me and confer on me the honorific title of professor. And, by the way, I am entitled to do so by the doctrine of academic freedom, which I define as “the ideal under which professors and students are autonomous and design their own development and interactions.”

Of course, as Rancourt recognizes, if this is how academic freedom is defined, its scope is infinite and one can’t stop with squatting: “The next step is academic hijacking, where students tell a professor that she can stay or leave but that this is what they are going to do and these are the speakers they are going to invite.” O, brave new world!

The record shows exchanges of letters between Rancourt and Dean Andre E. Lalonde and letters from each of them to Marc Jolicoeur, chairman of the Board of Governors. There is something comical about some of these exchanges when the dean asks Rancourt to tell him why he is not guilty of insubordination and Rancourt replies that insubordination is his job, and that, rather than ceasing his insubordinate activities, he plans to expand them. Lalonde complains that Rancourt “does not acknowledge any impropriety regarding his conduct.” Rancourt tells Jolicoeur that “Socrates did not give grades to students,” and boasts that everything he has done was done “with the purpose of making the University of Ottawa a better place,” a place “of greater democracy.” In other words, I am the bearer of a saving message and those who need it most will not hear it and respond by persecuting me. It is the cry of every would-be messiah.

Rancourt’s views are the opposite of those announced by a court in an Arizona case where the issue was also whether a teaching method could be the basis of dismissal. Noting that the university had concluded that the plaintiff’s “methodology was not successful,” the court declared “Academic freedom is not a doctrine to insulate a teacher from evaluation by the institution that employs him” (Carley v. Arizona, 1987).

The Arizona court thinks of academic freedom as a doctrine whose scope is defined by the purposes and protocols of the institution and its limited purposes. Rancourt thinks of academic freedom as a local instance of a global project whose goal is nothing less than the freeing of revolutionary energies, not only in the schools but everywhere.

It is the difference between being concerned with the establishing and implementing of workplace-specific procedures and being concerned with the wholesale transformation of society. It is the difference between wanting to teach a better physics course and wanting to save the world. Given such divergent views, not only is reconciliation between the parties impossible; conversation itself is impossible. The dispute can only be resolved by an essentially political decision, and in this case the narrower concept of academic freedom has won. But only till next time.

Stanley Fish is the Davidson-Kahn Distinguished University Professor and a professor of law at Florida International University, in Miami, and dean emeritus of the College of Liberal Arts and Sciences at the University of Illinois at Chicago. He has also taught at the University of California at Berkeley, Johns Hopkins and Duke University. He is the author of 10 books. His new book on higher education, "Save the World On Your Own Time," has just been published.

Thomas Carlyle's (1896) Sartor Resartus ("Tailor Retailored")

February 9, 2009 reply from Roger Collins [Rcollins@TRU.CA]

Hmm...- wasn't it Yuji Ijiri who was reported as claiming in a not-too-recent paper in Accounting Horizons that, as a student, one of his most interesting courses (in Accounting Theory ? I can't remember exactly) had been devoted entirely to a novel by Thomas Carlyle entitled Sartor Resartus (The Tailor Retailored) ? And that of all the courses he had taken, it was this course which he had found most stimulating and thought-provoking? (The Accounting Horizons paper was a piece on the thoughts of several high profile accounting academics of which Ijiri was one).

I think that Denis Rancourt crosses the line between academic freedom and idiosyncrasy for idiosyncracy's' sake. At the same time, the case may remind us that academic freedom generally gives us a fair amount of rope to play with if we so choose.

The Wikipedia reference is http://en.wikipedia.org/wiki/Sartor_Resartus 

The opening paragraph of the reference is.../

Thomas Carlyle's major work, Sartor Resartus (meaning 'The tailor re-tailored'), first published as a serial in 1833-34, purported to be a commentary on the thought and early life of a German philosopher called Diogenes Teufelsdröckh (which translates as 'god-born devil-dung'), author of a tome entitled "Clothes: their Origin and Influence." Teufelsdröckh's Transcendentalist musings are mulled over by a skeptical English editor who also provides fragmentary biographical material on the philosopher. The work is, in part, a parody of Hegel, and of German Idealism more generally.

Roger Collins
TRU School of Business

 

February 10, 2009 reply from Bob Jensen

Hi Roger,

Ijiri brings up Sartor Resartus (free download) at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=305904
“I took a philosophical "accounting seminar" as an undergraduate in Japan, in which we spent the entire course on Thomas Carlyle's (1896) Sartor Resartus ("Tailor Retailored"). Here, we went over the philosophy of clothes and the indispensable role that clothes play in society, treating accounting also as indispensable clothes people wear, change and discard. Nearly a half-century later, it is still having impact on my thinking.”

Professor Ijiri served on my doctoral studies committee when we were both at Stanford years ago. He never mentioned Sartor Resartus at the time.

Some Thoughts on the Intellectual Foundations of Accounting

Joel S. Demski
University of Florida - Fisher School of Accounting

Shyam Sunder
Yale School of Management

John C. Fellingham
Ohio State University - Department of Accounting & Management Information Systems

Yuji Ijiri
Carnegie Mellon University

Jonathan C. Glover
Carnegie Mellon University

Pierre Jinghong Liang
Carnegie Mellon University - Tepper School of Business


February 2002

Yale ICF Working Paper No.

Abstract:     
We report on a panel discussion at the 2001 CMU Accounting Mini-conference under the title "Intellectual Foundations of Accounting." We provide a background and the motivation for the discussion and present the remarks by the four panelists. A number of perspectives are taken. Sunder emphasizes dualities in accounting. Demski stresses the endogeneity of accounting measurement activities. Fellingham examines the core and superstructure of accounting. Ijiri observes the microcosmos in accounting and its philosophical connection. We also argue that accounting's intellectual foundations are far from settled and an on-going discussion is likely to help reinvigorate accounting scholarship

February 10, 2009 reply from Roger Collins [Rcollins@TRU.CA]

Hello Bob,

Many thanks for this. The paper you've so kindly attached was one that annoyed me somewhat when I first read it, as I thought that the major contributors (Demski, Sunder, Fellingham and Ijiri) were taking rather narrowly defined positions and perhaps rather resting on their laurels. I took the attached paper to a couple of minor conferences but never seriously thought of having it published. If you - or anyone else on AECM - feels inclined either to critique it or comment on its suitability for publication at this distance in time from the original paper, I'd welcome any responses.

Roger

Roger Collins
TRU School of Business

February 11, 2009 reply from Bob Jensen

Hi Roger,

Your critique is great for openers. It just does not go far enough with regard to the destructiveness of the search for "intellectual foundations" in accountancy. Since the "Perfect Storm" of the late 1950s and 1960s, academic accountants from Mattesich to Demski to Zimmerman became prophets of destructive positivism. The leading academic accounting research centers literally ignored the warnings of Bob Sterling, Steve Zeff, and others about the destructive evolution of this so-called "intellectualism" of academic accounting research. You can read more about this "Perfect Storm" at ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
 

By "destructive" I mean that the leading academic accounting research centers, journals, and doctoral programs virtually all adopted a mathematical model building paradigm without caring that the world of information, executive decision making, and portfolio investment behavior within and external to a business organization is far too complex for most models to have much utility to either decision makers or standard setting bodies around the world. The result was to divert our best and brightest accounting academic researchers into superficial worlds where they could get their intellectual highs while financial and managerial accounting professions themselves had to carry on without much of any contribution of merit from the accounting academy. A good example is Ijiri's promising cash flow equivalency model which on paper looked like it would revolutionize accounting information systems and financial analysis. But implicit inside the model is a hypersensitivity to parameter estimation error that washed out all relevance of the model. This is why very few people on the AECM listserv even heard about this model. Certainly it was never relevant to the FASB or General Electric.

About the same time, the same thing commenced to take place in the search for intellectual foundations of science intended to raise the world of science to new heights in intellectualism. This so-called "philosophy of science" intended to bring about intellectual sophistication in scientific effort. Leading universities commenced to offer philosophy of science courses and even majors in philosophy of science. Unlike in leading academic accounting research centers, the science research centers learned quickly that this intellectualization of science was not adding much if any value to science. Instead it was sometimes getting in the way of science. Quietly, these centers dropped most of their philosophy of science courses, journals, and study itself. Scientists just got on with their work without allowing themselves to be destroyed by positivism. This is not to say that there was not some basic values that evolved in the philosophy of science. It's constraints on science just should not be taken too far.

You might note the following quotation --- http://en.wikipedia.org/wiki/Philosophy_of_Science#Critiques_of_scientific_method

Paul Feyerabend argued that no description of scientific method could possibly be broad enough to encompass all the approaches and methods used by scientists. Feyerabend objected to prescriptive scientific method on the grounds that any such method would stifle and cramp scientific progress. Feyerabend claimed, "the only principle that does not inhibit progress is: anything goes."^[28] However there have been many opponents to his theory. Alan Sokal and Jean Bricmont wrote the essay "Feyerabend: Anything Goes" about his belief that science is of little use to society.

By way of example, since Joel Demski took charge of the accounting doctoral program at the University of Florida, every applicant to that doctoral program cannot even matriculate into the program before pre-requisites of advanced mathematics are satisfied.

Students are required to demonstrate math competency prior to matriculating the doctoral program. Each student's background will be evaluated individually, and guidance provided on ways a student can ready themselves prior to beginning the doctoral course work. There are opportunities to complete preparatory course work at the University of Florida prior to matriculating our doctoral program. 
University of Florida Accounting Concentration  --- http://www.cba.ufl.edu/fsoa/docs/phd_AccConcentration.pdf

Accordingly the University of Florida's doctoral program puts up a wall blocking doctoral program applicants with research skills other than mathematics. What Florida's biomedical research center put up the same barriers requiring advanced mathematics to be allowed into any of its doctoral programs?

Probably the major shortcoming of our model builders in academic accounting research centers is their indifference to risk and risk management. What leading accounting research center has experts on derivative financial instruments and the complex contracting that evolved in derivative instrument practice and frauds? I would really like to know since I'm contacted almost weekly by business firms and news reporters seeking accounting professors who are experts in FAS 133 and its amendments.

When coming to terms with this during the evolution of FAS 133, what accounting professor in the world made a noteworthy contribution to the FASB struggling to learn how to report these contracts? Where are the papers on derivative financial instruments and their massive frauds when you scour the literature of TAR, JAR, and JAE in the 1960s, 1970s, 1980s, and 1990s when all the derivative financial instruments frauds were taking place. I provide a timeline of these frauds and the evolution of FASB and IASB standards without citing a single noteworthy research paper appearing in our leading academic accounting research journals --- http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

Joel Demski steers us away from the clinical side of the accountancy profession by saying we should avoid that pesky “vocational virus.” (See below).

The (Random House) dictionary defines "academic" as "pertaining to areas of study that are not primarily vocational or applied , as the humanities or pure mathematics." Clearly, the short answer to the question is no, accounting is not an academic discipline.
Joel Demski, "Is Accounting an Academic Discipline?" Accounting Horizons, June 2007, pp. 153-157

 

Statistically there are a few youngsters who came to academia for the joy of learning, who are yet relatively untainted by the vocational virus. I urge you to nurture your taste for learning, to follow your joy. That is the path of scholarship, and it is the only one with any possibility of turning us back toward the academy.
Joel Demski, "Is Accounting an Academic Discipline? American Accounting Association Plenary Session" August 9, 2006 --- http://www.trinity.edu/rjensen//theory/00overview/theory01.htm

Too many accountancy research programs have immunized themselves against the “vocational virus.” The resulting problem is that we’ve been neglecting the clinical needs of our profession. Perhaps the real underlying reason is that our clinical problems are so immense that academic accountants quake in fear of having to make contributions to the clinical side of accountancy as opposed to the clinical side of finance, economics, and psychology.

Demski’s (1973) article, ‘‘The General Impossibility of Normative Accounting Standards,’’ reinforced academic reluctance to weigh in on how practice ‘‘ought’’ to proceed. What quantitative, management accountants read into Demski’s article was that the accounting standard-setting process was hopelessly and inevitably pointless— impossible, even—and that it did not deserve any further effort from them. Academicians began backing off from involvement in standard setting, which caused further separation of teaching from research, but also exacerbated the separation of research from practice. In fact, polls revealed that the most quantitative journals—thus, those least accessible to practitioners—were perceived to have the highest status in the academy (Benjamin and Brenner 1974).
Glenn Van Wyhe, "A History of U.S. Higher Education in Accounting, Part II: Reforming Accounting within the Academy," Issues in Accounting Education, Vol. 22, No. 3 August 2007, Page 481.

Bob Jensen

Some comparative nine-month academic year salaries recently released by the AACSB
Note that major research university salaries considerably higher than average while salaries in many private universities are much lower as are salaries in state universities that are not flagship research universities. The results for accounting and taxation new assistant professors primarily reflects the downward trend of doctoral graduates in accounting, auditing, and taxation in the past two decades --- http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

From the Financial Rounds Blog on February 16, 2009 --- http://financialrounds.blogspot.com/

The Annual AACSB salary survey is the definitive source for business school faculty salaries. Here's the most important table from the report - it shows the mean salaries for new doctorates for the major business disciplines



The figures above are for 9-month salaries. At research schools, summer research support can add another 10-20% to that, and there are also opportunities to pick up additional $$ teaching over the summer. However, at teaching oriented schools, there typically isn't summer support, and summer teaching money is also much lower.

For years, Finance professors got the highest salaries across all business disciplines. That's changed in the last few years, with accounting salaries pulling ahead. The increase in accounting new-hire salaries is likely due to smaller numbers of accounting PhD's being graduated and a lot of retirements in their field. But still, $120K isn't bad.

Click here for the free executive summary (you can also get the full report, but it'll cost you).

Bob Jensen's threads on salary compression, inversion, and controversy are at http://www.trinity.edu/rjensen/HigherEdControversies.htm#Salaries

February 19, 2009 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

Patricia, Zane, Bob,...

My ex-President (a brilliant scholar of American constitutional law, he died in a swimming accident a few years ago) Kermit Hall once said that if you don't like teaching, you should be a banker or something else. As our President, he taught an undergraduate course in history each semester. He insisted that all the Deans teach a course every semester; didn't make him popular.

We should not forget that, at the well-known English universities such as Oxford and Cambridge, in the not too distant past, faculty and dons were not to marry if they wished to retain their position, lest they acquire acquisitive (or comparative?) instinct.

I would never encourage any student to take to academics to get rich. In fact, I think business schools have been thoroughly corrupted because of this constant talk of opportunity costs of alternative employment. Fortunately this economic virus is not as rampant at other units at most universities I know.

On the other hand, as a profession, I think one should not be in teaching unless you also have practiced the profession. Any day, I would have a mid-career or retired professional teaching me than a PhD who has never seen real-world accounting and who has learnt the profession from faculty who have themselves never seen real-world accounting.

The shortage of accounting faculty is contrived by us to protect our wages. If opportunity costs are high, why not ask faculty to produce evidence of such opportunities if they demand higher wages? Or still better, how about asking tenured faculty to produce evidence of such alternative practice opportunities to retain their tenure? For most faculty these days, such opportunities are ethereal more than real.

I gave up a lucrative career in industry when I took the vow of poverty years ago, and have never regretted it. Early in my academic career, lack of material possessions irritated me, but have learnt not to compare me to any others, especially my good old friends in industry rolling in riches.

Jagdish Gangolly (gangolly@csc.albany.edu )
Department of Informatics,
College of Computing & Information
State University of New York at Albany
1400 Washington Avenue, Albany NY 12222 Phone: 518-442-4949

February 20, 2009 reply from Bob Jensen

Hi Jagdish,

You wrote:
"The shortage of accounting faculty is contrived by us to protect our wages."

I agree with most of what you said above. However, I don’t think the decline in accountancy doctoral graduates over the past two decades was contrived in any kind of conspiracy to create barriers to entry for purposes of higher salaries. The causes of accounting PhD shortages are many and complicated, but none of them were intended to make accounting professors the highest paid professors in the academy.

Part of the cause of a shortage was the increase in demand for accounting professors. When the big firms commenced adding internships to senior accounting majors, accounting became much more popular as an undergraduate major. The professorial supply just did not increase with this demand.

One of the main causes of a shortage of accountancy PhDs is the time-to-degree. A top economics undergraduate can get a PhD in economics in seven years of college. The same is possible in finance, marketing, and management. Law school typically takes three years after obtaining an undergraduate degree.

In accounting we now require 150 credits to take the CPA examination, so most of our graduates now get a masters degree with almost no courses in for academic research. If a statistics course is required it generally has a coloring book for a textbook.

In addition our doctoral programs prefer to admit candidates with work experience in accountancy. So now we’re talking six or more years before admitting a doctoral student. Then students week in mathematics, statistics, econometrics, and psychometrics take about two years of such courses. Students who manage to get admitted without much accounting, often foreign students, take about two years of undergraduate accounting. Then there’s the additional time for doctoral seminars in accounting research, financial research, and behavioral research. All told a doctoral program in accountancy takes at least five years and often six years. What is six years plus five years? That is just a minimum. Most of our accounting professors today probably did not complete their accountancy PhD degrees before they were almost 30 years old except for the oldsters who did not have to earn 150 credits to sit for the CPA examination along the way.

BYU recognized this problem and created a masters degree program for students who are pretty certain that they want to eventually be admitted to a doctoral program. The BYU masters program won an AAA Innovation in Accounting Education annual award. This masters program is intended to provide students with the research course prerequisites for doctoral studies such that the time in a doctoral program should, in theory, be reduced to three years. You can read about BYU’s award winning PhD Prep Program at http://phdprep.byu.edu/index.php?title=Main_Page 
If students has a sufficient amount of accountancy as undergraduates, that can also take the CPA examination with this masters degree.

Another barrier to entry in accountancy doctoral programs is that the accountics research professors hijacked the prestigious doctoral programs and all the other doctoral programs in North America thought that it was necessary to clone the accountancy doctoral programs at Chicago, Stanford, Rochester, Cornell, Northwestern, Illinois, Texas, USC, UCLA, and Cal-Berkeley. Hence all accountancy programs became highly mathematical social science programs in mathematics, econometrics, and psychometrics. Practicing CPAs who contemplate returning to a university for an accountancy PhD are frequently turned off by having to get a social science PhD in the name of accountancy/accountics. I’ve already written much about this problem at http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms 

The bottom line is that I don’t think that the decline in the number of accountancy doctoral graduates in North America was contrived for purposes of keeping accounting professor salaries high. The decline was caused by lengthening the time to the CPA (150 credits), a desire for work experience for doctoral program admission, and upping the requirements for mathematics, statistics, econometrics, and psychometrics if virtually all North American doctoral programs in accountancy.

There are of course other factors to be considered. Accounting careers in CPA firms and corporations became increasingly attractive. For example, all the Big Four accounting firms now place in the top ten organizations as desirable places to work. CPA firms in particular strived to become more accommodating to parents who seek more time to care for children. In the age of networking, more and more clients can be served from work at home. Hence, many accounting workers are less frustrated on the job and are less inclined to give up five or more years of their lives in a doctoral program.

Business school graduates in non-accounting specialties often have more trouble getting jobs. Even in the Wall Street boom times, most graduates in finance could not get plumb jobs on Wall Street and had to settle for less-than-exciting local bank jobs or become stock brokers living on commission income. Those graduates were more inclined to come back to college for doctorates in economics, finance, marketing, management, and MIS. Some regretted later on that they had not been accounting majors.

It’s tough late in life to come back and take all those accounting undergraduate courses to get back on track in accounting. But Finley Graves did it after becoming a PhD in German Literature. He then took the time and trouble to earn a second PhD in Accounting and is now a terrific accounting professor.

Bob Jensen

Video of an Accounting Researcher
Accounting Professor John Hughes (Ernst & Young accounting professor at UCLA)
Four Minute Video: Does Information Asymmetry Affect the Cost of Capital?
Video:  http://www.anderson.ucla.edu/documents/areas/adm/web/vid_JHughes.html
Paper:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=488203
Jensen Comment
With some rather innocent sounding assumptions, Modigliani and Miller, in a famous ground breaking study, showed that the amount of leverage is cost-of-capital neutral when making decisions to issue debt versus equity. I think the current collapse of large and highly leveraged banks brings market efficiency assumptions into question. In particular the moderating effect of cash traders depends upon deep markets that often just do not exist when insiders are either bailing out big time or jumping in deep based upon information asymmetry in inefficient markets. As with all empirical model findings, the assumptions should be severely analyzed. Also in the present economic crisis cost-of-capital expectations are all messed up when and if Uncle Sam interferes in the private markets. The Treasury Department will most certainly demand less information asymmetry before deciding how much to help troubled banks.

February 11, 2009 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

I most certainly did not question Professor Hughes' standing as an academic. I was just questioning if this sort of research is really accounting or finance. I am not opposed to this sort of research at all, and in fact do read it occasionally.

Neither am I saying this line of research should not be pursued by accountants. As some one from a campus-wide interdisciplinary PhD program, I view any such strictures as infringing on academic freedom. Almost all of my own research the past few years has been very much outside (yet extremely relevant to) accounting, but most accounting departments in the US thoroughly discourage any sort of research other than the likes of those in the video.

However, why is it that this sort of research is glorified (and privileged) in academic accounting AT THE EXPENSE of many other kinds of research (especially when the space in the so-called quality journals in accounting is limited)?

Also, since this is really research in finance, do the academics in finance read it? Does this sort of research in accounting get any sort of peer review from academic researchers in finance?

Jagdish Gangolly (gangolly@csc.albany.edu)
Department of Informatics,
College of Computing & Information
State University of New York at Albany
1400 Washington Avenue, Albany NY 12222 Phone: 518-442-4949

February 12, 2009 reply from Bob Jensen

Hi Jagdish,

I hate to keep harping on this, but if our “scientific” capital markets and behavioral studies published in leading accounting research journals had any genuine relevance, readers would demand replications. Readers don’t have any interest in replications and the leading accounting research journals won’t even publish replications --- http://www.trinity.edu/rjensen/theory01.htm#Replication
That’s the main difference between real science and accounting’s so-called science (accountics).

If you read an article in TAR, JAR, JAE, CAR, etc. you must make a leap of faith that the authors did not make a mistake in data collection and data analysis. Our leading research studies are assumed to be error free. It’s either that or the publications have so little relevance that nobody cares. Imagine that!

You asked whether academics in finance (and accordingly economics) find much value added in finance/economics studies published in accounting research journals.

In her Presidential Message at the AAA annual meeting in San Francisco in August, 2005, Judy Rayburn addressed the low citation rate of accounting research when compared to citation rates for research in other fields. Rayburn concluded that the low citation rate for accounting research was due to a lack of diversity in topics and research methods:

Accounting research is different from other business disciplines in the area of citations: Top-tier accounting journals in total have fewer citations than top-tier journals in finance, management, and marketing. Our journals are not widely cited outside our discipline. Our top-tier journals as a group project too narrow a view of the breadth and diversity of (what should count as) accounting research.
Rayburn [2006, p. 4] --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

 

Rayburn drew from a citation study by Ed Swanson in 2002 (SSRN) --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=345340

Abstract:     

Publication in top-tier journals is the primary criterion for promotion at many business schools and a strong influence on salary, teaching load, and research support. Business schools evaluate publication records by comparing the quality and quantity of top-tier research articles to those of peers within the same discipline (intradisciplinary) and to those of academics from other business disciplines (interdisciplinary). An analytical model of the research review process (the q-r model) predicts that interdisciplinary differences exist in the standards that top-tier journals use for accepting articles. If true, decision makers should consider these differences. I examine the period from 1980 to 1999 and, consistent with the model's predictions, find that significant differences exist in the number of articles and proportion of faculty who published in the "major" journals in accounting, finance, management, and marketing. Most notably, top-tier accounting journals publish substantially fewer major articles than journals in the other three business disciplines. In addition, I find the proportion of doctoral faculty publishing a major article has declined in all four disciplines over the 1980 to 1999 period.

 

I think one key difference between accounting and the related disciplines of finance, marketing, and management is that practitioners in those professions (e.g., former investment bankers, bankers, marketing executives, and some management executives) actually make use of leading academic journals in their disciplines and cite them in their own writings in professional non-academic journals. The Journal of Finance became so esoteric that it was not serving the majority of instructors of finance. This gave rise to the exceedingly popular Financial Management Association (FMA) among finance faculty and the generally readable journals called Financial Management and the Journal of Applied Finance.

Probably the main difference, however, is that the majority of instructors in accounting stopped even looking at the leading accounting research journals like TAR, JAR, and JAE. Once the practitioner-oriented and teaching-oriented articles were steered from TAR to AH and IAE, readership in TAR plummeted. You can read the following at http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

Fleming et al. [2000, p. 48] report that education articles in TAR declined from 21 percent in 1946-1965 to 8 percent in 1966-1985. Issues in Accounting Education began to publish the education articles in 1983. Garcha, Harwood, and Hermanson [1983] reported on the readership of TAR before any new specialty journals commenced in the AAA. They found that among their AAA membership respondents, only 41.7 percent would subscribe to TAR if it became unbundled in terms of dollar savings from AAA membership dues. This suggests that TAR was not meeting the AAA membership’s needs. Based heavily upon the written comments of respondents, the authors’ conclusions were, in part, as follows by Garcha, Harwood, and Hermanson [1983, p. 37]:

The findings of the survey reveal that opinions vary regarding TAR and that emotions run high. At one extreme some respondents seem to believe that TAR is performing its intended function very well. Those sharing this view may believe that its mission is to provide a high-quality outlet for those at the cutting-edge of accounting research. The pay-off for this approach may be recognition by peers, achieving tenure and promotion, and gaining mobility should one care to move. This group may also believe that trying to affect current practice is futile anyway, so why even try?

At the other extreme are those who believe that TAR is not serving its intended purpose. This group may believe TAR should serve the readership interests of the audiences identified by the Moonitz Committee. Many in the intended audience cannot write for, cannot read, or are not interested in reading the Main Articles which have been published during approximately the last decade. As a result there is the suggestion that this group believes that a change in editorial policy is needed.

We surmise that some professionals in accounting who have no aptitude or interest in becoming scientists refrain from enrolling in current accounting doctoral programs due to the narrowness of most accounting doctoral programs and the lack of other epistemological and ontological methods more to their liking. New evidence suggests that this problem also extends to topical concentrations of those who do enter doctoral programs. In a study of the critical shortage of doctoral students in accountancy, Plumlee et al. [2006] discovered that there were only 29 doctoral students in auditing and 23 in tax out of the 2004 total of 391 accounting doctoral students enrolled in years 1-5 in the United States. We might add that the authors of the article were all appointed in 2004 by American Accounting Association President Bill Felix to an ad hoc Committee to Assess the Supply and Demand for Accounting Ph.D.s. Plumlee et al. [2006, p. 125] wrote as follows (emphasis added as we think it relates to accountics):

The Committee believes the dire shortages in tax and audit areas warrant particular focus. One possible solution to these specific shortages is for PhD. Programs to create new tracks targeted toward developing high-quality faculty specifically in these areas. These tracks should be considered part of a well-rounded Ph.D. program in which students develop specialized knowledge in one area of accounting, but gain substantive exposure to other accounting research areas . . .

A possible explanation for the shortages in these areas is that PhD. Students perceive that publishing audit and tax research in top accounting journals is more difficult, which might have the unintended consequence of reducing the supply of PhD.-qualified faculty to teach in those specialties. Given that promotion and tenure requirements at major universities require publication in top-tier journals, students are likely drawn to financial accounting in hopes of getting the necessary publications for career success. While the Committee has no evidence that bears directly on this point, it believes that the possibility deserves further consideration.

A number of AAA presidents have asserted that empirical research is not always well suited for “discovery research.” These AAA presidents urged in their messages to the membership and elsewhere that accounting research become more diverse in terms of topics and methods. Examples include Bailey [1994], Langenderfer [1987], Rayburn [2006], and Dyckman and Zeff [1984]. The following is a quote from the President’s Message of Sundem [1993, p. 3]:

Although empirical scientific method has made many positive contributions to accounting research, it is not the method that is likely to generate new theories, though it will be useful in testing them. For example, Einstein’s theories were not developed empirically, but they relied on understanding the empirical evidence and they were tested empirically. Both the development and testing of theories should be recognized as acceptable accounting research.

 

In fairness, the new TAR Editor is listening to our complaints and is inviting the accounting academy to submit more diverse articles to TAR (including commentaries, survey-based studies, AIS-method studies, and (gasp) case studies. Thus far, however, the professors in the leading doctoral programs are not heeding the call. It’s pretty much same old, same old in all of our leading academic research journals.

I received the following message from a staff member of the FASB. I altered it slightly to keep it anonymous.

Hi Bob,

As you know, after 16 years in the corporate world, I spent over (XX) years teaching as a non-tenure track, non PhD in accounting. Several times during my stay in academia, i investigated PhD programs in accounting. Each time i found the mathematical requirements to be distasteful. Precious few programs actually included courses in accounting or current FASB/IASB practice issues and those who did still did so sparingly. I could not see myself, at advanced age and experience, subjecting myself to several year of extremely low pay and distasteful (to me) study. What joy is there in producing "research" that includes heavy statistical analysis that nobody outside a very small circle of researchers looking for citations will ever read? There certainly would have been no time or encouragement to pursue relevant topics like XBRL.

While I at the FASB, I see first hand the low esteem members of academia held inside FASB. Not once did I hear a staff member indicate that they would be calling a professor to ask an opinion on an accounting issue. I'm sure some did, but they were quiet about it. I also did not see any academic journals in the bookcases of FASB staff members. The library held copies of the top level journals but it was as rare occasion indeed when the library sent a notice to staff alerting them to a new accounting journal article. In contrast, Accounting Today, CFO magazine, Wall Street Journal, The Times, New York Times and the news services that produced digests of current accounting issues were in daily their reads.

XXXXX

February 12, 2009 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

THE NON-ECONOMETRICIAN'S LAMENT

By Sir Dennis H. Robertson

 

As soon as I could safely toddle

My parents handed me a Model;

My brisk and energetic pater

Provided the accelerator.

My mother, with her kindly gumption,

The function guiding my consumption;

And every week I had from her

A lovely new parameter,

With lots of little leads and lags

In pretty parabolic bags.

 

With optimistic expectations

I started on my explorations,

And swore to move without a swerve

Along my sinusoidal curve.

Alas!  I knew how it would end:

I've mixed the cycle with the trend,

And fear that, growing daily skinnier,

I have at length become non-linear.

I wander glumly round the house

As though I were exogenous,

And hardly capable of feeling

The difference 'tween floor and ceiling.

I scarcely now, a pallid ghost,

Can tell ex ante from ex post:

My thoughts are sadly inelastic,

My acts invariably stochastic.

________________________________

 

Re-arranging the deck chairs on the USS SEC
We understand why Ms. Schapiro would want to show some love to the staff after the blistering attack it received last Wednesday on the Hill. Said liberal New York Congressman Gary Ackerman, "You have totally and thoroughly failed in your mission." Then he went negative, referring to the SEC's difficulty in finding a part of the human anatomy "with two hands with the lights on." Mr. Markopolos added that his many interactions with the agency "led me to conclude that the SEC securities' lawyers, if only through their investigative ineptitude and financial illiteracy, colluded to maintain large frauds such as the one to which Madoff later confessed." . . . If Ms. Schapiro seeks to learn from the SEC's recent history, she might start by considering the most basic lesson from the Madoff incident. Private market participants spotted the fraud, while SEC lawyers couldn't seem to grasp it. Rather than giving her staff lawyers still more autonomy, she should instead be supervising them more closely, while trying to harness the intelligence of the marketplace. Meantime, investors should remember that their own skepticism and diversified investing remain their best defenses against fraudsters.
"Just Don't Mention Bernie:  Unleashing the SEC enforcers who were already unleashed," The Wall Street Journal, February 10, 2009 --- http://online.wsj.com/article/SB123423071487965895.html?mod=djemEditorialPage
Also see "High "Power Distance" at the SEC: Why Madoff Was Allowed to Take Investors Down with Him," by Tom Selling, The Accounting Onion, December 10, 2009 --- http://accountingonion.typepad.com/theaccountingonion/2009/02/high-power-dist.html 

I don't think we in the U.S. are as low a power distance society as we fashion ourselves, and the redistribution of wealth that has been occurring since the 1980s may be pushing us inexorably towards Colombia. Also, it wasn't difficult for me to think of a few examples of where the SEC in particular has been exhibiting symptoms characteristic of a high power distance country:

• When asked why he robbed banks, Willie Sutton simply replied, "Because that's where the money is." Lately, it seems that the SEC staff (i.e., the "co-pilots,") has shied away from the big money, out of a mirror-image version of the self-interest (survival, in case of a staff member) that motivated Mr. Sutton. And that fear is not merely paranoia, as tangibly illustrated recently when a former SEC investigator was fired after pursuing evidence that John Mack, Morgan Stanley's CEO, allegedly had tipped off another investment company about a pending merger.
   
• The Christopher Cox administration instituted an unprecedented policy that required the Enforcement staff to obtain a special set of approvals from the Commission in order to assess monetary penalties as punishment for securities fraud. Mary Schapiro, the new SEC chair, claims that the policy, among other deleterious effects, "discouraged staff from arguing for a penalty in a case that might deserve a penalty…" In other words, the co-pilots were "encouraged" to keep a lid on embarrassing news that reflected badly on members of the pilot class.
   
• And, lest you should not labor under any illusion that enforcement of accounting rules is a level playing field, consider the case in 1992 (I think) when the SEC effectively handed out special permission to AT&T to account for its acquisition of NCR as a "pooling of interests." Quite evidently, the SEC staff could not bring the bad news to the "pilots" that the merger with NCR would not happen just because AT&T did not technically qualify for the accounting it so sorely "needed." To put it in the stark terms of today, the merger was simply "too big to fail." (And perhaps not coincidentally, acquiring NCR proved to be one of the biggest wastes of shareholder wealth in the history of AT&T.)

February 10, 2009 reply from Tom Selling [tom.selling@GROVESITE.COM]

As to why “Madoff went unchallenged for so long,” I provide an ad hoc explanation based on Hofstede’s cultural dimension, “power distance” at www.accountingonion.com. 

Linda Thomsen should have resigned long ago, after investigators exposed her role in the firing of attorney/investigator Gary Aguirre, who wanted to obtain testimony from John Mack, the CEO of Morgan Stanley.  Only the autocratic Christopher Cox could have had the chutzpah to keep her on after that. 

As to why “Madoff went unchallenged for so long,” I provide an ad hoc explanation based on Hofstede’s cultural dimension, “power distance” at www.accountingonion.com. 

Linda Thomsen should have resigned long ago, after investigators exposed her role in the firing of attorney/investigator Gary Aguirre, who wanted to obtain testimony from John Mack, the CEO of Morgan Stanley.  Only the autocratic Christopher Cox could have had the chutzpah to keep her on after that. 

Best,

Tom

 

Bob Jensen's "Rotten to the Core" threads are at http://www.trinity.edu/rjensen/FraudRotten.htm

From The Wall Street Journal Accounting Weekly Review on February 12, 2009

Jensen Comment
What I don't understand is why the massive other losses of GM would not zonk this gain come tax time?

"Tax Bill Threatens GM's Overhaul:  Auto Maker Lobbies Washington to Avoid a Looming $7 Billion Liability," by John D. Stoll, The Wall Street Journal, February ,, 2009 --- http://online.wsj.com/article/SB123343353399236457.html?mod=djem_jiewr_AC

General Motors Corp. is reaching out to the U.S. Treasury Department and Congress in hopes of avoiding a multibillion-dollar tax burden that could be attached to a new restructuring plan the auto maker is working to create by mid-February, according to people familiar with the effort.

GM, racing to submit a viability plan to the White House by Feb. 17, could face an income-tax bill of as much as $7 billion that would be associated with a plan to give much of the company's outstanding stock to debtholders, the United Auto Workers union and the federal government.

Continued in article

Fighting the Spread of Corruption
A new KPMG Forensics survey suggests multinational organizations in the United States continue to face challenges with key issues related to the Foreign Corrupt Practices Act. The survey, completed in summer 2008, found that 85% of the respondents had an FCPA compliance program, but many struggled with fundamental elements, including: performing effective due diligence on foreign agents/third parties (82%); auditing third parties for compliance (76%); and performing due diligence during merger or acquisition activities (73%).
Journal of Accountancy, February 2009 --- http://www.journalofaccountancy.com/Issues/2009/Feb/FightingtheSpreadofCorruption.htm

Source: KPMG Forensic 2008 Anti-bribery and Anti-corruption Survey, www.kpmg.com .

Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/fraud.htm

After KPMG sold its consulting division, it promised over and over that its auditors would be independent

February 11, 2009 message from Roger Collins [rcollins@TRU.CA]

Two stories....

1. 'Independent' KPMG earned millions from HBOS Patrick Hosking, Banking and Finance Editor

The "independent" experts hired by HBOS to investigate allegations of serious failings at the bank in 2005 had been receiving millions of pounds in fees from the company for years.

KPMG, which was hired by Lord Stevenson of Coddenham, the HBOS chairman at the time, to investigate claims by the whistle-blower Paul Moore, received fees for auditing, tax advice, information technology work and compliance advice.

Last year it was paid £11.4 million in fees by HBOS and the year before £11.2 million, and it had had a close relationship with the bank since 2001, when it was appointed auditor.

HBOS is understood to be one of its biggest clients in the UK.

....continued in article...

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5709285.ece 

 

2.Top banker Sir James Crosby quits after whistle-blower claims Philip Webster, Political Editor and David Byers

The deputy head of the country's financial watchdog resigned today after Gordon Brown withdrew confidence in him over damaging allegations from a bank whistle-blower.

Sir James Crosby, the former HBOS chief executive, stepped down from his role at the Financial Services Authority (FSA) after it was claimed that he personally dismissed his former head of risk who raised fears that the bank was growing too fast.

Sir James resigned minutes after the No 10 spokesman made it clear that Mr Brown he did not have full confidence in the banker.

"These are serious allegations but they are contested allegations," the spokesman said.

...continued in article...

http://www.timesonline.co.uk/tol/news/politics/article5708234.ece 

Roger Collins
TRU School of Business

Bob Jensen's threads on KPMG's professionalism and legal woes are at http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

Bankruptcy and Other Educational Law Materials

February 10, 2009 message from Krzyzanowski, Jeanine (LNG-NPV) [jeanine.krzyzanowski@lexisnexis.com]

Hello Bob.

We suggest adding our link on the following page: http://www.trinity.edu/rjensen/FraudEnron.htm 

Bob Jensen's threads on law tutorials and other materials are at http://www.trinity.edu/rjensen/Bookbob2.htm#Law

Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/Fraud.htm

Bob Jensen's threads on how to find lawyers and accountants are at http://www.trinity.edu/rjensen/fees.htm

Question
Should You Stick With XP/Office 2003 or Upgrade To Vista/Office 2007?

Journal of Accountancy Answers, February 2009 --- Click Here

Jensen Comment
Windows Vista is heavily flawed, and the forthcoming Windows 7 (now in beta) is intended to overcome these flaws. If you've avoided upgrading to Vista, you may want to do so before upgrading to Windows 7.

Repeated from http://www.trinity.edu/rjensen/tidbits/2009/tidbits090203.htm
Computer Purchase Timing:  2009 is the Year of New Windows, Mac, and Palm Operating Systems

Windows 7 may leave Vista in the dust, but Vista makes switch to Windows 7 much easier
It will be complicated to leap from XP to Windows 7

But there are some downsides to Windows 7. First, you will only be able to directly upgrade Vista computers to the new version. People still using Windows XP will need to perform a more cumbersome multistep process. Microsoft is working on a method to help XP owners preserve all their data during this process.
"Even in Test Form, Windows 7 Leaves Vista in the Dust," by Walter S. Mossberg, The Wall Street Journal, January 29, 2009 --- http://online.wsj.com/article/SB123258632983004629.html

This will be a big year for new operating systems. Apple plans a new version of its Macintosh operating system, to be called Snow Leopard. Palm plans an all-new smart phone operating system called Palm WebOS. But the new release that will affect more users than any other will be Windows 7, the latest major edition of Microsoft's dominant platform.

Microsoft hasn't announced an official release date for Windows 7, but I would be surprised if it wasn't available to consumers by this fall. The company has just released the first public beta, or test, version of the software, and I've been trying it out on two laptops. One is a Lenovo ThinkPad lent me by Microsoft with Windows 7 already installed, and the other is my own Sony Vaio, which I upgraded to Windows 7 from Windows Vista.

Personal Technology columnist Walt Mossberg provides a preview of the coming Microsoft Windows 7 operating software, which he says offers significant improvements over the unpopular Windows Vista. I won't be doing a full, detailed review of Windows 7 until it is released in final form, but here's a preview of some of the main features of this new operating system and some of my initial impressions.

In general, I have found Windows 7 a pleasure to use. There are a few drawbacks, but my preliminary verdict on Windows 7 is positive.

Even in beta form, with some features incomplete or imperfect, Windows 7 is, in my view, much better than Vista, whose sluggishness, annoying nag screens, and incompatibilities have caused many users to shun it. It's also a serious competitor, in features and ease of use, for Apple's current Leopard operating system. (I can't say yet how it will compare with Apple's planned new release, as I haven't tried the latter.)

In many respects, Windows 7 isn't a radical shift from Vista, but is more of an attempt to fix Vista's main flaws. It shares the same underlying architecture, and retains graphical touches like translucent Window borders. But it introduces some key new navigation and ease-of-use features, plus scores of small usability and performance improvements -- too many to list here.

The flashiest departure in Windows 7, and one that may eventually redefine how people use computers, is its multitouch screen navigation. Best known on Apple's iPhone, this system allows you to use your fingers to directly reposition, resize, and flip through objects on a screen, such as windows and photos. It is smart enough to distinguish between various gestures and combinations of fingers. I haven't been able to test this feature extensively yet, because it requires a new kind of touch-sensitive screen that my laptops lack.

But even if your current or future PC lacks a touch screen, Windows 7 will have plenty of other benefits. The most important may be speed. In my tests, even the beta version of Windows 7 was dramatically faster than Vista at such tasks as starting up the computer, waking it from sleep and launching programs.

And this speed boost wasn't only apparent in the preconfigured machine from Microsoft, but on my own Sony, which had been a dog using Vista, even after I tried to streamline its software. Of course, these speed gains may be compromised by the computer makers, if they add lots of junky software to the machines. Windows 7 is also likely to run well on much more modest hardware configurations than Vista needed.

The familiar Windows taskbar is more customizable and useful in Windows 7. The program icons are larger, and can be "pinned" anywhere along the taskbar for easy, repeated use. There are also "jump lists" that pop out from the icons in the taskbar and start menu, showing frequently used or recent actions.

View Full Image

Associated Press A screenshot shows several application windows on the desktop of the Beta version of the Microsoft Windows 7 software. Windows 7 also cuts down on annoying warnings and nag screens. Microsoft notifications have been consolidated in a single icon at the right of the taskbar, and you can now decide under what circumstances Windows will warn you before taking certain actions.

Compatibility with hardware and software, which was a problem in Vista, seems far better in Windows 7 -- even in the beta. I tried a wide variety of hardware, including printers, Web cams, external hard disks and cameras, and nearly all worked fine.

I also successfully installed and used popular programs from Microsoft's rivals, such as Mozilla Firefox, Adobe Reader, Apple's iTunes, and Google's Picasa. All worked properly, even though none was designed for Windows 7.

But there are some downsides to Windows 7. First, you will only be able to directly upgrade Vista computers to the new version. People still using Windows XP will need to perform a more cumbersome multistep process. Microsoft is working on a method to help XP owners preserve all their data during this process.

Continued in article

Jensen Comment
I'm still hot under the collar about the vulnerability of Windows to malware. Each year I get closer to buying a Mac out of dirty Windows frustrations.

OpenOffice 3.0.1 --- http://www.openoffice.org/ 
Open Office is a fine choice for those looking for an alternative to some of the other commercial word processing software packages. This latest version of OpenOffice includes several new templates for professional writers, weblog publishing, and a tool that will help users export documents for functionality with Google Docs. This particular version is compatible with all operating systems.

February 6, 2009 message from Bob Jensen to the AECM

It is interesting that earlier in the day we had an AECM exchange about whether to upgrade from 2003 MS Office to the 2007 version.

My computer running 2003 MS Office will not run the [Policy assignment 2.docx] file that Denny Beresford attached to his AECM message. This is because I’ve not upgraded to a newer version of MS Office. The Journal of Accountancy in February 2009 discusses this problem.

"Why Can't They Read My Word 2007 Document?" by Stanley Zarowin, Journal of Accountancy, February 2009 --- http://www.journalofaccountancy.com/Issues/2009/Feb/WhyCantTheyReadMyWord2007Document.htm 

Stanley recommends saving a docx file as an rtf file and then sending it to persons like me still running on 2003 MS Word.

An alternate solution that I’ve always used for transmitted doc files is to open the file in MS Word and then save it as a htm file before attaching them to email messages. This is easy to do in Word. Sometimes this is problematic, but more often or not I found this to be a safe way to send MS Word files to others on the Web. One drawback is that if the file has embedded graphics, there may be added files to send. In that case, perhaps the Stanley’s rtf approach is better.

An advantage of htm files is that they are read in your Web browser such as Internet Explorer or Firefox or Safari. These are much safer when reading transmitted Word files. Denny would not intentionally send an unsafe doc or docx file to us. But if this is a student paper, he might innocently send a dangerous file. Hence, I recommend that he first save it as a htm file and attach it to his AECM message.

Bob Jensen

February 6, 2009 reply from Scott Bonacker [lister@BONACKERS.COM]

Bob -

Go here:

http://www.microsoft.com/downloads/details.aspx?FamilyId=941B3470-3AE9-4AEE-8F43-C6BB74CD1466&displaylang=en  

And download the "Microsoft Office Compatibility Pack for Word, Excel, and PowerPoint 2007 File Formats"

Overview Users of the Microsoft Office XP and 2003 programs Word, Excel, or PowerPoint-please install all High-Priority updates from Microsoft Update before downloading the Compatibility Pack.

By installing the Compatibility Pack in addition to Microsoft Office 2000, Office XP, or Office 2003, you will be able to open, edit, and save files using the file formats new to Word, Excel, and PowerPoint 2007. The Compatibility Pack can also be used in conjunction with the Microsoft Office Word Viewer 2003, Excel Viewer 2003, and PowerPoint Viewer 2003 to view files saved in these new formats. For more information about the Compatibility Pack, see Knowledge Base article 924074.

Note: If you use Microsoft Word 2000 or Microsoft Word 2002 to read or write documents containing complex scripts, please see http://support.microsoft.com/kb/925451  for information to enable Word 2007 documents to be displayed correctly in your version of Word.

Administrators: The administrative template for the Word, Excel, and PowerPoint converters contained within the Compatibility Pack is available for download.

Scott Bonacker CPA
Springfield, MO

A Parmalat Ruling May Broaden Auditing Firm Liability

From The Wall Street Journal Accounting Weekly Review on February 6, 2009

"A Parmalat Ruling May Broaden Liability," by Nathan Koppel, The Wall Street Journal, January 29, 2009 ---
http://online.wsj.com/article/SB123318828413626629.html?mod=djem_jiewr_AC

A U.S. judge issued a ruling in the Parmalat securities litigation that could worry large accounting firms with offices in many countries.

Parmalat SpA, an Italian conglomerate, collapsed in 2003 following the discovery of a massive fraud in which the company allegedly overstated its assets by $16 billion.

At issue in Tuesday's ruling, by U.S. District Judge Lewis Kaplan of New York, was whether Deloitte Touche Tohmatsu potentially could be held liable for an allegedly defective Parmalat audit by its Italian member firm, Deloitte & Touche SpA. Judge Kaplan held that it was possible, in denying Deloitte Touche Tohmatsu's motion for summary judgment. A request for summary judgment asks that part or all of the case be dismissed before trial.

"This is huge," says Stuart Grant, counsel for people who bought Parmalat shares. "Judge Kaplan has finally made the law reflect reality. These accounting firms sell themselves as world-wide, seamless organizations. Now they are going to be held responsible in the same fashion."

Deloitte Touche Tohmatsu "provided no services of any kind to any Parmalat entity," the firm said in a statement. "We are confident of victory at any trial of this matter."

Whether Deloitte Touche Tohmatsu can be held liable for Deloitte & Touche SpA turns on whether it had a "principal-agent" relationship with the Italian affiliate. Judge Kaplan concluded that "DTT exercised substantial control over the manner in which its member firms conducted their professional activities."

Bob Jensen's threads on the Parmalat/GrantThornton mess are at http://www.trinity.edu/rjensen/Fraud001.htm#GrantThornton

From The Wall Street Journal Accounting Weekly Review on February 6, 2009

From The Wall Street Journal Accounting Weekly Review on February 27, 2009

Medtronic to Acquire Valve Makers
by Jon Kamp
The Wall Street Journal
Feb 24, 2009
Click here to view the full article on WSJ.com ---
http://online.wsj.com/article/SB123540006048947881.html?mod=djem_jiewr_AC

TOPICS: Advanced Financial Accounting, Goodwill, Mergers and Acquisitions

SUMMARY: Medtronic is purchasing two closely-held entities, Ventor Technologies Ltd. and CoreValve, Inc., to expand its product lines to devices which require less-invasive surgical procedures than do implantable heart defibrillators. Ventor's product is expected to be introduced in Europe in 2012 and CoreValve's in the U.S in 2014; CoreValve had sales of $35 million in 2008.

CLASSROOM APPLICATION: Classes covering business combination accounting can use this article to discuss the nature of items resulting in R&D, patents, and goodwill accounts after such transactions.

QUESTIONS: 
1. (Introductory) What are the strategic reasons for Medtronic, Inc. to make the acquisitions described in this article?

2. (Advanced) Given that the two products being acquired in these transactions are not yet sold in the U.S., and one is not yet sold in Europe, how can Medtronic decide what price to pay for these acquisitions?

3. (Advanced) Given the nature of the acquisitions, what category of assets do you expect will be recorded on Medtronic's books in entries to record these business combinations?

4. (Advanced) Focus on the nature of goodwill in general. Do you think that the goodwill recorded in these business combinations will be relatively high or relatively low in relation to the total $1.03 billion price Medtronic will pay? Cite the factors in the article leading to your assessment.

Reviewed By: Judy Beckman, University of Rhode Island

"Medtronic to Acquire Valve Makersm" by Joe Kamp, The Wall Street Journal, February 27, 2009 --- http://online.wsj.com/article/SB123540006048947881.html?mod=djem_jiewr_AC

Medtronic Inc. agreed to pay at least $1.03 billion to buy two closely held makers of replacement heart valves that don't require major surgery, taking the medical-device maker into a nascent market and fueling a rivalry with Edwards Lifesciences Corp.

The deals for CoreValve Inc. and Ventor Technologies Ltd. could help Medtronic offset sluggish conditions in its biggest business -- implantable heart defibrillators -- and competitive pressure elsewhere.

The market for so-called transcatheter valves is small and open only overseas thus far. But Medtronic sees potential for the market to balloon to $2.7 billion to $3.5 billion over time.

The devices are replacements for the aortic valve, which sends blood from the heart's main pumping chamber. The aortic valve can become narrow to the point at which it impedes blood flow, in which case patients may need a replacement.

Medtronic already competes in the market for replacement valves that require major surgery. But some patients are too frail to withstand such procedures, which opens the door for transcatheter valves, the implantation of which is less invasive.

Medtronic agreed to pay $700 million for CoreValve, plus two potential $75 million milestone payments. CoreValve, based in Irvine, Calif., competes with Edwards in Europe in the market for valves delivered through arteries.

Sometimes patients' arteries can't handle such so-called transfemoral procedures, however. An alternate method, a transapical procedure, involves passing the valve through an incision between the ribs. Ventor, an Israeli company, designs valves that can be delivered by that procedure. Medtronic agreed to pay $325 million for Ventor.

Medtronic expects the Ventor product to be introduced in Europe in 2012 and for CoreValve's product to hit the U.S. in 2014.

Medtronic has an internal development program for such valves, but "the acquisition of CoreValve and Ventor will accelerate our market entry," Scott Ward, president of Medtronic's cardiovascular business, said in an interview. CoreValve had sales of $35 million last year, according to a Medtronic spokesman.

Edwards Lifesciences' valve, the Sapien, garnered $53 million in sales last year. The company has projected sales of $75 million to $95 million for this year. The Sapien value can be installed through either delivery method and is approved in Europe.

"With the success of transcatheter heart valve technology, we are not surprised that competitors are looking to move into the market; in fact, we are surprised it has not happened sooner," Edwards said.

Humor Between February 1 and February 28, 2009

Bailout Rap (link forwarded by David Albrecht) --- http://www.youtube.com/watch?v=64g_g22iEe8

PJ O’Rourke’s Parliament of Whores --- http://snipurl.com/parliamentwhores   

Forwarded by Paula

F16 vs C-130:  THERE IS A MORAL HERE!

A C-130 was lumbering along when a cocky F-16 flashed by. The jet jockey decided to show off.

The fighter jock told the C-130 pilot, 'watch this!' and promptly Went into a barrel roll followed by a steep climb. He then finished With a sonic boom as he broke the sound barrier. The F-16 pilot Asked the C-130 pilot what he thought of that?

The C-130 pilot said, 'That was impressive, but watch this!' The C-130 droned along for about 5 minutes and then the C-130 Pilot came back on and said: 'What did you think of that?' Puzzled, the F-16 pilot asked, 'What the heck did you do?' The C-130 pilot chuckled. 'I stood up, stretched my legs, walked To the back, went to the bathroom, then got a cup of coffee and a Cinnamon bun.'

When you are young & foolish - speed & flash may seem a good thing !!!

When you get older & smarter - comfort & dull is not such a bad thing !!!

Us old folks understand this one.

The last tool in the list is probably the only tool your little kids know by name.

Forwarded by Paula

Pay heed, free advice is worth every penny that you pay for it! .

The Importance of Walking

Walking can add minutes to your life. This enables you, at 85 years old, to spend an additional 5 months in a nursing home at $7000 per month.

My grandpa started walking five miles a day when he was 60. Now he's 97 years old and we don't know where he is.

I like long walks... especially when they are taken by people who annoy me.

The only reason I would take up walking is so that I could hear heavy breathing again.

I have to walk early in the morning... before my brain figures out what I'm doing.

I joined a health club last year, spent about 400 bucks. Haven't lost a pound. Apparently you have to go there.

Every time I hear the dirty word 'exercise,' I wash my mouth out with chocolate.

I do have flabby thighs but, fortunately, my stomach covers them.

The advantage of exercising every day is so, when you die, they'll say, 'Well, he looks good, doesn't he?'

If you are going to try cross-country skiing, start with a small country.

I know I got a lot of exercise the last few years,...... just getting over the hill.

We all get heavier as we get older because there's a lot more information in our heads. That's my story and I'm sticking to it.

New Financial Terms forwarded by my good neighbors

Subject: New Financial Terms

CEO- Chief Embezzlement Officer

CFO - Corporate Fraud Officer

BULL MARKET- A random market movement causing investors to mistake themselves for financial geniuses.

BEAR MARKET- a 6-to-18-month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.

VALUE INVESTING- The art of buying low and selling lower.

P/E RATIO- The percentage of investors wetting their pants as the market keeps crashing.

BROKER - What my financial planner has made me.

STANDARD & POOR- Your life in a nutshell.

STOCK ANALYST- Idiot who just downgraded your stock.

STOCK SPLIT- When your ex-wife and her lawyer split your assets equally between themselves.

MARKET CORRECTION- The day after you buy stocks.

CASH FLOW- The movement your money makes as it disappears down the toilet.

YAHOO! - What you yell after selling it to some poor sucker for $240 per share.

WINDOWS- What you jump out of when you're the sucker who bought Yahoo at $240 per share.

INSTITUTIONAL INVESTOR- Past year investor who's now locked up in a nuthouse.

PROFIT - Archaic word no longer in use.

Forwarded by Niki

Think about this...

THOSE BORN 1920-1979

READ TO THE BOTTOM FOR QUOTE OF THE MONTH BY JAY LENO. IF YOU DON'T READ ANYTHING ELSE---VERY WELL STATED

TO ALL THE KIDS WHO SURVIVED the 1930's, 40's, 50's, 60's and 70's!!

First, we survived being born to mothers who smoked and/or drank while they were pregnant.

They took aspirin, ate blue cheese dressing, tuna from a can, and didn't get tested for diabetes.

Then after that trauma, we were put to sleep on our tummies in baby cribs covered with bright colored lead-based paints.

We had no child proof lids on medicine bottles, doors or cabinets and when we rode our bikes, we had no helmets, not to mention, the risks we took hitchhiking.

As infants & children, we would ride in cars with no car seats, booster seats, seat belts or air bags.

Riding in the back of a pick up on a warm day was always a special treat.

We drank water from the garden hose and NOT from a bottle.

We shared one soft dr ink with four friends, from one bottle and NO ONE actually died from this.

We ate cupcakes, white bread and real butter and drank Kool-aid made with sugar, but we weren't overweight because,

WE WERE ALWAYS OUTSIDE PLAYING!

We would leave home in the morning and play all day, as long as we were back when the streetlights came on.

No one was able to reach us all day. And we were OK.

We would spend hours building our go-carts out of scraps and then ride down the hill, only to find out we forgot the brakes. After running into the bushes a few times, we learned to solve the problem.

We did not have Playstations, Nintendo's, X-boxes, no video games at all, no 150 channels on cable, no video movies or DVD's, no surround-sound or CD's, no cell phones, no personal computers, no Internet or chatrooms.......

WE HAD FRIENDS and we went outside and found them!

We fell out of trees, got cut, broke bones and teeth and there were no lawsuits from these accidents.

We ate worms and mud pies made from dirt, and the worms did not live in us forever.

We were given BB guns for our 10th birthdays, made up games with sticks and tennis balls and although we were told it would happen, we did not poke out very many eyes.

We rode bikes or walked to a friend's house and knocked on the door or rang the bell, or just walked in and talked to them!

Little League had tryouts and not everyone made the team. Those who didn't had to learn to deal with disappointment. Imagine that!!

The idea of a parent bailing us out if we broke the law was unheard of. They actually sided with the law!

These generations have produced some of the best risk-takers, problem solvers and inventors ever!

The past 50 years have been an explosion of innovation and new ideas.

We had freedom, failure, success and responsibility, and we learned HOW TO DEAL WITH IT ALL!

If YOU are one of them CONGRATULATIONS!

You might want to share this with others who have had the luck to grow up as kids, before the lawyers and the government regulated so much of our lives for our own good .

While you are at it, forward it to your kids so they will know how brave (and lucky) their parents were.

Kind of makes you want to run through the house with scissors, doesn't it?!

The quote of the month is by Jay Leno:

'With hurricanes, tornados, fires out of control, mud slides, flooding, severe thunderstorms tearing up the country from one end to another, and with the threat of bird flu and terrorist attacks, are we sure this is a good time to take God out of the Pledge of Allegiance?'

New Financial Terms forwarded by my good neighbors

Subject: New Financial Terms

CEO- Chief Embezzlement Officer

CFO - Corporate Fraud Officer

BULL MARKET- A random market movement causing investors to mistake themselves for financial geniuses.

BEAR MARKET- a 6-to-18-month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.

VALUE INVESTING- The art of buying low and selling lower.

P/E RATIO- The percentage of investors wetting their pants as the market keeps crashing.

BROKER - What my financial planner has made me.

STANDARD & POOR- Your life in a nutshell.

STOCK ANALYST- Idiot who just downgraded your stock.

STOCK SPLIT- When your ex-wife and her lawyer split your assets equally between themselves.

MARKET CORRECTION- The day after you buy stocks.

CASH FLOW- The movement your money makes as it disappears down the toilet.

YAHOO! - What you yell after selling it to some poor sucker for $240 per share.

WINDOWS- What you jump out of when you're the sucker who bought Yahoo at $240 per share.

INSTITUTIONAL INVESTOR- Past year investor who's now locked up in a nuthouse.

PROFIT - Archaic word no longer in use.

To which David Albrecht added the following:

Here's another list, from: http://247wallst.com/2008/11/26/new-bear-market/

Below is the long list:

• "201/K": What used to be your 401/K, but cut in at least half.
• "I.R.A.": This is the paramilitary group you want to sick on thepeople who created the over-the-counter instruments and financialderivatives that are making this financial mess much worse than itshould have been.
• "IPO": The acronym that one yells when they see their brokerage accounts or discover the balance of the 201/K.  "I’m Pissed Off!"
• "Short Squeeze": This is what you think your chair is doing to you when you try to calculate the new balance of your investments.
• "Foreclosure": The time that the stock market stops dropping each day.
• "Stock Broker": The value of your shares each day.
• "Discount Broker": The value of your shares of the brokerage firm you own.
• "Bond Broker": That guy who puts up court money to get you out of jail.
• "Market Sell-off": Daily news reports.
• "Selling Short": The notion you get every time you decide to not go with one of your winning stock picks.
• "Dollar Cost Averaging": Sticking with a strategy that isn’t working.
• "Market Crash": The last sound of Alec Baldwin jumping out of the window at the end of this SNL commercial.
• "Market Rally": A church vigil for investors praying for this stock market selling to end.
• "Bailout": What investors have been doing for weeks and weeks.
• "Credit Default Swap": When you trade canceled credit cards with your friends and family.
• "Treasury Bill": $700 billion to $3 trillion that your kids will have to pay for this mess, plus interest.
• "Over The Counter Derivative": The same stuff meth is made with.
• “CDO”: Community Debt Onus
• "Financial Adviser": Bookie.
• "Hedge Fund": The money, jewelry, and silver coins you buried in your back yard or stuck in a safe.
• "Analyst": Your proctologist’s trainee.
• "Risk Manager": The guy who rubber-stamped AAA ratings as the second coming.
• "Underwriter": That creepy guy that works for the funeral home.
• "Margin Call": What your former financial adviser keeps calling you about.
• "Options Expiration Date": When you decide to give up on the stock market forever.
• "Recession-Proof": That really strong and cheap booze that everyone is drinking now; formerly called rot gut.
• "Stock Split": What you think happened with your shares when you see the share price each week.  But it didn’t split.
• "Bottom Sniffing": When bottom fishing doesn’t work.
• "52-Week Low": How you feel each new day when you get home.
• "TARP": What you sleep under after you lost your job, car, and house.
• "Going Private": Telling your friends you are out of the stock market but aren’t really out.
• "Private Equity": What Eliot Spitzer got in trouble over.
• "Resistance": Almost every penny price increment above the current price.
• "Support": Tomorrow’s new resistance.
• "Gap and Crap": When the market opens up and almost immediately sells off. That’s actually a real term used.
• "Poison Pill": What investors want to take when they see their 201/K balance.
• "Junk Bond": Government agency investments.
• "DJIA": Down Jones Industrial Average
• "Blue Chip": The color of your skin around that broken piece of knuckle you got slamming your first into your desk or keyboard.
• "Penny Stock": Former DJIA and S&P 500 index components that have been kicked out of the index.
• "Reiterated Guidance": The new absolute best case scenario for future earnings.
• "Microsoft": A Man’s libido after talking about the current stock market.
• "Socialism": The new-age definition of Free Market Capitalism
• "Recession": A mild downturn in the economy where some friends and neighbors become jobless.
• "Depression": A mild downturn in the economy that has now turned horrible, and now you are jobless along with friends and neighbors.

 

Forwarded by David Albrecht

Some guy bought a new fridge for his house. To get rid of his old fridge, he put it in his front yard and hung a sign on it saying: 'Free to good home. You want it, you take it.' For three days the fridge sat there without even one person looking twice at it. He eventually decided that people were too un-trusting of this deal.

It looked too good to be true, so he changed the sign to read: 'Fridge for sale $50.'

The next day someone stole it!

***They walk amongst us!***

-----------------------------------------------------------------------------

*One day I was walking down the beach with some friends when someone shouted....'Look at that dead bird!' Someone looked up at the sky and said...'where?'

***They walk among us!!***

-----------------------------------------------------------------------------

While looking at a house, my brother asked the real estate agent which direction was north because, he explained, he didn't want the sun waking him up every morning. She asked, 'Does the sun rise in the north?' When my brother explained that the sun rises in the east, and has for sometime, she shook her head and said, 'Oh, I don't keep up with that stuff'

***They Walk Among Us!!***

---------------------------------------------------------------------------------

My colleague and I were eating our lunch in our cafeteria, when we overheard one of the administrative assistants talking about the sunburn she got on her weekend drive to the beach. She drove down in a convertible, but 'didn't think she'd get sunburned because the car was moving'.

***They Walk Among Us!!!!***

--------------------------------------------------------------------------------

My sister has a lifesaving tool in her car it's designed to cut through a seat belt if she gets trapped She keeps it in the trunk.

***They Walk Among Us!!!!!***

----------------------------------------------------------------------------------

I was hanging out with a friend when we saw a woman with a nose ring attached to an earring by a chain. My friend said, 'Wouldn't the chain rip out every time she turned her head?' I had to explain that a person's nose and ear remain the same distance apart no matter which way the head is turned...

***They Walk Among Us!!!!!!! ***

-------------------------------------------------------------------------------

I couldn't find my luggage at the airport baggage area. So I went to the lost luggage office and told the woman there that my bags never showed up. She smiled and told me not to worry because she was a trained professional and I was in good hands. 'Now,' she asked me, 'Has your plane arrived yet?'...

(I work with professionals like this.)

***They Walk Among Us!!!!!!!!***

-------------------------------------------------------------------------------

While working at a pizza parlour I observed a man ordering a small pizza to go. He appeared to be alone and the cook asked him if he would like it cut into 4 pieces or 6. He thought about it for some time before responding. 'Just cut it into 4 pieces; I don't think I'm hungry enough to eat 6 pieces.

***Yep, They Walk Among Us, too.!!!!!!!!

Sadly, not only do they walk among us, they also reproduce !!!!

Forwarded by Paula

EVEN GOD ENJOYS A GOOD LAUGH!
There were 3 good arguments that Jesus was Black:
1. He called everyone brother.
2. He liked Gospel.
3. He didn't get a fair trial.
 

But then there were 3 equally good arguments that Jesus was Jewish:
1. He went into His Father's business.
2. He lived at home until he was 33.
3. He was sure his Mother was a virgin and his Mother was sure He was God.
 

But then there were 3 equally good arguments that Jesus was Italian:
1. He talked with His hands.
2. He had wine with His meals.
3. He used olive oil.
 

But then there were 3 equally good arguments that Jesus was a Californian:
1. He never cut His hair.
2. He walked around barefoot all the time.
3. He started a new religion.

But then there were 3 equally good arguments that Jesus was an American Indian:
1. He was at peace with nature.
2. He ate a lot of fish.
3.  He talked about the Great Spirit.

But then there were 3 equally good arguments that Jesus was Irish:
1. He never got married.
2. He was always telling stories.
3. He loved green pastures.

But the most compelling evidence of all - 3 proofs that Jesus was a woman:
1. He fed a crowd at a moment's notice when there was virtually no food.
2. He kept trying to get a message across to a bunch of men who just didn't get it.
3. And even when He was dead, He had to get up because there was still work to do!

Forwarded by Niki

SMART ASS ANSWER #5

A flight attendant was stationed at the departure gate to check tickets. As a man approached, she extended her hand for the ticket and he opened his trench coat and flashed her. Without missing a beat, she said, 'Sir, I need to see your ticket, not your stub.'

SMART ASS ANSWER #4

A lady was picking through the frozen turkeys at the grocery store but she couldn't find one big enough for her family. She asked a stock boy, ' Do these turkeys get any bigger?' The stock boy replied, 'No ma'am, they're dead.'

SMART ASS ANSWER #3

The police officer got out of his car as the kid who was stopped for speeding rolled down his window. 'I've been waiting for you all day,' the officer said. The kid replied, Yeah, well I got here as fast as I could.' When the cop finally stopped laughing, he sent the kid on his way without a ticket.

SMART ASS ANSWER # 2

A truck driver was driving along on the freeway and noticed a sign that read: Low Bridge Ahead. Before he knows it, the bridge is right in front of him and his truck gets wedged under it. Cars are backed up for miles. Finally a police car comes up. The cop gets out of his car and walks to the truck driver, puts his hands on his hips and says, 'Got stuck, huh?' The truck driver says, 'No, I was delivering this bridge and I ran out of fuel!

THE SMART ASS ANSWER OF THE YEAR 2008 !!

A college teacher reminds her class of tomorrow's final exam. 'Now class, I won't tolerate any excuses for you not being here tomorrow. I might consider a nuclear attack or a serious personal injury, illness, or a death in your immediate family, but that's it, no other excuses whatsoever!' A smart-ass student in the back of the room raised his hand and asked, 'What would you say if tomorrow I said I was suffering from complete and utter sexual exhaustion?' The entire class is reduced to laughter and snickering When silence was restored, the teacher smiled knowingly at the student, shook her head and sweetly said, 'Well, I guess you'd have to write the exam with your other hand.'

A BONUS EXTRA

A woman is standing nude looking in the bedroom mirror. She is not happy with what she sees and says to her husband, 'I feel horrible; I look old, fat and ugly. I really need you to pay me a compliment.' The husband replied, 'Your eyesight's good.'

Forwarded by Dr. Wolff

They keep trying to make it sound complicated but it's really very simple!

Bank Crisis in Terms Understood

Forwarded by Paula

The Washington Post has published the winning submissions to its yearly neologism contest, in which readers are asked to supply alternate meanings for common words.

The winners:

 1. Coffee (n.), the person upon whom one coughs.
 2. Flabbergasted (adj.), appalled over how much weight you have gained.
 3. Abdicate (v.), to give up all hope of ever having a flat stomach.
 4. Esplanade (v.), to attempt an explanation while drunk.
 5. Willy-nilly (adj.), impotent.
 6. Negligent (adj.), describes a condition in which you absentmindedly answer the door in your nightgown.
 7. Lymph (v.), to walk with a lisp.
 8. Gargoyle (n.), olive-flavored mouthwash.
 9. Flatulence (n.) emergency vehicle that picks you up after you are run over by a steamroller.
10. Balderdash (n.), a rapidly receding hairline.
11. Testicle (n.), a humorous question on an exam.
12. Rectitude (n.), the formal, dignified bearing adopted by Proctologists.
13. Pokemon (n.), a Rastafarian proctologist.
14. Oyster (n.), a person who sprinkles his conversation with Yiddishisms.
15. Frisbeetarianism (n.), The belief that, when you die, your Soul flies up onto the roof and gets stuck there.
16. Circumvent (n.), an opening in the front of boxer shorts worn by Jewish men.

The Washington Post's Style Invitational also asked readers to take any word from the dictionary, alter it by
adding, subtracting, or changing one letter, and supply a new definition.

Here are the winners:

 1. Bozone (n.): The substance surrounding stupid people that stops bright ideas from penetrating. The bozone layer, unfortunately, shows little sign of breaking down in the near future.

 2. Foreploy (v.): Any misrepresentation about yourself for the purpose of getting laid.

 3. Cashtration (n.): The act of buying a house, which renders the subject financially impotent for an indefinite
 period.

 4. Giraffiti (n.): Vandalism spray-painted very, very high.

 5. Sarchasm (n.): The gulf between the author of sarcastic wit and the person who doesn't get it.

 6. Inoculatte (v.): To take coffee intravenously when you are running late.

 7. Hipatitis (n.): Terminal coolness.

 8. Osteopornosis (n.): A degenerate disease.

 9. Karmageddon (n.): It's like, when everybody is sending off all these really bad vibes, right? And then,
 like, the Earth explodes and it's like, a serious bummer.

10 Decafalon (n.): The grueling event of getting through the day consuming only things that are good for you.

11. Glibido (v): All talk and no action.

12. Dopeler effect (n.): The tendency of stupid ideas to seem smarter when they come at you rapidly.

13. Arachnoleptic fit (n.): The fra ntic dance performed just after you've accidentally walked through a spider
 web.

14. Beelzebug (n.): Satan in the form of a mosquito that gets into your bedroom at three in the morning and cannot be cast out.

15. Caterpallor (n.): The color you turn after finding half a grub in the fruit you're eating.
 And the pick of the literature:

16. Ignoranus (n.): A person who's both stupid and an asshole.

 

Forwarded by Professor Edwards

Forwarded by Auntie Bev

And you also find out interesting things when you have sons, like...

1.) A king size waterbed holds enough water to fill a 2000 sq. ft. house 4 inches deep.

2.) If you spray hair spray on dust bunnies and run over them with roller blades, they can ignite.

3.) A 3-year old Boy's voice is louder than 200 adults in a crowded restaurant.

4.) If you hook a dog leash over a ceiling fan, the motor is not st rong enough to rotate a 42 pound Boy wearing Batman underwear and a Superman cape. It is strong enough, however, if tied to a paint can, to spread paint on all four walls of a 20x20 ft. room.

5.) You should not throw baseballs up when the ceiling fan is on. When using a ceiling fan as a bat, you have to throw the ball up a few times before you get a hit. A ceiling fan can hit a baseball a long way.

6.) The glass in windows (even double-pane) doesn't stop a baseball hit by a ceiling fan.

7.) When you hear the toilet flush and the words 'uh oh', it's already too late.

8.) Brake fluid mixed with Clorox makes smoke, and lots of it.

9.) A six-year old Boy can start a fire with a flint rock even though a 36- year old Man says they can only do it in the movies.

10.) Certain Lego's will pass through the digestive tract of a 4-year old Boy.

11.) Play dough and microwave should not be used in the same sentence.

12.) Super glue is forever.

13.) No matter how much Jell-O you put in a swimming pool you still can't walk on water.

14.) Pool filters do not like Jell-O.

15.) VCR's do not eject 'PB & J' sandwiches even though TV commercials show they do.

16.) Garbage bags do not make good parachutes.

17.) Marbles in gas tanks make lots of noise when driving.

18.) You probably DO NOT want to know what that odor is.

19.) Always look in the oven before you turn it on; plastic toys do not like ovens.

20.) The fire department in�Austin�,�TX�has a 5-minute response time.

21.) The spin cycle on the washing machine does not make earthworms dizzy.

22.) It will, however, make cats dizzy.

23.) Cats throw up twice their body weight when dizzy.

24.) 80% of Women will pass this on to almost all of their friends, with or without kids.

25.) 80% of Men who read this will try mixing the Clorox and brake fluid.

Forwarded by Dick Haar

Understanding why they voted democrat

I voted Democrat because I love the fact that I can now marry whatever I want. I've decided to marry my horse.

I voted Democrat because I believe oil companies' profits of 4% on a gallon of gas are obscene but the government taxing the same gallon of gas at 15% isn't.

I voted Democrat because I believe the government will do a better job of spending the money I earn than I would.

I voted Democrat because freedom of speech is fine as long as nobody is offended by it.

I voted Democrat because when we pull out of Iraq I trust that the bad guys will stop what they're doing because they now think we're good people.

I voted Democrat because I'm way too irresponsible to own a gun, and I know that my local police are all I need to protect me from murderers and thieves.

I voted Democrat because I believe that people who can't tell us if it will rain on Friday can tell us that the polar ice caps will melt away I n ten years if I don't start driving a Prius.

I voted Democrat because I'm not concerned about the slaughter of millions of babies so long as we keep all death row inmates alive.

I voted Democrat because I believe that business should not be allowed to make profits for themselves. They need to break even and give the rest away to the government for redistribution as THEY see fit.

I voted Democrat because I believe liberal judges need to rewrite The Constitution every few days to suit some fringe kooks who would never get their agendas past the voters.

I voted Democrat because my head is so firmly planted up my ass that it is unlikely that I'll ever have another point of view.

"A Liberal is a person who will give away everything they don't own."

"W.'s Greatest Hits
The top 25 Bushisms of all time," by Jacob Weisberg, Slate, January 12, 2009 --- http://www.slate.com/id/2208132/

Being able to laugh at yourself is a rare quality in a leader. It's one thing George W. Bush can do that Bill Clinton couldn't. Unfortunately, as we bid farewell to Bushisms, we must conclude that the joke was mainly on us.

1. "Our enemies are innovative and resourceful, and so are we. They never stop thinking about new ways to harm our country and our people, and neither do we."—Washington, D.C., Aug. 5, 2004

2. "I know how hard it is for you to put food on your family."—Greater Nashua, N.H., Chamber of Commerce, Jan. 27, 2000

3. "Rarely is the question asked: Is our children learning?"—Florence, S.C., Jan. 11, 2000

4. "Too many good docs are getting out of the business. Too many OB/GYNs aren't able to practice their love with women all across the country."—Poplar Bluff, Mo., Sept. 6, 2004

5. "Neither in French nor in English nor in Mexican."—declining to answer reporters' questions at the Summit of the Americas, Quebec City, Canada, April 21, 2001

6. "You teach a child to read, and he or her will be able to pass a literacy test.''—Townsend, Tenn., Feb. 21, 2001

7. "I'm the decider, and I decide what is best. And what's best is for Don Rumsfeld to remain as the secretary of defense."—Washington, D.C., April 18, 2006

8. "See, in my line of work you got to keep repeating things over and over and over again for the truth to sink in, to kind of catapult the propaganda."—Greece, N.Y., May 24, 2005

9. "I've heard he's been called Bush's poodle. He's bigger than that."—discussing former British Prime Minister Tony Blair, as quoted by the Sun newspaper, June 27, 2007

10. "And so, General, I want to thank you for your service. And I appreciate the fact that you really snatched defeat out of the jaws of those who are trying to defeat us in Iraq."—meeting with Army Gen. Ray Odierno, Washington, D.C., March 3, 2008

11. "We ought to make the pie higher."—South Carolina Republican debate, Feb. 15, 2000

12. "There's an old saying in Tennessee—I know it's in Texas, probably in Tennessee—that says, fool me once, shame on—shame on you. Fool me—you can't get fooled again."—Nashville, Tenn., Sept. 17, 2002

13. "And there is distrust in Washington. I am surprised, frankly, at the amount of distrust that exists in this town. And I'm sorry it's the case, and I'll work hard to try to elevate it."—speaking on National Public Radio, Jan. 29, 2007

14. "We'll let our friends be the peacekeepers and the great country called America will be the pacemakers."—Houston, Sept. 6, 2000

15. "It's important for us to explain to our nation that life is important. It's not only life of babies, but it's life of children living in, you know, the dark dungeons of the Internet."—Arlington Heights, Ill., Oct. 24, 2000

16. "One of the great things about books is sometimes there are some fantastic pictures."—U.S. News & World Report, Jan. 3, 2000

17. "People say, 'How can I help on this war against terror? How can I fight evil?' You can do so by mentoring a child; by going into a shut-in's house and say I love you."—Washington, D.C., Sept. 19, 2002

18. "Well, I think if you say you're going to do something and don't do it, that's trustworthiness."—CNN online chat, Aug. 30, 2000

19. "I'm looking forward to a good night's sleep on the soil of a friend."—on the prospect of visiting Denmark, Washington, D.C., June 29, 2005

20. "I think it's really important for this great state of baseball to reach out to people of all walks of life to make sure that the sport is inclusive. The best way to do it is to convince little kids how to—the beauty of playing baseball."—Washington, D.C., Feb. 13, 2006

21. "Families is where our nation finds hope, where wings take dream."—LaCrosse, Wis., Oct. 18, 2000

22. "You know, when I campaigned here in 2000, I said, I want to be a war president. No president wants to be a war president, but I am one."—Des Moines, Iowa, Oct. 26, 2006

23. "There's a huge trust. I see it all the time when people come up to me and say, 'I don't want you to let me down again.' "—Boston, Oct. 3, 2000

24. "They misunderestimated me."—Bentonville, Ark., Nov. 6, 2000

25. "I'll be long gone before some smart person ever figures out what happened inside this Oval Office."—Washington, D.C., May 12, 2008

Forwarded by Maureen

(Passing requires 4 correct answers) 

1) How long did the Hundred Years' War last? 

2) Which country makes Panama hats? 

3) From which animal do we get cat gut? 

4) In which month do Russians celebrate the October Revolution? 

5) What is a camel's hair brush made of? 

6) The Canary Islands in the Pacific are named after what animal? 

7) What was King George VI's first name? 

8) What colour is a purple finch? 

9) Where are Chinese gooseberries from? 

10) What is the colour of the black box in a commercial airplane?  
 

Remember, you need 4 correct answers to pass. 

Check your answers below.  

ANSWERS TO THE QUIZ 

1) How long did the Hundred Years War last? 116 years 

2) Which country makes Panama hats?   Ecuador 

Forwarded by Gene and Joan

Subject: Doctors' opinions on the stimulus package
 
The  Allergists voted to scratch it, and the

Dermatologists advised not  to make any rash moves.

The Gastroenterologists had sort of a gut  feeling about it, but the

Neurologists thought the Administration  had a lot of nerve, and the

Obstetricians felt they were all  laboring under a misconception. The

Ophthalmologists considered the  idea shortsighted. The

Pathologists yelled, 'Over my dead body!'  while the

Pediatricians said, 'Oh, grow up!'   The

Psychiatrists thought the whole idea was madness,  the

Radiologists could see right through it, and  the

Surgeons decided to wash their hands of the whole thing.  The

Internists thought it was a bitter pill to swallow, and  the

Plastic Surgeons said, 'This puts a whole new face on the  matter.'

The Podiatrists thought it was a step forward, but  the

Urologists felt the scheme wouldn't hold water.   The

Anesthesiologists thought the whole idea was a gas, and  the

Cardiologists didn't have the heart to say no.  In the  end, the

Proctologists left the decision up to the assholes in  Washington  

 

Forwarded by Team Carper

London Times Obituary of the late Mr. Common Sense

'Today we mourn the passing of a beloved old friend, Common Sense, who has been with us for many years. No one knows for sure how old he was, since his birth records were long ago lost in bureaucratic red tape. He will be remembered as having cultivated such valuable lessons as: Knowing when to come in out of the rain; why the early bird gets the worm; Life isn't always fair; and maybe it was my fault.

Common Sense lived by simple, sound financial policies (don't spend more than you can earn) and reliable strategies (adults, not children, are in charge).

His health began to deteriorate rapidly when well-intentioned but overbearing regulations were set in place. Reports of a 6-year-old boy charged with sexual harassment for kissing a classmate; teens suspended from school for using mouthwash after lunch; and a teacher fired for reprimanding an unruly student, only worsened his condition.

Common Sense lost ground when parents attacked teachers for doing the job that they themselves had failed to do in disciplining their unruly children.

It declined even further when schools were required to get parental consent to administer sun lotion or an aspirin to a student; but could not inform parents when a student became pregnant and wanted to have an abortion.

Common Sense lost the will to live as the churches became businesses; and criminals received better treatment than their victims. Common Sense took a beating when you couldn't defend yourself from a burglar in your own home and the burglar could sue you for assault.

Common Sense finally gave up the will to live, after a woman failed to realize that a steaming cup of coffee was hot. She spilled a little in her lap, and was promptly awarded a huge settlement.

Common Sense was preceded in death by his parents, Truth and Trust; his wife, Discretion; his daughter, Responsibility; and his son, Reason. He is survived by his 4 stepbrothers; I Know My Rights, I Want It Now, Someone Else Is To Blame, and I'm A Victim.

Not many attended his funeral because so few realized he was gone. If you still remember him, pass this on. If not, join the majority and do nothing.

And that's the way it was on February 28, 2009 with a little help from my friends.

Bob Jensen's Threads --- http://www.trinity.edu/rjensen/threads.htm

International Accounting News (including the U.S.)

AccountingEducation.com and Double Entries --- http://www.accountingeducation.com/
        Upcoming international accounting conferences --- http://www.accountingeducation.com/events/index.cfm
        Thousands of journal abstracts --- http://www.accountingeducation.com/journals/index.cfm
 

Deloitte's International Accounting News --- http://www.iasplus.com/index.htm
 

Association of International Accountants --- http://www.aia.org.uk/ 

Wikipedia has a rather nice summary of accounting software at http://en.wikipedia.org/wiki/Accounting_software
Bob Jensen’s accounting software bookmarks are at http://www.trinity.edu/rjensen/Bookbob1.htm#AccountingSoftware

Bob Jensen's accounting history summary --- http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

Bob Jensen's accounting theory summary --- http://www.trinity.edu/rjensen/Theory.htm

AccountingWeb --- http://www.accountingweb.com/
AccountingWeb Student Zone --- http://www.accountingweb.com/news/student_zone.html

Introducing the New journalofaccountancy.com  (free) --- http://www.journalofaccountancy.com/Issues/2008/Nov/NovSmartStops.htm

SmartPros --- http://www.smartpros.com/

I highly recommend TheFinanceProfessor (an absolutely fabulous and totally free newsletter from a very smart finance professor, Jim Mahar from St. Bonaventure University) --- http://www.financeprofessor.com/ 

Financial Rounds (from the Unknown Professor) --- http://financialrounds.blogspot.com/

Professor Robert E. Jensen (Bob) http://www.trinity.edu/rjensen
190 Sunset Hill Road
Sugar Hill, NH 03586
Phone:  603-823-8482 
Email:  rjensen@trinity.edu